Contract Law

Essential Features of Contract

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 Lecture 1
Essential Features of Contract
 Formation of contract;

 Essential elements of a contract;

 Intention to create legal relations;

 Offer & Acceptance, invitation to treat;

 Consideration, part payment of debts;

 Battle of Forms;

 Parol evidence rule;

 Postal rule 2
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 Formation of a Contract
A contract may be defined as an agreement
between two or more parties that is intended to
be legally binding.

The first requisite of any contract is an

agreement (consisting of an offer and
acceptance). At least two parties are required;
one of them, the offeror, makes an offer which
the other, the offeree, accepts.

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 Essential Elements of a Contract
Agreement – An agreement is formed when one party accepts
the offer of another and involves a “meeting of the minds”.

Consideration – Both parties must have provided consideration,

i.e., each side must promise to give or do something for the
other.

Intention to create legal relations – The parties must have

intended their agreement to have legal consequences. The law
will not concern itself with purely domestic or social agreements.

Form – in some cases, certain formalities (that is, writing) must

be observed.

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 Essential Elements of a Contract
Capacity – The parties must be legally capable of entering into a
contract.

Consent – The agreement must have been entered into freely.

Consent may be vitiated by duress or undue influence.

Legality – The purpose of the agreement must not be illegal or

contrary to public policy.

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Intention to Create Legal Relations
Domestic Agreements – Agreements between a husband and
wife living together as one household are presumed not to be
intended to be legally binding, unless the agreement states to
the contrary.

Social Agreements – It is recognised that there is a sphere of

social arrangements where contractual relations are not
intended.

Commercial Agreements – In commercial agreements, there is a

strong presumption that the parties intend to be legally bound.

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 Offer
An offer is an expression of willingness to contract made with
the intention that it shall become binding on the offeror as soon
as it is accepted by the offeree. A valid offer:

 Must be communicated, so that the offeree may accept or

reject it;

 May be communicated in writing, orally, or by conduct;

 May be made to a particular person, to a group of persons, or

the whole world;

 Must be definite in substance;

 Must be distinguished from an “invitation to treat”.

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 Unilateral Offer
The offeror alone makes a promise. The offer is accepted by
doing what is set out in the offer. For example:

Offer – I will pay $500 to anyone who return my lost dog.

Acceptance – The lost dog is returned.

Revocation of unilateral offer – communication will be assumed

if the offeror takes reasonable steps to inform the public.

Revocation cannot take place if the offeree has started to

perform.

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 Unilateral Offer
Carlill v Carbolic Smoke Ball Co (1893)

An advert was placed for 'smoke balls' to prevent influenza. The

advert offered to pay £100 if anyone contracted influenza after
using the ball. The company deposited £1,000 with the Alliance
Bank to show their sincerity in the matter. The plaintiff bought
one of the balls but contracted influenza. It was held that she
was entitled to recover the £100.

The Court of Appeal held that:

(a) the deposit of money showed an intention to be bound,
therefore the advert was an offer;
(b) it was possible to make an offer to the world at large, which
is accepted by anyone who buys a smokeball;
(c) the offer of protection would cover the period of use; and
(d) the buying and using of the smokeball amounted to
acceptance.
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 Cross Offer
A writes to B offering to sell certain property at a stated price.

B writes to A offering to buy the same property at the same price.

The letters cross in the post.

Is there (a) an offer and acceptance, (b) a contract?

This problem was discussed, obiter, by the Court in Tinn v

Hoffman (1873) 29 LT 271.

Five judges said that cross-offers do not make a binding

contract. One judge said they do.

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 Termination of the Offer
Rejection – If the offeree rejects the offer that is the end of it.

Revocation – The offer may be revoked by the offeror at any

time until it is accepted. However, the revocation of the offer
must be communicated to the offeree(s). Unless and until the
revocation is so communicated, it is ineffective.

Counter offer - In his reply to an offer, the offeree introduces a

new term or varies the terms of the offer.

