Chapter 2: Introduction and Contractual Formation

Question 1

What is the basic function of the law of contract?

Answer 1

To ensure that agreements freely entered into are honoured, or, if not honoured, that compensation for the losses caused by the breach are paid.

Question 2

What would happen if parties to an agreement could break their promises without legal consequences?

Answer 2

The commercial world would be dysfunctional - contracts provide a level of certainty and stability, allowing the parties to a contractual agreement to plan their activities in the knowledge that the agreements must be kept, or, if not, the innocent party will be compensated.

Question 3

What is the same no matter how varied contracts can be?

Answer 3

Contracts may vary a great deal in content, form, value, complexity and time, nonetheless general contractual principles are still relevant.

Question 4

What is a contract?

Answer 4

An agreement between 2 or more parties under which legal rights and obligations are create which will be enforced in the courts.

More succinctly, a contract is a promise or a set of promises that the law will enforce.

Question 5

What is the law of contract concerned with?

Answer 5

The principles applicable to the formation, performance, interpretation and breach of contracts.

Question 6

What are the essential elements of a valid contract?

Answer 6

In the absence of one or more of these elements, the agreement between the parties will not constitute a contract and will not be enforced by the courts.

. An offer by one party and its acceptance by the other
. The intention of the parties to create legal regulations (a contract)
. Valuable consideration (unless the promise is made by deed)
. Legal capacity of the parties to act and
. A genuine consent by the parties
. Legality of objects

Question 7

Contractual formation: offer and acceptance

Answer 7

Agreement is the cornerstone of contracts. The parties must agree on the basic terms or no enforceable contract exists.

Question 8

What is the most common way to analyse whether or not the parties have made an “agreement”?

Answer 8

To see if there has been an offer made by one party that has been accepted by the other. (Offer and acceptance analysis)

This is necessary when there is an absence of a written agreement (as offer and acceptance is quite clear)

Question 9

If a valid contract is alleged, what must be shown?

Answer 9

It must be shown that one person has made an offer and another person has accepted that offer expressly or impliedly on the terms in which it was made.

Question 10

What are the rules as to offer?

Answer 10

. May be made to one or more people
. All major terms must be included
. May specify conditions to be followed
. Must be communicated to offeree
. May be revoked or lapse

Question 11

What is an offer?

Answer 11

An indication by one party, orally, in writing or by conduct, of a willingness to enter into a contract on particular terms if the person to whom the offer is directed accepts those terms.

Question 12

Why can it be hard to determine whether a statement is an offer?

Answer 12

Because it could be:
. An offer
. Invitation to treat 
. Sales puffery or 
. A request for information

Question 13

What is an “invitation to treat”?

Answer 13

Indication of willingness to deal or trade. It is essentially an initial approach to others inviting them to make an offer which may or may not be accepted.

It is important to distinguish an offer (which will give rise to binding obligations on acceptance) from an “invitation to treat”.

Question 14

Invitation to treat example.

Answer 14

A: I want to sell my car, but I will not let it got for less than $5,000 (that is an invitation to treat)
B: (desires to purchase A’s car for $5,000 - doesn’t have to be sold by A, because they did not make an offer for B to accept)

HOWEVER
A: “I will sell you my car for $5,000” (that is an offer)

Question 15

Harvey V Facey [1893] AC 552

Answer 15

Case info:
. Harvey sent telegram asking what the lowest price for Bumper Hall Pen (a property in London) would be.
. Facey replied that the lowest price would be £900.
. Harvey replied, saying that they agreed to buying Bumper Hall Pen for the sum of £900
. Facey refused to sell - Harvey sued for breach of contract

Relevant law:
. Offer to treat

Court decision:
. The third telegram was in fact an offer to buy at the price Facey stated - which he merely stated to answer Harvey’s question (meaning Harvey made the offer and it was up to Facey to accept or decline it).

Question 16

Shop displays and catalogues and advertisements.

Answer 16

The display of goods or the advertising of goods, even with a price, is not generally an offer: it is an invitation to someone to make an offer of purchase.

It is the customer that makes the offer which the retailer/seller may either accept or reject or make a counter-offer.

Question 17

Pharmaceutical Society of Great Britain V Boots Cash Chemists (Southern) Ltd [1952] 2 QB 795

Answer 17

Case info:
. Boots opened first self-service pharmacy in England - pharmaceutical supplies were displayed on the shelves for customers to select and take to the register (where there was a qualified pharmacist always in attendance).
. Pharmaceutical society objected to this new method of retailing pharmaceuticals - they prosecuted Boots under an Act that required prescribed drugs to be “sold” under the supervision of a pharmacist.
. Society argued that an offer was made when products were placed on the shelves and offer accepted (and contract made) when customer placed drugs in basket.
. Boots argued that putting items on a shelf was an invitation to treat and the customer made the offer by taking it to the cashier (who “accepted” the offer under the supervision of a registered pharmacist)

Relevant law:
. Offer to treat

Court decision:
. The court accepted Boots’ argument

Question 18

What may an advertisement be interpreted as?

