Formation of Contracts 1:

Intention to Contract &

Agreement :
Offer & Acceptance
AB 1301

Seminar 2
©Katherine Khoo
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Principles of Contract Law
1. Formation 2. Contents – Types
• Intention of Terms
• Offer This class • Condition Seminar 4
• Acceptance Next class • Warranty
• Consideration • Innominate Terms
CONTRACT • Exemption Clauses Seminar 5
“a legally
binding
5. Remedies for Breach agreement”
3. Enforceability of
• Damages : Liquidated Contract (Vitiating
Damages vs Penalties Factors affect
• Equitable Remedies :
formation of K)
Specific Performance,
4. Discharge of Contract • Incapacity
Injunction
• Performance • Misrepresentation
• Breach • Illegality
• Frustration • Contracts in
• Agreement Restraint of Trade 2
• Key Learning Points:
• To know and understand the general concept of a legally enforceable
contract and contractual obligations
• To be able to identify the elements of a legally enforceable contract
• To know what amounts to a valid offer at law
• To know what amounts to an effective acceptance at law

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A. General Concepts Relating to Contracts
Definition of Contract
A contract is
A legally enforceable agreement entered into by 2 or more
parties, containing the rights and obligations of each party.

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A. General Concepts Relating to Contracts

• Purpose of a contract
• Contracts give the contracting parties the assurance that promises made will be
performed, because it is a legally enforceable agreement
• Each party is bound to perform obligations; failure to perform entitles the other
party to sue in a court of law.

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A. General Concepts Relating to Contracts
• Obligations in a contract
• How do they arise ?
• Parties have agreed to and consented to perform those obligations, in exchange
for certain rights in the contract.

• Significance of agreement
• As a contract is a legally enforceable agreement, both parties have the assurance
that promises made will be performed.

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Understanding the background
• Are all agreements contracts ?

• Mention an agreement that is not a contract.

• Why is this agreement not a contract?

• Identify a contract that you entered into today.

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 Types of Contracts

Simple Special
Simple contracts can be in any form Special contracts eg
deeds, must be in writing.

Oral Written Contract under

Certain contracts that
must be in writing : sale
seal (Deed)
& purchase of immovable
property - land, house;
guarantees, hire purchase
agreements.

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A. General Concepts Relating to Contracts
Elements of a legally enforceable contract

Offer Intention to create

= proposal
legal relations
Acceptance = intend legal consequences for breach
= unconditional “Yes”
Consideration
= something in exchange
for something

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B. Intention to Contract :
Intention to create legal relations

Intention to create legal relations is defined as the

intention to be legally bound in an agreement where the
rights and obligations of the agreement are enforceable.
• Parties must intend to create legal relations to conclude a legally enforceable
agreement.

• Test: Whether a reasonable person viewing all the circumstances of the case
would consider that the party at issue intended his promise to have legal
consequences.

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B. Intention to Contract :
Intention to create legal relations

General Presumptions

Domestic / Social Agreements Commercial Agreements

Presumption is that there is no Presumption is that there is

intention to create legal relations intention to create legal relations
in social & domestic agreements in commercial agreements

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B. Intention to contract
• Domestic and Social Arrangements
• There is a presumption that there is no such intention
to create legal relations in social & domestic agreements.
• Balfour v Balfour (1919)

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B. Intention to contract
• Presumption may be rebutted if agreement was reached in a
business context.
• Eg where family members run a business together, where couples
on the verge of divorce make arrangements regarding distribution
of matrimonial property or custody of children.
• Merritt v Merritt (1970)

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B. Intention to contract
• Business and commercial arrangements
• There is a presumption that parties do intend to create legal relations.
• Edwards v Skyways Ltd (1964).

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B. Intention to Contract

• The presumption may be rebutted to the contrary in the following situations:

• i) use of honour clauses
• ii) gentleman’s agreement
• iii) letters of intent
• iv) Memorandum of understanding
• v) letters of comfort

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C. Offer - Definition
An offer is
A statement of the offeror which gives a definite indication of his
willingness to contract on the terms stated in his offer such that
upon acceptance by the offeree, a binding agreement is formed.
• An offer must have promissory intent – an intention to be bound.
• The test is objective.
I would like to sell I would like to
you this house for buy your house
$1m. Would you for $1m. Would
like to buy it ? you like to sell it?

