Contract Law

Supplementary Assignment 2012

A.

To advise Khan &Co whether there is a binding contract with Sofoam and, if so, whether
they can rely on the cancellation clause, it is significant to initially start with the essential
elements of a legally binding contract, the elements are an agreement, consideration,
capacity, intention, and certainty.

Sofoam Ltd sent a fax to Khan & Co, following their negotiations, offering to supply them
with foam for a 5 year period at a price of £20 per kilo for the first year. The fax which was
sent from Sofoam Ltd to Khan &Co amounts to an Offer; this is because it was
communicated in the written form effectively from an offeror to an offeree. For an offer to be
effective the offeree needs to be acknowledged of the offer. It is stated that the
“communication will be treated as an offer if it indicates the terms on which the offeror is
prepared to make a contract… and gives a clear indication that offeror intends to be bound by
those terms if they are accepted by the offeree”1.

Fax machine it is seen as an instantaneous method which is treated as both parties being in
each other’s attendance, thus there has to be a clear communication of acceptance by the
offeror and this method will come under the receipt rule. An example of the receipt rule can
be seen in the case of JSC Zestafoni Nikoladze Ferroalloy Plant V Ronly Holdings Ltd 2.
The sender of a fax receives a message telling them that the message has been received. This
shows that the instantaneous messages are treated as both parties being in each other’s
presence, but as the fax sent throughout office hours it is expected that the fax machine is
observed constantly as stated in the case of Brimnes3 “the withdrawal was received when it
appeared on the machine rather than when it was actually read”, in contrast to the case,
there was an effective communication by Sofoam’ fax, hence Khans replied by mail.
Khans sent a letter back stating they accepted the offer and sending their standard purchase
contract including a cancellation clause allowing Khans to cancel the agreement on 2 weeks’
notice. Postal rule will apply; contract is legally bound as soon as letter is posted Henthorn V
Fraser4. In this case Lord Herschell stated “where the circumstances are such that it must
have been within the contemplation of the parties that, according to the ordinary usage of
mankind, the post might be used as means of communicating the acceptance of an offer, the
acceptance is complete as soon as it is posted” 5. This can also be seen in the case of Adam v.
Lindsell6, the court held that the contract was made at the time letter was posted. As a result,
acceptance letter sent by Khan’s is immediate and forms a Bilateral contract, where both
parties are immediately bound provided there is consideration and intention to form a legal
relations.

1
Elliot, C. and Quinn, F. (2007) Contract Law. 6th ed. Essex: Pearson p.12
2
[2004] EWHC 245
3
[1975] QB 929
4
[1892] 2 Ch 27
5
Jill Poole (2010). Casebook on Contract Law . 10th ed. oxford: University Press. 44.
6
(1818) 1 B & Ald 681
Furthermore Khan’s included a cancellation clause allowing them to cancel the agreement on
2 weeks’ notice. By including a cancellation is now a counter offer by Khan’s. It can be
argued that the postal rule does not apply since Khan’s made a counter offer. Seeing as, an
acceptance must communicate the exact terms of the offer in order for it to be applicable, it
follows that a reply which initiate new terms or try to differ terms proposed in the offer is not
valid. In this situation the response turns into a counter offer which obliterates the original
offer, rendering it incapable of acceptance. This is illustrated in the case of Hyde v Wrench7;
in this case it was held that if new terms are introduced to the original offer made, it will then
destroy the original offer and, since the original offer had been destroyed, it was no longer
open to Hyde to agree. Furthermore in this case, the Lord Langdale stated that “No valid
binding contract between the parties. As the defendant offered to sell property for £1,000,
and of that has been at once unconditionally accepted, there would undoubtedly have been a
perfect binding contract; instead of that, the plaintiff made an offer of his own to purchase
the property for £950, and he thereby rejected the offer previously made by the defendant. I
think that it was not afterwards competent for him to receive the proposal of the defendant,
by tending an acceptance of it; and that, therefore, there exists no obligation of any sort
between the parties…”8
The importance of communication can be seen in the case of Taylor v Laird9. For an offer to
be valid it must be communicated. This might seem rather obvious; however circumstances in
real life may be more blurred as illustrated by the case of Taylor v Laird10. The captain of a
ship, employed for a trading and exploring voyage, refused to go any further and resigned his
command. He subsequently helped to work the ship home and wanted to claim his wage for
this work. It was held however that he could not do so as his offer to help bring the ship home
was not communicated, therefore there had been no opportunity to accept or reject his offer11.

