Contract - Contract Formation (1) Flashcards
How are contracts formed?
Contract Formation: Legally enforceable contracts have a number of requirements.
(1) Agreement: Contracts must be agreed by both parties. This involves offer and acceptance.
(2) Legal Intention: Parties must intend to be legally bound. This is often implied.
(3) Consideration: Both parties must provide something, typically money for a good or service.
(4) Capacity: Parties must be mentally capable of entering into the contract. This will differ.
What is an offer?
Offer: One party must make an ‘expression of willingness’ to contract on specific terms, with the intention that they will be bound to those terms once accepted (Allied v Leonidas).
(1) Expression: An express is any means of communication.
(2) Intention: Intention is determined objectively - would the reasonable person interpret the offer as intentional?
Types of Offer
Types of Offer: Offers can be bilateral or unilateral.
(1) Bilateral: The offer is made with the intention of being immediately bound (Carlill v Carbolic).
>(A) offers £200 for (B)’s car.
(2) Unilateral: The offer is made with the intention of being bound on the completion of an act, and is often made generally (Williams v Carwardine).
>(A) places a notice in the newspaper offering £200 if somebody finds his lost dog.
>This includes prospective tenders, i.e. (A) says he will consider any tender sent by a certain date. He is liable for loss of opportunity for failure to consider valid tenders (Blackpool v Blackpool).
>This includes best-offer tenders, i.e (A) says he will accept the tender with the lowest price (Harvela v Royal).
>This includes auctions without reserve, as the auctioneer offers to accept the best bid. Breach of this promise is against the auctioneer, not the owner (Barry v Davies).
Invitations to Treat
Invitations to Treat: Offers are not to be confused with invitations to treat. This is where (A) invites (B) to make an offer, but is not themselves making an offer.
(1) Shelved Goods: Shelved goods in a shop are invitations to treat (Fisher v Bell).
(2) Advertisements: Ordinary advertisements are invitations to treat (Partridge v Crittenden).
(3) Reserve Auctions: Auctions with reserve are invitations to treat below the reserve price (s57 SGA).
(4) Tenders: Ordinary tenders are invitations to treat.
Terminating Offer
Terminating Offer: Offers may be terminated. Once terminated, they cannot be accepted.
(1) Revocation: (A) communicates that their offer is revoked to (B) prior to acceptance (Byrne v Tienhoven).
Communication: This means receipt of notice, need not be read.
>Business ‘receive’ communication when it is reasonable to have been read (Brimnes).
>Can be to their last known address if the current address is unknown.
Unilateral Offers: Unilateral offers are revoked by the method made, i.e. newspaper (Schuey v US). They cannot be revoked if a party has substantially completed the act (Errington v Errington).
Third-Party: Third parties may revoke for the offeror if it is reasonable to believe they have the right to do so - even if they do not (Dickinson v Dodds).
(2) Rejection: (B) rejects (A)’s offer. They cannot then change their mind.
Express: (B) expressly rejects the offer to (A).
Implied: (B) makes a counter-offer - this is rejection of the original offer (Hyde v Wrench).
>Requests for information are permitted (Stevenson v McLean).
(3) Lapse: (A)’s offer will lapse after a reasonable time, or any time expressed.
Express: (A) tells (B) their offer is open for 24 hours. It lapses after 24 hours (but can be expressly revoked before this).
Implied: Offers will lapse as reasonable in the context, i.e. one week for a perishable good.
What is acceptance?
Acceptance: The other party must make ‘unqualified assent’ to the terms of the offer.
(1) Unqualified: Acceptance must be to the exact terms of the offer.
(2) Assent: Acceptance must be communicated and received in time.
Communication
Communication: Acceptance can be communicated in several ways.
(1) Literal Receipt: In general, acceptance must be literally received by the offeror, i.e. by email, telephone etc.
(2) Silence: Silence may comprise acceptance if the offeree stipulates as such (Re Selectmove). The offeree cannot be bound by silence where the offeror says ‘I will take your silence as acceptance’ (Felthouse v Bindley).
(3) Unilateral Contracts: Unilateral contracts are accepted by performance of the act (Carlill v Carbolic).
(4) Business: A business has accepted once it is reasonable to expect notice to have been read (Entores v Miles).
(5) Postal Rule: Acceptance sent by post is valid once posted, provided it would reasonably have arrived before lapse (even if it never arrives). This is not applicable if the offeror demands literal receipt (Adams v Linsell).
>(A) posts acceptance to (B) but the post is lost. It is deemed accepted when posted.
>(A) is told that acceptance ‘must be read’ by (B). If the post is lost, acceptance does not occur.
Unclear Terms
Unclear Terms: There may be instances where parties believe to be agreeing to the same terms, but are not.
(1) Vague Terms: Vague terms may not be accepted, unless they hold obvious meaning to both parties (Scammell v Ouston; Hillas v Arcos).
(2) Battle of Forms: Where two business parties both believe to be acting on their own standard terms, it is important to determine which was accepted.
Last Shot: Typically the last set of terms to have been accepted are the valid terms (Butler).
Exception: This is excepted if a party has signed another contract disapplying any terms they send in response (TRW v Panasonic).
What is legal intention?
Legal Intention: Contracting parties must intend for the contract to be legally binding. There are two presumptions.
(1) Domestic Presumption: An agreement between friends or family is presumed not to be legally binding (Balfour v Balfour).
Exception: This is rebutted with evidence to the contrary, such as contracts in writing, contracts with high consideration, or fractured relations (Merritt v Merritt).
(2) Commercial Presumption: An agreement in a commercial setting is presumed to be legally binding (Edwards v Skyways).