Lapse of time – Where an offer is stated to be open for a specific

length of time, then the offer automatically terminates when that
time limit expires. Where there is no express time limit, an offer
is normally open only for a reasonable time.

Death – The offeree cannot accept an offer after notice of the

offeror’s death. 12
 Termination of the Offer
Byrne v Van Tienhoven (1880)

1 Oct: D posted a letter offering goods for sale.

8 Oct: D revoked the offer; which arrived on 20 Oct.
11 Oct: P accepted by telegram
15 Oct: P posted a letter confirming acceptance.

It was held that the defendant's revocation was not effective

until it was received on 20 Oct. This was too late as the contract
was made on the 11th when the plaintiff sent a telegram.
Judgment was given for the plaintiff.

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 Invitation to Treat
An invitation to treat is an action by one party which may appear
to be a contractual offer but which is actually inviting others to
make an offer of their own. An invitation to treat may be seen as
a request for expressions of interest.

The following are examples of invitations to treat :

Auctions – In an auction, the auctioneer's call for bids is an

invitation to treat, a request for offers. The bids made by
persons at the auction are offers, which the auctioneer can
accept or reject as he chooses.

Display of goods – The display of goods with a price ticket

attached in a shop window or on a supermarket shelf is not an
offer to sell but an invitation for customers to make an offer to
buy.
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 Invitation to Treat
Advertisements – Advertisement of goods for sale are normally
interpreted as invitations to treat. However, advertisements may
be construed as offers if they are unilateral, i.e., open to all the
world to accept (e.g., offers for rewards).

Mere statement of price – A statement of the minimum price at

which a party may be willing to sell will not amount to an offer.

Tenders – Where goods are advertised for sale by tender, the

statement is not an offer, but an invitation to treat; that is, it is a
request by the owner of the goods for offers to purchase them.

E-Commerce – It would seem likely that the display of goods

and prices on a website will be treated as an invitation to treat
and to as an offer, since otherwise there might well be
thousands of acceptances at the click of a button of an item.
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 Invitation to Treat
Fisher v Bell (1960)

A shopkeeper displayed a flick knife with a price tag in the

window. The Restriction of Offensive Weapons Act 1959 made it
an offence to 'offer for sale' a 'flick knife'. The shopkeeper was
prosecuted in the magistrates' court but the Justices declined to
convict on the basis that the knife had not, in law, been 'offered
for sale'.

This decision was upheld by the Queen's Bench Divisional

Court. Lord Parker CJ stated: "It is perfectly clear that according
to the ordinary law of contract the display of an article with a
price on it in a shop window is merely an invitation to treat. It is
in no sense an offer for sale the acceptance of which constitutes
a contract."

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 Invitation to Treat
Pharmaceutical Society of Great Britain v. Boots Cash Chemists
(Southern) Ltd. [1953] 1 Q.B. 401

The Court distinguished the display of a product in a store with a

price attached is not sufficient to be considered an offer, but rather
is an invitation to treat.

When a customer would enter the store he or she was given a

basket and could pick items off the shelves as they wished and
place them in the basket. The customer would then take it to the
cash desk next to where a registered pharmacist was watching.

The display of goods was not an offer, rather the customer made an
offer to buy when he or she placed the item in the basket. The offer
can be accepted or rejected by the pharmacist by the cash desk.
Thus, the moment the actual contract is completed is at the cash
desk under the supervision of the pharmacist. 17
 Acceptance
An acceptance is a final and unqualified acceptance of the terms
of an offer.

A valid acceptance must:

 Be in response to the offer;

 Be made while the offer is still in force;

 Be made and communicated by the offeree or his agent;

 Exactly match the terms of the offer;

 Be written, oral, or implied from conduct.

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 Counter Offer
If in his reply to an offer, the offeree introduces a new term or
varies the terms of the offer, then that reply cannot amount to an
acceptance. Instead, the reply is treated as a "counter offer",
which the original offeror is free to accept or reject. A counter-
offer also amounts to a rejection of the original offer which
cannot then be subsequently accepted.

A counter-offer should be distinguished from a mere request for

information.