Answer 18

An advertisement may be interpreted as being (or including) an “offer” or it may be regarded as containing nothing but sales talk or “puffery”. It is sometimes difficult to tell.

Question 19

When it is difficult to tell if an advertisement is puffery or not, what should you do?

Answer 19

Think, would a reasonable person say that the advertisement was an offer to make an enforceable agreement if the person(s) to whom the offer was directed accepted?

Question 20

Carlill V Carbolic Smoke Ball Co [1893] 1 QB 256

Answer 20

Case info:
. Defendants manufactured an influenza preparation called the carbolic smoke ball
. They advertised their preparation by offering to pay £100 to any purchaser who use it (in accordance with the printed directions) and caught influenza.
. Advertisement stated that the defendants had deposited £1000 pounds with their bankers to show sincerity
. Carlill bought and used the smoke ball as directed, but still caught influenza - she claimed £100, but was rejected (so she sued the defendants)

Relevant law:
. Offer can be made to whole world
. Mere puff

Court decision:
. Rejected defendants arguments that advertisement was a mere puff
. In courts view there was an offer made to all the world which was capable of acceptance by those members of the public who performed the conditions set out int the offer
. It was held that the plaintiff was entitled to recover the £100

Question 21

Leonard V PepsiCo 88 F Supp 2d 116 (1999)

Answer 21

Case info:
. In the U.S., PepsiCo ran an advertising campaign in which consumers were encouraged to collect “Pepsi points” from specially marked packages of Pepsi
. It as possible to purchase additional points for 10 cents each (if a person wanted an item for which he or she had insufficient points)
. Leonard (and his syndicate) decided to purchase the advertised jet fighter by “buying” the 7,000,000 points (he submitted an order form with a cheque for 700,008.50)
. PepsiCo rejected his order and returned his cheque - Leonard sought specific performance of the unilateral contract that he argued had been made when he performed his part

Relevant law:
. Mere puff

Court decision
. Advertisement was mere puffery. Because of the comical nature of the commercial, a reasonable person could not conclude that PepsiCo was officer a Harrier Jet to anyone who collected 7,000,000 Pepsi points

Question 22

Auction sales

Answer 22

The auctioneer’s call for bids is only an invitation to treat. When a bid is made it constitutes an offer from the bidder to buy at that price. The auctioneer may then either accept or reject the bid on behalf of the principal.

Question 23

Tenders.

Answer 23

A statement that goods are to be sold by tender is usually regarded as an intention to treat. As a result, the person making the statement is not bound to sell to the highest tenderer, unless it was expressly stated in the original statement that he or she would do so.

The offer is normally made by those submitting tenders and there is no contract until the person who called for tenders accepts on of them.

Question 24

Persons to whom an offer may be made.

Answer 24

An offer can be made to a specific person or persons, to a particular class of persons, or to the world at large. It may only be accepted by the person or persons for whom it was intended.

However, if the offer made to the world at large (eg. By way of a general advertisement) then it may be accepted by anyone who reads the advertisement (this is what occurred in Carlill V Carbolic Smoke Ball Co).

Question 25

Communication of offer.

Answer 25

The offer must be communicated, that is, brought to the notice of the person to whom it is made. Unless an offer is communicated, there can be no acceptance and therefore no contract.

This is because the word “agreement” presupposes that the parties were aware of the fact that what they were doing would lead to an agreement.

Question 26

Revocation of offer.

Answer 26

An offer is revoked when the offerer formally withdraws the offer. On revocation, the offer to an end and cannot subsequently be accepted.

The offerer can give notice of the revocation of the offer at any time before acceptance.

Question 27

What does revocation of an offer need in order to be effective?

Answer 27

Like the offer itself, it must be communicated to the offeree.

Until the time the offeree become aware of the revocation, he or she can accept the offer and create a valid and binding contract.

Question 28

Byrne & Co V Leon Van Tienhoven & Co

Answer 28

Case info:
. On 1/Oct Van Tienhoven wrote from Cardiff and offered goods for sale to Byrne in New York - received in 11/Oct.
. Byrne accepted the offer by telegram straight away and by letter on the 15/Oct.
. Meanwhile, on 8/Oct Van Tienhoven had posted a letter withdrawing the offer - received 20/Oct

Relevant law:
. Revocation of offer
. Communication of offer

Court decision:
. It was held that the withdrawal of the offer was ineffective
. A revocation was not effective until it had been communicated to the offeree
. A contract binding both parties had been entered into on 11/Oct when Byrne accepted by telegram the offer of 1/Oct

Question 29

What does the law not stipulate regarding revocations?

Answer 29

The law does not stipulate any particular way in which the revocation is communicated to the offeree. It simply requires the offeree be made aware that the offer has been withdrawn.

As a result, the method of communication is sufficient provided the fact of revocation actually comes to the offeree’s notice.

Question 30

When can’t an offer be revoked?

