Contract Formation

Basic elements of a contract

• Offer

• Acceptance

• Consideration

• Intention to create legal relations

Offer

An offer is an expression of willingness to enter a contract on certain terms. If accepted, an offer can become a contract. An offer must be definite in its terms.

Biggs v Boyd Gibbons

The seller made an announcement that “for a quick sale, I will accept 26K” regarding his house. This was considered an offer by the court.

Gibson v Manchester City Council

Letter received from the council which said it “may be prepared to sell the house to you”. Court found the council’s letter not an offer because of the uncertainty, and Mr Gibson’s application was the offer for the council to accept

Invitation to Treat (ITT)

an invitation to treat is an indication of willingness to negotiate. it may encourage others to make offers. an ITT is not an offer, and therefore cannot be accepted

ITT - Goods in a shop window or on a shelf

In a shop, an offer is made by the customer on presenting the goods. (Fisher v Bell) Flick knife on display was not being “offered to sell” contrary to the restriction of offences weapons act

ITT - Advertisements and Brochures

Usually ITTs. they become offers when the person viewing them contacts the advertiser. (Partridge v Crittenden) protected wild birds were being advertised for sale, but the court decided they were not at this stage being offered

ITT - A request for information

A general enquiry or indication of price is not an offer by itself. (Harvey v Facey) H sent a message asking for price of a farm. F replied with a price, and H tried to buy at that price but could not as the reply was merely a reply of information not an offer

ITT - Auctions

At an Auction the bidder makes the offer that the auctioneer then accepts by banging his or her hammer. This means that the lots available at an auction are an invitation to treat.

Carlill v Carbolic Smoke ball co

A company published an advert stating it would pay £100 to anyone who used its smoke ball remedy and became ill. £1,000 was placed on deposit.

The court decided this was an offer, owing to the clear wording used, and that it cold be anyone who bought the smoke ball. the deposit of "£1,000 demonstrated a willingness to be bound by the promise

Thornton v Shoe lane parking

anyone can make an offer, a person, business or other organisation. in this case a parking meter was deemed to be making an offer to anyone who wanted to park.

Making an offer

an offer comes into existence when it is communicated to the offeree. Communication of the offer is vital since an offeree cannot accept an offer that they do not know about

Inland Revenue Commission v Fry

F owed te Inland revenue over £100k. F sent a cheque along with a letter that said the cheque should only be chased if they were happy to accept it as the full settlement. The cheque was cashed before the letter was read

Ending an offer

An offer can come to an end in the following way:

• Revocation

• Rejection

• Lapse of time

• Death

• Acceptance

Revocation

An offer can be revoked by the offeror at any time before it has been accepted. the offeror must communicate the revocation to the offeree before it is effective

Routledge v Grant

G offered his house for sale, stating that the offer would remain open for six weeks. Three weeks later G told R that he had changed his mind and no longer wished to sell the house. This was effective revocation even though it was within the six-week period.

Dickinson v Dodds

Dodds offered to sell a house to Dickinson, stating that the offer would remain open until Friday. The house was sold to someone else and Dickinson heard of the sale via a reliable third party. This was an effective revocation as it was from a reliable source

Rejection

Once an offer is rejected, it cannot be accepted by the person rejecting the offer as the rejection ends the offer. A counter offer is treated as a rejection of an offer as it is trying to vary the terms of the original offer.

Hyde v Wrench

W offered to sell his farm for 1k. H offered him £950 instead. W refused, and when H later tried to accept the original offer the court decided it had ended with the counter offer.

Lapse of time

If a fixed period for the duration of the offer is stated, then as soon as that expires there is no offer to accept. Where the offeror has not specified a time limit, it will lapse on a reasonable length of time. in (Ramsgate Victoria hotel v Montefiore) 5 months was considered too long.

Death

if the offeree dies then the offer ends and those dealing with his or her estate cannot accept the offer. When an offeror dies, acceptance can still take place until the offeree learns of the death. This doesn’t matter when the offer is to perform some personal service.

Acceptance

Acceptance of an offer means unconditional agreement to all the terms of that offer. Acceptance requires matching the terms of the offer exactly. Any variation will amount to a counter-offer

Stevenson v McLean

Court decided that a letter sent by S asking whether payment could be in instalments was not a counter offer but a mere enquiry. The offer was therefore still open to accept later

Felthouse v Bindley

F said to B, “if i hear no more from you, i shall consider this horse mine at £30”. B did not reply but the court held there was no contract as silence or inactivity is not acceptance. Acceptance must be communicated

Brogden v Metropolitan railway

B supplied coal to a railway company for many years on an informal basis with no written contract. Both parties c

Yates v Pulleyn

Acceptance was to be made in writing by registered delivery. The court decided that when Y sent it by ordinary post, acceptance WAS effective.

