Formation of Contracts Tutorial Transcript

This Tutorial is broken up into stages, which include learning blocks, case studies,
and knowledge checkpoints. We recommend you complete this online session in
chronological order.

By the end you will be able to:

 Explain  the  mechanism  of  offer  and  acceptance  by  which  agreement  is
reached, and decide in simple cases whether it has been
 Explain  how  an  intention  to  create  legal  relations  is  required  for  the
formation of an enforceable contract, and decide in simple cases whether it’s
present
 Explain  the  need  for  consideration  before  a  contractual obligation can be
enforced, and decide in simple cases whether it’s present

Contents
Formation of Contracts Tutorial Transcript...................................................................1
Stage 1: Introduction.................................................................................................1
Stage 2: Knowledge Check.......................................................................................3
Stage 3: Acceptance.................................................................................................5
Stage 4: Termination of offer.....................................................................................6
Stage 5: Knowledge check........................................................................................8
Stage 6: Knowledge check........................................................................................8
Stage 7: Consideration............................................................................................10
Stage 8: Knowledge Check.....................................................................................12
Stage 9: Conclusion................................................................................................12

Stage 1: Introduction

Welcome to this Tutorial on the Introduction to Contract Law.

Let me start by describing an ordinary day.

Yesterday, I got up and caught the train to work as usual. I bought a newspaper at
the station, and did a normal day’s work. I sorted out my house insurance at
lunchtime.

After work, I got the bus back home so I could stop off and buy some milk. Later on,
I went to the cinema with some friends – I paid with my credit card, and afterwards,

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we had a meal out. I stopped off for petrol on the way home, and paid with my debit
card. Once I got home, I rang the plumber, booked a holiday on the internet, and got
some tickets for the football.

Mr Average, you might think, but really, I lead a remarkable life – it’s one dominated
by contracts – I just can’t seem to avoid them – trains, newspapers, insurance,
supermarkets, credit cards, holidays, tickets and so on… not forgetting the really key
ones, like my job and my mortgage.

Take a minute or two to think of some of the contracts that you’ve entered into
recently.

I don’t suppose your life is that different from mine? You may be in contractual
relationships with several people right now – you undoubtedly will be if you’ve got a
job, or car insurance, or a mortgage, or if you’re paying rent, or if your laptop’s on
three years’ interest free credit.

What’s the law of contract about, then?

Of all the core legal subjects, contract is probably the easiest to sum up in a few
words: contracts are really just about “agreements” or “deals” – or, in the sense of
bargaining at least, “bargains”.

That’s the case whether it’s buying a burger, or buying Burger King; selling ice
creams or selling ICI; fish and chips or silicon chips; inventory supply chain logistics
solutions; or just your weekly shopping.
Contract lawyers advise on all sorts dealings, from those of the man in the street to
those of the multinational corporation. They may be involved in drafting contracts –
ensuring that they achieve what their clients want. Or they may be engaged in
litigation – suing and defending claims in contract.

And they have to grapple with lots of questions - Did the parties ever really agree?
What if they don’t pay? Can we get compensation? Can they? Are they off the hook?
What does the small print say? – what ?! nobody thought to write any?! Contract law
is a vital area of expertise for lawyers looking to answer these questions.

Before we get going, let’s take a moment to preview the Tutorials in this series.
Formation of a contract
In this Tutorial, we’ll be looking at the formation of a contract – what are the
requirements for there to be a contract, and how does a contract get made?
Remedies for breach of contract
After that, we’ll look at what happens if someone breaks a contract? Can you sue
them? What do you get if you do? Can you get out of the contract? In other words,
what are their remedies for breach of contract.

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Exemption clauses
We’ll also introduce you to exemption clauses. We can characterise these as
clauses designed to “get someone off the hook” in some shape or form. If you’ve
bought a mobile phone, or hired a car, you’re probably aware that you signed up to a
load of “small print”. You might’ve thought, can they use the small print to wriggle out
of things?

Once you’ve studied these Tutorials, you should have a good overview on which to
build your understanding of contract law.

The rest of this Tutorial, then, is about the formation of contracts. There are normally
regarded as being three key elements to formation of a contract:
 Firstly, agreement, made up of offer and acceptance
 Secondly, intention to create legal relations; and
 Thirdly, something lawyers call consideration

If those three things are present, then we’ve got a contract.

In the remaining stages, we’ll look at these elements in more detail.

