Contract formation

What is a contract?

A legally enforceable agreement between two or more parties.

What are the main elements normally required to form a simple contract?

Agreement (offer and acceptance), consideration and an intention to create legal relations, together with sufficient certainty and capacity.

What is an offer?

A definite promise to be bound on specified terms once accepted by the person to whom it is addressed.

Who is an offeror?

The person who makes the offer.

Who is an offeree?

The person to whom an offer is made.

Can an offer be made to one person, a group or the world at large?

Yes. An offer may be directed to an individual, a class of people or the world at large.

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

An offer is capable of immediate acceptance; an invitation to treat invites another party to make an offer.

Are goods displayed in a shop normally an offer or an invitation to treat?

Normally an invitation to treat; the customer makes the offer to buy.

Are advertisements normally offers?

Normally they are invitations to treat, although an advertisement can amount to a unilateral offer if sufficiently clear and definite.

What is a unilateral contract?

A contract in which one party promises something in return for the other party performing a specified act.

What is the significance of Carlill v Carbolic Smoke Ball Co?

It shows that an advertisement can be a unilateral offer to the world where its wording demonstrates a serious intention to be bound.

What is the general rule for auction sales?

The auctioneer's request for bids is normally an invitation to treat; each bid is an offer that may be accepted when the hammer falls.

What is a counter-offer?

A response that changes the terms of the original offer and proposes different terms.

What effect does a counter-offer normally have on the original offer?

It normally destroys the original offer so that it can no longer be accepted.

What is the significance of Hyde v Wrench?

A counter-offer rejects and terminates the original offer.

Does a mere request for information terminate an offer?

No. Asking for clarification does not necessarily amount to a counter-offer or terminate the offer.

What is acceptance?

A final and unqualified assent to the terms of an offer.

What is the mirror-image rule?

Acceptance must correspond exactly with the terms of the offer; otherwise the response may be a counter-offer.

Must acceptance normally be communicated to the offeror?

Yes, subject to limited exceptions such as some unilateral contracts and the postal rule.

Can silence normally amount to acceptance?

No. An offeror cannot normally impose a contract by stating that silence will count as acceptance.

What is the significance of Felthouse v Bindley?

It illustrates the rule that silence does not normally constitute acceptance.

When is acceptance by instantaneous communication generally effective?

When the acceptance is received by the offeror.

What is the postal rule?

Where it applies, acceptance is effective when a properly addressed and stamped acceptance is posted, rather than when it is received.

When might the postal rule not apply?

Where the offer requires actual receipt, use of post is unreasonable, or the surrounding circumstances exclude the rule.

Can an offeror prescribe a method of acceptance?

Yes. If the offer requires a particular method, the offeree should comply with it, especially where it is stated to be the only valid method.

How is a unilateral offer normally accepted?

By fully performing the act specified in the offer.

What is revocation of an offer?

Withdrawal of an offer by the offeror before it has been accepted.

When must revocation normally be communicated?

Before acceptance takes place.

Can revocation be communicated through a reliable third party?

Yes. The offeree may learn reliably from a third party that the offeror has withdrawn or disposed of the subject matter.

What is the significance of Dickinson v Dodds?

An offeree can have effective notice of revocation through a reliable third party.

Give common ways in which an offer may terminate.

Revocation, rejection, counter-offer, lapse of time, failure of a condition, death in some circumstances, or acceptance.

What is consideration?

Something of value in the eyes of the law given in exchange for a promise.

Who is the promisor?

The person who makes the promise.

Who is the promisee?

The person to whom the promise is made.

Must consideration move from the promisee?

Yes. A person seeking to enforce a promise must normally have provided consideration for it.

Must consideration be adequate?

No. The courts do not normally assess whether the bargain was economically equal.

Must consideration be sufficient?

Yes. It must have some value recognised by law, even if it is not economically adequate.

What is the significance of Chappell & Co Ltd v Nestle Co Ltd for consideration?

Consideration need not be adequate; items of very small economic value can still be legally sufficient.

Is past consideration normally good consideration?

No. An act already completed before a promise is made is normally not valid consideration for that later promise.

What is the significance of Re McArdle?

Work carried out before a later promise of payment was made amounted to past consideration and did not support the promise.

Can performing an existing contractual duty amount to consideration for a further promise?

In some circumstances, yes, particularly where the promisor obtains a practical benefit and there is no duress or fraud.

What is the significance of Williams v Roffey Bros?

Performance of an existing contractual duty may provide consideration for a further promise where the promisor obtains a practical benefit.

What is the general rule when a debtor pays only part of a debt?

Part-payment of a debt on the due date does not normally provide consideration for a promise to waive the balance.

What is the significance of Pinnel's Case and Foakes v Beer?

They support the rule that payment of a smaller sum cannot normally satisfy a larger debt without fresh consideration.

What is promissory estoppel?

An equitable doctrine that may prevent a party from insisting on strict legal rights where a clear promise not to enforce them has been relied upon and it would be inequitable to go back on it.

Can promissory estoppel normally be used to create a new cause of action?

No. It is generally a defence, often described as a shield rather than a sword.

What is intention to create legal relations?

The requirement that the parties intend their agreement to have legal consequences.

What is the usual presumption for domestic or social agreements?

The parties are presumed not to intend legal relations, although the presumption can be rebutted.

What is the significance of Balfour v Balfour?

An ordinary domestic arrangement between spouses was presumed not to be legally binding.

What is the significance of Merritt v Merritt?

A domestic presumption can be rebutted where the circumstances, such as separation and a written agreement, indicate an intention to be legally bound.

What is the usual presumption for commercial agreements?

The parties are presumed to intend legal relations.

Can the commercial presumption be rebutted?

Yes, but clear wording or evidence is normally required to show that the parties did not intend legal enforceability.

Why must contractual terms be certain?

A court must be able to identify what the parties agreed before it can enforce the contract.

What may happen if an essential term is too vague or uncertain?

The agreement may be unenforceable for uncertainty.

What is contractual capacity?

The legal ability of a person or entity to enter into a binding contract.

Are contracts made by minors always void?

No. Some are binding, particularly contracts for necessaries and certain beneficial contracts of service.

What are necessaries in relation to a minor?

Goods or services suitable to the minor's condition in life and actual requirements at the time of sale and delivery.

What is privity of contract?

The general rule that only parties to a contract can sue or be sued on it.

What problem does the doctrine of privity create for third parties?

A third party who benefits from a contract may traditionally be unable to enforce that benefit because the third party is not a party to the contract.

Which Act creates an important statutory exception to privity?

The Contracts (Rights of Third Parties) Act 1999.

When may a third party enforce a contractual term under the Contracts (Rights of Third Parties) Act 1999?

Broadly, where the contract expressly permits enforcement or the term purports to confer a benefit on an identified third party, unless the contract shows otherwise.

How must a third party normally be identified under the 1999 Act?

By name, as a member of a class, or by answering a particular description; the third party need not necessarily exist when the contract is made.

Can contracting parties exclude the Contracts (Rights of Third Parties) Act 1999?

Yes. They can draft the contract so that third parties do not have enforcement rights under the Act.

What is the key exam distinction between offer and invitation to treat?

Ask whether the statement shows a definite willingness to be bound immediately on acceptance, or merely invites offers from others.

What is the key exam distinction between adequate and sufficient consideration?

Consideration need not be economically equal, but it must have legally recognised value.