If the offeror asks for acceptance in a particular way, then it must usually be performed in that way unless the method was “equally effective”

The postal rule

Where acceptance is communicated by Post, acceptance takes place the moment the letter is posted. The rule only applies if use of the post is reasonable, and the letter is correctly stamped and addressed.

Adam v Lindsell

Wool was offered for sale and an acceptance letter was posted. The letter was delayed in the post and Lindsell assumed Adams did not want the wool. The court decided that there was a valid contract because acceptance took place once the letter was posted

Household Fire Insurance v Grant

It was held that the rule applies even where the letter is never received, rather than merely delayed

Holwell Securities v Hughes

an attempt to rely on the postal rule failed where the acceptance was required to be “by notice in writing”. The fact that actual notice was required meant that the postal rule did not apply

Electronic methods of communication

where acceptance is made by an instant mode of communication, these are treated as face to face so actual communication is needed. In general the communicator is responsible for making sure the message gets through

Entores v Miles Far East

The court of appeal decided that acceptance by Telex took place when and where it was received

Brinkibon v Stahag Stahl

The telex machines were in the offices of the parties and the messages were received inside normal working times so that communication to the machine was actual communication

Messages outside of Hours

messages received out of working hours will take effect when the offeree can reasonably expect it to be communicated to the offeror. This is likely to be the next working day for businesses. However each case is taken on its own merit

Thomas v BPE solicitors

T sent acceptance of an offer by email to the offeror’s solicitor at 6pm on a Friday before a bank holiday, but the solicitor had gone home at 5:45pm. The high court decided that the email took effect at 6pm Friday, as the transaction could have been completed and 6pm was not seen by the court as out of hours

Intention to create legal relations

Each party to a contract must intend the agreement to be legally binding and therefore enforceable in court. This is an objective issue, and the courts make 2 sensible presumptions regarding social and business agreements.

Social agreements Presumption

The courts presume that agreements made between family members or close friends are not intended to form a contract, but the presumption can be rebutted

Balfour v Balfour

Husband promised to pay wife an allowance whilst he was abroad, but failed to which caused the marriage to break down.

The court decided that this was a domestic arrangement, and as the agreement was at an amicable point in the relationship, there was no ICLR

Merrit v Merrit

Mr M had left his wife. An agreement to send some money and sign over the house was held to create legally binding obligations as the parties were separated and about to divorce. The agreement could be enforced by the court

Snelling v Snelling

Three brothers were directors of a business and agreed to loan money to the business and if any resigned their loan would be forfeit. The court decided that the agreement was inteded to be binding as it had a commercial context

Jone v Padavatton

Mother persuaded daughter to move to the UK saying she’d house and support her financially. the later fell out and the mother tried to evict the daughter

There was no ICLR as the agreement was made at a point where they were very close

Simpkins v Pays

An agreement between family members and a lodger was legally binding as it had included a third party in the form of the lodger and involved money changing hands.

Wilson v Bunnet

3 Young women attended a bingo session where one won 100k. The suggestion of a contract to share the winnings was undermined by the other 2 women asking if “she was going to share”, suggesting no ICLR therefore a claim to the money failed

Parker v Clark

A young couple were persuaded by an older couple to sell their house and move in with them, saying they’d inherit the house. later the couples fell out and the young couple was asked to leave.

There was ICLR as there was a risk towards the younger couples financial security.

Granatino v Radmacher

The courts are prepared to attach “significant weight” to pre-nuptial agreements that are freely entered into with a full appreciation of its implication for the couple”

Business agreements presumption

In business dealing , the courts will presume that any agreement made was intended to be a contract, e.g. Carlill v Carbolic Smoke ball

Edwards v Skyways

An airline pilot was promised a payment by his employer upon redundancy, but they didn’t pay. The court decided that the promise was ICLR, therefore the company owed him money

McGowan v Radio Buxton

M entered and won a radio competition to win a Renault Clio car, but was given a small model car instead. the court decided that this was an enforceable contract as "there was not even a hint that this would be a toy” there was reasonable expectation for a real car prize

Jones v Vernon Pools

Mr Jones entered a competition and won. Vernon pools refused to pay stating tat on the back of the form it said “these words are binding in honour only”. The court decided that the words meant there was no ICLR, but simply a “gentleman’s agreement”

Kleinwort Benson v Malaysia Mining

A Malaysian company acquired a loan from UK bankers to fund its company in London. The bank relied on a letter of comfort sent by the company when it liquidated to reclaim its money. The comfort letter was designed only to reassure not to create legal relations

Consideration

Consideration is what one party gives (or promises to give) in exchange for the other party’s performance (or promise of performance) and is set out in (Dunlop v Selfridge).

• Consideration must be sufficient but need not be adequate

• Consideration must not be in the past

• Consideration cannot be for an existing obligation

Consideration must be sufficient not adequate

Sufficient means that what is promised must hold some amount of value. however what is promised need not be the real or market value of the goods or services.

