Chapter 2 - Contract Formation

Question 1

What are the five essential elements of 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. Offer, acceptance, consideration, intention, capacity (e.g. legal age, sound mind) and form (some contracts need to be in writing).

Question 2

Define Void and Voidable

Answer 2

Void - There is no contract and goods should be returned (even from a third party).

Voidable - The contract can be set aside by the ‘injured’ party.

Question 3

If there is a lack of capacity in a contract what does this mean? and what is the effect of the rule not being followed?

Answer 3

An individual should be of sound mind and aged 18 or over. Voidable.

Question 4

If there is an absence of free will in a contract what does this mean? and what is the effect of the rule not being followed?

Answer 4

There should not be duress or undue influence. Voidable.

Question 5

If there is an Illegality in a contract what does this mean? and what is the effect of the rule not being followed?

Answer 5

Contract must not be illegal or against public policy. Void.

Question 6

If there is misrepresentation in a contract what does this mean? and what is the effect of the rule not being followed?

Answer 6

An incorrect statement of fact made pre contract which is intended to and does cause the party to enter into the contract. Voidable.

Question 7

When must contracts be in writing to be enforceable?

Answer 7

In cases like land transfers or consumer credit agreements, written form is mandatory.

Guarantees.

Question 8

Can email exchanges form a binding contract?

Answer 8

Yes, courts accept email exchanges as evidence of agreement, with typed names serving as signatures.

Question 9

What is an ‘invitation to treat’?

Answer 9

It is an indication of willingness to negotiate, not an offer. Examples include advertisements and goods displayed in a shop.

Question 10

How is an offer different from an invitation to treat?

Answer 10

An offer is a definite promise to be bound on specific terms, while an invitation to treat invites others to make offers.

Question 11

What terminates an offer?

Answer 11

Rejection, counter-offer, lapse of time, revocation by the offeror, or failure of a precondition.

A counter offer must be distinguished from a request for information.

Question 12

What is a way to communicate an acceptance of an offer?

Answer 12

Any reasonable means.

If a method is prescribed (specifically said) acceptance must be in that form, or in a way which is not less expeditious (e.g. normal post vs registered post)

Question 13

What are 2 exceptions to the communication rule?

Answer 13

1. Communication has been waived – unilateral contracts so the offeror has impliedly or expressly waived the need for communication as in reward type contracts.
2. Postal rule
   Where this rule applies acceptance by post is valid from the moment the letter of acceptance is posted regardless of whether it is actually received.

Question 14

What is the postal rule in contract law? What are the 5 conditions?

Answer 14

Acceptance is valid once the letter is posted, even if it has not been received.

Conditions:
1. Use of post is reasonably within the contemplation of the parties.
2. The letter must be correctly addressed and the correct postage paid.
3. Applies only to acceptance, not revocation.
4. Acceptance ‘by notice in writing’ overrides the postal rule as notice must actually be received by the offeror.
5. The postal rule does not apply to instantaneous communication such as email.

Question 15

Why is silence not sufficient to accept an offer?

Answer 15

Acceptance requires an act, such as express words or conduct, to communicate agreement.

Can’t just do nothing, must do something

Question 16

INTERACTIVE QUESTION 1: REQUEST FOR INFORMATION ABOUT AN OFFER

Oscar has horses to sell and offers two each to Abby and Ben for £4,000, stating that the offer will be open until Monday. Abby asks Oscar whether she could have one now and the other in a month’s time. Oscar does not reply, so on Sunday, Abby accepts his original offer. Ben replies on Saturday saying that he will take them for £3,500. Oscar does not reply, so on Saturday Ben accepts his original offer.

What is the contractual position

Answer 16

If Abby’s enquiry whether she could have the horse now and the other later had been a counter-offer, then she could not have accepted the original offer, as a counter-offer would have terminated it. However, in this case, Abby has simply requested more details of the terms of the offer and can still accept the original offer to form a contract.
Ben’s reply amounts to a counter-offer which has the effect of terminating Oscar’s original offer. Ben’s purported acceptance of the purchase at £4,000 is therefore not effective and there is no contract.

