Contract - Contract Formation

What are the elements of a contract?

- offer

- acceptance

- intention to create legal relations

- consideration

How are the intentions of the parties judged?

- judged objectively

- does not matter what they actually thought

- will look at what a reasonable man would say was the intention of the parties, having regard to all the circumstances.

What is a unilateral contract?

- One party makes an offer or proposal in terms which call for an act to be performed by one or more other parties (e.g., find my lost cat)

- only actual performance of the required act will constitute acceptance

- unlike traditional bilateral contracts where each party has an obligation

What are the requirements of a valid offer?

- must be clear, certain, and show an intention to be bound

- saying 'I may be prepared to sell...' is not enough

What is the difference between a binding offer and an invitation to treat?

- An invitation to treat is a first step in negotiations which may or may not lead to a firm offer by one of the parties

- even if an invitation to treat is accepted, this cannot form a binding contract - an offer is also needed

- An offer is an undertaking to be contractually bound by the terms of that offer in the event of an unconditional acceptance being made by the offeree

Are adverts invitations to treat?

- generally regarded as invitations to treat

- except in Carlill v Carbolic Smoke Ball, where advert was held to be a unilateral offer becase there was a clearly prescribed act, performance of which constituted acceptance, and intention to bound was clearly shown in D's deposit of the £1,000 and the certainty of the language used in the advert

- similar to language used for advert seeking lost property

Is display of goods for sale an offer or invitation to treat?

- invitation to treat

- including if there is a special offer

Are invitations to tender an offer or invitation to treat?

- asking for tenders from sellers is an invitation to treat

- however, only where requestor can accept or reject any tender

- will be an offer where the invitation to tender expressly contains an undertaking to accept the highest or the lowest bid

- this is a unilateral contract - soliciting performance of a specific thing (the lowest/highest bid) - and when this is carried out, the offeror is bound

When will there be a contractual obligation to consider tenders?

1. the tenders were solicited from specified parties who were known to the requesting party

2. there was an absolute deadline for submission

3. the party requesting tenders had laid down absolute and non-negotiable conditions for submission

- must consider all tenders that comply with these rules in this case

Are auctioneers making offers or invitations to treat?

general rule: invitations to treat

- bidder makes an offer which the auctioneer is then free to accept or reject.

- acceptance of the offer is communicated by banging the hammer

Are auctioneers making offers or invitations to treat in auctions without reserve price?

- in auctions without reserve price, seller promises to sell to the highest bidder whatever that bid turns out to be

- auctioneer can be sued for breach of contract if they refuse to sell to the highest bona fide bidder

How can an offer be terminated? (3 ways)

- rejection

- lapse

- revocation

What will happen if an offer is rejected? When does it take effect?

- the same offer cannot be accepted after it has been rejected

- unless offeror makes another offer again

- rejection does not take effect until it is actually communicated to the offeror

Is a counter-offer by the offeree a rejection of the original offer? What about when parties agree to contract on standard terms but those are different?

- yes, when a counter offer is made, the original offer is deemed to have been rejected and cannot be subsequently accepted

- can be difficult when both parties agree to contract on their standard terms, and those terms are different - in this case, usually the person who last asserts that their own terms and conditions should apply is likely to prevail

- although if both sides cannot agree, there is no contract

What is the difference between a counter-offer and a request for more information?

- a request for more infomation will not kill off the original offer

How does an offer lapse via passage of time?

a) where acceptance is not made within the period prescribed by the offeror

or

b) where no period is prescribed and acceptance is not made within a reasonable time. What is reasonable will depend on the circumstances of the case.

How does an offer lapse via death?

death of the offeror

- if the offeree knows that the offeror has died, the offer will lapse

- if the offeree is unaware of the offeror's death, it probably will not.

death of the offeree

- will cause the offer to lapse

- the offer cannot be accepted after the offeree's death by the offeree's representatives.

When can an offer be revoked? At what point is revocation effective?

- offeror can withdraw their offer any time before acceptance

- cannot withdraw after acceptance

- revocation is effective only upon actual notice of it reaching the offeree

- e.g., if posted, effective from when it reaches offeree, and not when it is posted

- the means of communication of revocation are irrelevant - can even be communicated by a third party

What are the rules around revoking a unilateral contract?

- it is possible to revoke the offer at any time prior to the completion of the required act

- unless oferee has partially performed the obligation and is willing and able to complete

- in this case, offeror may be under an implied obligation not to revoke the offer once performance has commenced

How is revocation of a unilateral contract communicated?

- unilateral contracts are made to the whole world, and difficult to communicate to the whole world that the contract no longer stands

- therefore revocation will be effective if the offeror takes reasonable steps to bring the revocation to the attention of all those who may have read the offer.

Who can accept an offer?

only the person to whom the offer is made (not someone who overhears eg)

Must acceptance be unqualified?