Exception: Very clear wording may rebut this, usually in writing, though this is rare (Rose v Crompton).
What is consideration?
Consideration: Contracts require sufficient consideration, meaning both parties are acting on a promise (Currie v Misa).
(1) Sufficient Consideration: The promise must have some intrinsic value, though this need not be economic (Chappell v Nestle).
Generosity: Promises to trigger generosity, such as ‘touch my car for £1m’, are insufficient.
Physical Acts: A promise to ‘stop moaning’ is insufficient (White v Bluett). However, a promise to forego rights such as drinking may be sufficient (Hamer v Sidway).
(2) Adequate Consideration: The promises are ‘fair’ (this is not required).
>(A) pays £1 for an Aston Martin. This is not adequate, but it is sufficient, so is permitted.
(3) Definition: Consideration must be a benefit to one party or a detriment to another. It is often both.
Past Actions as Consideration
Past Actions as Consideration: Promises based on already completed actions are generally not binding.
(1) Example: (A) sold (B) a horse. After completion, (A) told (B) the horse was healthy, but it was not. This was made after the contract, and the sale was past consideration, so insufficient (Roscorla v Thomas).
(2) Exception: Past consideration may be sufficient if the following three conditions are met.
Promisor’s Request: (A) asked (B) to complete an action (Lampleigh v Braithwaite).
Promise of Reward: (A) then offered (B) a reward, and it was mutually understood the act would be rewarded (Re Casey’s Patents).
Legal Consideration: The considerations on both sides would have been legally enforceable in a pre-existing contract.
Existing Duties as Consideration
Existing Duties as Consideration: Promises to perform existing duties or obligations are generally insufficient (Collins v Godefroy). There are exceptions.
(1) Exceeding Duties: Where a party exceeds their duty for extra payment, it is sufficient (Ward v Byham).
Public Body: Public bodies may exceed duties for payment (Glasbrook v Glamorgan), unless this is contrary to public policy (Williams v Williams).
(2) Third Party Duties: Where a party has a duty to one party, and a third party offers to pay them to continue performing that duty, it is sufficient (Scotson v Pegg).
>(A) contracts to build (B)’s house for £100,000. (C) then offers (A) £100 to ensure they build (B)’s house.
(3) Contractual Duties: Where (A) contracts with (B), and (B) offers greater payment later in the contract in respect of the same duty, is generally not binding (Stilk v Myrick).
Exceeding Obligation: If (A) exceeds the original obligation, this is sufficient (Hartley v Ponsonby).
Practical Benefit: Provided (B) makes the offer, and receives a practical benefit in respect of (A’s) original obligations, such as ensuring their business opens on time, it is sufficient (Williams v Roffey).
>(A) pays (B) £100 to build a cafe. It appears (B) may be delayed, so (A) offers them another £100 to ensure they are not. This is sufficient due to the practical benefit to (A).
>(A) pays (B) £100 to build a cafe. (B) then demands another £100 to complete on time. This is not sufficient, as (A) has not made the offer.
Part Payment of Debts
Part Payment of Contracts: A promise to accept partial payment of a debt is generally insufficient (Foakes v Beer). There are exceptions.
(1) Practical Benefit: The promise confers a practical benefit, such as early payment. Otherwise, it is not a practical benefit.
>(A) tells (B) he cannot pay £100 by Friday, but could give him £75 today. This is sufficient.
(2) Non-Cash: The promise is altered for a non-monetary good, such as an asset (Pinnel’s Case). >(A) tells (B) he cannot pay the full debt, but will give him half the money and a horse. This is sufficient.
Promissory Estoppel
Promissory Estoppel: If (A) allows (B) to forego a contractual obligation, and (B) acts on it, then (A) will be ‘estopped’ from reneging on that promise in any action it brings against (B) in respect of those foregone obligations (High Trees Case).
(1) Promise and Reliance: (A) must make a clear promise to waive (B’s) contractual rights for a period of time, and (B) must act and rely on this promise (Combe v Combe).
(2) Rescission: It will be inequitable for (A) to rescind on this promise, but can resume full contractual rights with ‘reasonable notice’ or at the end of a clearly specified period (Tool v Tungsten).
(3) Effect: Promissory estoppel only acts as a ‘shield’ to claims, and not a ‘sword’ of claimant action.
What is capacity?
Capacity: Parties must have the requisite capacity to enter contracts.
Minors
Minors: Generally, minors are not bound by contracts they enter, but the other party (if an adult) is.
(1) Necessities Exception: Minors are bound to contracts necessary for the ‘suitable condition’ of their life, and their actual requirements at time of sale and delivery (SGA 1979).
Direct Link: Contract must directly provide ‘necessaries’. A contract which enables payment with which the minor to then contract for necessities is non-binding (Proform v Proactive).
>(A) buys school equipment from (B). This is binding.
>(A) offers drawing classes to (B) in order to make money to buy school equipment. This is not binding.
(2) Benefits Exception: Contracts which benefit minors on balance are binding, such as contracts for employment and education, if on ‘reasonable terms’.
Mental Incapacity
Mental Incapacity: Contracts entered by the mentally incapable or the intoxicated are generally valid.
(1) Exception: Contract is voidable if the party was incapable of understanding the nature of contract and the other party knew this to be the case.
(2) Example: (A) enters (B)’s shop and seems sober, subsequent contract is binding. (A) enters (B)’s shop and it is clear to (B) that he is very drunk. Subsequent contract is not binding.
Corporate Capacity
Corporate Capacity: Registered businesses have full legal capacity to contract in their own right.
