Law 200: Legal Environment of Business

Course Nutshell No. 2

Contract Law

The Contract law is called to the main essence of the corporate law as, agreement between the
parties remain the center point of proceeding business. In our country Contract Law 1872 is the
main governing Act for enforcing legal contracts. However, to understand the elements of
contract more clearly and elaborately we would look into the English case laws and Indian case
references in this handout.

As we all know a contract to be enforceable must contain the following four essential elements:

1. Offer
2. Acceptance
3. Consideration
4. Intention to Create Legal Relationship

It is, therefore, imperative to be aware of the actual meaning of these afore-stated four elements.

Offer:

An offer is a statement by one party (offeror) of a willingness to enter into a contract on the
terms stated or inferred, provided that these terms are, in turn, unequivocally accepted by the
party (offeree) to whom the offer is addressed [see Storer v. MCC].

What can be deduced from this definition is that an offer must contain a promise on part of the
offeror to be bound by the stated terms. That is why it is of utmost importance to distinguish,
from an offer, an invitation to treat (ITT) which lacks that promise.

An invitation to treat is rather an invitation to enter into a negotiation which, it is hoped, may
conclude to a contract at a later date [see Gibson v. MCC]. To determine between an offer and an
invitation to treat, the court will look at the intention of the parties and also the surrounding
circumstances, albeit objectively. The followings are some examples of invitation to treat:

i. Display of goods:- Display of goods even price tag labeled on it, is not an offer but an
invitation to treat [see Fisher v. Bell, Pharmaceutical Society v. Boots]. If display of
goods were to be regarded as an offer, then the seller would have been bound by a series
of contracts which he may not be able to fulfill.
 ii. Auction:- The general rule is that an auctioneer, by inviting bids to be made, makes an
invitation to treat. The offer is made by the bidder which in turn is accepted when the
auctioneer strikes the table with his hammer [see British Car Auctions v. Wright].
iii. Tender:- Where a tender for a particular project is invited, the general rule is that the
invitation to tender is simply an invitation to treat. The offer is made by the person who
submits the tender and the acceptance is made by the person who invited that tender [see
Harvela Investment v. Royal Trust].
iv. Advertisement:- Advertisement in the newspaper or any other media is an invitation to
treat [see Partridge v. Crittenden].

Another concept relating to Offer is counter offer. A counter offer is where an offeree responds to an
offer by making an offer on different terms. This has the effect of destroying the original offer so
that it is no longer open for the offeree to accept. The effect of the counter offer is to ‘kill off’ or
destroy the original offer so that it cannot subsequently be accepted by the offeree [see Hyde v.
Wrench]. However, a request for further clarification or explanation by the offeree does not
amount to a counter offer to ‘kill off’ the original offer [see Stevenson v. Mclean].

Acceptance:

When an offer has been established, it then needs to be seen whether there has been an
acceptance.

An acceptance is an unqualified(clear) expression of assent to the terms proposed by the offeror.

In other words, acceptance may be defined as words or conduct that unequivocally(Leaves no
doubt) demonstrates willingness by the offeree to be bound by the terms of the offer without
qualification or further negotiation [see Brogden v. Metropolitan Railway Co.].

When the fact of the acceptance is clearly identifiable, the next issue which needs to be
considered is that whether the acceptance has been communicated. The general rule is that an
acceptance must be communicated to the actual notice of the offeror. Until and unless the
acceptance is so communicated, no contract comes into existence [see Entores v. Miles Far East
Corp.]. The burden is on the offeree to ensure that the acceptance has been communicated by the
offeree himself or someone authorized by him [see Powell v. Lee]. However, if the
communication could not be procced for the fault of the Offeror, even after making successful
communication by the Offeree then its probably would be deemed as acceptance{ lack of ink,
paper of the Fax Machine, Printer}.

However, the offeror cannot impose mere silence as acceptance on part of the offeree [see
Felthouse v. Bindley]. But, silence may operate as acceptance if it is imposed by long term
previous dealings or the offeree himself.
In case of instantaneous way of communication, such as telephone, fax, email etc. the acceptance
takes place and the contract is concluded as soon as it is received by the offeror and at the place
where the offeror happens to be [see Brinkibon v. Stahag-Stahl].

Some exceptions exist to the communication rule of acceptance. Firstly, in cases of business
party, the message of acceptance would be deemed to have been communicated from the very
moment it reaches the business premises during business hour [see Brinkibon]. And secondly,
there is the postal rule which implies that acceptance takes place as soon as the letter is posted in
the post box [see Adams v. Lindsell]. However, the postal rule applies only where it is
reasonable to use the post [see Henthorn v. Fraser]. Thus, it may not be reasonable to use the
post, when an expeditious reply has been asked for within a day or two, or the previous
correspondence has been carried out through various means other than the post, or where the
offeror has expressly excluded the use of post [see Byrne v. Van Tienhoven].

