2019 WEEK 2 – INTRODUCTION TO THE LAW OF CONTRACT

The Formation of the Contract – Chapter 6 Card & James

Every day we contract in various situations. When you get on a bus or a train, you contract, when you
buy a sandwich from the supermarket, you contract. When you pay your landlord, when you pay your
university fees, when you get a job, take out a bank loan etc. In business, virtually all transactions are
by way of contract. Often we are not aware of all of the terms of a contract; it is only when things go
wrong that we have to make reference to it. For this reason, we need to know what a contract actually
is.

There is no legal definition of the word contract in English law, and so we look at the formalities to
establish if there is one and if so, what are its terms and the consequence of breach. The law, for the
most part, does not impose a requirement as to the form of contract, so it might be in writing, it might
be oral, it might be partly in writing and partly oral. One exception to this general principle is that
contract relating to the sale land of land must be in writing, as must consumer credit and HP
agreements.

1. E-commerce
E-commerce creates its own particular difficulties regarding formalities of contract eg how can one
sign an electronic document? We refer here to EU law and see its application as a source of English
law. Article 9(1) of the Electric Commerce Directive required the UK to address these problems by
stating that it, and all other member states ensure their legal systems allow contracts to be concluded
by electronic means. Contracts should not be deprived of their legal effectiveness and validity on the
grounds that they were made electronically. To comply with and implement this Directive, the
following were introduced: The Electronic Commerce (EC Directive)Regulations 2002 were made to
implement the Directive and the Electronic Communications Act 2000 was passed, which recognises
‘electronic signature’ and empowers the Secretary of State to amend legislation to facilitate electronic
communications and storage.

2. Capacity and Privity

In very basic terms – there is no capacity to contract if you are a minor (under 18), there are
exceptions, or if you lack capacity under section 2(1) of the Mental Capacity Act 2005.

The doctrine of privity of contract means, that again, with exceptions, only the parties to the contract
may enforce the provisions of that contract, and that third parties have no right to enforce the
contracts of others, even if they have an interest in the contract: Tweddle v Atkinson (1831) (an
example of common law). The injustices of this strict doctrine, as established by common (case) law
were finally addressed by parliament, by the introduction of a statue, a piece of legislation, The
Contracts (Rights of Third parties) Act 1999. For a fuller discussion of this see page 118-121 of Card
and James.
3. Formalities

Let us now look at what is required, what are the ingredients of a contract under English law.
There are 5 of these:
(i) Offer
(ii) Acceptance
(iii) Certainty
(iv) Consideration
(v) Intention to create legal relations

The courts will apply an OBJECTIVE test to determine if these requirements are met. Sometimes it
is easy to identify the contract eg it is in writing and it is signed by the parties, but in other
instances, it is not so obvious. One party may be claiming there is a contract, the other, not
wishing to be legally bound will be claiming there is not. The contract may have been concluded
orally, or through a mix eg of telephone discussion and email. It might not be clear if there is a
contract, if so, what are its agreed terms, and/or when the contract was actually made. In business
these can be significant considerations, the time and the place of contracting can have serious
commercial implications.

Lord Denning, a famous CA judge was its head, the Master of the Rolls for a number of years, and
as such was a very significant ‘creator’ of common law. On this question as to objectivity he said in
a judgement in the case of Storer v Manchester City Council [1974]: ‘In contracts you do not look
into the actual intent of a man’s mind. You look at what he said and did.’ (see p126 of Card and
James).

Finally, before looking at the formalities of contract, note there are two types of contract – a
bilateral contract, which is where both parties to the contract are bound to perform their side of
the contract, and the unilateral contract, where only one party is bound to perform.

(i) The Offer

An offer is an expression of willingness to be legally bound on certain specified terms, and the
person making the offer is known as the offereror, the person to whom the offer is addressed is
the offeree.

An offer may be made in writing, orally or it may be inferred through conduct. It can be made to a
specific person, a group of persons, even to the whole world : Carlill v Carbolic Smoke Ball Co
[1893].

An offer must be communicated to the intended offeree: Taylor v Laird (1856) .

Offers must be distinguished from invitations to treat. In the course of negotiations the parties
may make preliminary statements which do not actually amount to an offer, and to distinguish
between those statements that do constitute offers and those that do not can sometimes be
difficult. For example an inquiry as to the price of a thing is not an offer to buy it at that price – it
is an invitation to the person selling the item to make an offer to sell the item at a price.

