FIRST YEAR CONTRACT LAW

First year Contract law

First Year Contract law

Invitation to Treat

An invitation to treat is a mere declaration of willingness to enter into negotiations; is not an offer, and cannot be accepted so as to form a binding contract. In this case, invitation to treat means that the advertisement by John for vase in the window of his shop with a sign which stated 'exceptional piece of 19th century pottery - on offer for $500'. And the letter by to Ben agreeing to buy the vase for the stated price of $500 is the invitation to treat.

An offer must be a clear, unequivocal and direct approach to another party to contract. For this reason, advertisements, catalogues or store flyers are not offers. Nor is a FOR SALE sign on a used car. The law calls these invitations to treat; essentially invitations to the general public to make an offer on a particular item. But, even here, there have been exceptions. For example, in a 1856 case, an advertisement of train rates was held to be a valid offer. Much depends on the wording of the invitation (Garner, 2004).

Counter Offer

Counter offer is an offer made in response to a previous offer by the other party during negotiations for a final contract. Making a counter offer automatically rejects the prior offer, and requires an acceptance under the terms of the counter offer or there is no contract. Example: John Seller offers to sell her vase for $500; Ben Buyer receives the offer and gives Seller a counter offer of $500. The original offer is dead, despite the shorter time for payment since the price is lower. Seller then can choose to accept at $500, counter again at some compromise price, reject the counter offer, or let it expire (Mattei, 1997).

Option Contract

The right, but not the obligation, to buy (for a call option) or sell (for a put option) a specific amount of a given stock, commodity, currency, index, or debt, at a specified price (the strike price) during a specified period of time. For stock options, the amount is usually 100 shares. Each option contract has a buyer, called the holder, and a seller, known as the writer. If the option contract is exercised, the writer is responsible for fulfilling the terms of the contract by delivering the shares to the appropriate party. In the case of a security that cannot be delivered such as an index, the contract is settled in cash. For the holder, the potential loss is limited to the price paid to acquire the option. When an option is not exercised, it expires. No shares change hands and the money spent to purchase the option is lost. For the buyer, the upside is unlimited. Option contracts, like stocks, are therefore said to have an asymmetrical payoff pattern. For the writer, the potential loss is unlimited unless the contract is covered, meaning that the writer already owns the security underlying the ...