Question 17

INTERACTIVE QUESTION 2: FORMATION OF A CONTRACT

Frank writes to Xiao-Xiao on 1 July offering to sell him his sailing dinghy for £1,200. On 10 July, having received no reply, he decides to withdraw this offer and sends a second letter. On 10 July, Xiao-Xiao received the original letter and posts a reply to Frank accepting the offer. Frank never receives Xiao- Xiao’s letter and sells the boat to Mel on 13 July.

Indicate whether or not each of the following statements is true or false.
A Xiao-Xiao’s reply constitutes a valid acceptance
B Frank’s original letter constitutes an offer, which Xiao-Xiao is entitled to accept or reject
C Frank is legally entitled to sell the boat to Mel on 13 July since he revoked his offer

Answer 17

A True: Franks letter constitutes an offer
B True – acceptance takes effect when posted on 10 July, the revocation letter will only take effect when it is received which will be too late.
C False: Frank’s sale of the dinghy is a breach of his contract with Xiao-Xiao.

Question 18

What is consideration in a contract?

Answer 18

Consideration is something of value exchanged between parties, which makes the contract enforceable.

Question 19

Define Consideration

Answer 19

‘An act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable’ (Dunlop v Selfridge 1915).

Question 20

Define Executed consideration

Answer 20

An act performed or executed in return for a promise

Question 21

Define Executory

Answer 21

A promise given for a promise

Question 22

Define Past consideration

Answer 22

An act which has already been done when the promise is made

Past consideration cannot form the basis of a legally binding contract.

Question 23

What is invalid consideration?

Answer 23

Past actions or promises and existing legal duties cannot usually serve as valid consideration.

Question 24

HIGHLY EXAMINABLE

When is consideration not required in a contract? What are examples of this types of contract?

Answer 24

In contracts made by deed or when exceptions to the general rule apply.

Certain contracts are required to be made by deed:
 Conveyancing: the transfer of property (in its ‘real estate’ sense)
 Leases which last over three years
 Promises unsupported by consideration (eg a promise to donate to charity over several years) - expect nothing in return

Question 25

What is the difference between adequacy and sufficiency in consideration?

Answer 25

Consideration must be sufficient (having value in law) but need not be adequate (equally valuable).

so if you get a bad deal that is still a valid contract

Question 26

SUMMARISE
16 2: Contract formation Law 5.3 Adequacy and sufficiency of consideration
 Consideration need not be adequate (that is, equal in value to the consideration received in return). A bad bargain is still a contract!
 Consideration must be sufficient. It must have some identifiable value in order to be capable in law of being regarded as valid consideration.
Consideration which has been held to be insufficient
(1) Performance of existing statutory duty - unless it can be shown that some extra service over and above the scope of the statutory duty is also being offered.
For example, someone agrees to pay another a sum of money for appearing in court, even though they had already been subpoenaed to appear.
(2) Performance of existing contractual duty owed to the promisor is 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.
 The other party obtains some extra practical benefit.

(3) Performance of a contractual duty owed to a third party

(4) Forbearance of existing rights (Giving up right), (or the promise of it) may be sufficient consideration if it has some value, or amounts to giving up something of value.

Question 27

Is giving up the right to sue someone in return of money sufficient consideration?

Answer 27

Yes

Question 28

A crew of 30 men contracts to sail a ship from Lands End to John O’Groats for £2,000 each. During the voyage, two crew members desert and the captain promises an additional £500 to the remaining 28 if they will complete the voyage short-handed.

Can this promise be enforced?

What if half of the crew members had deserted?

Answer 28

No. The 28 crew members are already contractually bound to complete the voyage and they would be expected to deal with normal emergencies arising enroute. The fact that they have to cover two missing crew members does not amount to something over and above what they are bound to do anyway.

If, on the other hand, many more had deserted, so as to make the continuation of the voyage exceptionally hazardous, then their agreement to complete for an extra £500 each would amount to valid consideration. (Note that the position might be different in each case if it were a case of the remaining crew members refusing to go further without extra payment.)

Question 29

What happens if a creditor accepts part payment of a debt without further consideration?

Answer 29

The creditor can still claim the remaining debt and interest unless supported by new consideration.

Question 30

What is required to make a waiver of a debt binding?

Answer 30

The waiver must be supported by new consideration, such as an additional benefit or agreement

Question 31

What are examples of new consideration that make a debt waiver binding?