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 Counter Offer
Hyde v Wrench (1840)

6 June: W offered to sell his estate to H for £1000; H offered

£950
27 June: W rejected H's offer
29 June: H offered £1000. W refused to sell and H sued for
breach of contract.

It was held that if the defendant's offer to sell for £1,000 had
been unconditionally accepted, there would have been a binding
contract; instead the plaintiff made an offer of his own of £950,
and thereby rejected the offer previously made by the defendant.
It was not afterwards competent for the plaintiff to revive the
proposal of the defendant, by tendering an acceptance of it; and
that, therefore, there existed no obligation of any sort between
the parties.
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 Communication by
instantaneous/electronic means
Fax, telex – It is suggested that , during normal office hours,
acceptance takes place when the message is printed out not
when it is read. A message sent outside business hours should
be ‘communicated’ when it is expected that it would be read, for
example, at the next opening of business.

Telephone – There is no direct authority on telephone answering

machines. It might well be argued that the presence of an
answering machine indicates that communication is not
instantaneous. It would then follow that acceptance must be
communicated. Acceptance, therefore, would take place when
the message is actually heard by the offeror.

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 Consideration
Something of value given by both parties to a contract that
induces them to enter into the agreement to exchange mutual
performances.

In a bilateral contract—an agreement by which both parties

exchange mutual promises—each promise is regarded as
sufficient consideration for the other.

In a unilateral contract, an agreement by which one party makes

a promise in exchange for the other's performance, the
performance is consideration for the promise, while the promise
is consideration for the performance.

Consideration must have a value that can be objectively

determined. A promise, for example, to make a gift, or a promise
of love or affection, is not enforceable because of the subjective
nature of the promise. 22
 Rules Governing Consideration
 Consideration must be referable to the promise;
 Consideration must move from the promisee - but not
necessarily to the promisor;
 Consideration need not be adequate - but must be sufficient;
 Consideration must not be illusory; "I will give you ten
dollars if I feel like it,"
 Consideration must be current - it cannot be past;
 Performance of an existing obligation under a contract owed
to the promisor - is not consideration for a promise;
 Part payment of a debt - is not consideration for a promise to
discharge the whole sum;
 Performance of a public law duty - is not consideration for a
promise;
 Performance of a contractual obligation owed to a third party
- does amount to consideration for a promise.
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 Rules Governing Consideration
Consideration must not be past – If one party voluntarily
performs an act, and the other party then makes a promise, the
consideration for the promise is said to be in the past. The rule is
that past consideration is no consideration, so it is not valid and
cannot be used to sue on a contract. For example, A gives B a lift
home in his car. On arrival B promises to give A $50 towards the
petrol. A cannot enforce this promise as his consideration, giving
B a lift, is past.

Consideration must be sufficient but need not be adequate –

Providing consideration has some value, the courts will not
investigate its adequacy. Where consideration is recognised by
the law as having some value, it is described as "real" or
"sufficient" consideration. The courts will not investigate
contracts to see if the parties have got equal value.

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 Past Consideration
Roscorla v Thomas (1842) 3 QB 234

Roscorla and Thomas contracted to buy a horse for £30. After the
sale, Thomas promised Roscorla that the horse was sound; the
horse turned out to be vicious. It was held that Roscorla could
not enforce the promise, as the consideration given for entering
into the contract to buy the horse had been completed by the
time the promise was made; in a sense, the consideration was
"used up".

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Performance of an existing contractual
duty is not consideration
The performance of an existing contractual duty owed to the
promisor is not good consideration for a fresh promise given by
the promisor.

