CH-2 FORMATION OF CONTRACT

1. Notion of offer and acceptance

Contract occurs when the minds of the offeror and offeree meet upon common object of the
contract. This meeting of mind is called consensus ad idem i.e. consent to the matter. The
declaration of both parties must relate to the same matter. Since meeting of mind is inferred from
offer and acceptance made by the parties, the law is often concerned with the objective
appearance of the offer and acceptance than the actual fact of the intention of offeree or offeror.

Parties are to be judged not by what is in their mind but by what they have said, written or done.
So nobody could be bound by an intention (estate of mind) which is not included in the offer or
acceptance i.e. a person cannot claim to avoid a contract by citing reservations or restrictions that
has not been made clear to the other party through offer or acceptance. When the law in forces
the intention (consent) of the parties it does so, so that the parties‟ reasonable expectation is
protected. Any intention of a party not included in the offer or acceptance never forms part of the
contract. Therefore, obligation that one of the parties wants to be included in the contract never
binds the other party unless such party knew and agreed to be bound by it.

2. Elements of contract; Formation of contact involves the criteria that the state uses in order
to determine whether or not it has to execute agreements of persons between themselves. In
other words, the state uses the following yardsticks to check whether or not persons have
made a law that binds them. All contract involve the element of capacity, consent and object
i.e. contract cannot be imagined without capacity, consent, and object. However form is
required for few contracts only.
a. Capacity Although human beings are subject to rights and duties from the moment of birth,
to death some may not be entitled to exercise such rights and duties. Still others may exercise
only some of their rights. Minors and judicially interdicted persons cannot enter into a
contract. However; when legally interdicted person and specially interdicted person are
enters into a contract which they were prohibited from such is not limited to incapacity but
also extends to illegality.

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b. Consent; Consent is expressed either in the form of offer or acceptance Offer and
acceptance are ways of communicating one’s own intention to be bound by an obligation.
Therefore; offer or acceptance is declared to another person by ordinary ways of
communication .These ways of communication are oral, written, signal and conduct.

Offer is laying down contents of would be contract i.e. indicating the respective obligation of
each would be parties to the contract and informing the same to them with the expectation of
response from them. Moreover, offer contains the intention of the person making it to be
bound by the content of the offer. In short offer contains three important elements, the content
of the contract, the agreement of an offeror to be bound and request of the offeror to the
offeree to be bound by the offer. The person making the offer is called offeror.

In principle, an offer is binding on the offeror only if it is addressed to a specified person. B/c
the person may want to advertise his product or service without any intention to be bound by the
content of the advertisement. The person advertising a product or service may not have the
product or service at his disposal and he may be making a market study i.e. he may want to know
the demand for his product. This means although he states the type of product or service he
wants to supply and the price he expects he might not intend to be bound.

E.g. A certain college releases the following information on Addis Zemene Newspaper. “Our
college is going to open Degree Program in Business Management. Tuition free is birr 500
per month. It takes only 30 months to complete B.A. the program any person who has
completed preparatory or has Degree in any other field is invited to apply soon.” This is not
offer but declaration of intention. Declaration of intention is not offer except public promise
of reward b/c it is addressed to a specified person.

Once the offer is made, it means one side of the parties to the contract (the offeror) has agreed to
be bound. Offer contains would be obligation i.e. the content of would be contract is defined by
offer. This indicates that the conclusion of a contract is partly completed. The party making an
offer cannot change his opinion. That is why it is necessary to distinguish an offer from mere
declaration. A person making mere declaration of intention can change its declaration at any time
it wants for whatsoever reason without any legal liability for unreasonable and arbitrary change
of its intention. It is obvious that if declaration of intention is not an offer, it is full autonomy of

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the person who declared such intention to live up to his declaration or change his intention for
whatsoever reason. However, an offer cannot be changed by the offeror for unjustified reason.
An offeror who changes his offer partially (make some modification to the content of his offer)
or totally (refusing to be bound by his offer) is liable for any material damage on the offeree.

Change or withdrawal of an offer is not a fault when it is withdrawn or changed. Before the
offeree knows the offer or at the time the offeree know the offer or at any time before
acceptance for justified reason. Even if modification or withdrawal is made contrary to the
above precondition, the offeror may be liable only if the offeree proves that the offer is the
cause for his loss.

Acceptance; is a positive response to an offer i.e. it is a declaration of intention to be bound by

each and every contents of an offer. In short acceptance is a “Yes” answer to all the contents of
the offer. Any slightest modification made to the content of the offer is considered as rejecting
the offer and making, an alternative offer. So the offeree must take care in giving response to an
offer. He has three alternative answers to an offer, the “yes” answer which means accepting the
offer as it was made; the “No” answer which means totally rejecting the offer or “acceptance
with reservation” which means having reservation or alternative proposals for some of the
contents of the offer. So “where acceptance is made with reservation or does not exactly conform
to the terms of the offer” the offeree must remind himself that he is taking the position of the
offeror and the offeror then becomes an offeree.

The offeree does not have a duty to give response to the proposal of the offeror. He can
respond negatively or positively only if he wants to respond otherwise he may for example read
an offer and simply throw it in a dust basket or tear it off by reading only the address of the
letter. That means the offeree has the right to remain silent; no one is allowed to disturb his
peace. Moreover; if the offeree remains silent there is no assurance that the offer was brought to
his attention; he might have not known the existence of offer. Therefore silence shall not
amount to acceptance. It should not be taken as a signal indication of acceptance. However, in
the following cases the offeree has a duty to respond a “no” answer if he does not want to be
bound by an offer, otherwise his silence may be taken as a sign of acceptance by the offeror.

