Contract law: Formation and contents

Question 1

Define a contract

Answer 1

A contract can be defined as a ‘legally binding agreement’.

Question 2

What is consensus ad idem?

Answer 2

It’s what the contract is based on: A meeting of the minds.

Question 3

Do all contracts have to be made in writing?

Answer 3

No. Those that are are called specialty contracts (eg contracts of guarantee). Those that aren’t are parol or simple contracts.

Question 4

What does “made by deed” mean?

Answer 4

Contracts for conveyances of land and leases of property over more than three years must be made by deed. Contacts that must be in writing but not necessarily by deed are bills of exchange, cheques and promissory notes.

Question 5

Describe 4 types of contracts

Answer 5

1. Valid contracts: Fully binding. The court will enforce the pre established rights and responsibilities.
2. Void contracts: No legal effect. Can be void for many reasons (eg mistake, illegality, lack of consideration).
3. Voidable contracts: May be avoided by one of the parties. If a party does not avoid the agreement, then a valid contract still exists. (e.g. contracts entered into under fraud, misrepresentation, duress). The remedy is abolition of the original agreement.
4. Unenforceable contracts: Legal contracts, but can’t be sued upon. eg. time limit for enforcing contract has lapsed.

Question 6

How is a contract formed? 3 steps

Answer 6

1. Offer
2. Acceptance
3. Consideration

Question 7

What is an offer?

What is it characterised by? (8)

Answer 7

A promise to be bound on particular terms

1. Not too vague.
2. Each party must know their rights/ obligations. A statement of intention isn’t enough to form a contract.
3. An invitation to treat is an invitation to others to make offers. (eg display of goods in a shop window/self-service shop/public advertisement)
4. An offer can be made to a person/group. If it is restricted, only the person it is offered to can accept it. If it is made to the public, anyone can.
5. A person cannot accept an offer that he does not have knowledge of, the motive for accepting isn’t important.
6. Expressly rejecting an offer terminates the offer. A counter offer is not connected to the original, terminated offer: it is a new offer. It is not request for information.
7. Revocation is when the offeror takes back the offer. Can occur at any time before acceptance. Communication of revocation may be made through a third party. A promise to keep an offer open requires its own contract. This is known as an option contract. Revocation isn’t allowed once the requested task has been started.
8. Offers lapse and can no longer be accepted at the end of the stated period (after a reasonable time, or when one of the sides dies).

Question 8

What is acceptance characterised by? (6)

Answer 8

1. Binds both parties.
2. Must correspond with the terms of the offer.
3. May be in express words or in implied conduct.
4. Must be communicated to the offeror. Silence cannot amount to acceptance.
5. Acceptance through the post is complete once the letter is posted.
6. Offeror can require acceptance to be made in a particular way.

Question 9

What is consideration characterised by? (4)

Answer 9

1. Gratuitous/uncalled for promises aren’t enforceable unless made by deed.
2. Executory consideration: Promise to perform at some future time. Contract made based on exchange of promises.
3. Executed consideration: Promise is only enforceable once the offer has actually performed the required act.
4. Past consideration: Action performed before the promise. Not sufficient to support a valid contract, because it has already occurred, except if payment was expected.

Question 10

Rules relating to consideration (6)

Answer 10

1. Performance must be legal.
2. Performance must be possible.
3. The one carrying out the performance must be the one carrying out the promise and the consideration.
4. Must be sufficient but need not be adequate. agreement must be entered into freely.
5. Performance of an existing duty does not provide valid consideration.
6. A public duty cannot be claimed as a consideration for a promised reward. A promise to give up existing rights must be supported by a consideration from the other party, eg with regard to debt. if A owes B an amount, it should not be assumed that A accepts to pay a lesser amount if B offers this, unless A has considered it.

Question 11

Rules relating to payment (9)

Answer 11

1. Money’s worth (eg in property etc) is as capable of settling a debt as actual money.
2. Paying a lesser sum before the due date of payment is allowed if accepted by owed party.
3. Payment at a different place is allowed if accepted by both parties.
4. Payment of a lesser sum by a third party is allowed if accepted.
5. Promissory estoppel is a doctrine that prevents promisors from going back on their promise to go without their strict contractual rights. It only arises when a party relies on a promise. It only varies rights within an existing contract. It can only suspend rights.
6. A contract can only impose rights/obligations on persons who are a party to it This is the doctrine of privity.
7. In order to allow a third party to enforce a contract, the beneficiary can sue in another capacity, the situation involves a collateral contract ie. A promises B something, if B enters a contract with C.
8. A party to the contract can transfer the benefit of the contract to an external party.
9. It may be foreseeable that a breach of a contract would cause damage to a third party. One of the parties has entered the contract as a trustee for the third party.

Question 12

3 cases of intention to create legal relations

Answer 12

1. Courts only enforce agreements that the parties wanted to have legal effect.
2. Domestic/social agreements are assumed to have no intention of legal relations. Commercial situations are complicated and need express wording to show they are domestic/social agreements, to avoid invalidation.
3. No impairing factors present (nothing to prove the agreement to be not genuine).

