Contract Formation

Question 1

What are the 6 components of forming a contract?

Answer 1

Offer, acceptance, consideration, intention, capacity, and purpose.

Question 1

What are the two distinct types of offers?

Answer 1

A traditional offer is where communication of acceptance is needed to create a valid contract. A unilateral offer where no formal communication of acceptance is required and the offer is accepted by carrying out the conditions of the offer.

Question 2

Carlill V Carbolic Smoke Ball Co

Answer 2

The advert was made to the whole world whereby the use of the smoke ball should stop colds and flus and if not a reward was to be given. Mrs Carlill tried this smoke ball and still got sick leading her to claim the rewards to which she was refused. This was under the basis that she had not accepted the contract but as this had been a unilateral contract she accepted by carrying out the terms. This case shows how an offer may be made to one individual, a group or the whole world.

Question 3

Bloom v American Swiss Watch Co

Answer 3

The claimant gave information to the police which led to the arrest of some jewellery thieves. He later discovered that a reward had been advertised for the arrest of the thieves and tried to claim it. This case shows how the offer must be communicated to the offeree. As it he hadn’t known of it before the offer was not valid.

Question 4

Routledge V Grant

Answer 4

An offer was made for the purchase of a lease and the offer was stated to be open for 6 weeks for the offeree to accept. He later wrote that he found another lease and that no contract was made. This case shows that an offer can be revoked before it is accepted.

Question 5

Dickinson V Dodds

Answer 5

An offer to sell a house was made to the claimant. A trusted third party was sent to inform the claimant that the house had been sold to someone else and the claimant sued for breach of contract. This case shows that if the offer has not been accepted a reliable third party can withdraw the offer on their behalf.

Question 6

Ramsgate Victoria hotel co ltd v Montefiore

Answer 6

The offeror offered to buy shares in the offeree’s company but the letter from the offeree accepting never arrived. The offeror thought his offer had been rejected so refused to take them up. This case shows how an offer may be terminated by a reasonable lapse of time.

Question 7

What is a counteroffer?

Answer 7

This is when the offeree changes the terms of the original offer and in doing so wipes the original offer.

Question 8

What is a revised offer?

Answer 8

If the offeror makes an offer which they subsequently revise before it is accepted it will terminate the first offer.

Question 9

Pharmaceutical Society of GB V Boots

Answer 9

It was a criminal offense to sell drugs without the presence of a pharmacist and so when the customer picked up the product it was seen that the sales was made. This case shows that an offer must be distinguished from an invitation to treat and in this case the sales were not made until the purchase at the counter.

Question 10

What is an invitation to treat?

Answer 10

This is where the goods are displayed and the offer is made by the customer when they go to purchase the item.

Question 11

What counts as invitations to treat?

Answer 11

1) Selling goods in shops.
2) Selling goods at auctions.
3) Selling goods privately by advertisements in newspapers, magazines, and websites.

Question 12

Hyde V Wrench

Answer 12

The defendant writes to the claimant offering to sell his farm to him for £1,000 and the claimant makes a counter-offer which is refused. They now want to accept the original offer but the defendant no longer wants to sell the farm. This case shows how acceptance must be a mirror image of the offer and how a counteroffer wipes the original offer.

Question 13

Pickfords Ltd V Celestica Ltd

Answer 13

The defendants wished to move their IT business and the claimants were the removal firm. They made an original offer which was revised after further calculation. The defendant wanted to cap the cost but was still referring to the first offer. Work was carried out but the defendant refused to pay the second offer. As the defendant made a counter offer it was accepted by conduct. This case shows a counteroffer.

Question 14

What are the two exceptions to “acceptance must be communicated to the offeror”?

Answer 14

1) A unilateral offer.
2) The postal rule.

Question 15

What is the postal rule?

Answer 15

Acceptance by post takes place as soon as the letter is posted. This can only hold when the letter is pre-paid, properly addressed, and properly posted. An offer that is revoked by post, however, is not valid until it is received by the offeree and communicated to them.

