Formation of a contract

Question 1

Who is the offeror?

Answer 1

The person making the offer

Question 2

Who is the offeree?

Answer 2

The person to whom the offer is made

Question 3

What is a bilateral contract?

Answer 3

Both parties assume an obligation to each other.

Most common type of contract.

Offer can be accepted by an unequivocal communication of acceptance at which point each party would be bound to do what it promised to do.

Question 4

What is a unilateral contract?

Answer 4

One party makes an offer in terms which call for an act to be performed by one or more other parties.

Offer is accepted by performance of the required act. At that point the other party becomes bound.

Question 5

What are the elements of a binding contract?

Answer 5

Offer

Acceptance

Intention to create legal relations

Consideration

Question 6

What are the elements of offer and acceptance?

Answer 6

Clear and certain offer displaying an intention to be bound

Unequivocal acceptance

Question 7

What is the test for identifying agreement?

Answer 7

Court is concerned with what a reasonable person would say was the intention of the parties, having regard to all the circumstances.

Objective approach.

Not concerned with inward mental intent of the parties.

Question 8

What is an invitation to treat?

Answer 8

An invitation to treat is a first step in negotiations which may or may not lead to a firm offer by one of the parties. It usually takes the form of an invitation to make an offer.

Cannot be accepted to form a binding contract.

Examples: Advertisements, Display of goods for sale, invitations to tender, auction sales (unless without reserve - if withdrawn highest bona fide bidder is entitled to damages).

Question 9

When will an advertisement amount to a unilateral offer?

Answer 9

When there is a prescribed act and a clear intention to be bound.

Question 10

What are the three ways an offer can come to an end?

Answer 10

Rejection
Lapse
Revocation

Question 11

What are the rules regarding a rejection of an offer?

Answer 11

An offer is terminated by rejection. A rejection foes not take effect until it is actually communicated to the offeror as only then will the offeror known that they are free from the offer.

Question 12

What happens if the offeree makes a counter offer?

Answer 12

Where an offeree makes a counter-offer the original offer is deemed to have been rejected and cannot be subsequently accepted.

Where a counter-offer is accepted its terms and not the terms of the original offer become the terms of the contract.

Question 13

What is the effect of a request for information?

Answer 13

No effect, the original offer remains open for communication.

Question 14

How can an offer lapse?

Answer 14

1. By the passage of time
   - where acceptance is not made within the period prescribed by the offeror
   - where no period is prescribed and acceptance is not made within a reasonable time. What is reasonable depends on the circumstances.
2. By the death of one of the parties
   Death of offeror: if offeree knows that the offeror has died, offer will lapse. If offeree is unaware it probably will not.

Death of offeree: will lapse as offeree’s PRs cannot accept on behalf.

Question 15

What is revocation of an offer?

Answer 15

Offeror may withdraw they offer at any time before acceptance.
Once valid acceptance has been made, the offeror is bound by the terms of their offer. An offer cannot be revoked after acceptance.

Question 16

How can revocation be communicated?

Answer 16

Post: moment it is received by the offeree not from time of posting.

Means do not matter: can show by words or conduct a clear intention to revoke offer.

Will be effective even if communicated by a third party.

Question 17

Can a unilateral offer be revoked?

Answer 17

Yes.

But exception where offeree has partly performed the obligation and is willing and able to complete.

Question 18

What are the four aspects to identifying whether there has been the communication of an unequivocal acceptance needed to form a contract?

Answer 18

1. Acceptance must be in response to the offer
2. Acceptance must be unqualified - mirror image rule
3. It may be necessary to follow a prescribed mode of acceptance
4. Acceptance must be communicated

Question 19

Who can accept an offer?

Answer 19

Only the person/people to who an offer is made can accept the offer.

Question 20

How can acceptance be communicated?

Answer 20

Can be communicated in any manner whatsoever. Generally offeree may decide the manner of acceptance but not always the case where the offeror has prescribed the mode of acceptance.

Question 21

When will an offeree be required to use a method of acceptance stipulated by offeror?

Answer 21

When the stipulation as to mode is clearly mandatory and excludes all other options.

If not mandatory another mode of acceptance which is no less advantageous to the offeror will bind them.

Question 22

Can silence amount to acceptance?

Answer 22

No.

Offeror may not stipulate that they take silence to be acceptance.

Question 23

What if a third party accepts a contract on behalf of the offeree without their permission?

Answer 23

No contract will arise if communication is made by a third party without the authority of the offeree.

Question 24

What is the postal rule?

Answer 24

Held where pose is deemed to be a proper means of communication, the acceptance takes effect from the moment the letter of acceptance is properly posted - not from the moment it is received.

A letter is properly posted when it is put into an official letter box or into the hands of a postal operative who is authorised to receive letters.

Applies even where acceptance is delayed or lost in the post.

