Formation of a Contract Flashcards
What are the 3 elements of a properly formed contract?
Agreement (offer + acceptance)
Consideration
Intention to create legal relations
What is the difference between a bilateral contract and a unilateral contract?
A bilateral contract is an exchange of promises (both parties agree to do something for the other)
A unilateral contract is where offer is accepted by the performance of a prescribed act
What are the 6 questions to ask when establishing agreement?
(1) Is the advert / letter / statement an offer or an invitation to treat? If an offer, is it a valid offer?
(2) Is acceptance in response to the offer?
(3) Is acceptance unqualified?
(4) Is acceptance made through a valid mode?
(5) Is acceptance communicated?
(6) At the point of acceptance, is the offer still open or has it been revoked?
What is an offer?
An expression of willingness to contract on specified terms made with the intention that it is to become legally binding as soon as it is accepted by the person to whom it is addressed
What is an invitation to treat?
The first step in contractual negotiations
(ie. Not intended that it will be legally binding the moment it is accepted - unlike an offer)
Is an advert an offer or an ITT?
General rule: ITT
Exception: if seller is manufacturer
Exception: if advert can be construed as a unilateral offer
(eg. first person arriving at 9am with £1 = completion of prescribed action)
Is the display of goods an offer or an ITT?
ITT
(Both shop window & goods on shelf)
Is a tender an offer or an ITT?
General rule: ITT
Exception: If make a commitment
(eg. to accept the highest/lowest, to consider tenders etc.) - then will be a unilateral contract
(Nb. the bidder’s tenders are offers)
Is an auction an offer or an ITT?
Auctioneer makes an invitation to treat by opening bids
Bid is an offer
Acceptance occurs at the fall of the hammer
(Nb. An auction without reserve (ie. no min price) is a unilateral contract - auctioneer making unilateral offer to sell to highest bidder)
Is it a valid offer?
- Terms of offer must be clear and certain
- Offeror must show requisite intention to be legally bound
(judged objectively)
‘We may be prepared to sell’ v ‘We will sell’
Which of these statements by the offeror shows the requisite intention to be legally bound?
We ‘WILL’ sell
(Gibson & Storer cases of MCC inviting tenants to buy council homes - ‘may’ held no intention to be bound)
Can you snap up an offer?
No
Hartog v Colin: Col sold hairskins for 30s - at end of negotiation, accidentally said ‘per pound’ instead of ‘per piece’
–> No contract: parties not in true agreement because Hartog (offeree) knew Col’s mistake & could not have reasonably supposed that the stated price was correct
(2) Is acceptance in response to the offer?
Mostly clear on facts if offeree is accepting offeror’s offer
Only OFFEREE can accept
Who can accept an offer?
The offeree only (ie. the person to whom the offer was made)
Nb. If they have knowledge of the offer at the time of making acceptance, the offeree’s motive for accepting is irrelevant
(3) Is acceptance unqualified?
Acceptance must be a mirror-image, ie. without qualification
(eg. offering a different price instead is a counter-offer)
What is the effect of a counter-offer instead of acceptance?
It extinguishes the original offer
Does a request for further information terminate the offer?
No - offer remains open
(4) Is acceptance made through a valid mode?
Has offeror specified the mode of acceptance by using mandatory words (‘must respond by email’) AND explicitly excluded all other modes (‘only email’)?
If yes - ONLY acceptance in the prescribed mode will bind the offeror
If no - acceptance that is ‘no less advantageous’ will bind the offeror
(ie. consider purpose for which mode prescribed - default is timing: is alternative mode just as quick?)
How do you establish if acceptance is ‘no less advantageous’ & therefore binding on the offeror?
Consider the purpose for which offeror has attempted (ie. mandatory words but may not excluded all other modes) to prescribe a mode
If is the offerors responsibility to make the reason clear (eg. for record keeping, want email)
If they haven’t, the default position is TIMING - whether the alternative mode is just as quick
(5) Has acceptance been communicated?
Acceptance must be communicated - silence cannot constitute acceptance
EXCEPTION: Unilateral offers - just need to do prescribed act
Who can communicate acceptance?
The offeree
or
A third party authorised by the offeree
At what point is acceptance deemed communicated?
Different rules for different modes
Post = upon posting
Exceptions:
- Not properly posted
- Unreasonable to use post
- Misaddressed by offeree
- Causing manifest inconvenience & absurdity
- If receipt required
Instantaneous communications = when received by offeror
(or next working day)
What is the postal rule for acceptance?
General rule: posted acceptance is effective UPON posting
(even if letter never arrives)
Exceptions:
- Not properly posted
- Unreasonable to use post
- Misaddressed by offeree
- Causing manifest inconvenience & absurdity
- If receipt required
What are the 5 exceptions to the postal rule?