Question 16

Household Fire Insurance Co V Grant

Answer 16

The defendant applied for 500 shares in the claimant’s company to which the claimant accepted and replied. However, the letter never arrived and so the defendant thought his offer had been rejected. Later when the business was liquidated they wanted the defendant to pay for his shares. The court held that a contract was formed and the defendant must pay for his shares. This case shows the postal rule in effect.

Question 17

When does the postal rule not hold?

Answer 17

It does not apply to instantaneous communication such as telephone or fax. It also does not hold if the offeror excludes the post as a means of acceptance.

Question 18

How do courts deal with modern methods of communicating acceptance?

Answer 18

Messages delivered to the business during normal office hours are deemed to be communicated. However, no universal rule can cover all cases.

Question 19

Felthouse V Bindley

Answer 19

The black stallion which was saved for his uncle was sold. This case shows that no answer is not a valid acceptance.

Question 20

Balfour v Balfour

Answer 20

A husband promised to pay an allowance to his wife while she stayed in Sri Lanka but later stopped. She sued claiming a contract was made however, as this is a domestic setting there is no intention to create a legally binding contract. This case shows that in domestic relationships it is assumed that there is no intention to create legal relations.

Question 21

How would rebutting the presumptions to create legal relations occur?

Answer 21

If there is clear evidence of a legal commitment then the presumption that a social/domestic agreement is not legally binding can be rebutted.

Question 22

What are letters of comfort?

Answer 22

These are exchanged in a business setting and include promises that are extra to the contractual agreement where the legal status is not clear. This assumes moral responsibility not legal liability.

Question 23

Who does not have the capacity to enter a legally binding contract?

Answer 23

Any person who is drunk, suffering from a mental disorder, or under the age of 18.

Question 24

What is a contract for necessaries?

Answer 24

This is where a minor can enter a contract that will benefit them at a later date or are "goods suitable to the condition in life of the minor".

Question 25

Proform Sports Management v Proactive Sports Management

Answer 25

Wayne Rooney entered a contract with a management company when he was 15. He later wanted to change management despite the contract. It was held that this was possible as he had been a minor when signing this contract. This case shows that contracts can be made void if signed by a minor.

Question 26

What is consideration?

Answer 26

This is defined as the price (not always monetary) which induces a party to enter into a contract.

Question 27

Thomas v Thomas

Answer 27

A man died leaving his house to be inherited by his two brothers. They let his wife live there for an annual rent of £1 for the rest of her life as long as she kept the house in good shape. After the other brother died he tried to take back the house. This case shows us that consideration must be sufficient.

Question 28

What are the two types of consideration?

Answer 28

Executed consideration is where consideration is exchanged at the time of the agreement. Executory consideration is a promise to give consideration in the future.

Question 29

What are the rules for consideration?

Answer 29

1) The consideration must be of some value. 2) The consideration must not be past. 3) According to the common law there must be a privity of contract between the parties in litigation. 4) Consideration must be real or sufficient. 5) Part payment of debt is not sufficient consideration to discharge the whole debt.

Question 30

What are the main components of an offer?

Answer 30

1) It can be made to one individual, to a group of people, or even to the whole world. 2) The offer must be communicated to the offeree. 3) An offer may be terminated before it's accepted by the offeror or by a reliable third party. 4) The offer may be terminated by lapse of time. 5) The offer may be terminated by the offeror making a revised offer. 6) The offer may be terminated by the offeree making a counteroffer. 7) An offer must be distinguished from an invitation to treat.

Question 31

What are the main components of acceptance of an offer?

Answer 31

1) Acceptance must be absolute and unqualified (mirror image rule). 2) Acceptance must be communicated to the offeror. 3)Acceptance must be in the method specified by the offeror.

Question 32

Re McArdle

Answer 32

The wife made some improvements to the property after moving in after the death of her father-in-law. The siblings agreed to pay her after the death of her mother-in-law for her work. However, after her death they refused. This case shows how consideration cannot be of the past.

Question 33

Stilk v Myrick

Answer 33

Some of the crew deserted and so the captain offered their wages to be split among those who stayed when they got back. However, when they got back he did not hold his promise of goodwill to which the crew sued. However, the crew were already bound by their existing contracts and were not doing any extra work so not provide any consideration for the new deal. This case shows how consideration must be real or sufficient.