Does not apply if not contemplated post would be used (must be reasonable to use the post), to letters revoking offers, if incorrectly addressed, if disapplied by offeror.

Question 25

What is rule for acceptance by instantaneous means?

Answer 25

Rule is that the acceptance takes place at the moment the acceptance is received by the offeror.

Emails effective when received. If sent outside business hours - start of next business day.

Question 26

What happens if an agreement is incomplete or uncertain?

Answer 26

A court may not be able to enforce it.

Although courts will look to enforce the agreement reflecting the intentions of the parties where this is possible.

Will apply an objective test asking whether in all the circumstances of the case the parties have agreed all the terms they considered to be a precondition to creating legal relations.

Question 27

What is the effect of no consideration?

Answer 27

Not a contract, it will be a gratuitous promise.

Law requires reciprocity to make the contract enforceable.

Question 28

What are the consideration rules?

Answer 28

• Consideration must not be past
• Consideration must move from the promisee
• Consideration need not be adequate
• Consideration must be sufficient

Question 29

Is a promise to pay more to perform an existing obligation under a contract enforceable?

Answer 29

Generally no.

Exceptions:
1. B has exceeded their contractual duty, so good consideration for additional payment.

2. Factual consideraiton: Williams v Roffery - no fresh legal consideration (not exceeded contractual duty):
   Conditions for it to operate: applies where there is an existing contract between parties, paying party has reason to doubt whether the performing party will be able/willing to complete, the paying party promises to pay more to ensure completion. Paying party gains a practical benefit/obviation of disbenefit.
   - As long as no economic duress and promise was freely given then it is enforceable.

Question 30

Is a promise to accept less than legal rights enforceable?

Answer 30

No it is unenforceable.

Unless a common law exception applies:
- Payment at a different place/time or of a different thing - a new element is introduced which will amount to good consideration

• Payment by a third party - agreement with a creditor, by which the creditor accepts payment by the third party of a lesser sum then debt is in full satisfaction.
• Practical benefit -

If none apply: promissory estoppel may apply

Question 31

What is consideration?

Answer 31

An act or forbearance of one party or the promise thereof is the the price for which the promise of the other is bought, and the promise thus given for value is enforceable.

I.e. providing something in return for promise to do something.

Question 32

What is executory consideration?

Answer 32

Where contracting parties make promises to each other to perform something in the future after the contract has been formed.

e.g. delivery of goods at some time in the future.

Question 33

What is executed consideration?

Answer 33

Where at the time of the formation of the contract, the consideration has already been performed.

Question 34

Consideration must not be past

Answer 34

If act/forbearance has taken place prior to promise, then it cannot be in exchange for that promise.

Exception - three conditions:

1) Act must have been done at promisor’s request
2) Parties must have understood that the act was to be rewarded either by a payment or the conferment of some other benefit. These could be because of an agreed reward or implied.
3) Payment or conferment of other benefits must have been legally enforceable had it been promised in advance.

e.g. taking a car to garage and then leaving ultimate price to be decided after completion.

Question 35

Consideration must move from promisee

Answer 35

Means that a party who has not provided consideration may not bring an action to enforce a contract.

Question 36

Consideration need not be adequate

Answer 36

If agreement is freely reached, the inadequacy of the price is immaterial.

Question 37

Consideration must be sufficient

Answer 37

Consideration must have some value in the eyes of the law. Doesn’t matter how small the value as long as it is worth something.

Question 38

Can an existing contractual obligation owed to a party amount to good consideration for a new contract with that party or variation of the contract?

Answer 38

Generally no there must be fresh consideration.

Exception: factual consideration - conferring practical benefit or obviating a disbenefit. And no duress or fraud.

Question 39

Is performing a public duty good consideration?

Answer 39

No.

Example: police officer giving information. Public duty to prevent crime.
In this case there was consideration because police officers are not under a duty to provide information to a private individual.

Question 40

Can an obligation to do something for a third party amount to consideration for a contract with another party?

Answer 40

Yes it can amount to valid consideration.

Question 41

What is promissory estoppel?

Answer 41

An equitable doctrine that effectively allows a promise to be enforced despite not being supported by consideration.

Aims to protect a party who relies on such a promise. Equity prevents of ‘estops’ the promisor from going back on their promise in situations where the promisee has relied on it.

Often involved part payment of debt where debtor relies on a promise by the creditor that they will not require the debt to be paid in full.

Question 42

What are the parameters of promissory estoppel?

Answer 42

• It acts as a shield and not a sword
• A clear and unequivocal promise that strict legal rights will not be fully enforced
• A change of position in reliance on the promise
• Inequitable to allow the promisor to go back on their promise

Question 43

Promissory estoppel: Acts as a shield and not a sword

Answer 43

Can only act as a defence to an action: cannot be used as a cause for an action. Cannot sue on the basis of promissory estoppel. (must have provided consideration to sue).