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  Duty to accept: - Sometimes a law or contract may impose on the offeree the obligation
to accept offers made to it. This is mainly when the offeree is a monopoly supplier of
goods or provider of services. Some public enterprises are established by law to provide
goods and services to the public, hence they are duty bound to accept an offer from the
public. Example, Ethiopian Electric Power Corporation, Ethiopian Telecommunication,
Water & Sewerage Authorities are expected to accept offer for electric use, telephone line
and pipe line. If they do not want to be bound by the offer they have to notify with in
time specified in the offer, if any or within a reasonable time. Otherwise their silence is
considered as an acceptance. Again in case of contract of concession (the contract
between the business Enterprise and state organ), if offer is made by state organ the
silence of the offeree will be taken as an acceptance.
 Preexisting Contractual Relation Silence may also amount to acceptance where the
content of the offer is to vary, supplement or complement preexisting contractual relation.
Variation of a contract means changing, modifying or avoiding some of the provisions of
the contract. Variation of contract itself is a contract and hence needs consent of parties.
So, one of the parties may offer such variation. For example, in a sale contract, the buyer
may offer to change the delivery date. Supplementary or subsidiary contract is a contract
that may exist independently but that help to facilitate the implementation of preexisting
contract. But during this silence can be interpreted as acceptance only if the offeror uses
written form of communication that is addressed directly to the offeree. Once an offer is
accepted the offeree is bound by his word.

Consent must be sustainable at law; - If the consent expressed in the form of offer and
acceptance does not indicate what the offeree or the offeror really intended then there exists
defect in consent; that means the consent is not sustainable at law. The cause of defect in
consent is either wrong information (mistake, false statement, fraud) or threat (duress,
reverential fear, threat to exercise rights).

c. Object of a contract is what parties have actually agreed to undertake. It is the obligation of
both parties to the contract. The obligation may be to do something or to refrain from doing
something or to give something to someone. So, object of a contract is the agreement of the
parties to act, not to act, or to give. The object of employment contract, for example, is the

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 employers” agreement to pay wage and employees” agreement to do certain thing. In
contract of sale of house; the obligation of the seller is to transfer ownership and possession
to the buyer and the obligation of the buyer is to pay price. Object of contract differs from
subject matter of contract. For example, in the above case, the work and the house are
subjects of the contract. The object of the contract must sufficiently clear, possible, lawful
and moral.
d. Form if any:- contract may exist either in written form or oral form. Limitation of freedom
of form means denying the parties the option to make their contract orally. The reason for
such limitation may be; Evidentiary value Recalling content of contract for Indication of
intention to create legal relation: If a contract is made in writing, there remains little doubt
that there was no intention to be bound. If a contract is to be made in writing, a party thinks
twice before he gives his final consent to be bound. For instance; the following contract
shall be made in writing; Contract relating to immovable, Contract with public
administration; Employment contract, Contract of guarantee, Contract of insurance and
others.
3. Effects of Elements of Contract; Contract that misses any of these elements is either void
or voidable. Difference between void and voidable contracts

Definition: The deference between void and voidable contract emanate from the definition given
to each of them. Void contract is a contract which parties intend to produce binding effect but
does not actually have any legal effect. The obligation intended by the parties does not exist from
the beginning. So, it is called void abinitio. But voidable contract is a contract that has begun to
produce effect intended by the parties carrying with itself certain birth defects that may destroy
the effect it has produced.

Cause: A contract is said to be void when the object or form element are missed. The object is
either immoral or unlawful/impossible or unclear. Or the special form required by the law or the
parties has not been complied with. But voidable contract is due to defect in consent or lack of
capacity.

Plaintiff: - Here, plaintiff indicates the person who brings void or violable contract to the
attention of court. Anybody, including public prosecutor, can bring void contract to the attention
of court. But in case of void able contract only a person whose consent was defective or the

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person who was lacking capacity at the time of conclusion of the contract can bring the case to
the attention of the court.

Relief Sought; In case of void contract, the person is not intending to have the contract
invalidated since there is nothing to be invalidated. Therefore, he wants either to make sure that
the contract is void or wants the court to stop parties from violating the law/moral standard of the
society under the guise of performance of contract. On the other hand, voidable contract is a
contract that has produced effect. Therefore, the relief sought is to have such contract declared
invalidation. Voidable contract produces legal effect unless the party whose consent was vitiated
or incapable at the time of conclusion of contract challenges its validity.

A party whose consent was vitiated loses his right to invalidate the contract unless he brings
court action within two years from the moment he knew the fraud or mistake or from the
moment the duress disappears. The right will be absolutely barred if he has been unable to know
the existence of defect in consent or the duress has not disappear within ten years from date of
conclusion of the contract. Notice that a contract affected by incapacity need to be invalidated
within two year from the date the person became capable.

Similarities between Void and Void able Contracts

Unable to Produce Legal Effect on the Parties; like void contract voidable contract is also
considered as void abolition once it is invalidated. Invalidation of voidable contract has a
retroactive effect thereby denying the contract to produce any obligation from the moment of its
inception. Contract is invalidated means the embryo is aborted.

Reinstatement;- Void contract and voidable contract that is invalidated do not produce
obligation but parties might have made payment believing that the contract was valid i.e. such
payment was made unduly or improperly. So a party who receives such undue payment shall
give it back. Such giving back is called reinstatement. A contract was void or was made void
does not mean that those who made undue payment will be without remedy. Reinstatement is
made either by returning back the payment (thing) received or by paying appropriate
compensation for the thing that cannot be returned.

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