Stage 2: Knowledge Check

It’s pretty easy to enter a contract when you buy stuff from a supermarket –
you’d hardly think of yourself as entering a contract at all. A few words if
you’re lucky and punch in your PIN number.

But if your milk was sour, or your lettuce full of slugs, your claim would be for
breach of contract.

So somewhere along the line, you must’ve entered a contract. When?

If you’re buying a car, you probably haggle a bit longer and are more conscious of
“striking a deal” – perhaps you’d see “signing on the dotted line” as the point of no
return. Or maybe shaking hands. Which?

If you’ve ever bought or sold a house, or if you know someone who has, you’ll know
what a protracted process it can be. You’re probably also aware that “exchanging
contracts” is one of the key moments in the process: the point when the sale
becomes legally binding on the buyer and the seller. How?

English law has a sort of idealised conception of contract formation. It sees contracts
as formed by one person putting forward a proposal - and the other person agreeing
to it.

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“You can have that Jag for two grand” says the car salesman. “OK”, says the
customer, “it’s a deal”. We’ve got a contract. The proposal came from the car
salesman, the customer agreed to it.

Or: “I’ll give you three grand for the Mercedes”, says the customer. “It’s yours”, says
the car salesman. We’ve got a contract again. This time, the proposal came from
customer, and the salesman agreed to it.

How does the law describe these things? Well, the proposal, it calls an “offer”, and
the agreement to the proposal, it calls an “acceptance”. So we can say a contract is
formed when an offer is accepted.

In other words, offer and acceptance equals agreement.

A moment’s reflection shows this is a bit of an idealised conception – after all, people
often manage to enter into contracts without really making explicit proposals and
agreements with one another. You don’t expect to have to say to the supermarket
cashier “I offer to buy these baked beans for 25p”, and you’d be surprised if they
shook you warmly by the hand if they agreed.

Nevertheless, offer and acceptance provides the analytical mechanism which the law
uses to identify contract formation.

Let’s concentrate on what an offer is.

We might think of an offer as the making of a proposal to enter a contract.

Metaphorically, it’s sticking your hand out to shake hands on the proposal, or putting
the proposal on the table.

Lawyers call the person who makes the proposal the “offeror”, and the person it’s
made to, the “offeree”.

Any sort of proposal? Well, not quite. Let’s imagine ourselves in a car showroom.
Have a look at the following proposals: do you think they’re the sort of thing which
would result in a contract, if the offeree agreed to them? In other words, do you think
they are offers? Just use your intuition for the moment.

Do you think the following proposals are offers? Answer by selecting Yes or No.

Available online.

We can see from these examples what’s needed for a proposal to count as
an offer. The two requirements for an offer are:

 A willingness to be bound by the proposal if it is agreed to; let’s call this

“willingness to be bound”

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  Sufficient certainty in the terms of the proposal: let’s call this “certainty of
terms”

Why does the law of contract want these things?

Willingness to be bound

Let’s take willingness to be bound first. Contract, you will remember, is basically
about agreement. So putting yourself in a position where you may be bound to a
contract has got to be a voluntary thing. That’s why the law has this requirement: it’s
at the core of what a contract is. It’s what was missing in the first example: our
prospective seller hadn’t yet put themselves in that position.

Certainty of terms

What about certainty of terms then? If the proposal in the second example had been
agreed, we’d’ve had an agreement to buy a car - any car? - for about £11,000 - but
how much really? The problem here is not really whether there’s an agreement, but
what is the agreement? It’s just all too vague: we don’t know what car, and we don’t
really know how much. If the parties were to go to court about their agreement, the
poor judge wouldn’t be able to work out what was going on, and might well decide
the agreement was too uncertain to enforce.

There’s another way of looking at the proposal in the second example – it rather
gives the feeling that although the customer wants to buy, the negotiations aren’t yet
completed: yeah, they’re gonna buy a car and pay between 10 and 12 thousand for
it, but there’s some talking to be done before a deal’s struck. Is it to be the Golf or
the Polo? Will it be ten grand, or will it be twelve? We might say here that the
requirement for certainty of terms is undermined by incompleteness as well as
uncertainty.

Third Proposal

Our third proposal, however, satisfies both of our requirements for an offer: the seller
is clearly willing to sell, and it’s certain what’s being sold and for how much.
Stage 3: Acceptance

Let’s move on to acceptance. From now on, we’ll assume that an offer has
been made. It’s up to the other party whether to accept it. If they do, we’ve got
our deal. If they don’t, we haven’t.