Question 44

Promissory estoppel: A clear and unequivocal promise that strict legal rights will not be fully enforced

Answer 44

Must be clear and unequivocal promise or representation that existing legal rights will not be fully enforced.

Promise must be intended to affect legal relations and not simply amount to a gratuitous privilege given to the promisee. A promise can be express or implied.

Question 45

Promissory estoppel: A change of position in reliance on the promise

Answer 45

Debtor must have relied upon the promise or representation i.e. influenced their conduct. Does NOT need to be detrimental reliance. sufficient if promisee has made a change of position in reliance on the promise.

Question 46

Promissory estoppel: Inequitable to allow the promisor to go back on their promise

Answer 46

Based on principles of fairness and it is discretionary. Courts will undertake a balancing exercise to determine whether it would be inequitable to go back on promise.

Although detrimental reliance is not necessary it will make more likely for inequity to be found.

Courts will look at the conduct of both parties.

Question 47

Does promissory estoppel suspend or extinguish legal rights?

Answer 47

Effect is generally to suspend them, not to extinguish them.

A promisor may resume his full legal rights after giving reasonable notice - Tool Metal v Tungsten.

Rights may be extinguished where it has become impossible for the other party to meet the obligation concerned or it would be clearly inequitable to require them to do so.

Question 48

Which rule of consideration does promissory estoppel provide an exception to?

Answer 48

Part payment of a debt without fresh consideration does not discharge the debt obligation.

Question 49

What is an intention to create legal relations?

Answer 49

An intention to enter into an agreement that has legal ramifications.

It is one of the necessary requirements of a binding contract.

Question 50

What is the test of intention to create legal relations?

Answer 50

Test of intention is objective by which we mean that the intention of the parties is to be determined more by what the actions of the parties in the particular circumstances suggests,

rather than by taking evidence from what was in the parties minds.

Courts seek to give effect to the intentions of the parties whether expressed or presumed.

Question 51

What is the presumption for ITCLR for commercial agreements?

Answer 51

It is presumed there is an intention to create legal relations.

This is rebuttable. Onus is on party disputing presumption to rebut - heavy burden/

Includes agreements between individuals and businesses and two individuals.

Question 52

What is the presumption for ITCLR for domestic agreements?

Answer 52

It is presumed that there is not an intention to create legal relations?

May be rebuttable. Question whether it can be rebutted will be resolved on a case by basis by examining the circumstances of each case. Courts are willing in cases where spouses are in the process of separating.

Question 53

What is an agreement ‘subject to contract’?

Answer 53

Creates a strong inference that the parties do not intend to be bound until the formal execution of a contract. Prima facie is not binding.

Question 54

Who has capacity to enter into a contract?

Answer 54

Persons over the age of 18 have full contractual capacity if they are of sound mind and not suffering from a factor ruling out capacity such as drunkenness.

If they do not have capacity to enter into a contract they will generally not be bound.

Question 55

What are the exceptions for when a minor will be bound by a contract?

Answer 55

Generally minors are not bound by a contract entered into under the age of 18 even if the other party contracting does not know of this fact or the minor has lied about their age.

Two exceptions:

1) Contracts relating to necessity

2) Contracts of employment, apprenticeship or education: but only if it is for their benefit. If it is not for their benefit the contract will not be binding.

Question 56

What is a contract for necessaries?

Answer 56

A minor is bound by a contract to supply necessaries to them if the contract if for their benefit. A minor must pay a reasonable price for these rather than the actual cost of the necessaries supplied.

Necessaries means: goods suitable to the condition in life of the minor or other person concerned and to their actual requirements at the time of the sale and delivery.

Question 57

What is the effect of entering into a contract with a minor?

Answer 57

Unless one of the exceptions applies, the contract cannot be enforced against the minor, although the minor can enforce it against the other party.

If a minor ratifies a contract once they reach age of 18 then the contract will be binding on them.

Question 58

When does a person lack capacity?

Answer 58

If he is unable to make a decision for himself in relation to the matter at the time the contract is made.

Lacks capacity if unable to:
- Understand the relevant information
- Retain the relevant information
- Use the relevant information
- Communicate a decision.

Question 59

What is the effect of entering into a contract with a person who lacks capacity?

Answer 59

They will remain liable to pay a reasonable price for necessaries.

In any other case, the contract will be binding unless they can show:
1) They did not understand what they were doing
2) other party knew that to be the case
If these can be shown the contract will be voidable.

This can be extended to those incapacitated by alcohol or other substances.

Question 60

When can commercial contracts be rebutted?

Answer 60

In a commercial context there is a strong presumption that the parties intended legal relations but it may be rebutted if the agreement is stated to be ‘binding in honour only’. i.e. clear words must be used.