Chapter 1 - Contract formation

Question 1

What is a valid contract?

Answer 1

A valid contract is a legally binding agreement, between two parties, which agreement may be evidenced by writing, words or action.

Question 2

In order for a contract to be valid, what three essential elements must be shown to be present?

Answer 2

1. Agreement between the parties
2. An intention to create legal relations
3. Consideration

Question 3

What are the five vitiating factors that my render a contract void or voidable?

Answer 3

1. Lack of capacity - Voidable at the option of the person without capacity.
2. Absence of free will - Voidable
3. Illegality - Void
4. Mistake - Depends
5. Misrepresentation - Voidable

Question 4

Define a void contract.

Answer 4

A void contract is not a contract at all. The parties are not bound by it and if they transfer property under it they can generally recover their goods even from a third party.

Question 5

Define a voidable contract.

Answer 5

A voidable contract is a contract which one party may set aside. Property transferred before avoidance is usually irrecoverable from a third party.

Question 6

Define an unenforceable contract.

Answer 6

This means that if either party fails to perform their part of the contract, the other party cannot compel them to do so.

A contract will be unenforceable where it is not in the correct form, for example not in written form or not signed.

Question 7

What is an offer?

Answer 7

An offer is a definite promise to be bound on specific terms. It is made by an offeror.

An offer must be something more than a supply of information or a statement of intention (example that an Auction will take place).

An offer does not have to be made to a particular person. It may be made to a class of persons or to the world at large.

Question 8

What is an invitation to treat?

Answer 8

Where a party is initiating negotiations, they are said to make an invitation to treat.

Advertising is generally considered to be an invitation to treat unless if a clear offer is made within the advertisement.

Goods displayed on shelves and circulation of a price list are also considered invitations to treat.

Question 9

In the absence of an acceptance, what are five ways in which an offer may be terminated?

Answer 9

1. Rejection
2. Counter-offer (must not be merely a request for information)
3. Lapse of time
4. Revocation by the offeror. Takes effect when it is communicated to or received by the offeree.
5. Failure of a pre-condition

Question 10

What constitutes acceptance?

Answer 10

The offeree’s response must amount to an unqualified agreement to all the terms of the offer in order to constitute a valid acceptance.

Acceptance may be made by express words to that effect by the offeree or their authorised agent, or it can be inferred from conduct.

There must be some act on the part of the offeree to indicate their acceptance.

Question 11

When does acceptance become effective?

Answer 11

The general rule is that acceptance must be communicated to the offeror and the acceptance is not effective (and hence there is no agreement) until this has been done.

However, it is always open to the offeror to waive this requirement either expressly or by implication.

Acceptance will only be effective to create an agreement where the offeree is aware of the offer. (Example: If A offers a reward to anyone who finds and returns their property and B, unaware of A’soffer, returns the property, B cannot have ‘accepted’ A’s offer since they were unaware of it and there is no agreement.

Question 12

What does the ‘postal rule’ state?

Answer 12

Where acceptance is made by post, communication will be effective the moment the acceptance is posted even if it is delayed or lost altogether in the post, subject to the following:

1. If the delay is attributable to the offeree’s negligence, for example by stating the address incorrectly, it will not be the case that posting amounts to acceptance.
2. Use of the post must have been within the contemplation of the parties, which intention can be deduced from the circumstances and need not be express.

Question 13

Can an agreement exist without an offer and acceptance?

Answer 13

In some exceptional circumstances, yes. For example, when you enter a club and undertake to obey the club’s rules.

Question 14

Define rebuttable presumptions.

Answer 14

A rebuttable presumption is an assumption made by a court that is taken to be true unless someone comes forward to contest it and prove otherwise.

For example, a defendant in a criminal case is presumed innocent until proved guilty.

Question 15

If the intention to create legal relations is not obvious, what are two rebuttable presumptions that may be applied?

Answer 15

1. Social, domestic and family - It is presumed that social, domestic and family arrangements are not intended to be legally binding unless there is clear evidence which points to the contrary.
2. Commercial - It is presumed that there is an intention to enter into legal relations unless this is expressly disclaimed or the circumstances give a clear contrary indication.

Use of the words ‘subject to contract’ amounts to a strong presumption that no immediately binding contract is intended.

Question 16

Define consideration.

Answer 16

It is what each party gives or agrees to give to the other, usually payment or a promise to do something in return.

Question 17

What are the three types of consideration?

Answer 17

1. Executed (valid) - A performed, or executed, act in return for a promise. For example, payment for goods at the time those goods are delivered.
2. Executory (valid) - A promise given for a promise. The consideration in support of each promise is the other promise, not a performed act. For example, a promise to pay for goods which are to be delivered and paid for at a later date.
3. Past (generally invalid) - Past consideration is something which has already been done at the time the promise is made, for example where works are carried out and then a promise is made to pay for them Past consideration can be valid only if there was an implied promise.

Question 18

What are the two rules regarding consideration?

Answer 18

1. Adequacy - Consideration need not be adequate. There is no remedy at law for someone who simply makes a poor bargain.
2. Sufficiency - Consideration must be sufficient. It must have some identifiable value in order to be capable in law of being regarded as valid consideration.

Question 19

Give four examples of what constitute and does not constitute valid consideration.

Answer 19

1. Performance of existing statutory duty - Not consideration unless it can be shown that some extra service over and above the scope of the statutory duty is also being offered.
2. Performance of existing contractual duty owed to the promisor - Not consideration unless it can be shown that the promisee is actually giving or doing something over and above the scope of the contractual obligation.
3. Performance of existing contractual duty owed to a third party - This can amount to valid consideration.
4. Forbearance or waiver of existing rights - Forbearance or the promise of it may be sufficient consideration if it has some value, or amounts to giving up something of value.

Question 20

In which three cases will a waiver of existing debt be binding?

Answer 20

1. Alternative consideration
2. Bargain between the creditors
3. Third party part payment

Question 21

What should be taken into account regarding the terms of a contract?

Answer 21

1. Terms must be substantially complete on the face of it or capable of being clarified.
2. A statement of fact made before the contract which induces a party to enter into the contract may become a term of the contract.
3. Oral evidence will not usually be admitted to add to, vary or contradict written terms, unless it can be shown that the document was not intended to comprise all the agreed terms.

Question 22

What is ‘freedom of contract’?

Answer 22

As a general rule, the parties to a contract may expressly include in the agreement whatever terms they choose.

Question 23

Can additional terms of a contract be implied by law?

Answer 23

Yes.

Terms may also be implied into the contract by the courts (necessary to give business efficacy and implicit nature of the contract itsef), by statute or by custom.

Question 24

What is the doctrine of the privity of contract?

Answer 24

As a general rule, only a person who is a party to a contract has enforceable rights or obligations under it.

Question 25

What are two principal exceptions to the privity of contract rule?

Answer 25

1. Where an agent enters into a contract with a third party on behalf of their principal, the resulting contract is actually enforceable by and between the principal and the third party. The agent cannot enforce it.
2. The Contracts (Rights of Third Parties) Act 1999 provides that a third party may enforce a term of the contract provided: (a) the contract expressly provides that they may and (b) the term confers a benefit to them unless it appears that the contracting parties did not intend them to have the right to enforce it.

The third party must be expressly identified in the contract by name, class or description, but need not be in existence when the contract is made.