LAW OF CONTRACT

CHAPTER 4

DEFINITION

Legally enforceable or binding agreement made between at least two parties.– Agreements which are not legally enforceable are

not contracts.– ‘Legally enforceable’ means that disputes relating to

the agreement may be referred to a court for settlement.

ESSENTIAL OF A CONTRACT

Intention to create a legal relationship Offer and acceptance Consent Capacity Consideration Legality

OFFER AND ACCEPTANCE

A contract is formed when both an offer and an acceptance are capable of being inferred from the circumstances.

An offer is a firm proposition put by one person (the offeror) to another person (the offeree) coupled with an intention that it shall become binding and it must be firm and capable of acceptance.

Acceptance is the unconditional assent by one party to the terms of the offer.

Offer and acceptance must be voluntary and may be made expressly in writing or orally, or may be implied from conduct.

OFFER AND ACCEPTANCE

When purchasing insurance:– When individuals completes an application form it acts as an

offer to purchase insurance– In general insurance, a person usually makes an offer when

he proposes for insurance (submit a completed proposal to insurer), the insurer concerned is deemed to accept the offer if he agrees to provide the proposed insurance.

– Insurer may not accept the proposal but may offer to provide insurance on a different term. This situation constitutes to a counter-offer from the insurer.

CONSIDERATION

The fair exchange of something of value to include the other party to enter into a legally binding contract.

To be legally sufficient to support an enforceable contract.

In other words, the benefit which one party gives to another or burden which he undertakes is termed as consideration

CONSIDERATION

In insurance contracts, the consideration of the insured is “to pay or promise to pay the premium”.

This rule is not applicable for motor insurance as this policy undertakes “cash before cover”

The insurer’s consideration is the “promise to pay if a covered loss occurs”

INTENTION TO CREATE A LEGAL RELATIONSHIP

The parties must intend their agreement to have legal consequence.

It is essential that parties to an agreement intend to be legally bound otherwise there cannot be a contract between them.

Hence the agreement must legally bind.

CONSENT

Refers to the requirement whereby all parties to a contract must agree to exactly the same terms.

There must be “consensus ad idem” or meeting of minds.

LEGAL CAPACITY TO CONTRACT

Capacity is the legal ability for a party to enter into a binding contract.

In general law, the capacity to enter into a contract is upon majority age or above 18 years old.

In insurance, under Section 153, Insurance Act 1996 states:– 0 – 10 – cannot enter into an insurance contract– 10-16 – may enter into an insurance contract with written

consent of his/her parents/guardian– 16 and above – may enter into insurance contract without

parental written consent– 18 and above – can enter into other contracts as well.

LEGALITY

Refers to the requirements whereby the subject matter or transaction contracted for must not violate any laws or public policy.

A contract should be created for a legal purpose.