Chapter 2 - 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

What are the key components that make up a valid contract?

Answer 2

• Offer
• Acceptance
• Consideration
• Intention
• Capacity
• Form

Question 3

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

Answer 3

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

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

What are the factors that my render a contract void or voidable? (4)

Answer 6

Question 7

Define an unenforceable contract.

Answer 7

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 8

What types of contact must be in writing or evidenced in writing?

Answer 8

Question 9

What is an offer?

Answer 9

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

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 10

What is an invitation to treat? Give the common examples (4)

Answer 10

An invitation to treat is not an offer but a statement of willingness to enter into negotiations. An invitation to treat cannot be accepted but is an invitation to other parties to make an offer.

• advertisements (in a newspaper, for example)
• goods displayed for sale in a shop window or on self-service shelves
• circulation of a price list
• auction)

Question 11

Outline the Carlill v Carbolic Smoke Ball Co 1893 case and what we can take from it

Answer 11

The manufactures of a carbolic smokeball which was supposed to prevent influenza. The company offered a reward of £100 to anyone who contracts influenza after using the product for 2 weeks. Carlill saw the advert and contracted influenza after using the product.

Key points:
* An offer can be made to the world at large (by analogy with reward cases).
* An offer of this type can be accepted by behaviour (i.e. by using the smoke balls).

Question 12

In the absence of an acceptance, what are the ways in which an offer may be terminated? Define each (5)

Answer 12

1. Rejection by the offeree - person receiving the offer turns it down
2. Counter-offer (must not be merely a request for information) the offeree proposes new or amended terms, thereby terminating the original offer.
3. Lapse of time - offer expires after a certin time has lapsed
4. Revocation by the offeror - offeror (or his authorised agent) may revoke his offer at any time before acceptance either expressly or by implication (This is effective only when it is communicated to the offeree)
5. Failure of a pre-condition - offer will automatically lapse if a pre-condition is not satisfied.

Question 13

Who can make communication regarding the revocation of an offer?

Answer 13

Communication can be made by any reliable person - someone who is reasonably aware of the offerors intention to revoke the offer

Question 14

What is the legal standing with regards to offering to keep a contract open for a set period and then going back on this?

Answer 14

Agreement to keep an offer open is only binding if there is a separate contract to do so - seperate consideration has to be made in order for this to be legally binding

Question 15

How do we distinguish a counter offer from a counter offer?

Answer 15

A counter-offer is when the offeree proposes new or amended terms, thereby terminating the original offer whereas a request for information is simply the offeree inquiryng with the offeror if alternative terms would be acceptable - in the former an official offer is made, in the latter no offer is made

Ask (request for information) vs give (counter-offer)

Question 16

What constitutes acceptance?

Answer 16

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 (i.e. their behaviour demonstrates agreement with the contract terms).

There must be some act on the part of the offeree to indicate their acceptance - silence is not enough

Question 17

When does acceptance become effective?

Answer 17

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 18

What does the postal rule state?

Answer 18

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.
3. Acceptance ‘by notice in writing’ overrides the postal rule as notice must actually be received by the offeror.

Question 19

Does the postal rule apply for revocation?

Answer 19

Applies only to acceptance, not revocation - offeree must receive revocation by post before it is considered valid

Question 20

Can an agreement exist without an offer and acceptance?

Answer 20

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

Question 21

Define rebuttable presumptions.

Answer 21

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 22

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

Answer 22

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 23

Define consideration.

Answer 23

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

Question 24

What are the different types of consideration?

Answer 24

1. Executed - A performed, or executed, act in return for a promise. For example, payment for goods at the time those goods are delivered.
2. Executory - 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 - 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 25

Can past consideration form the basis of a legally binding contract?

Answer 25

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

Question 26

For a contract to be valid what must be true with regards to consideration?

Answer 26

Each party must provide some form of consideration under the contract for it to be valid. This consideration must be sufficient but not neccesarily adequate:

Question 27

What is meant by ‘sufficient but not necessarily adequate’ consideration?

Answer 27

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 28

What is the key exception to the rules regarding the need for consideration?

Answer 28

There is one key exception to the rules relating to consideration, and it is when a contract is made by deed

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)

Question 29

What are the four examples of consideration we will look at to see if they are forms of valid consideration?

Answer 29

1. Performance of existing statutory duty
2. Performance of existing contractual duty owed to the promisor
3. Performance of existing contractual duty owed to a third party
4. Forbearance or waiver of existing rights

Question 30

Is the performance of existing statutory duty sufficient consideration?