Answer 31

1. Alternative payment, such as goods or services instead of money.
2. Bargain between creditors - all agree to accept less money
3. Payment by a third party.
4. Early repayment of the debt - benefit of having some part of the cash in early

Question 32

A owes B, C and D £100 each. Each of the creditors agrees to accept £90 in full satisfaction of the debt. A also owes X £200. T offers to pay X £150 on the condition that X discharges A from the £200 debt.

Can creditors B, C and D take action against A for the remaining £30? Can X take action against A for the debt of £200 or any part of it?

Answer 32

The answer is no in each case. The arrangement between the creditors will bind each of them as the law effectively imports a consideration to support the creditors’ agreement (although the exact legal reasoning for this is far from clear). X cannot sue A for the original debt as he has now received consideration from T, against whom he had no previous claim. Like the creditors’ agreement, this instance is another exception to the rule in Foakes v Beer.

Question 33

Are all terms in a written contract enforceable even if a party has not read them?

Answer 33

Yes, as long as the terms are part of the written agreement.

Question 34

What factors influence whether a pre-contract statement becomes part of the contract?

Answer 34

1. The expertise of the party making the statement. - special knowledge of the subject
2. Time elapsed between the statement and the contract.
3. Importance of the statement to the agreement.
4. Reasons the statement was excluded from the written terms.

Question 35

When can oral evidence be used to vary written contract terms?

Answer 35

If it can be proven that the written document does not include all agreed terms.

Question 36

How can additional terms be implied into a contract?

Answer 36

1. By reference to custom provided the custom is not inconsistent with the express terms of the contract. Through established custom (if consistent with express terms).
2. By law or statute (e.g. the Sale of Goods Act which can override express terms of the contract)
3. By the courts. If the court concludes that the parties must have intended the term to apply to make the contract effective

Question 37

Why would courts imply additional obligations into a contract?

Answer 37

To ensure the agreement is effective or meets its intended purpose.

Question 38

What is rule of privity?

Answer 38

The rule of privity in contract law states that only the parties to a contract can enforce its terms or be bound by them. In other words:

A person who is not a party to the contract cannot claim any benefits or enforce obligations under it.
Similarly, a third party cannot be sued under the contract.

Key Principles:
- A contract creates rights and obligations only for the parties involved in the agreement.
- Third parties, even if affected by the contract, typically have no legal standing to enforce its terms.

In summary, the rule of privity ensures that contracts are enforceable only by those directly involved, but certain exceptions allow third parties to gain enforceable rights in specific situations

Question 39

What is the effect of privity of contract?

Answer 39

Only parties to a contract can enforce its terms or be bound by it.

Question 40

Who can enforce a contract under the rule of privity?

Answer 40

Only the parties directly involved in the contract.

Question 41

What are the exceptions to the rule of privity?

Answer 41

1. Statutory Exceptions: STATUE LAW = COMMON LAW
   For example, under the Contracts (Rights of Third Parties) Act 1999 in the UK, a third party can enforce a term of a contract if:
   The contract expressly states that the third party may enforce it.
   The term confers a direct benefit on the third party, unless it is clear the parties did not intend this.
2. Agency Arrangements:
   An agent acting on behalf of a principal can create a binding agreement between the principal and a third party.
3. Trusts and Wills:
   Beneficiaries of a trust or will can enforce provisions even if they were not a party to the agreement.
4. Special Legislation:
   For example, the Road Traffic Act requires third parties (e.g., accident victims) to benefit from insurance policies.

In summary, the rule of privity ensures that contracts are enforceable only by those directly involved, but certain exceptions allow third parties to gain enforceable rights in specific situations

Question 42

What is a unilateral contract?

Answer 42

A contract in which one party promises something in return for the act of another, e.g., a reward for finding a lost item.

Question 43

INTERACTIVE QUESTION 5: ESSENTIALS OF A VALID CONTRACT

You have been asked to act as legal advisor to Catherine, advising her whether or not a contract exists between her and David after the following course of events.

On Monday, David advertised a table and chairs for sale for £100 in the local newspaper. Catherine saw the advertisement and telephoned David offering him £75. David offered to sell the table and chairs to Catherine for £80. She accepted. Two days later, Catherine rang David and said that she would give him £85 if he delivered the table and chairs as well. David refused. Catherine said that if she had to collect the table and chairs herself she would only give David £75. During the course of their negotiations, Catherine and David have discovered that they know each other through the local gardening club.