- acceptance must be unqualified and must correspond exactly with the terms of the offer (the mirror image rule)

- a qualified offer may actually be a counter offer or a request for information

Can offeree accept via any mode they wish?

in any way whatsoever

- although possible for offeror to stipulate that they will only be bound if acceptance is communicated in a precise way

- however, if offeror merely specifies a mode of acceptance without making it mandatory, offeree can use any mode that is no less advantageous to the offeror

When does acceptance come into effect?

As soon as it is communicated to the offeror

Can silence be acceptance?

general rule that it is not

Can a third party validly communicate acceptance of a contract on someone's behalf?

Yes, as long as they have the authority of the offeree

What is the postal rule?

where post is deemed to be a proper means of communication, the acceptance takes effect from the moment the letter of acceptance is properly posted (not when it was received)

When is a letter 'properly posted'?

- when it is put into an official letter box

- or into the hands of an employee of the Post Office who is authorised to receive letters (not a postman who is only authorised to deliver them)

Does the postal rule apply when the letter is delayed/lost in the post?

yes, acceptance is still considered communicated

When does the postal rule not apply?

- When it is unreasonable for post to be used (eg when prompt acceptance is required) or has been disapplied by the offeror

- For revocations (must be received to be effective)

- If the acceptance is incorrectly addressed

When does acceptance occur when mde via instant communication eg text?

acceptance takes place at the moment the acceptance is received by the offeror (opposite of postal rule)

does the postal rule apply to emails?

no

an acceptance by email is effective only when received

Must acceptance be communicated for unilateral contracts?

no

- perfomance of the act = acceptance

What is the principle of certainty?

A binding contract requires all material terms to be certain and complete.

What will happen if an agreement is uncertain?

cannot be enforced by the court

What test will the court apply to determine whether the parties have reached an agreement?

whether, in all the circumstances of the case, the parties have agreed all the terms they considered to be a precondition to creating legal relations (objective test)

What is consideration?

- an act or promised act of one party, as the price for which the promise of the other is bought

- in order to enforce a promise made to you, you must be able to show you promised something in return

What is executed consideration?

at the time of the formation of the contract, the consideration has already been performed

- occurs in unilateral contracts

What is executory consideration?

contracting parties make promises to each other to perform something in the future after the contract has been formed.

What does the rule 'Consideration must not be past' mean?

- Generally, acts or forbearance that occurred before the promise cannot be used as consideration

What are the exceptions to the 'consideration must not be past' rule?

a) Act done at promisor's request

b) Parties understood the act would be rewarded (eg lost dog posters)

c) Payment would have been legally enforceable if promised in advance

What does the rule "consideration must move from the promisee" mean?

A party who has not provided consideration cannot enforce a contract

What does the rule "consideration need not be adequate" mean?

- the court will not asses the value of each party's contribution

- chocolate wrappers could be valid, despite having no value to the company

What does the rule "consideration must be sufficient" mean?

- consideration must have SOME value in the eyes of the law

- e.g., £1 p.a. in peppercorn rent will be sufficient

Will a contract be valid, if party X is already under an existing contractual obligation the the same party to do that same act? (more money for the same work)

no, would not be valid

- no consideration has been provided, as party Z is basically paying more money for X to do the same thing and getting nothing of value

When will there be an exception to the usual rule that Z cannot demand more money in order to do an act they are already contracted to do, on the basis of going above and beyond?

if Z exceeds the terms of the original contract by providing a far better service, to the extent that this can be considered fresh (legal not factual) consideration

When will factual consideration apply, as an exception to the usual rule that Z cannot demand more money in order to do an act they are already contracted to do?

- an existing obligation can be good consideration for a new contract where there is still some kind of practical benefit to the existing obligation being carried out, as consideration for the increased payment

- eg X contracted to do some work by a deadline, later finds out they cannot complete to this deadline. Y pays them more to make this deadline, and there is valid consideration (despite the fact all they did was meet the deadline) because Y achieved a new benefit of not having to find an alternative builder etc

Can police officers validly claim rewards for responding to requests for information on criminals?

Yes

- the duty of a police officer is the prevention of crime, not to provide information to an individual

- therefore, they are going beyond public duty, and giving valid consideration

Is there good consideration when X is just fulfilling an existing obligation to a third party?

- still good consideration, even if X would have done it anyway

Can offering to pay off part of a debt in return for debt being fully discharged be good consideration? (Foakes v Beer)

No - they are offering to do something they are already obliged to do

- The debtor remains liable even if the creditor has agreed to release them from further liability

When does the rule about part-payment of a debt not being good consideration NOT apply?

- When a new element is introduced into the payment (e.g., payment at a different time or with a different thing in place of money)

- When payment of a lesser sum is made by a third party

- Potentially when there is a practical benefit to the creditor (this remains controversial)

What is promissory estoppel?

An equitable doctrine that allows a promise to be enforced without consideration

- protects a party who has relied on a promise, and prevents the other party from going back on their promise

What is a typical example of promissory estoppel?