Stilk v Myrick (1809) 2 Camp 317

Stilk, a seaman, agreed with Myrick to sail his boat to the Baltic
Sea and back for £5 per month. During the voyage, two men
deserted. Myrick promised he would increase Stilk's wages if Stilk
agreed to honour his contract in light of the desertions. Stilk
agreed and on return to port, Myrick refused to pay him the extra
wages. It was held that Myrick's fresh promise was not enforceable
as the consideration Stilk had provided for it, the performance of a
duty he already owed to Myrick under contract, was not good
consideration for Myrick's promise to increase his wages.
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 Performance of an existing contractual
duty is not consideration (Exception)
Williams v Roffey Bros & Nicholls (Contractors) Ltd. [1991] 1 QB 1

The defendants were building contractors and had a big contract to

build a block of flats. They employed the claimant to do all the
carpentry for the flats, he agreed to do it for £20,000. They paid him
in instalments. Part way through it became clear that the plaintiff
would not finish the work on time.

The defendants had a clause in their contract for building the flats
whereby they paid a heavy penalty for everyday the flats were late.
(Penalty Clause). Defendants worried about failing to meet deadline
due to plaintiff. Asked him if there was a problem, turned out he had
underestimated the cost. The defendants agreed to pay him extra is
he finished on time. He did but they refused to pay the extra as he
had already agreed to finish on time for the £20,000 originally agreed.
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Performance of an existing contractual
duty is not consideration (Exception)
Williams v Roffey Bros & Nicholls (Contractors) Ltd. [1991] 1 QB 1

Held:
There is an exception in modern law to the Myrick principle. In
practice there is a benefit to the defendants by paying the claimant
the extra money. There were many conditions stated by the court
to except the Myrick Principle. Since the defendants didn’t have to
pay out on their penalty cause they had benefited and therefore
the claimant’s work had been consideration for the new offer.

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 Contracts "under seal"
There is one exception to the requirement of "consideration"
and that is a "deed", which is a contract "under seal" or a
"specialty contract". In centuries past, persons contracting
would drip a drop of hot wax on the bottom of the contract and
press a family ring into the wax, thereby signifying consent to
the terms of the document. Nowadays, deeds are used mostly in
contracts that involve real estate. If a contract is a "deed", then
no consideration is required. If charitable donations are made
under seal, they are valid contracts even though there is no
valid consideration.

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 Part Payment of Debts
Basic Rule: Payment of a smaller sum will not discharge the duty to
pay a higher sum.

If one person owes a sum of money to another and agrees to pay

part of this in full settlement, the rule at common law is that part-
payment of a debt is not good consideration for a promise to forgo
the balance. Thus, if A owes B $100 and B accepts $50 in full
satisfaction on the due date, there is nothing to prevent B from
claiming the balance at a later date, since there is no consideration
proceeding from A to enforce the promise of B to accept part-
payment. This is because he is already bound to pay the full amount.
It also protects a creditor from the economic duress of his debtor.

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 Part Payment of Debts
However, it was held that the agreement to accept part-payment
would be binding if the debtor, at the creditor's request, provided
some fresh consideration.

Consideration might be provided if the creditor agrees to accept:

 part-payment on an earlier date than the due date;

 by a different method: chattel instead of money;

 part-payment in a different place to that originally specified;

 where payment is accompanied by a benefit of some kind;

 where payment is made by a third party.

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 Battle of Forms
The phrase “battle of the forms” comes from a situation that
sometimes occurs when businesses attempt to enter legal
relations but use their own standard term contracts to reply to
each others communication in negotiations. The battle starts
when one business sends their terms to another business, but
the other business replies by sending their own standard term
contract back stating that the contract is on their terms.

The ‘Last Shot’ approach :

If the general rules on offer and acceptance were to be applied,
there would either be no contract at all since the purported
acceptance by the offeree would amount to a counter-offer, or if
the two parties have started to perform without objecting to
each other's standard terms, a contract would be considered to
have been concluded on the basis of those terms which were
the last to be sent or to be referred to (the "last shot").
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 Battle of Forms
Butler Machine Tools Ltd v Ex-Cell-O Corp (1979) 1 WLR 401
The defendants wanted to buy a machine from the claimant. The
claimant provided a quotation of price on a standard term draft
contract with a clause allowing them to vary the price since the
goods were not to be delivered for 10 months, and stating that
their terms would prevail over any terms in the buyers order.
The buyers placed an order on another standard term draft
agreement which included a tear-off acknowledgement slip
stating “we accept your order on the terms and conditions
contained thereon”. The claimant sent the acknowledgement
slip back to the buyers.
The contract was made under the buyers terms. The court of
appeal held that the reply to the quotation was not an
unconditional acceptance but a counter-offer. The sellers
accepted the terms on the buyers counter-offer when they
returned the acknowledgement slip.
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 Parol Evidence Rule
Terms of a contract are commonly proposed, discussed, and
negotiated before they are included in the final contract. When the
parties to the negotiations do put their agreement in writing and
acknowledge that the statement is the complete and exclusive
declaration of their agreement, they have integrated the contract.