Indicate whether each of the following statements is true or false.

A As Catherine and David are acquaintances, they cannot form a binding contract

B Catherine and David have not formed a valid contract as they have been unable to come to an agreement about price

C Delivery is capable of constituting sufficient consideration for an increase in contract price

D If David accepts Catherine’s final suggestion there will be a binding contract between them at a price of £75

Answer 43

A False. The presumption that friends do not intend to form contractual agreements is rebuttable and is rebutted in this case – their acquaintance was not recognised or relevant at the time of making the contract.

B False. David’s original advert is an invitation to treat so cannot be accepted as an offer. Catherine’s offer of £75 is rejected by David so no contract is formed at this point. However, David then makes an offer of £80 which is accepted by Catherine, at which point a contract is made. The further offer of £85 is rejected but this does not affect the agreement already reached.

C True. Delivery is clearly valuable to Catherine, as she implies by her offer of an extra £5 for delivery.

D False. Catherine is asking David to waive his rights under the contract but there is no
consideration to support this waiver and it would not be binding on David.

Question 44

An acceptance of a contractual offer sent by email takes effect as soon as the person accepting the offer presses the ‘send’ key.
A True B False

Answer 44

False
The law has not yet provided a clear statement of when an acceptance sent by email becomes effective.

Question 45

18 Are the following statements true or false?
Where the offeror prescribes a mode of communication of acceptance, the offeree can normally use an alternative mode, provided it is at least as expeditious as the mode prescribed.
A True B False
Where no mode of communication of acceptance is prescribed, the offeree should use the same mode as that used for the offer.
C True D False

Answer 45

A True
The offeror would need to be very specific indeed for this not to be the case.

D False
The offeree may use any reasonable method.

Question 46

Define Rebuttable and Irrebuttable

Answer 46

Rebuttable
Definition: A rebuttable presumption or argument is one that can be challenged and overturned with sufficient evidence.
Explanation: It allows for the introduction of contrary evidence to prove that the presumption or claim is not true in a particular case.
Example: The presumption of innocence in a criminal trial is rebuttable because the prosecution can present evidence to prove guilt.

Irrebuttable
Definition: An irrebuttable presumption or argument is one that cannot be challenged or disproven, regardless of evidence to the contrary.
Explanation: It is considered absolute and binding, often set by law or regulation.
Example: A law may state that children under a certain age (e.g., 7 years old) cannot commit a criminal act because they are deemed incapable of forming intent. This is an irrebuttable presumption.

Question 47

2 Which of the following terms describes a contract where one party may set it aside, but property transferred before avoidance is usually irrecoverable from a third party?
A Void
B Voidable
C Unenforceable D Valid

Answer 47

B Voidable
For example, where a party enters a contract as a result of undue influence, they may elect to avoid the contract.

Question 48

3 Grace intends to promise Carlos that she will pay the debts owed to Carlos by Duncan, in the event that Duncan fails to pay them himself.
Requirement
Which of the following is true with regard to Grace’s proposed guarantee so that it will be enforceable in a court of law?
A It must be by deed.
B It must be in writing.
C It can be oral provided it is evidenced in writing.
D It can be oral only.

Answer 48

C It can be oral provided it is evidenced in writing.
The written evidence must be signed or acknowledged in some way by Grace.

Question 49

6 A local newspaper advertises “50 Whizzalong scooters remaining. 3 feet high. Only £20 each”. Which legal term best describes the advert?
A Offer
B Statement of intention
C Invitation to treat
D Supply of information

Answer 49

C Invitation to treat
Advertisements are generally invitations to treat.

Question 50

7 All of the following, except one, have the effect of terminating an offer.
Requirement
Which is the exception?
A Rejection
B Counter offer
C When a pre-condition is satisfied
D A lapse of time

Answer 50

C When a pre-condition is satisfied
When a pre-condition is satisfied, the offer becomes unconditional.