- a debtor may seek to defend a debt action against them by arguing that they have relied on a promise by the creditor that they will not require the debt to be paid in full

- works as an exception to the rule in Foakes v Beer that part payment of a debt already due to be paid cannot be good consideration to discharge the debt

What are the requirements for promissory estoppel to apply?

1. clear and unequivocal promise by A that strict legal rights won't be fully enforced

2. B's change of position in reliance on the promise

3. is inequitable to allow A to go back on their promise (even though they have the legal right to do so)

is promissory estoppel a cause of action?

- a defence, not a cause of action (shield, not sword)

What is required for a change of position in promissory estoppel?

- Promisee must have relied on the promise

- The promise must have influenced the conduct of the promisee

- Act of reliance must occur after the promise is made

(Detrimental reliance is not required, but can be a factor)

How do courts determine if it's inequitable for the promisor to go back on their promise?

- will conduct a balancing exercise, based on fairness

- considering conduct of both parties (eg pressure based on one party's financial situation)

- detrimental reliance will be considered, if present

What is the effect of promissory estoppel on the promissor? Are rights permanently extinguished?

- suspends their right to enforce their legal right to go back on the promise either temporarily, or (in rare cases) permanently

- if temporary, can resume full rights when the period of PE ends, or after giving reasonable notice

- rights may be permanently extinguished if it would clearly be inequitable to require the other party to meet the obligation

Is the intention to create legal relations objective or subjective?

Objective test

- court asks "would reasonable people regard the agreement as intended to be binding?"

- rather than asking the parties what they personally thought at the time

What is the presumption for commercial agreements regarding intention to create legal relations?

- presumption that parties intend to create legal relations

- can be rebutted by clear evidence to the contrary

Who bears the onus of rebutting the presumption that parties intend to create legal relations?

The onus of rebutting the presumption lies on the party asserting that no legal effect was intended (heavy burden)

What is the effect of the phrase 'subject to contract'?

- creates a strong inference that the parties do not intend to be bound until the formal execution of a contract.

- therefore, the agreement is not prima facie binding

What is the presumption for social and domestic agreements regarding intention to create legal relations?

usual presumption is that there is no intention to create legal relations

How can the presumption of no intention for social and domestic agreements be rebutted?

- By examining the circumstances of each case and the language used by the parties

- Courts may find intention in agreements between separating spouses

What are the general rules regarding minors and contracts?

- Persons under 18 are generally not bound by contracts

- applies even if the other party doesn't know the person's age or was lied to

What are the exceptions to the rules about minors not being bound by contracts?

The following contracts MAY be enforceable:

1. contracts for necessaries

2. contracts of employment, apprenticeship, or education

What are "necessaries" in the context of minors' contracts?

- Goods or services essential for the minor's living, (food, medicines, accommodation, and clothing)

- as long as they are not purchased for comfort/pleasure only

- What is necessary is determined based on the minor's age and actual requirements

What must a minor pay in the satisfaction of contracts for necessaries?

- These contracts are binding

- but minor must only pay a 'reasonable price' for necessaries, rather than the actual cost of the 'necessaries' supplied.

What are the rules for contracts of employment, apprenticeship, or education for minors?

- binding on minors only if they are for the minor's benefit

- eg contract with football club that imposed onerous conditions on minor with little benefit was not binding

What is the effect of a minor entering into a contract?

- Generally, the contract cannot be enforced against the minor

- However, the minor can enforce the contract against the other party

- Some exceptional contracts are enforceable unless specifically repudiated by the minor

- If a minor ratifies a contract upon reaching 18, it becomes binding

How is mental incapacity defined under the Mental Capacity Act 2005?

- A person lacks capacity if unable to make a decision for themselves at the time of contract

- Capacity is decision-specific, not a blanket status

- Can be permanent or temporary

What are the 4 criteria for determining mental incapacity under s 3(1) of the Mental Capacity Act 2005?

- Unable to understand the relevant information

- Unable to retain the relevant information

- Unable to use the relevant information

- Unable to communicate a decision

what is 'the relevant information' that a person must be able to understand to have capacity for a contract?

the reasonably foreseeable consequences of:

a) Deciding one way or another; or

b) Failing to make a decision.

What is the role of the Court of Protection in determining capacity?

has the power to make declarations as to a person's capacity and ability to contract in specified situations

What is the effect of entering into a contract with a person lacking capacity?

- still liable to pay a reasonable price for 'necessaries'

- Other contracts are binding unless the incapacitated person can prove they didn't understand and the other party knew this

- If proven, the contract becomes voidable

How do the rules on capacity apply to intoxicated persons?

- Similar rules apply as for mental incapacity

- Intoxicated persons must pay a reasonable price for necessaries

- Other contracts are not binding if the person was so intoxicated they didn't understand what they were doing

- This likely extends to other intoxicating substances beyond alcohol