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 C. Offer - Requirements
• 1. An offer can be made to
(1) a particular person,
(2) a particular group of people, or
(3) the world at large (eg through the internet/ newspapers).

• 2. An offer must have been communicated to the offeree

before it is effective.

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Carlill v Carbolic Smoke Ball Co(1893)

• Facts: CSB advertised their product as a preventive medication

Image from http://www.australiancontractlaw.com/images/lawcases/carlill2.jpg

against influenza. The ad stated that CSB would pay £100 to
any person who contracted the flu after having used the
product according to its dosage. The ad also stated that
£1000 had been deposited in the bank to show CSB’s sincerity.
Mrs. C bought the smoke ball and used them as prescribed,
three times a day, from November 20, 1891, to January 17,
1892. She still caught the flu and sued for £100.
• Court held : that the ad in this case constituted an offer to the
whole world and that the contract is formed with the person(s)
who come forward and performed the stated condition.

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C. Offer
Requirement : Communication
• Offer is only effective when communicated to the offeree.
• Offeree must know the existence and terms of offer.
• Offer may be communicated orally or in writing.
• An offeree cannot accept an offer unless he is aware of the offer.
R v Clarke (1927)

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C. Offer
Offer v Provision of Information
• Offer v Provision/Supply of information
• A supply of information is not an offer.
• Harvey v Facey (1893)

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 Differences in the nature of
Unilateral and Bilateral Contracts
Unilateral Contracts Bilateral Contracts

Characteristics : Characteristics :
1. Offeror makes an offer 1. Offeror makes an offer
to the whole world to an offeree
2. Offeror makes a 2. Exchange of promises
conditional promise containing rights and
3. Offeror does not know obligations
offeree’s identity 3. Parties know the
4. Offeree accepts by identities of each other
performing condition in 4. Upon acceptance by
the promise. communication during
5. Upon acceptance by negotiations, a bilateral
performance of contract is formed
condition, a unilateral
contract is formed
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Offer v Invitation to treat
Ask: Is there promissory intent ?
Is there intention to be bound ?
YES NO
OFFER INVITATION TO TREAT
- Offeror’s expression of - Expression of willingness to enter
willingness to contract on certain into negotiations with a view to
terms, with the intention that upon contracting.
acceptance of those terms by the - Is an invitation for others to make
offeree, a binding agreement is an offer.
formed. - It is not an offer itself.
- Terms negotiated lead to - Any terms suggested are tentative.
agreement. - There is no intention to be bound.
- There is intention to be bound. - Eg Shop display of goods with price tags,
auctions, tenders, quotations, advertisements.
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C. Offer v Invitation to treat
Examples of Invitation to treat
• 1. Display of goods in shops with price tag attached
• Pharmaceutical Society v Boots Cash Chemist, 1953
• The display of goods at the store was held to be an invitation to treat.

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C. Offer v Invitation to treat
Examples of Invitation to treat
• 2. Auctions

• 3. Tenders

• 4. Quotations

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 C. Offer v Invitation to treat
Examples of Invitation to treat
5. Advertisement for sale
• Advertisements for sale are generally regarded as invitations to treat.
Partridge v Crittenden (1968)
• Exception : An advertisement for the offer of a reward.

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C. Offer v Invitation to treat
Examples of Invitation to treat
• 6.Internet advertisements :
• S14 Electronic Transactions Act (ETA)
14. A proposal to conclude a contract made through …electronic
communications which is …accessible to parties making use of information
systems, including …placement of orders through such information systems,
is to be considered as an invitation to make offers, unless it clearly indicates
the intention of the party making the proposal to be bound in case of acceptance.

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Termination of offer
• Requirements:
• Offer may be terminated any time before acceptance.
• Withdrawal of offer or revocation must be communicated to and received
by offeree.
• Effect of termination is that as the offer no longer exists, there can be no
acceptance to make an agreement.

