May 2023
Karen Groves explains about contract law, which is covered in the AAT Level 2 Business
Environment Synoptic assessment.
Contract law is a new topic to the Level 2 AAT Q2022 qualifications. It is important as an accounting professional, that you are aware of the main elements of contract law, as they form the basis of most business transactions.
The law of contract determines if a promise is enforceable by a court of law (in other words, is it legally binding?). A contract is a legally binding agreement between two parties. The offeror is the party making the offer, and the offeree is the party accepting the offer.
For a contract to be valid, it must have the following:
Offer and acceptance: An offer is a statement of willingness to be bound on specific terms without any further negotiations. An agreement is then made between two parties and accepted with no further changes required. The offer can be either written, verbal or by conduct.
Consideration: Both parties must do something as part of their side of the contract (for example, a decorator (the offeror) must complete the office decorating and the offeree must pay the decorator once the work has been completed.
Consideration must have some value; this could be an item or a service and must also be legal. Consideration can be either executed (a promise that has been executed, for example, paying the decorator £1,000 to paint an office), or executory, for example a promise to do something in the future – namely the decorating, in exchange for another promise, namely paying the decorator £1,000 once the work has been completed.
Consent to terms: Both parties must be certain of the contract terms and conditions, which should be legal and possible to complete.
Intent to create a legal relationship: Both parties must be willing to be bound by the contract terms.
In addition to the above, both parties must be able to contract and submit themselves to the contract. For example, children are not allowed to enter into a contract agreement.
Invitation to treat
An invitation to treat means that one party has invited the other party to make an offer, and is therefore not an offer as mentioned earlier. An example of this could be a property for sale. At the stage a customer expresses interest in the item for sale, the offer is then made, which can be refused by the seller.
Termination
An offer can be terminated as follows:
Rejection: The offeree may reject the offer, or a counteroffer could be made.
Lapse: The offer may have an expiry limit, or the offeror or offeree may have died, causing the offer to lapse.
Revocation: An offer can be revoked by the offeror before acceptance unless a part payment or another act has been performed, indicating acceptance of the offer.
Capacity and legality
Void contracts
A void contract is a contract that is either illegal or impossible to carry out, and therefore void. This type of contract cannot be enforced by law.
Voidable contracts
A voidable contract could include for example, a contract between an adult and a child (under the age of 18). The adult would be bound by the contract; however, a child is not, and therefore the contract would be nullified (made legally null and void)
Discharge of contract
A discharge of contract means that the contract is no longer legally binding and has therefore been terminated.
Discharge by performance
The discharge of contract by performance occurs when both parties are refused to perform the contract obligations.
Discharge by breach
The discharge of contract by breach refers to one of the parties failing to perform the contract obligations, hence being called a breach of contract.
Now have a go at the questions below:
1. You are in a car sales room and tell the salesperson you would like to buy the car.
This creates a binding contract:
- True
- False
2. An advert in your local newspaper selling a car is an invitation to treat:
- True
- False
Answers:
- False
- True
- Karen Groves is an AAT tutor and Faculty Director of Accounting at e-Careers