Question 13

What are the terms of the contract?

Answer 13

What the parties actually agree to do

Question 14

What are pre-contractual statements called?

Answer 14

Representations. These are NOT contractual terms which actually form part of the contract.

Question 15

How can a contractual term be distinguished?

Answer 15

• The statement is of such importance that the promisee wouldn’t have entered the agreement without it.
• If there is a time gap between a statement and the making of a contract, this statement is a representation, not a contractual term.
• If a statement is oral and not included in the drawn up written form, is wasn’t intended as contractual term.
• When one of the parties has special knowledge/skill, statements made by them will be contractual terms.

Question 16

Describe 2 types of contractual term

Answer 16

• A condition. Fundamental part of the agreement. Goes to root of the contract. Breach can lead to termination of contract or suing for damages.
• Warranties. Subsidiary obligations. Not vital, don’t destroy the efficacy of the agreement. Breach can only sue for damages. Remedy for unclassified terms isn’t based on breach, but on the consequences of it. If the breach deprives the innocent party of the contract’s whole benefit, rejection will be permitted. If part of the benefit is deprived, the innocent party can settle for damages.

Question 17

What is the bystander test?

Answer 17

Courts will presume that parties intended to include a term that isn’t expressly written. Whether this can be presumed is tested using the bystander test: If A and B are negotiating a contract, and C intervenes with a provision, and A and B agree to it, this provision can be assumed to be included, and passes the officious bystander test.

Question 18

What is an exemption clause?

How is it made valid

Answer 18

An exemption clause tries to limit the liability of a party breaching the agreement. Must effectively cover breach.

Validity:

• It must be included in the contract.
• By signature (except if the signer was deceived).
• By notice (party must be given sufficient notice for the average person to be aware of it).
• By custom (parties have had previous dealings. Based on exclusion clause, it can be included in later contracts).

Question 19

What is the exclusion clause?

Answer 19

…. An exclusion clause imposed on a consumer isn’t binding unless it satisfies the act’s requirement of reasonableness. Assumes that the person acted ‘in the course of business’. The contract is only minor to the relevant business.

Question 20

What is the contra proferentem rule?

Answer 20

It requires that any uncertainties in the exclusion clause are interpreted against the person who relies on it.

Question 21

What is the Unfair Contract Terms Act 1977?

Answer 21

A statutory attempt to control unfair exemption clauses. Prohibition on exemption clauses in relation to liability in negligence resulting in death or injury.

Question 22

What are the considerations in reasonableness?

Answer 22

• The strength of the parties’ bargaining power.
• Whether encouragement was offered for limiting liability.
• Whether the customer knew/ought to have known about the existence/extent of the exclusion.
• Whether it was made specifically for the customer.

Question 23

Give the facts/arguments/judgment of the Carlill v. Carbolic Smoke Ball Company case

Answer 23

Facts:
Plaintiff (P) bought a Carbolic Smoke Ball based on the company’s ad that they would pay 100l to anyone who got influenza after using it. She contracted influenza. The court found she should recover the 100l. Defendant (D) then appealed.

Arguments:
D: Facts show no binding contract between parties. Claim was not established based on Ps acts, because P can’t control contracting influenza. The ad is too vague to be the basis of a contract. No time limit stated. No intention to accept the offer.

P: The ad was an offer from the defendants. Offer was accepted. Using the ball is an acceptance of proposal. Notice of acceptance is not required because ad was made to any person who contracted influenza, not just P. Product not needed to be gotten directly from producers.

Judges: Ad legally constitutes a promise to pay 100l. Offer is continuing. Notice of acceptance not necessary. All elements are present to make this a binding contract enforceable by law. Case is nudum pactum. Sale of balls was enough to constitute a consideration. Consistent and regular use of smoke ball over time by P can constitute consideration. P was not the victim of influenza. Therefore, no contract between P and D. However, there is enough evidence of consideration. Ad intended to be read by public. Should be considered how the public would interpret it: Protection covered time period in which smoke ball was used.

Judgment:
D must pay 100l to P, so appeal was dismissed.

Question 24

Give the facts/arguments/judgment of the Oscar Chess Ltd. v. Williams case

Answer 24

Facts:
Appeal by D after P were awarded £115 damages for breach of warranty. D sold a 1939 model car to P, stating it was a 1948 model.

Judges:
Both models look the same, but price is different. D believed it to be a 1948 model. Question ‘depends whether D gave a binding promise to P that car was made in 1948’. Both parties believed the car to be a 1948 model. Both mistaken. Enables the contract to be ‘set aside in equity’. Binding promise or innocent misrepresentation? Intended as a warranty or not? Seller had no knowledge of year of manufacture, did not intend to bind himself. Actual year of manufacture was only discovered 8 months after purchase, the damages should not be claimed. Seller produces evidence: the registration book.

Judgment:
Appeal was allowed