Yet, it can be argued that Khan did not reply to Sofoam and silence cannot be a basis for
acceptance, as silence does not amount to an acceptance. In Felthouse v Bindley12 “the court
felt that the nephews conduct in trying to keep the horse out of sale did not necessarily imply
that he intended to accept his uncles offer – even though the nephew actually wrote
afterwards to apologise for the mistake – and so it was not clear that his silence in response to
the offer was intended to constitute acceptance”. 13 This case states that the nephew being
silent doesn’t amount to there being an acceptance. Relating to scenario, Khan’s remained
silent this suggests that the offer is not accepted by Sofoam, as they did not respond back.
This principle was also considered in the case of The Leonidas D14, where Goff LJ stated that
it was ‘axiomatic that acceptance of an offer cannot be inferred from silence, save in the
most exceptional circumstances’15As no acceptance is made by Khan’s to the terms of
Sofoam’s offer, it suggests that there is not a legally binding contract between both parties,
based upon the terms of the offer made by Sofoam’s fax. Postal rule is not valid in this
situation, as it only applies to acceptances, which is that acceptance forms once letter is
posted. As a clear offer was made the question arises whether Khan’s accepted this offer
made to create a legally binding contract.
7
(1840) 3 Beav 334
8
As above
9
(1856) 1 H & N 266
10
(1856) 1 H & N 266
11
http://www.legalnorms.com/offer-and-acceptance.php accessed on 25/07/12
12
(1862) 11 CBNS 869
13
See f.n.4 at Page23
14
[1985] 1 WLR 925
15
As above
Sofoams letter never arrived yet it can be seen in the case of The Household Fire and
Carriage Accident Insurance Company (Limited) v Grant 16, it was held that there was a
valid contract, since the rule for the post is that acceptance is effective even if the letter never
arrives.
However, it can be argued that in this case it can be clearly identified that ‘battle of forms’
has occurred, as Sofoam first sends an offer stating that contract should be based on their
terms and then Khan’s reply with an including of a cancellation clause, which concerns the
contract to be based on their terms. In Trollope and colls Ltd v Atomic Power construction
ltd17: Megaw J states that the counter offer destroys the original offer, and the party whom
wins ‘battle of forms’ is the one who accept the counter offer last which is then accepted by
the other party this is also called ‘last shot’.

In situation of the ‘battle of forms’, there is no legally binding contract, as the offer and
acceptance do not match. In this case of conflict, each communication is considered as a
counter offer so if a contract is made between Sofoam and Khan’s, then the acceptance is
generally inferred by a conduct. This is supposed to have been accepted and it is the terms of
the final counter offer which applies to the contract overall this can be seen in the case of
Zambia Steel & Building Supplies Ltd. v. James Clark & Eaton Ltd18.

In British Road Services Limited v Arthur Crutchley & Co Limited19, the claimant had
delivered an amount of whisky to the defendant for storage, delivery driver passed defendants
a delivery note which contained the claimants’ ‘conditions of carriage’. The note was
stamped and by the defendants as ‘received under the defendants’ conditions’. It was held by
the court that the counter offer accepted by the claimant and handing over the goods and as a
result the contract incorporated the defendant’s not claimants’ conditions.

Though the courts may make a decision that there is not a valid contract and cancelling the
performance of the contract, they are unwilling to do so once the performance has started;
this is illustrated in the case of British Steel Corp v Cleveland Bridge and Engineering Co
Ltd20. On the other hand, a somewhat radical (and thus unlikely to be followed) departure
from the strict offer/ counteroffer analysis was offered in Butler Machine Tool Co. Ltd v.
Ex-cell-O corporation England Ltd21 by Lord Denning who looked beyond the strict
wording of the forms when he stated: The terms and the condition of the both parties are to be
construed together. If they can be reconciled so as to give harmonious result, all well and
good. If differences are irreconcilable, so that they are mutually contradictory, then the
conflicting terms may have to be scrapped and replaced by responsible implication22.