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 Termination of Offer
Action by offeree Action by offeror

Accept Counter-offer Reject Death Failure of Lapse of time Revoke

Condition

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Termination of offer: by offeree
• Counter-offer
• Where offeree accepts offer but proposes some changes of terms, the
acceptance amounts to a counter-offer.
• A counter offer involves any proposed change of the terms of the original offer.
• A counter offer is a rejection of the original offer.
• Counter-offer terminates original offer.
• Inquiry as to whether the offeror will accept new or different
terms may not amount to either an offer or rejection.
• Once offeree makes counter-offer, offeree cannot revert to original offer to
accept, unless offeror agrees.
• Hyde v Wrench (1840)

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Termination of offer: by offeree

• Rejection
• Offer is terminated when offeree rejects offer.
• For rejection to be effective, it must be communicated to the offeror.

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Termination of Offer
• By death of either party
• Offer terminates if either party dies before it is accepted.

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Termination of Offer : by offeror
• By Failure of Condition
• An offer may be made subject to a condition such that if the condition is not met,
the offer is automatically terminated.

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Termination of Offer
• By way of lapse of time
• Lapses after specified time
• Lapses after reasonable time. Ramsgate Victoria Hotel Co v Montefiore (1866)

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Termination of offer: by offeror
• Withdrawal or revocation
• Offer can be withdrawn or revoked anytime before acceptance.
• To be effective, withdrawal of offer or revocation must be communicated to and
received by offeree. Byrne v Van Tienhoven
• Notice of revocation may be made by offeror or reliable 3rd party. Dickinson v
Dodds (1876)
• Promise to hold offer open for a certain time is binding only if consideration is
given in return for the promise. Otherwise offeror may revoke his offer at any
time before acceptance, even if he offered to keep his offer open till a particular
date.
• Offer made in context of a unilateral contract cannot be withdrawn if offeree,
within a reasonable time from making of the offer, has started to perform its
condition. Dickson Trading v Transmarco [1989]

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Byrne v Van Tienhoven (1880)
• Oct 1: Defendant (D) in UK posted letter of offer to Plaintiff (P)
in USA;
• Oct 11: P received offer and telegraphed acceptance on the
same day;
• Oct 8: D posted letter to revoke his offer to P;
• Oct 20: P received the letter of revocation.
• Held: Since the offer was accepted (on Oct 11) prior to
revocation (effective only on Oct 20 when received), there was
a valid contract.

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D. Acceptance
Acceptance is
the final and unconditional assent to the terms of offer.
• Requirements:
• (1) Must be absolute and unconditional.
• A conditional acceptance is not an acceptance. A counter-offer which is subject to
new terms is not an acceptance.
• (2) Acceptance must be communicated and received by offeror. Entores Ltd v
Miles Far East Corporation (1965). Notice of acceptance may be made by offeree
or authorized agent.
• (3) Once communicated to the offeror, the acceptance cannot be withdrawn or
revoked.

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D. Acceptance
• (4) Generally therefore, silence cannot amount to acceptance.
• Felthouse v Bindley (1862)

• Exception : Communication of acceptance can be waived by agreement (express

or implied) by the parties.
• Carlill v Carbolic Smoke Ball Co (1892)

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D. Acceptance:
Communication – Receipt Rule
General Receipt Rule under Entores v Miles Far East
Acceptance must be communicated; acceptance is
effectively communicated when received by offeror.
• Exceptions to the rule:
• (1) express waiver
• (2) implied waiver
• (3) Postal rule

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D. Acceptance:
Postal Rule
Postal Rule under Adams v Lindsell (1818)
Acceptance by post takes effect when letter is posted, not when received.