Answer 30

Although as a general rule an offer may be revoked before acceptance, if it takes the form of an offer in exchange for the doing of an act, revocation may not be available. This is seems in circumstances when the offeree has already partly performed the act.

Question 31

Lapse of offer.

Answer 31

An offer will lapse:
A. If not accepted within the time stated
B. If not accepted within a reasonable time, where no time for acceptance has been stated
C. If a counter-offer is made (even if it is not accepted)
D. On the death of either party before acceptance
E. By loss of contractual capacity by either party, for example by insanity.

Question 32

When does an acceptance occur?

Answer 32

When the party to whom an offer is made agrees to the proposal of the offerer.

Question 33

What are the different ways to accept an offer?

Answer 33

By word of mouth, in writing, or by conduct and must be made in the manner indicated by the offerer.

Question 34

Who can accept an offer?

Answer 34

An offer can only be accepted by the person to whom it is made, but there is nothing to prevent an offer from being made to a number of persons generally, any of whole may accept.

The manner in which an acceptance is to be signified depends upon the terms of the offer, and if no special manner is specified, then the mode of acceptance would depend upon the circumstances.

Question 35

What happens when a person carries our certain acts in ignorance of the fact that an offer exists which is capable of acceptance by so performing those acts?

Answer 35

The person carrying out those acts does not do so on the faith of the offer, there is not an acceptance capable of resulting in a binding contract.

Question 36

Communication of acceptance.

Answer 36

The general principle, for there to be a binding contract between the parties, is that acceptance of an offer must be communicated to the offerer.

Question 37

What are the exceptions regarding communication of acceptance?

Answer 37

A. Where the offeree has dispensed with notification of acceptance, that is, where it has been made clear that notification of acceptance is unnecessary.

B. Where acceptance is to take the form of performance of an act (as in Carlill V Carbolic Smoke Ball Co [1893] 1 QB 256).

C. Where the postal acceptance rule applies.

Question 38

In accordance with the general principle stated previously….

Answer 38

… Where two people make a contract by word of mouth the acceptance must be actually communicated to the person making the offer.

Question 39

What happens when the means of communication between the offerer and offeree is instantaneous (eg. Telephone or fax machine)?

Answer 39

The formation of a contract between the parties is governed by the general rule that a contract is concluded at the time when, and the place where, the acceptance is received.

Question 40

What happens when a contracts acceptance is communicated by email?

Answer 40

The contract is made in the place where acceptance is received.

Question 41

What happens when there is no prescribed acceptance time?

Answer 41

Acceptance must be communicate with into the time prescribed. However, if there is no prescribed time, then acceptance must be received within a reasonable time.

Question 42

What are the rules of acceptance? (1-3)

Answer 42

1. Acceptance which is to take the form of a promise and not the performance of an act must be communicated to the offeror. Acceptance must be by word of mouth, writing or conduct.
2. Acceptance which is to take the form of an act does not require communication to the offeror unless the terms of the offer require it. The offerer is deemed to have waived the need for the offeree to communicate acceptance: it is the performance of the act that is the acceptance (eg. Carvill V Carbolic Smoke Ball Co [1893] 1 QB 256).
3. Acceptance must be unconditional - a qualified/conditional acceptance (“yes, I will buy the car provided you promise to give me free air-conditioning”) would amount to a counter-offer that the offeror could accept or reject. Where the acceptance is made:
   . “subject or contract” or
   . “subject to finance” or
   . “subject to an RACV check” or
   . “ subject to formal contract to be drawn up by our solicitors”,

as often happens in negotiations, no binding agreement between the parties exists unless or until the condition has been satisfied.

Question 43

What are the rules of acceptance? (4-9)

Answer 43

4. Acceptance must follow the conditions, if anymore stated in the offer.
5. Acceptance can be made only by the party to whole the offer was made.
6. Acceptance can be revoked provided the revocation is communicated to the offeror before the acceptance is received.
7. Acceptance must be made within the the time prescribed or, if no time has been prescribed, within a reasonable time.
8. The existence of the offer must be known to the person accepting it.
9. Communication if acceptance must be made in a regular and authorised manner.

Question 44

Explain the postal acceptance rule.

Answer 44

According to this rule,me here acceptance by post us contemplated by the parties, acceptance is complete as soon as the letter of acceptance is properly posted.

The acceptance is not affected by delay or loss of the letter in the course of post, provided that the parties contemplated the post as a means of entering into contractual obligations.

Question 45

Can an offeror stipulate the required method of acceptance of their offer?

Answer 45

Yes. Accordingly, the postal acceptance rule is excluded where the offeror requires actual communication of the acceptance.

This may arise, for example, where there is an express stipulation in the offer requiring receipt by the offeror of the offeree’s acceptance for it to be effective. In such a case the mere posting of the acceptance would not create a binding contract.

Question 46

Adams V Lindsell (1818) 106 ER 250.

Answer 46

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Question 47

Bresson v squires.

Answer 47

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