Thomas v Thomas

Before he died, a man expressed his wish for his wife to remain in the house. The wish wasn’t in the will but executors agreed that the wife could live there provided she pay £1 a year. when the tried to evict her the court decided this was good consideration even if it wasn’t commercial rent

Chappell & Co v Nestle

Nestle offered music records in return for used sweet wrappers as part of a promotion. The court decided that the wrappers were sufficient consideration despite not holding the same value

White v Bluett

A son owed his father money. The father promised not to enforce the debt if the son promised to not complain about the fathers will. The sons promise wasn’t good consideration as he had no right to complain about the will anyway

Past consideration

Consideration must not be in the past. It must not be something that was already done when the agreement was made. If a promise or payment has already been carried out, it was a gift. it needs to be in return for another promsie made as part of a contract.

Re McArdle

A widow had been left a house that was later inherited by her 5 children. One son and his wife paid for repairs, and once completed the other sons agreed to contribute to the cost. The court decided that consideration was in the past and there was no valid contract

Exception to Past C

If one party acted at the others request and it was understood all along that payment wold be made later, the past consideration will be valid.

Lampleigh v Braithwaite

B had been sentenced to death. he asked L to speak to the king and seek a pardon for murder. L succeeded and then B promised to pay £100, which he never did. The court decided there was good consideration as it was so important a fee was implied

Re Casey’s Patents.

C worked on obtaining certain legal rights for a company, the company later promised a thirds share in those rights. The court decided that C was entitled to the share as it was implied that he would receive payment when working.

Performing an existing duty

The general rule is that if you promise to do something that you already have to do, it is not good consideration as you’re obliged to do it anyway. may arise due to contractual obligation etc

Stilk v Myrick

2 out of 12 sailors deserted their ship during a voyage. the Captain promised those who remained extra wages. When they returned the captain refused. The court decided no consideration was given as they were obligated to sail home anyway

Exception to existing duties

If you do more than your existing duty, or provide some extra practical benefit to the promisor, then it could be good consideration.

Hartley v Ponsonby

Over half the crew of a ship deserted, leaving few experienced sailor to sail home. Extra wages were offered. THs was good consideration was the sailed had gone beyond their contractual duty

Glasbrook Bros v Glamorgan CC

During a strike a mine owner asked for extra protection from the police by having officers live on site. As the police provided more officers and in a different way than usual, they had gone beyond their public duty, and the extra payment would be required

Williams v Roffey

R hired W to do carpentry work on the refurbishment of flats. W were in financial difficulties and couldn’t finish it. R offered more to get the work done and avoid penalty payment for the deadline. The court decided that W was owed the extra, as R gained a benefit by avoiding the delay and pentalty

Scotson v Pegg

S made a contract to sell coal to B, but deliver to P. P failed to unload the coal as promised. The court disagreed with P’s argument and held that performing a contractual duty to a third party can amount to good consideration for a new promise by the third party

Privity of Contract

The doctrine of privity means that generally only those who are parties to a contract are bound by it and can benefit from it. Anyone outside the contract cannot claim or be claimed against.

Tweddle v Atkinson

Two fathers whose children were engaged made an agreement to give them money as a wedding gift. One father died and the executor refused. Although the promise had been made for the couples benefit, the court held they had no right to enforce it.

Beswick v Beswick

an Uncle made a contract to sell his business to his nephew in exchange for an allowance to be paid to him and his widow. The court decided that one the uncle died the widow could not herself claim as she wasn’t a party in the contract, but could claim as her husbands administrator.

The contract (Rights of third parties) Act 1999

Rules of privity were reformed by this act. The act allows a person who is not a party to the contract to enforce a term of that contract provided:

• The contract expressly states that the parrty may do so S.1(1)(a)

• The term clearly confers a benefit on the third party S.1(1)(b)

Notes about Act

• A third party must be expressly identified in the contract by name, or describe as a member of a particular class S.1(3)

• s.1(1)(b) does not apply if it appears the parties did not intend the term to be enforceable S.1(2)

Nisshin Shipping co v Cleaves

A contract between Nisshin and various clients included a requirement to pay commissions to cleaves, the broker who arranged contracts.

The judge held that Nisshin was unable to show that the arties didn’t intend the term to be enforceable by cleaves, therefore they were entitled to rely on the act

Common Law exceptions to the rule

• Holiday cases: e.g. if a parent books a holiday they can claim on the families behalf

• Agency

• A trust exists to benefit a third party

• If the court finds a collateral contract, which runs alongside the main contract

• A third party motor insurance policy.

Jackson v Horizon Holidays

The holiday booked by Mr Jackson was a disaster by Horizon refused to compensate the rest of the family. The court decided that it would be unfair to limit the award of damages to the family, and they should reflect all the members of the family

Shanklin Pier v Detel Products

A pier company hired a firm of painters to paint their pier. Detel products represented to the company that the paint would last 7 years. when the paint didn’t last they tried to sue, and found a collateral contract.