The courts (common law source of law) have made a number of presumptions (general rules) as
to what and what is not an offer in certain commonly occurring situations.

So, eg in relations to advertisements, the general rule, the presumption is, that an advert will only
be an invitation to treat: Partridge v Crittenden [1968]. There are exceptions however, the most
notable example of which is seen in the Carlill case. The facts of this case can be found on page
134 of Card and James.

Displays of goods in shop windows are usually only an invitation to treat: Fisher v Bell [], and
displays of goods within a shop likewise: Pharmaceutical Society of Great Britain v Boots Chemist
[1953]. The facts can be found on page 129 of Card and James.

Where transactions are effected through machines, eg vending machines, or ticket parking, the
general rule is that the machine makes the offer, which the customer accepts by putting the
money in the machine : Thornton v Shoe Lane Parking Ltd [1971].

At auction, the general rule is that when an auctioneer calls for bids, he is only making an
invitation to treat, bidders make the offer, which the auctioneer is free to accept or reject: Payne v
Cave [1775].

Tenders are a common business mechanism eg in large commercial and construction contracts,
but inviting tenders is usually only an invitation to treat: Spencer v Harding (1870).

E-commerce can be problematic on this point, as although we have the EU legislation on e-

commerce, this does not tell us at what point the contract is concluded or what is the legal status
of goods on websites. In March 2003 eg Amazon was forced to temporarily shut down after a
pocket computer worth £247.99 was mistakenly priced on its website at £3.32. The website was
flooded with offers to buy the computers. Again in 2012, Next the retailer advertised two sofas for
offer on its website at £98 when the price should have been £1,198. Again, they were inundated
with orders, but usually retailers will not be held to the error. An exception is Marks and Spencer,
who also in 2012, after unhappy customers had set up an online petition to complain, decided to
honour agreements to sell a TV worth £1099 for the mistakenly offer price of £199.
Unfortunately, the legislation (statute law) is silent on this and we do not have a higher court
ruling as yet (common law). So there is a gap in the law. But the thinking is that displays of goods
on websites are only invitations to treat. The courts have however made it clear they will not assist
a purchaser who is aware that a pricing mistake has been made.

Offers can terminate in 5 ways:

(i) Rejection: Tinn v Hoffman (1873)

(ii) Lapse of time: Ramsgate Victoria Hotel v Montefiore (1866)
(iii) Death of the offeror or the offeree
(iv) Failure of a condition precedent
(v) Revocation: Payne v Cave (1789) – the offer can be revoked any time before acceptance,
and once revoked, the offer is destroyed. This applies even if the offeror has said that an
 offer will remain open for a certain period of time: Routledge v Grant (1828). In order for
the revocation to be valid, it must be communicated to the offeree: Byrne v Van
Tienhoven (1880)

(ii) The Acceptance

In order to form a binding contract, the offeree must accept the offer. So the offeree must know
of the offer: R v Clarke (1927), the offeree’s acceptance must be communicated to the offeror, and
the acceptance must match the offer, it must be ‘final’ and ‘unqualified’. This is the ‘mirror image
rule’ and means that if in accepting the offer the offeree introduces a new term, or varies the
terms in another way, then a counter-offer is made. This has the effect of destroying the original
offer, and the offeree now becomes the offeror: Hyde v Wrench (1840).

Acceptance must be communicated, and silence will not be enough: Felthouse v Bindley (1862).
Attempted communication will be insufficient, even where the fault is not that of the offeree (eg
the telephone line goes dead while he is accepting): Entores v Miles Far East Corporation [1955]
(see page 141 of Card and James for the facts of this case) .

In general, the communication of acceptance must be received by the offeror, but there are a
number of exceptions to this rule. The first is the postal rule, which states that where acceptance
is made by post, then acceptance occurs when the letter is posted and not when it it received:
Adams v Lindsell (1818). See page 142 of Card and James for the facts). Post has to be the
appropriate form of communication however: Henthorn v Fraser [1892].

In the case of instantaneous communications such as telephone, telex and fax, the acceptance is
deemed to have occurred not when it was sent but when it was actually received. Receipt is
necessary : Entores Case and Brinkibon v Stahag Stahl [1983], but where there has been a
malfunction, a lost signal for example, then there will be no contract and the offeree will have to
repeat the acceptance, unless he believed that his acceptance had been communicated, in which
case a contract will exist. If no party is at fault, there will be no contract.(See page 141-145 of Card
and James for a fuller discussion).