Question 51

9 On Monday, Ivan offers to sell his piano to Hilda for £1,500, to be delivered on Thursday. On Tuesday, Hilda replies, saying that she will only buy the piano if Ivan will delay delivery until the following Monday. Ivan doesn’t reply but sells his piano to Ivy on Thursday.
Requirement
On Friday, Hilda sees Ivan and accepts his offer. Is there a binding contract between Ivan and Hilda?
A Yes, Hilda’s reply on Tuesday constitutes an acceptance of the offer.
B No, Hilda’s reply on Tuesday constitutes a counter offer which destroys the original offer.
C No, the offer is terminated when Ivan sells the piano to Ivy on Thursday.
D Yes, Hilda’s reply on Tuesday is a request for information only and on Friday she accepts his offer.

Answer 51

9 Correct answer(s):
B No, Hilda’s reply on Tuesday constitutes a counter offer which destroys the original offer. Hilda’s reply constitutes a counter offer which terminates Ivan’s offer.

Question 52

10 Frank offered Mila his lawnmower for £200. Mila asked whether he might be willing to accept £100 now and £100 at the end of the month when she is paid.
Requirement
Which of the following best describes the status of Mila’s reply?
A It is a rejection of Frank’s offer.
B It is an implied acceptance because she was clearly agreeable to the price.
C It is a counter offer.
D It is a request for information.

Answer 52

10 Correct answer(s):
D It is a request for information.
The offer remains capable of acceptance (at least for a reasonable time). Mila is simply asking for information about when she can make payment.

Question 53

11 Idris emails Nathan and offers to sell his bike to him for £250. Nathan texts him back to say that he’d love it, but he will only pay £230. Two days later Idris says he’ll accept £230 but Nathan has bought one on eBay for £200.
Requirement
Which of the following best describes the legal position between the parties?
A Nathan’s reply is a rejection of Idris’s offer.
B Nathan’s reply is a counter offer which Idris accepts.
C Nathan’s reply is merely a request for information as to whether Idris will accept £20 less.
D Nathan’s reply constitutes a counter offer but this is revoked when he buys a bike from eBay.

Answer 53

11 Correct answer(s):
B Nathan’s reply is a counter offer which Idris accepts.
He should have revoked his counter offer on buying the bike from eBay by communicating that fact to Idris.

Question 54

17 Are the following statements true or false?
An acceptance of a contractual offer sent by email takes effect as soon as the person accepting the offer presses the ‘send’ key.
A True B False
Whether or not postal acceptance is within the contemplation of the parties is a question of fact and may be deduced from all the circumstances.
C True D False

Answer 54

17 Correct answer(s): B False
The law has not yet provided a clear statement of when an acceptance sent by email becomes effective.
Correct answer(s): C True

Question 55

18 Are the following statements true or false?
Where the offeror prescribes a mode of communication of acceptance, the offeree can normally use an alternative mode, provided it is at least as expeditious as the mode prescribed.
A True B False
Where no mode of communication of acceptance is prescribed, the offeree should use the same mode as that used for the offer.
C True D False

Answer 55

18 Correct answer(s): A True
The offeror would need to be very specific indeed for this not to be the case. Correct answer(s):
D False
The offeree may use any reasonable method.

Question 56

19 On 1 May, Hugo offered to sell his boat to Jeff for £5,000, stating that his offer had to be accepted by notice in writing. Jeff posted a letter of acceptance on 3 May, but it never arrived.
Requirements
Does the postal rule apply ie, is the acceptance effective as soon as it is posted? A Yes
B No
Is there a contract between Hugo and Jeff?
C Yes D No

Answer 56

19 Correct answer(s): B No
When acceptance is to be made ‘by notice in writing’, this means that notice is required to be received by the offeror and the postal rule does not apply.
Correct answer(s):
D No
No, because there is no valid acceptance.

Question 57

20 Belle writes to Carol on 1 January offering to sell her gold necklace for £100. Carol receives the letter on 3 January and on 5 January posts a letter accepting Belle’s offer and sends a cheque for £100. In the meantime, however, Belle has sold the necklace to her sister Daisy for £150 believing that Carol wasn’t interested. She wrote to Carol telling her this on 4 January but the letter wasn’t received by Carol until 6 January. Belle received Carol’s cheque on 7 January.
Requirement
Which of the following is true?
A Carol’s acceptance is effective on 5 January.
B Belle’s offer is revoked on 4 January.
C Carol’s acceptance is effective on 7 January.
D There is no binding agreement between Belle and Carol.