• Conditions for application of postal rule :

• 1. Letter must be properly stamped and addressed.
• 2. Parties must contemplate using mail as medium of acceptance. Henthorn v
Fraser (1892).
• 3. Where post is not prohibited by terms of offer. Eg postal rule may be excluded
if some other mode of acceptance is specified to be used instead of the post.
• If postal rule applies, acceptance by letter is effective when posted even if letter is
not received by offeror. Adams v Lindsell (1818)

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D. Acceptance:
Requirement of communication :
Instantaneous Communication
• Modes of instantaneous communication
face to face telexes
video
conferencing
telephone faxes
conversations

• General Rule : “Receipt rule” under Entores Ltd v Miles Far East
When acceptance is by way of instantaneous
communication, acceptance is regarded as
communicated only when received by offeror.
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 D. Acceptance:
Requirement of communication :
Instantaneous Communication
• Problem: Delayed transmission of message
• When the time the message reaches the machine is not the same time the
offeror reads the message, when does receipt of acceptance occur in cases of
instantaneous communication ?
• Instantaneous non-email communication:
If acceptance received WITHIN business hours,
deemed received upon reaching the machine.
If acceptance received OUTSIDE business hours,
deemed received at the start of the next business day.

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 Electronic Transactions Act (Cap 88) Revised Edition 2011
• Time and place of despatch and receipt
• 13.—(1) The time of despatch of an electronic communication is —
• (a) the time when it leaves an information system under the control of
the originator or of the party who sent it on behalf of the originator; or
• (b) if the electronic communication has not left an information system
under the control of the originator or of the party who sent it on behalf
of the originator, the time when the electronic communication is received.
• (2) The time of receipt of an electronic communication is the time when
the electronic communication becomes capable of being retrieved by the
addressee at an electronic address designated by the addressee.
• (3) The time of receipt of an electronic communication at an electronic
address that has not been designated by the addressee is the time when
the electronic communication becomes capable of being retrieved by the
addressee at that address and the addressee becomes aware that the
electronic communication has been sent to that address.
• (4) For the purposes of subsection (3), an electronic communication is
presumed to be capable of being retrieved by the addressee when it
reaches the electronic address of the addressee. 42
D. Acceptance:
Requirement of communication :
Instantaneous Communication
• So, does the general receipt rule apply or does the postal rule (effective when
sent, not when received) apply to online or email acceptances?
• When is acceptance by email effectively communicated –
• at the time it is sent,
• received by the system or
• when it is actually retrieved by the offeror?
• The ETA does not definitively resolve the issue.
• Note: The High Court in Chwee Kin Keong v Digilandmall (2004) seemed to
favour the receipt rule. However, the matter is yet to be authoritatively settled.

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D. Acceptance - Termination

• Termination of acceptance
• Once acceptance is communicated, it cannot be withdrawn,
since upon communication, there is an agreement.
• Hence, acceptance can be revoked or withdrawn if
revocation of acceptance is communicated before
acceptance itself is communicated.

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 ©Katherine Khoo

Summary Contract
Simple Contracts Special Contracts

Oral Written Written

(“deed”)
Contracts under seal. No
4 Elements consideration needed

Intention to create
Offer Acceptance Consideration legal relations

Offer must be communicated Offeror waives

communication
of acceptance
Made to Made to group or
Specific whole world Parties agree
Golden Rule : that Offeree’s
Offeror (unilateral contract) Acceptance Exceptions silence is
must be acceptance

Offer Accepted communicated Acceptance

Modes : under
Offer Terminated Face ) instant Postal Rule
Phone) 1. Letter must be properly
stamped & addressed
Lapse of Failure of Death Telex ) Biz hours 2. Not prohibited by terms of
Withdrawal Rejection Fax ) offer
/Revocation Time Condition
Email - ETA 3. Post is contemplated mode
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 General guide to answer a legal question
1. Identify the legal issues to be determined.
2. Set out and explain the relevant legal principles,
which includes stating the relevant law, its
elements, and the issues.
3. Apply the legal principles to the facts.
4. Come to a logical conclusion based on your
preceding argument, which also includes if the
defendant is liable, if he has any defences and
the remedies available to the plaintiff.
Disclaimer / Exclusion of liability Clause
*This may be used as a guide provided always that you encounter such questions or issues that require you to answer if the defendant is
liable under a particular principle of law.
Should the question ask you otherwise, you should answer each question as directly as possible.
© Katherine Khoo
Read the relevant chapters of the
textbooks :
- Tabalujan, Ch 3;
- Chandran, Ch 6;
- LWL, Ch 7;
- Shenoy & Loo, Ch 7

Agreed ?

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