Answer 30

Unless it can be shown that some extra service over and above the scope of the statutory duty is also being offered then it is not considered sufficient consideration

Simply doing your legal or moral duty does not constitute sufficient consideration

Question 31

Is the performance of existing contractual duty sufficient consideration?

Answer 31

Unless it can be shown that the promisee is actually giving or doing something over and above the scope of the contractual obligation or the the other party obtains some extra practical benefit from the contract then it is not considered sufficient consideration

Simply doing the job does not constitute sufficient consideration

Question 32

Is the performance of existing contractual duty owed to a third party sufficient consideration?

Answer 32

This can amount to valid consideration

Question 33

Is the forbearance or waiver of existing rights sufficient consideration?

Answer 33

It may be sufficient consideration if it has some value, or amounts to giving up something of value.

Question 34

What is meant by the waiver of exisiting debt? What must be present?

Answer 34

Where one party agrees to waive the debt owed to them by another

Where one party accepts part payment of a debt in full satisfaction of the debt the waiver should be supported by consideration.

Question 35

In which cases will a waiver of existing debt be binding? Define each (4)

Answer 35

1. Alternative consideration - payments made in lieu of cash (i.e. goods or services)
2. Bargain between the creditors - creditors agree together to accept a reduced payment from a debtor to ensure they are all paid some of the money owed
3. Third party part payment - a third party settles part of the debt for debtor
4. Early payment - debtor pays part of the money early and improves the cash flow of the creditor

In each case, if accepted, the remaining debt cannot be chased by the creditor - these are considered full and final settlements of the total.

Question 36

Outline the Foakes v Beer 1884 case and what we can take from it

Answer 36

The facts: D had obtained judgment against C. Judgment debts bear interest from the date of the judgment. By a written agreement D agreed to accept payment by instalments, no mention being made of the interest. Once C had paid the amount of the debt in full, D claimed interest, claiming that the agreement was not supported by consideration.

Decision: D was entitled to the debt with interest. No consideration had been given by C for waiver of any part of her rights against him.

The debt cannot be waived as only part-payment received and no sufficient consideration received by D from C

Question 37

Are all expressed terms considered to be incorporated into an oral or written contract? What is the issue with the former?

Answer 37

For both all terms, which are substantially complete on the face of it or capable of being clarified are incorporated into the contract.

However, for oral contracts, there may be evidentiary issues.

Question 38

What is important to remember regarding statements of fact and contracts?

Answer 38

A statement of fact (i.e. If you buy this car it will do 70 mpg) may be incorporated into a contract if it induces a party to enter into the contract - if it is not part of the contract the claimant may have a claim for misrepresentation but not for breach of contract.

Question 39

What will courts take into account when deciding if a statement of fact is incorporated into a contract?

Answer 39

• Special knowledge of the subject by the party making the statement
• How much time has passed between the statement and the making of the contract - the less time that lapses the more likely it will be considered incorporated
• Why the statement was not included in the contract - if it was considered to be for nefarious reasons (i.e. they knew it to be untrue) the more likely it will be considered incorporated
• The importance attached to the statement by the parties - the higher the regard the parties hold the statement the more likely it will be considered incorporated

Question 40

What should be taken into account regarding oral evidence?

Answer 40

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 - if the oral agreement adds additional information to the written form without contradicting

Question 41

What is meant by implied terms?

Answer 41

Additional terms of a contract may be implied by law. Such implied terms will be deemed to form part of the contract even though they are not expressly mentioned.

Question 42

What ways can terms be implied?

Answer 42

Terms can be implied in the following ways:
* By reference to custom provided the custom is not inconsistent with the express terms of the contract - implied by industry norms
* By statute (e.g. the Sale of Goods Act) which can override express terms of the contract - implied by legislatation
* By the courts where it can be concluded that the parties must have intended the term to apply to make the contract effective or the term is implicitly required for the contract to be effective

Question 43

What is the doctrine of the privity of contract?

Answer 43

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

Question 44

What are principal exceptions to the privity of contract rule?

Answer 44

• Road Traffic Act - victims of car accidents can claim compensation from the driver’s insurer, even though they were not part of the original contract.
• Agency arrangements - 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
• Executors of a will
• 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.

Question 45

Outline the method for determining the existence and legal validity of a contract

Answer 45

METHOD