Sofoam supplied the foam for 2 years, the parties having agreed a 5% price increase for year
2. Khans then gave Sofoam 2 weeks’ notice terminating the agreement. Sofoam say this is
not possible and that the contract is for 5 years. Yet the fax was not agreed upon since the
terms of the fax were changed by Khans’ purchase order therefore; there is no legally binding
contract based upon a 5 year agreement as the fax which they first sent was written ‘subject
16
(1878-79) LR 4 Ex D 216
17
[1962] 3 All ER 1035
18
[1986] 2 Lloyd's Rep. 225
19
([1968] 1 All ER 811)
20
[1984] 1 All ER 504
21
[1979] 1 WLR 401
22
Stefan Fafinski and Emily Finch (2010). Contract Law. 2nd ed, Pearson education limited
p.19
to contract’, means no offer was made and the terms will not be binding until the both parties
have signed the formal contract. Additionally, the terms stated were unclear and vague
suggests there was a lack of certainty between both parties.
In the case of Scammell and Nephew Ltd v Ouston23, it was held that “no precise meaning
could be attributed to the clause as hire purchase agreements varied widely and there was
thus no contract. The level of vagueness here was such as to render the contract
unenforceable.24 Contrasting this case to the scenario, there is no formal contract between
both of the parties so Khans are liable to stop purchasing foam from Sofoam.

To conclude, Offer made by Sofoam was a counter offer and thus the postal rule does not
apply. This is because Postal rule applies to an acceptance only and not the offer. The khans’
acceptance letter is fulfilled regardless of receipt or not and a ‘battle of forms’ and legal
issues arising as a result. The Khans’ in their acceptance sent their standard form contract
with the cancellation clause, this it could also be considered as a counteroffer. The issue still
arises, that a contract cannot be made since Sofoam declined the counter offer by crossing the
cancellation clause part out. As a result, an offer/acceptance must match unambiguously and
completely in order to form a legally binding contract.

B.

To advise Khans’ whether they are bound to make the extra payments to CC, the rule of
consideration need to be applied consideration is the element of exchange for the promise in
an accord and usually gratuitous promises are unenforceable. Consideration can be money,
goods, services and a promise. It is clear that there is consideration as the money if being
exchanged for an agreement made by CC to build a new factory. In the case of Dunlop v.
Selfridge25, Lord Dunedin defines consideration as ‘an act of forbearance of the promise is
the price for which the promise of the other is bought, and promise thus given a value is
enforceable26.
By applying the principle of consideration, it can be established that Khan’s do not need to
pay the extra £5,000. Consideration is not just needed to make a contract but also needed for
an accord to terminate or vary an existing contract. The definition of consideration is also
illustrated in the case law in Curries v Misa27, Lush J referred to consideration as follows: “a
valuable consideration, in the sense of the law may consist either in some right, interest,
profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility
given, suffered or undertaken by the other” 28 Consideration should be made from the
promisee’, they are the ones who can implement the promise if they can give the
consideration for it.
Additionally, that the extra £5,000 can come under the ‘performance of an existing duty’,
which means that if a party is performing a duty which is already bound to do then this is no