If the letter is not properly posted
- Proper posting = putting it into hands of employee of post office authorised to receive post (not postman out on delivery)
Where it is unreasonable to use post
(eg. posting on morning of well-publicised postal strike)
If the letter is misaddressed by the offeree
Where posting would cause ‘manifest inconvenience & absurdity’
(eg. if clear from circumstances parties could not have intended there to be a binding agreement until acceptance communicated)
If receipt is required
- Will oust postal rule
- ‘Only binding if reaches me’ will be sufficient
At what point is acceptance by instantaneous communications (eg. email) deemed accepted?
When acceptance is received by offeror (eg. when email lands in inbox)
If, in business, communication sent outside office hours, acceptance is received first thing next working day
(nb. ‘office hours’ may be dependent on context)
If acceptance is not received, court looks at whose fault
If acceptance by instantaneous communications is not received, will there be a contract?
The court looks at who is at fault
If OFFEREE is at fault (eg. has reason to believe acceptance not heard but doesn’t repeat) –> NO contract
If OFFEROR is at fault (eg. fax machine out of ink) –> CONTRACT
If NOBODY at fault –> NO contract
(6) At the point of acceptance is the offer still open?
Whether it has been revoked depends on whether it is a bilateral or unilateral offer
Revocation of BILATERAL offer:
- Anytime prior to acceptance
- Effectively only at point at which it reaches offeree
- Can be communicated by TP
Revocation of UNILATERAL offer:
- Anytime prior to acceptance (ie. completion of the act)
- Done with equal notoriety to original offer
- If unequitable to revoke, must give offeree opportunity to complete required act
What are the requirements for revocation of a bilateral offer?
TIMING: Anytime prior to acceptance
COMMUNICATION: Effective at the point at which it reaches the offeree
(ie. postal rule does not apply)
Can be communicated by third party
Nb. OPTIONS: offeror will breach separate contract (option) if offer revoked when offeree has provided consideration to keep the offer open
What are the rules for revocation of a unilateral offer?
TIMING: Anytime prior to acceptance (ie. prior to the completion of the act)
(‘I offer you £100 if you walk to York - I can revoke any time before you reach York’)
BUT
Where performance has begun & it would be INEQUITABLE for offeror to revoke, must give the offeree the opportunity to complete the required act
HOW: If offer made to the whole world, must be with equal notoriety to original offer
(eg. full page in Sunday T must be full page in Sunday T, not on Tues, not smaller)
What is intention to create legal relations?
Whether the parties intend to be bound by the contract
(Objective: would a reasonable man conclude an agreement would have been reached)
Is there a presumption of intention create legal relations in commercial agreement?
Yes - strong rebuttable presumption of ICLR
Can be rebutted by:
- Very clear words (eg. ‘binding in honour only’; ‘subject to contract’)
Look at the context eg. statements said in jest where no objective person could have reasonably concluded offer serious & intention to create a contract (Pepsico etc) no ICLR
Is there a presumption of intention to create legal relations in domestic agreements?
No - rebuttable presumption of no ICLR
Rebuttable factors include:
- Amount of money at stake (more = ICLR?)
- Closeness of relationships
- Formality (eg. if signed & in writing)
- Completeness
What is consideration?
Something given in return for another party’s promise
What is consideration in a unilateral contract?
The specified act
How much should consideration be?
It must be sufficient - but it need not be adequate
(ie. doesn’t need to adequately reflect the value of the promise for which it is given)
Can consideration be past?
General rule: Past consideration is not good consideration
Exception: A past act/promise may be consideration if -
1. The past act was done at the promisor’s request
2. It was mutually understood that the promisee would be rewarded in some way for what they had done
3. If the promise had been made in advance, it would have been legally enforceable
What 3 conditions must be fulfilled for past consideration to be good consideration?
- The past act / promise done at the promisor’s request
- Mutually understood from the start that the promisee would be rewarded in some way for what they had done
- If the promise had been made in advance it would have been legally enforceable
(Look for an intention to create a contract)
What is the difference between upward variation of contract & downward variation of contract?
Upward variation = A wants more from B for performing an existing contractual duty
(eg. asking company to pay more for goods it’s already supplying)
Downward variation = X wants to pay less than is owed to satisfy a debt owed to Y
(eg. owing £100 & asking if can pay £50 only)
Will there be consideration in the variation of a contract to pay more? (Upward variation)
General rule: Performance of an existing contractual duty is NOT consideration for a promise to pay more money
BUT: If the promisee exceeds their existing contractual duty, that something extra will be consideration
Exception: Practical benefit consideration - for commercial contracts only
If the performance of the existing contractual duty confers a real practical benefit, the promise to pay more will be binding (unless obtained by duress)
General rule: Performance of existing contractual duty owed to other party NOT good consideration
–> Did the promisee exceed their existing contractual duty? (Yes: good consideration - variation is binding)
–> If not, did the promise confer a practical benefit? (No: Variation is not binding)
–> If yes, variation binding unless made under duress (If made under duress, variation is voidable)
Will there be consideration in the variation of a contract to pay less (part payment of a debt)?