Not surprisingly, it’s the terms of the offer that have to be accepted: because
it’s the offer that’s being agreed to. So let’s describe acceptance as “the
unqualified assent to the terms of the offer”.

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“Assent”, because contracts are voluntary things, so the person accepting the offer
– the offeree - must be doing something of their own volition in entering into the
contract.

“Unqualified”, because if the acceptance were qualified in some way, then it

wouldn’t be a complete assent to the terms of the offer at all. If the offeree starts
tinkering around with the terms of the offer: “well I agree to this bit, but I don’t agree
to that bit” – then we just haven’t reached the point of agreement.

So far so good, and this all works fine where the parties are dealing face to face. But
if they’re dealing at a distance, we run into a different problem. The problem isn’t with
whether the offeree wishes to assent to the terms of the offer, it’s with getting their
assent across to the offeror. Not surprisingly, the law generally takes the view that
you need to have let the offeror know that you agree to the terms of their offer.
Otherwise the offeror wouldn’t know whether they were bound by a contract or not.
In other words, the law normally requires the acceptance to be communicated to the
offeror.

That sounds simple enough. But life is rarely that simple, and the issue of when a
communication’s to be treated as made isn’t without difficulty. Should we treat the
contents of a letter as communicated when it’s posted? Or when it arrives? Or only
when it’s actually read? What about e-mails? And faxes? These are issues which
contract law has to grapple with but it’s enough for our present purposes just to
understand the issue.

In any event, the requirement for communication of acceptance is only a general rule
– like most legal principles, it has some exceptions to it. Before we move on, then,
let’s remind ourselves then of what’s needed for a response to an offer to be an
acceptance:

 the unqualified assent to the terms of the offer,

 which is, normally, required to have been communicated to the offeror.
Stage 4: Termination of offer

We’re now going to look at the termination of an offer: in other words, ways in
which an offer can cease to be “on the table”.

This is important in cases where the offeror wants to say to the offeree “sorry,
you’re too late with your acceptance: you missed your chance”. The offeree, of
course, may disagree.

For this, we need to go back a stage in our process of contract formation. Imagine
once again that we have an offer “on the table”, but which has not yet been
accepted. We need to look at the ways in which our offer can disappear. Take a
minute and see if you can think of any.

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There are three main ways:

1. Where the offeror, so to speak, takes the offer off the table: lawyers
call this “revocation”.
2. Where the offeree, so to speak, sweeps it off the table: lawyers call
this “rejection”.
3. Where it disappears from the table by itself: lawyers call this “lapse”.

Revocation

Let’s start with revocation.

Revocation is when the offeror – the person who made the offer - withdraws it.
Perhaps they’ve changed their mind and don’t want to sell anymore. Or perhaps they
think they can get a better price somewhere else. If they successfully revoke the
offer, it’s then too late for it to be accepted.

So what counts as “successful revocation”? The law requires the revocation of the
offer to be communicated to the offeree: unless the offeree’s told that the offer is
no longer on the table, the law regards it as still open for acceptance. So really it’s
the communication of the revocation which has the effect of bringing the offer to an
end. And the same difficulties with “what counts as communication” crop up here as
well. But provided that the offeror’s done something which counts as communicating
their revocation of the offer, then it’s too late for the offeree to accept it.

Rejection

Let’s look at rejection of the offer next.

Express rejection of the offer brings it to an end. If you reject an offer, the law says
you can’t change your mind and later accept it – rejecting it puts an end to it; sweeps
it off the table, so to speak.

What if rather than an outright rejection of an offer, the offeree comes back with a
proposal of their own. Say, if the offeror’s offered to sell something for £1000, but the
offeree has responded with an offer to buy for £950? Can the offeree later turn round
and say “OK, I’ll pay £1,000 after all.” The law is clear on this: they can’t. If the
offeree makes an alternative offer to the offeror, they’re taken to have rejected the
original offer, even though they haven’t said as much. In the language of contract,
we say that a counter-offer impliedly rejects an offer.

That a counter-offer impliedly rejects an offer is settled law. But it’s often hard to tell
whether a response to an offer is actually a counter-offer, or just a request for
more information about the offer.

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An outright proposal offering less money – such as “Would you take 250 quid
instead?” is likely to be seen as a counter-offer: after all, it contains a proposal of its
own.

But “would you be prepared to come down a bit on that?” – is likely to be seen as
just an exploratory enquiry. It doesn’t contain any definite proposal of its own: so it’s
not likely to be seen as impliedly rejecting an offer.