23
[1941] AC 251
24
Elliot, C. and Quinn, F. (2007) Contract Law. 6th ed. Essex: Pearson Page52
25
[1915] AC 847
26
Stefan Fafinski and Emily Finch (2010). Contract Law. 2nd ed, Pearson education limited
p.34
27
(1875) LR 10 Ex 153
28
Stefan Fafinski and Emily Finch (2010). Contract Law. 2nd ed, Pearson education limited
p.34
sufficient to amount to consideration for a new agreement. In essence, since consideration is
defined in the terms of detriment of forbearance, then it seems logical that CC cannot suffer
any loss in relation to a new promise if that detriment is something that CC were going to
have to do anyway29. This is illustrated in the case of Stilk v Myrick30, “the promise was
unenforceable since the sailors were already contractually bound to return the ship to London.
Therefore, there was no consideration given by the sailors in return for the captain’s promise
to pay additional wages”31.
As a result, the basic rule relative to the performance of an existing duty is that it is not good
consideration for a new promise. Yet, there are exceptions on this rule where a contractual
duty is exceeded, this is illustrated in the case of Hartley v. Ponsonby32, half of a ship's crew
abandoned the voyage. The crew members who left behind, the captain promised to pay extra
money if they worked on the ship and completed the voyage but later the captain then refused
to pay up. This case is similar to the case stated above Stilk v Myrick33, though in Stilk case 9
crew out of 11 remained; in this case 19 out of 36 remained. Thus, the promise by the captain
to pay extra wages was enforceable. “The court considered that the greater proportional
reduction in crew members made the return voyage much more dangerous since the ship was
short-handed. The sailors’ promise to return under the more dangerous conditions had
exceeded their existing contractual obligations and therefore this represented good
consideration for the promise of extra pay”34
So therefore, the principal of performance appears to be that where a party does additional
than that for which they originally bargained, then this is a good consideration to support the
fresh bargain. Contrasting this to the scenario, it is apparent that CC was required to complete
the work on time as this was included in the terms of the contract by Khans’, so paying an
extra £5,000 was not a good consideration and CC cannot suffer any loss in relation to a new
promise if that detriment is something that CC were going to have to do anyway.
However looking into the Performance of a Contractual Duty Owed to the promisor, this
helps and makes a more clear view regards to the scenario, here one can look at the question
whether or not performance of a pre-contractual duty owned to the promisor is good
consideration for additional promise of payments made by the promisor has proved to be
vexed one in English Law35.
Yet, there is a case Williams v Roffey36 in which the principals where recognised by the
Courts of Appeal. Roffey were a building firm with a contract to refurbish a block of flats.
They Sub-contracted the carpentry work on the project to Williams, agreeing to pay him
£20,000 for the work, before the work was finished; Williams had financial difficulties which
would have prevented them to finish the work on time.
Roffey agreed to pay additional payments of £10.300on top of the agreed price of £20,000 in
return of finishing the job scheduled. The agreement also included change to the working
arrangements; instead of William working on several flats he would finish one at a time.

29
see.fnt.25 p.39
30
[1809] EWHC KB J58
31
see.fnt.25 p.40
32
(1857) 7E & B872
33
[1809] EWHC KB J58
34
see.fnt.25 p.39
35
E Mckendrick, Contract Law Fourth Edition, 2010, oxford, pg 169
36
[1989] EWCA Civ 5
When the carpentry work was done, Roffey refused their promise to honour the extra
payment of £10,300 sue William sued them for breach of contract.
The courts of Appeal found that Roffey’s promise extra was supported by valuable
consideration, in return for Williams for finishing the job on time; Roffey would have lost his
money under the penalty clause in their contract with the building’s owner. Even though,
William was only doing what he had originally contracted to do so, Roffey was receiving
extra benefit.
As a result of Williams v Roffeys37 , the law now seems to that if one party’s promise to
perform an existing contractual duty to supply good or service confers an additional practical
benefit on the other party, then making sure no duress is made then it will be sufficient
consideration to make a promise given in return binding, even though in a legal terms they
are only agreeing to carry out their existing contractual duties38.
To conclude, relating this to the scenario, If Khans had made an agreement with the CC or
even had mentioned slight in a clause then the situation would have been that Khans would
have been in breach of they promise, but because they had made verbal agreement it is hard
to prove what was promised by Khan’s. However Khan’s are benefiting because the work
would have been done on time. On the other hand looking at CC, they only carried out what
they also had promised in their contractual duty. So, it is difficult to states whether Khan’s
can be sued or not, by looking at the case above it seems like no Khan’s are not in breach of a
contract and they don’t have to pay any extra payments but still have a duty to pay the
original agreed payment.

37
[1989] EWCA Civ 5
38
C Elliott & F Quinn , Contract law , Fifth ED, PEARSON , PG 81