General rule: Part payment of a debt is not consideration for a promise to pay less
–> Unless there is any new element of consideration
- Something extra in addition to the part payment (eg. early payment, chattel)
If not, consider whether promissory estoppel can be used as a defence to a common law action?
- Promisor has made promise to forgo legal right (eg. promising to accept part instead of full payment)
- Promisee has acted in reliance on the promise (ie. the promise influenced the conduct of the promisee)
- Inequitable for the promisor to go back on their promise
What are the conditions that must be satisfied for a defence of promissory estoppel?
i. Promise to forgo/suspend a legal right
ii. Promisee acts in on reliance on the promise (reliance does not need to be detrimental)
iii. Inequitable for promisor to go back on the promise (eg. allowed part payment because have no money, inequitable to go back whilst they still have no money)
Nb. Equitable remedy, so promisee must have clean hands to rely on it
What is the effect of promissory estoppel?
If it is available as a defence, the promisor’s strict legal rights are suspended
Any rights to arrears are extinguished
Their rights can be resumed when the circumstances giving rise to the estoppel have ceased or by reasonable notice
If promissory estoppel is not available as a defence, what is the effect?
The promisor’s promise to waive their strict legal right (eg. landlord’s promise to accept payment of less rent) is unenforceable
(so eg. landlord could suddenly change their mind & demand full rent + arrears)
Certainty - how can you be sure that parties have reached agreement on all the material terms of the deal?
Whether or not parties have reached complete agreement in relation to the material terms of the deal is generally judged objectively
Context to consider includes:
(a) Whether the parties are in the same trade
(b) Trade usage
(c) Whether the arrangement has been acted on for any length of time
(d) Whether there is an objective mechanism for resolving any uncertainty (eg. arbitration clause)
Certainty examples
(A) Go to car dealership & say you are interested in buying a particular car priced at £10k. Agree to buy it on ‘hire purchase terms’
–> NOT CERTAIN, NO CONTRACT (no other details of hire purchase agreement, eg. duration etc.)
(b) Agreement to buy ‘timber of fair specification’
–> CERTAIN because parties had dealt with each other in the past, knew about timber trade, contract had been partially performed
ie. as far as the parties were concerned there was no uncertainty
(c) A ‘provisional agreement’ is drawn up & is to operate until a fully legalised agreement drawn up by a solicitor & embodying the conditions of the provisional agreement is signed
–> CERTAIN: clear parties are in agreement, fact that formalised contract yet to be drawn up is irrelevant
Do minors have capacity to enter into a contract?
General rule: Minors are NOT BOUND for contracts they enter into
(Nb. the other party is bound, but the minor is not)
Exceptions:
- Contract for ‘necessaries’ (ie. goods/services suitable to their actual requirements & social status)
- Contracts of service predominantly beneficial to a minor (eg. apprenticeship)
What are the 2 exceptions to the rule that minors are not bound for contracts they enter into?
Contract for ‘necessaries’
(what is ‘necessary’ will depend on their actual requirements & social status at the time of the purchase)
Contract of service predominantly beneficial to the minor (eg. apprenticeship)
If a party to a contract is suffering some form of mental incapacity, will they be bound?
Yes
Unless:
a. The person was incapable of understanding what they were doing at the time of the contract
AND
b. The other party knew that to be the case
In which case, the contract will be voidable (ie. binding unless & until person who had mental impairment terminates it)
Do corporations have capacity?
If they are separate legal entities (directors will act as agents for the companies)
- LLPs = unlimited capacity
- Registered company = check memorandum of assoc –> an ultra vires contract will be binding if the other company acted in good faith
- Statutory corporations = check the statute under which they were set up –> an ultra vires contract will be invalid
eg. Unincorporated assocs (clubs etc.) are not separate legal entities, so not competent contracting parties
Do LLPs have capacity?
Yes - separate legal entities with unlimited capacity
Will an ultra vires contract be binding on a registered company?
Ultra vires contract = company enters into a contract which is not within its permitted range of activities
Will be binding if the other party acted in good faith (but check memorandum of assoc)
Will an ultra vires contract be binding on a statutory corporation?
No - an ultra vires contract will be invalid
Statutory corporations = corps incorporated by virtue of a statute (eg. local authorities) - the relevant statute will set out the purposes for which they can enter contracts
What is an ultra vires contract?
A contract that is beyond the scope of the powers & purposes provided to the company / corporation etc. by its document of association