In short, the postal rule will not apply ‘where it would lead to a manifest inconvenience and
absurdity’ [see Holwell Securities v. Hughes]. The practical effect of the postal rule is that an
acceptance is made and hence the contract is concluded when the letter of acceptance is posted,
even if it gets lost in the post and so never reaches the offeror [see Household Fire v. Grant].
Again, if the offeree sends his acceptance by post, that acceptance can no longer be withdrawn
even though the offeree sends his notice of withdrawal by a quicker method which reaches the
offeror first [see the South African case A-Z Bazar v. Minister of Agriculture].

And lastly, where the offeror prescribes a specific method of acceptance, the general rule is that
an acceptance which is made in a form that is no less advantageous to the offeror than his own
prescribed method, he will be bound by it [see Holwell Securities v. Hughes]. However, if the
offeror states that he will ‘only’ be bound if the offer is accepted in a particular way and makes
his intention clear with the words used, then the offeree should presumably be required to accept
the offer only in the stipulated way of communication [see Tin v. Hoffman].

Next comes the important issue of the termination of a particular offer; because if an offer is
terminated, it cannot subsequently be accepted by the offeree anymore. There are several ways
by which an offer may be terminated: firstly, when the offer has been accepted by some other
person; secondly, by rejection by the offeree; thirdly, by lapse of time (if no time is specified,
then the offer lapses within a reasonable time which is a question of fact); fourthly, by the effect
of a counter offer; fifthly, through the death of the offeror; and lastly through the revocation by
the offeror.

An offer may be revoked anytime before acceptance [see Payne v. Cave]. This is so even if the
offeror promised to keep his offer open for a specified period. The offeror only has a moral
obligation but no legal obligation in this regard [see Routledge v. Grant]. However, where there
is a separate contract under which the offeror makes a promise to keep the offer open for a
certain period of time in return for valuable consideration from the offeree, and then if the
offeror goes back on his promise, this will result in the breach of the collateral bargain between
the parties [see Mounteford v. Scott].

But, to revoke the offer successfully, the notice of the revocation must actually be brought to the
attention of the offeree. It is sufficient that a) the revocation must take place before acceptance
b)it is preferable to revoke in the same medium as the offer was made, however if the offeror
sends the notice of revocation in a faster medium which gives the actual notice of withdrawal of
offer then it would suffice.The postal rule has no application in revocation cases, thus any
revocation through the post must actually reach the offeror to be valid [see Byrne v. Van
Tienhoven]. In case of business party, actual notice is not mandatory. It is sufficient, to be
effective, that it reaches the business premises during business hour [see The Brimnes].
However, if it fails to reach there within the business hour, it will be effective when the business
office reopens [see Mondial Shipping v. Astarte Shipping].

However, it is unclear whether it is at all possible to revoke a unilateral offer when a potential
offeree has actually started to perform the stipulated task. In Daulia v. Four Millbank Nominees,
it was held that there is an implied obligation on part of the offeror not to prevent the
performance as soon as the offeree starts to perform. A similar reasoning was followed in
Errington v. Errington.

Consideration:
In contract law consideration is concerned with the bargain of the contract. A contract is based
on an exchange of promises. Each party to a contract must be both a promisor and a promisee.
They must each receive a benefit and each suffer a detriment. This benefit or detriment is
referred to as consideration.
 
Consideration must be something of value in the eyes of the law .This excludes promises of
love and affection, gaming and betting etc. A one sided promise which is not supported
by consideration is a gift.

There are mainly 3 types of consideration

(Future) Executory consideration is something given or accepted in return for promise where the
promise act remains to be performed on a future day.

Present consideration is something which is given or accepted in return for consideration

simultaneously between the parties.

Past consideration is a past promise or act which forms the basis of a future promise. A promise
is said to be given for past consideration when the promisors motivation for making the promise
is a past benefit he received that give rise to a non-legal obligation to make compensation
Rules of consideration
 
 There are various rules governing the law of consideration:
 
 
 The consideration must be sufficient but need not be adequate.

 The consideration must move from the promisee.

 An existing public duty will not amount to valid consideration. Police serving citizens is
not consideration

 An existing contractual duty will not amount to valid consideration.

 Part payment of a debt is not valid consideration for a promise to forego the balance.

Intention to create legal relationship: 

The requirement of intention to create legal relations in contract law is aimed at sifting out cases
which are not really appropriate for court action. Not every agreement leads to a binding contract
which can be enforced through the courts. For example one may have an agreement to meet a
friend at a pub. One may have a moral duty to honour that agreement but not a legal duty to do
so. This is because in general the parties to such agreements do not intend to be legally bound
and the law seeks to mirror the party's wishes. In order to determine which agreements are
legally binding and have an intention to create legal relations, the law draws a distinction
between social and domestic agreements and agreements made in a commercial context.

Ishtiak Abdullah

Barrister-at-Law (Lincoln’s Inn)

North South University