Question 34

Hartley v Ponsonby

Answer 34

Similar to other crew cases but more than half left. As they had to do more work they were required to be paid more. This case also shows how consideration must be real or sufficient.

Question 35

Willaims v Roffey Bros

Answer 35

The defendants entered a contract to refurbish a block of flats. For the defendant, there was a penalty clause whereby they must complete the work before a specific time. He offered the claimants a bonus to complete the work faster however, after completing the work he refused to give the payment. As there was new consideration in this case from from the hiring of extra workers and putting in more time to meet the deadline he deserved the bonus payment. This case shows how consideration can be the giving of a practical benefit.

Question 36

Pinnel V Cole

Answer 36

Cole owed Pinnel a debt of money and wanted to settle for less than the amount owed. Pinnel initially accepted but later sued for the remaining amount. As Cole gives no consideration and Pinnel is only promising not to collect the rest of the debt Pinnel could sue for the remainder. This case shows how part-payment of debt is not a good consideration.

Question 37

What are the expectations for Pinnel's case?

Answer 37

1) Accord and satisfaction 2) Promissory Estoppel

Question 38

What does accord and satisfaction involve?

Answer 38

1) A lesser sum at an earlier date at the request of the creditor. 2) Goods or some material benefit as an alternative. 3) Part-payment by a third party which creates a new agreement between the creditor and third party.

Question 39

Central London Property Trust v High Trees House

Answer 39

The defendants leased a block of flats to the claimant. During the war, the claimants agreed to lower the rent but after the war, they wanted to reclaim the rent lost during the war. This case shows the doctrine of promissory estoppel in action.

Question 40

What is the promissory estoppel?

Answer 40

This is a shield, not a sword meaning it is used to protect the defendant who is being unfairly sued. For this to be useful there must be an existing contractual relationship between the claimant and defendant. The claimant knows that the defendant is likely to rely on this promise.

Question 41

What are the components of purpose in a contract?

Answer 41

1) Illegality 2) Public policy

Question 42

What does illegality include?

Answer 42

If the purpose of the contract is illegal the contract will not be valid. This is seen in the case of Pearce v Brooks where the claimant wished for a decorated carriage for prostitution to which the defendant damaged the carriage.

Question 43

What is a restraint of trade?

Answer 43

This is where one person is stopped from carrying on employment or a business for a certain period.

Question 44

What are the three types of clauses in restraint of trade?

Answer 44

1) In contracts of employment usually to protect a trade secret. 2) In contracts for the sale of a business. This allows for the business to not have as many competitors in the area. 3) Solus agreements- this is where a trader agrees to be supplied by only one company.

Question 45

What do the courts consider when deciding whether a clause is valid?

Answer 45

1) Is the clause designed to protect a legitimate business interest? Are the terms reasonable? 2) How long is the restraint intended to last? 3) What are the relative bargaining peers of the parties? 4) How wide is the restriction?

Question 46

Attwood v Lamont

Answer 46

A tailor was hired in Kidderminster on the condition that if he left he would not work as a "tailor, dressmaker, general draper, hatter, gentleman's, ladies or children's outfitter". The court held that the scope of the clause was too wide and severed all but the "tailor" aspect of the clause. This case shows employment contracts' purpose.

Question 47

Nordenfelt v Maim Nordenfelt Guns and Ammunition

Answer 47

A machine gun manufacturer with a worldwide reputation sold his gun-making business under the condition that he would not set up a competing business anywhere in the world for 25 years. The court held that as his reputation was worldwide this restriction was reasonable. This case shows contracts in the sales of a business.

Question 48

Esso Petroleum v Harpers Garage

Answer 48

The garage entered an agreement to only sell Esso petrol in return for a discount. The second agreement was a loan to purchase a second garage. Each agreement was given a timeframe with the second being extremely long (21 years). The garage wanted to be released from the contracts and so took them to court. The court held that the 2nd agreement was too long but the first was still enforceable. This case shows a solus agreement.

Question 49

What is severance?

Answer 49

First, the blue pencil test is used by which the offending parts are penciled out leaving what is enforceable. This was seen in Attwood v Lamont.

Question 50

What are damages?

Answer 50

Damages are monetary compensation which is awarded in order to place the injured party in the same position they would have been had the contract been properly performed.