Answer 57

20 Correct answer(s):
A Carol’s acceptance is effective on 5 January.
Carol’s acceptance is effective when posted. A revocation is ineffective until received (which, in this case, is after the contract becomes binding on the posting of the acceptance on 5 January).

Question 58

23 Are the following statements true or false?
LO 1a
There is a rebuttable presumption that social, domestic and family arrangements are not intended to be legally binding.
A True B False
There is an irrebuttable presumption that parties to a commercial agreement intend it to be legally binding.
C True D False

Answer 58

23 Correct answer(s): A True
Correct answer(s):
D False
The presumption is rebuttable.

Question 59

24 Which of the following statements best describes consideration?
A Consideration must be adequate and sufficient.
B Consideration must be adequate but need not be sufficient.
C Consideration must be sufficient but need not be adequate.
D Consideration need be neither sufficient nor adequate.

Answer 59

24 Correct answer(s):
C Consideration must be sufficient but need not be adequate.
Consideration must have some identifiable value (‘sufficient’) but does not need to be equal in value to the consideration received in return (‘adequate’).

Question 60

28 In which of the following scenarios is there insufficient consideration for a waiver of rights by Eva where Isabella owes her £1,000 to be paid on 13 May?
A Eva agrees to accept a car instead.
B Eva agrees to accept £980 on 13 May in cash.
C Eva agrees to accept £980 from Isabella’s sister in full satisfaction of the debt.
D Isabella agrees to pay Eva £700 on 1 May.

Answer 60

28 Correct answer(s):
B Eva agrees to accept £980 on 13 May in cash.
There is no consideration for the waiver of the additional £20 to which Eva is entitled. The lesser sum in D is sufficient because it is to be paid early.

Question 61

30 Prunella agrees to pay Paul £500 if Paul will landscape Phillip’s garden. There is no agency relationship and the Contract (Rights of Third Parties) Act 1999 does not apply.
Requirement
Who may enforce the terms of the contract?
A Prunella, Paul and Phillip
B Prunella and Phillip only
C Paul and Phillip only
D Prunella and Paul only

Answer 61

30 Correct answer(s):
D Prunella and Paul only
Phillip has given no consideration and is not a party to the contract. He has no rights to enforce the contract.

Question 62

36 To be valid, a contract must contain:
Written evidence of the principal terms of the contract A Yes
B No
An agreement
C Yes
D No

Answer 62

36 Correct answer(s): B No
Not all contracts need to be in writing. For example, a contract for the sale of goods does not need to be in writing, nor evidenced in writing.
Correct answer(s):
C Yes
Contracts must contain an agreement (offer and acceptance).

Question 63

38 Raheem is visiting Karl’s office. Whilst he is there, he sees a photocopier that Karl no longer needs. Raheem offers Karl £500 for the photocopier and Karl accepts. Raheem pays Karl, loads the photocopier into his van and drives away.
Requirement
Which type of consideration is present in the contract between Raheem and Karl? A Past
B Executed
C Executive
D Executory

Answer 63

38 Correct answer(s): B Executed
The consideration is executed because payment occurs at the time the contract is made. Executory consideration is a promise given for a promise. Past consideration is made before the contract is formed. There is no such consideration as executive consideration.

Question 64

39 Which of the following statements correctly describes privity of contract?

A Individuals and businesses only have rights and obligations under a contract if they are a party to it.
B To be valid, contracts must contain agreement, consideration and intention to create legal relations.
C Consideration must be sufficient but need not be adequate.
D Contractual terms are a private matter to be decided by the contracting parties.

Answer 64

39 Correct answer(s):
A Individuals and businesses only have rights and obligations under a contract if they are a party to it.
In terms of contract law, every statement is correct. However, only statement A describes privity of contract.

Question 65

40 All of the following contracts except one must be in the form of a deed. Which one is the exception?
A Contract for the transfer of land or property
B Contract for consumer credit
C Contract for a lease over three years
D Contract for the regular payment of a donation to charity

Answer 65

40 Correct answer(s):
B Contract for consumer credit
A contract for consumer credit must be in writing. The other options must be in the form of a deed.