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When do we have a contract?

CATEGORY: CYPRUS LEGAL SYSTEM

When do we have a contract?

The principles of a contract in Cyprus are governed by the Contract Law, Cap. 149 that essentially codified the English common law and principles of equity in Cyprus[1].

 Before there can be a contract, one party (the offeror) must make an identifiable offer on certain terms, showing intention to be bound, and the other party (the offeree) must accept those terms unconditionally. Once the agreement holds sufficient consideration, there must be intention to be legally bοound by the terms of the contract.

Where the contract is in writing and signed by the parties, it will be obvious when this occurs. However, it may not always be clear when the contract was made, especially if the parties did not sign any form of written document.

 Offer

 In order to initiate the formation of a valid contract, a valid offer must be made. That is a statement of an intention to be bound to the terms of an offer made and upon acceptance a valid contract is formed. An offer must be distinguished from an invitation to treat, where there is no intention to be legally bound. The following are not considered to be offers:

a)      Advertisements

b)      Estimates

c)      Brochures

d)      Price lists

e)      Enquires or requests for information

f)       Letters of intent/heads of terms/memoranda of understanding

 However, these are general rules, and whether a communication can constitute to be an offer or an invitation to treat, may be a question of fact upon each case.

In practise, it is advisable to suggest to parties to include terms such as “subject to contract”, which indicate that the parties do not intent to be bound by the terms of any informal agreement or pre-contractual negotiations. Also, this qualification of words can further rebut the usual presumption that in commercial contracts, that parties do intent to be legally bound when they are negotiating. However, the courts will look at the conduct of the parties during negotiations, so as to be certain that the parties should also include an express statement to the effect that they do not intent to be legally bound.

 Throughout the negotiation phrase, it is important to ensure that any offer remains on the table. An offer can be ended by rejection, counteroffer, lapse of time, death of the other party or by revocation before it has been accepted. If any of these occur, there cannot be a valid acceptance.

Battle of forms:

Where both parties seek to impose their own terms on the other, it may be uncertain whose standard terms apply. If the contract is dealt with by the seller’s sales representatives or untrained administrative staff, who may not be aware of the rules relating to offer and acceptance, there is always a possibility that the wrong set of terms may be accepted by accident. In the event of dispute, the court will consider whose terms and conditions were lastly on the table at the time of acceptance.

 Commercial contracts can be formed:

a)      Written

b)      Orally

c)      Partly written, or partly orally

d)      Based in the conduct of the parties

 The Contract Law, Cap. 149 has explicitly set out certain contracts that are required to be in writing:

  • Sale of Immovable property [2]
  • Transfer of shares[3]
  • Mortgage guarantee agreements[4]

 Intention and capacity to create legal relations

 The objective of the parties is to create legal relations. That presupposes that parties will have sufficient intention to establish contractual terms upon each other. Of course, this also considers the capacity that parties should have in order to establish commercial contracts. The law excludes people who may be unable to have sufficient capacity to enter into contracts either because of their age, their mental state or their legal capacity to represent a party[5].

 Entry into contract:

 The very establishment of a contractual agreement is that all parties must have been agreeing to the same thing and must not have been talking at cross-purposes. The existence, or otherwise, of an agreement is judged objectively. However, it is possible that a contract may come into existence by means of performance, although this must be clear from the conduct of the parties.

 Acceptance:

 An acceptance of an offer must be made aware to the offeree. That assumes that the offer is still valid upon its acceptance and that the acceptance was executed in a normal and reasonable way, as the contract required. It must be clear that an acceptance of an offer cannot be established by setting fixed time limits. For example, “if you do not reply to me in one week, the contract shall be considered agreed”[6].

Although nowadays, commercial contracts are negotiated and even agreed through modern electronic means (e-mails, video calls etc), the law is clear that a possibility to accept an offer is through the post. The postal rule applies a presumption that a valid acceptance occurs when a prepaid postal fee is paid (upon dropping your acceptance letter at the post office, you have accepted an offer and formed a contract), and the confirmation of the offer is sent to the other party[7]. It does not matter whether the confirmation/ acceptance letter has been received by the other party, but only that it has been sent through.

 Consideration

In Cyprus, there is the need to have sufficient consideration for the establishment of a contract[8]. In commercial contracts, consideration may be money, goods or services, or the promise of any of these as long as there is some value (not necessarily of an economic worth)[9]. In general terms, it is considered to be an exchange of promises that the contract shall be sustained. A contract lacking consideration may be perceived as though there was no consent by a party to participate on its own free will.

There are occasions where “consideration” is not needed[10]:

a)      A written agreement on behalf of a party, who will participate in a contract and have a close (relative) relationship

b)      A written agreement of an obligation from a party, which bears the obligation to repay a debt that the offeror could impose

c)      Gifts that are completed, do not need consideration to be executed

It must be noted that an existing obligation, either contractual or legal, to do something cannot be perceived as consideration. For example, in Collins v Godferoy[11], a witness was paid while there was an obligation to testify in the first place, rendering the in-between them contract invalid.

 [1] Contact Law Act, Cap. 149, Section 2

[2] Company Law Act Cap.149, Section 77A

[3] Company Law Act Cap.149, Section

[4] Company Law Act Cap.149, Section 138

[5] Company Law Act Cap.149, Section 10

[6] Felthouse v. Bindley

[7] Entores Ltd. V Miles Far East Corporation Ltd

[8] Company Law Act Cap.149, Section 10(1)

[9] Thomas v Thomas, Chappel v Nestle

[10] Company Law Act Cap.149, Section 25(1)

[11] 1 B& Ad 950; 109 ER 1040

 

Author: ALEXANDROS ST. YIALLOUROS

 

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