Another consideration is office hours – if communication is received during office hours,

acceptance takes place when it is received on the machine, not when it is actually read: Brinkibon
Case. If the communication was received outside of normal office hours, then acceptance is
deemed to have taken place at the start of the next working day : Mondial Shipping v Astarte
[1995].

(iii) Certainty
If there is an agreement i.e. an offer and a mirror image acceptance, the next test is certainty. The
terms of the agreement must be certain, not too vague, and must not be incomplete. If the
intention of the parties is too vague, the court will find there to be no contract: G Scammell v
Ouston [1941].
The inclination of the court is however to uphold and enforce contracts wherever possible, rather
than be seen as ‘the destroyer of bargains’: Hillas & Co v Arcos (1932).

(iv) Consideration

If there is agreement and the contract is not vague and uncertain, then the next thing for the court
to identify is consideration. In legal terms, consideration means the price of the promise, the
bargain element to the exchange of promises. Historically, consideration was defined as a benefit
or a detriment given or suffered by one in exchange for that given or suffered by the other: Currie
v Misa (1857). See page 149 of Card and James for a fuller discussion.

There are 3 types of consideration:

1. Executed – consideration that has already been provided

2. Executory – consideration that has yet to be provided, and
3. Past – which is not good consideration as it has been provided prior to the promised act: Re
McCardle [1951]. See page 151 for facts.

The first two, executed and executor are both good consideration, but generally, past
consideration is not good consideration. There are exceptions to the rule however: (a)if the act
was done at the promisor’s request: Lampleigh v Braithwaite (1615); and (b) the act was done on
the understanding by the parties that there would be some payment in the future: Re Casey’s
Patents [1892].

There are legal question marks over whether the following things constitute ‘sufficient’
consideration. But note the court is not concerned with adequacy – consideration need be
sufficient, it need not be adequate : Nestle v Chappell [].

- Performance of an existing legal duty – can it be sufficient? The answer is generally, no:
Collins v Godefoy (1831). However, where a party has done more than was legally required,
this can be good consideration: Glasbrook v Glamorgan CC [1925].
- Performance of a contractual duty owed to the other party – can it be sufficient? The answer
is generally no: Stilk v Myrick (1809). However, if the party does something over and above
that required under the terms of the contract, it can be good consideration: Hartley v
Ponsonby . The most significant case on performance of duty is the case of Williams v Roffey
Bros [1991]. See page 154 of C&J for the facts. In this case, though there was nothing in the
performance that was beyond the contractual duty owed, there was good consideration for
the extra payments promised as consideration came by way of the ‘practical benefits’
principle. This is a very important case, as while the precedent of Stylk was upheld, and was
not overruled, the court instead chose to ‘refine and limit’ the principle of law in Stylk. This is
a good example of how the common law is developed within the English legal system.
- Can the part-payment of a debt be good consideration for the payment of the whole debt?
Generally, the answer is no: Pinnel’s Case (1602); Foakes v Beer (1884). However again the
common law provides a number of exceptions:
(a) If part payment is accompanied by something else requested by the creditor eg
payment in kind. The request must come from the creditor, not the debtor
(b) There are multiple creditors and the debtor has entered into a composition
agreement
(c) Where the part-payment is made by a third party: Welby v Drake (1825)
(d) Promissory estoppel: Central London Property Trust v High Trees House [1947]. In
essence this doctrine holds that the court will not tolerate bullying, economic duress
and an inequitable going back on promises: D&C Builders v Rees [1966]. See page 158-
160 of C&J for a fuller discussion of the complex topic of ‘promissory estoppel’.

(v) Intention to Create Legal Relations

This is the final ingredient necessary to find there is a binding contract – the parties must have
intended to create a legally binding agreement. The court relies on 2 presumptions of law in trying
to ascertain whether this requisite intention is present, and both can be rebutted:

(a) There is a presumption AGAINST legal relations in social and domestic agreements: Balfour v
Balfour [1919], but this presumption can be rebutted as it was in the case of Merritt v Merritt
[1970]. The presumption applies to social agreements as well as familial agreements: Wilson v
Burnett [2007]

(b) There is a presumption FOR legal relations in commercial agreements: Edwards v Skyways Ltd
[1964]. The presumption is hard to rebut but was in the case of Rose Frank v Compton [1925]
where an honour clause was inserted to say that the parties were bound in honour but not in
law. A ‘subject to contract’ clause would have the same effect, ‘heads of agreement’ etc