Question 51

What must the claimant do to win a case?

Answer 51

1) Prove that a contract exists. 2) Prove that the contract has been breached. 3) Request a remedy.

Question 52

What are some remedies?

Answer 52

Injunction, specific performance, and rectification.

Question 53

What is frustration of a contract?

Answer 53

This occurs when an external event beyond the control of the parties causes the contract to become impossible/ illegal to perform or radically different from what was intended.

Question 54

Hadley v Baxendale

Answer 54

The claimant wished for the defendant to transport a broken crankshaft which was essential for the operation of his mill. Due to an error, it took seven days during which the mill was out of action. The court held that as the defendant was not informed that the mill would be idle nor was it obvious the mill would remain idle and so the damages claimed were too remote and could not be recovered. This case shows how if too remote damages cannot be claimed.

Question 55

When can damages be recovered?

Answer 55

1) They are for a loss that arises naturally from the breach of contract. 2) They are for a loss that is reasonably within the contemplation of the parties when they make the contract. Damages that are not anticipated by the parties cannot be recovered.

Question 56

H Parsons Ltd v Uttley Ingham

Answer 56

The claimant was a livestock farmer and the defendant supplied and installed food hoppers for pig food. By the error of the defendant, the pigs contracted e-coli and many died. The court held that as the defendant caused physical damage which could be reasonably foreseen the death was not too remote and damages were rewarded. This shows that the causation of damage can lead to damages being rewarded.

Question 57

What are the consequences of frustration?

Answer 57

1) Money or property paid in advance may be recovered. 2) A party who has incurred expenses on the contract is entitled to payment. 3) Money due to be paid is no longer payable and work to be carried out does not have to be completed. 4) Where one party has gained a benefit from work done before frustration, the other party must be awarded an amount that the court considers fair and just.

Question 58

What is a force majeure clause?

Answer 58

Parties can avoid litigation by ensuring that the contract is carefully contracted with a force majeure clause. This clause specifies what will happen if an event occurs which is beyond the control of the contracting parties.

Question 59

What does a specific performance remedy do?

Answer 59

The other party is required to perform the contract as agreed. Any party who refuses to comply would be considered to be in contempt of court.

Question 61

When will specific performance not be rewarded?

Answer 61

1) When the claimant has behaved badly. 2) Where personal services are involved as it would be wrong to force someone to work against their will. 3) It would cause excessive hardship to the defendant.

Question 62

What does an injunction remedy do?

Answer 62

This is a court order imposed on the other party in order to stop them from acting in breach of contract.

Question 63

What does rectification remedy do?

Answer 63

The court may amend the terms of a legal document that, because of a mistake, fails to accurately reflect the intentions of the parties.

Question 64

What is mitigation of loss?

Answer 64

This is when any party who suffers a loss as a result of a breach of contract must take all reasonable steps to mitigate their loss. Any parties who fail to do so will only be entitled to nominal damages.

Question 65

What are the ways to discharge an agreement?

Answer 65

1) By performance. 2) By agreement 3) By breach 4) By death 5) By frustration

Question 66

The case for frustration due to the impossibility of performing.

Answer 66

Taylor V Cadwell as the hall set on fire so it could not be used.

Question 67

The case for frustration due to illegality of performing.

Answer 67

Re Shipton Anderson & Co where wheat was requisitioned which meant the wheat could not be shipped.

Question 68

The case for frustration due to it being radically different.

Answer 68

Krell V Henry when a room was hired to view King Edward's coronation. As he became ill the room was no longer needed and the contract was frustrated so the defendant didn't have to pay for the room.

Question 69

What is the quantum meruit rule?

Answer 69

This means "as much as he deserved" which is when money can be recovered for services supplied to a defendant when the contract is frustrated.

Question 70

What makes auctions without reserve different?

Answer 70

In this case, selling goods at auctions is not considered an invitation to treat. This is because the seller will sell the product to the highest bidder no matter the price.

Question 71

What is a tender?

Answer 71

This is a competitive offer to provide goods or services. This is classed as an invitation to treat but the person inviting has a legal obligation to consider all submitted tenders and failure to do so will amount to breach of contract.