The parol evidence rule presumes that a written contract embodies

the complete agreement between the parties involved. The rule
therefore generally forbids the introduction of extrinsic evidence (i.e.,
evidence of communications between the parties which is not
contained in the language of the contract itself) which would change
the terms of a later written contract.

The parol evidence rule applies to written contracts to safeguard the

terms of the contract. The courts assume by the parol evidence rule
that contracts contain the terms and provisions that the parties
specifically intended and lack those provisions that the parties did
not want. 34
 Parol Evidence Rule
There are a number of exceptions to the parol evidence rule.
Extrinsic evidence can always be admitted for the following
purposes:

 To work out the subject matter of the contract;

 To resolve an ambiguity in the contract;

 To show fraud, duress, mistake, or illegal purpose on the part

of one or both parties;

 To identify the parties, especially if the parties have changed

names;

 To imply or incorporate a term of the contract. 35

 Postal Rule
Acceptance takes place when a letter is posted, not when it is
received, even when the letter is lost in the post.

A rule of contract law that makes an exception to the general

rule that an acceptance is only created when communicated
directly to the offeror. An acceptance is binding and the
contract is said to be perfected when the acceptor places this
acceptance in the mail box for return mail even if, in fact, it
never reaches the offeror. This is known as the "postal rule." If
the post office loses or delays the acceptance letter, there is
still a binding contract.

Remarks:
Acceptance of an offer takes place when a letter is posted.
Revocation of an offer takes place when the letter is received.
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 Postal Rule
Adams v Lindsell (1818) B & Ald 681

2 Sept: The defendant wrote to the plaintiff offering to sell

goods asking for a reply "in the course of post“

5 Sept: The plaintiff received the letter and sent a letter of

acceptance.

9 Sept: The defendant received the plaintiff's acceptance but

on 8 Sept had sold the goods to a third party.

It was held that a binding contract was made when the plaintiff
posted the letter of acceptance on 5 Sept, so the defendant
was in breach of contract.

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 Limitations to the Postal Rule
 It only applies to acceptances, and not to any other type of
communication.

 It only applies to letters and telegrams. It does not apply to

instantaneous methods of communication such as telex or,
probably, fax or e-mail.

 It must be reasonable to use the post as the means of

communication.

 Letters of acceptance must be properly addressed and

stamped.

 It may be excluded by the offeror either expressly or

impliedly. 38
 QUESTION ONE:
A sends B an offer through the mail to sell A's car for $100,000.
Whilst this offer is in the mail, B, in ignorance thereof, mails to A an
offer to pay $100,000 for the car. Is there a contract? Give reasons
for your answer.

QUESTION TWO:
A offers to sell his apartment to B for $1,500,000 within 30 days. A
week later he sells the apartment to C. Has B any legal cause for
complaint? Give reasons for your answer.

QUESTION THREE:
A offers to sell B his apartment for $1,500,000, stating that the offer
will remain open for 30 days. B replies, "I will give you $1,400,000
for the block", and on A's declining that, B writes within the 30 day
period, "I accept your offer to sell for $1,500,000 ". Is A under an
obligation to sell to B? Give reasons for your answer.

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 Lecture 2 – Contents of Contract
 Express and implied terms;

 Conditions, warranties & innominate term;

 Exemption clauses;

 Contra preferentem rule;

 Equitable intervention – promisory estoppel;

 Collateral contracts;

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