Similarly, “does your offer include such and such?” is a request for further
information about what’s on the table - the offeree wants to know the information in
order to make up their mind about accepting the offer – quite the reverse of an
implied rejection of it.

Lapse

Finally, an offer may simply lapse.

The offeror may stipulate that the offer’s only open until a particular time – if this is
the case, it’s a bit like at the appointed time, it just self-destructs.

If an offer doesn’t say anything about how long it’s open for, then the law regards it
as lapsing after “a reasonable time”; and how long that is will depend on the
circumstances of the particular case.
Stage 5: Knowledge check
This Knowledge check is designed to make you think about offer and acceptance
together. Have a look at the various possible responses to the following offer sent by
Mycrotech to ABC Systems and decide which of them results in a contract.
Offer: “We offer for sale a job lot of 100 Mycrotech XC2000 Notebooks for £100,000.
Please let us know a.s.a.p. as we’re going to have to get rid of them at the trade fair
on Friday. Dated Monday 1st June.”
Select “Yes” or “No” to answer which of these situations you think results in a
contract.
Available online.
Stage 6: Knowledge check

Now let’s get to grips with our second requirement for a contract: intention to
create legal relations.

People reach all sorts of agreement with one another - some are obviously
meant to be legally binding: if you paid for a lawnmower or a dishwasher and it
didn’t arrive, you would, ultimately, expect to end up in court. But some aren’t
meant to be legally binding - if I agreed to mow the lawn if my wife did the
dishes, I wouldn’t expect her to sue me if I forgot.

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When we talk about commercial agreements here, we don’t just mean agreements
between businesses. We also mean agreements between individuals and
businesses - for example, when you go shopping or buy something over the internet
- and we even mean agreements between individuals not in business – for example,
if you bought a second hand bike out of the paper.

When we talk about domestic agreements, we mean those where there is some
other relationship between the parties – perhaps the parties are family members, or
close friends, or the like.

So what does the law say about them? Can we say all commercial relationships
should be treated as legally binding, and all domestic relationships should not? Well,
it’s true that most commercial agreements are meant to be legally binding and it’s
true that most domestic agreements are not. But we can’t really say that that’s
always the case, because the parties might not always intend that.
Instead, the law starts with what lawyers call “presumptions”.
In the case of commercial agreements, the law presumes that the agreement is
intended to be legally binding, unless the facts show otherwise. So we can say that
in commercial agreements, there is a presumption of intention to create legal
relations.
It’s the exact opposite where our agreement is domestic: the law presumes that the
agreement isn’t intended to be legally binding, unless the facts show otherwise. So
we can say that with domestic agreements, there’s a presumption of no intention
to create legal relations.

These two presumptions, then, give us a starting point. But we also know that the
facts might show otherwise – another way of saying that is by describing the
presumptions as “rebuttable”. And if the facts do show otherwise, then the
presumption does not hold good, and we say that it’s been rebutted. The law in this
area arises from cases where one party says that the evidence has rebutted the
relevant presumption, but the other party says it hasn’t.

So let’s have a go at some examples of agreements between family members or

friends who now disagree about whether their agreement was intended to be legally
binding. Let’s characterise each of the agreements as “domestic” on the basis that
the parties have some pre-existing relationship. Have a look at the relevant facts in
each case below, and work out which ones tend to rebut the presumption that there
is no intention to create legal relations.

Answer by selecting “Yes” or “No”.

Available online.

In these situations, the legal principles are clear – after all, we know what the
presumptions are. But the application of the law can be quite hard – it’s not always

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easy to see whether the balance has tipped away from the presumption we started
with. In most of these examples, knowing more of the facts might tip the scales
further one way or the other.

If we’d started the last activity with a commercial agreement, we could’ve considered
facts which helped to rebut the presumption of intention to create legal relations. But
in fact, there have been very few cases involving commercial agreements where the
presumption of intention to create legal relations has been successfully rebutted. A
clear, express statement that the agreement isn’t meant to be legally binding would
work, but not much short of that.

That, then, is our second requirement for the formation of a contract - intention to
create legal relations. Let’s not overstate its significance - in practice, most contracts
are commercial in nature, and how often do you come across people in business
saying that their agreements are not meant to be legally binding – hardly ever!
Stage 7: Consideration

Finally, we come on to our third requirement for the formation of a contract: what
lawyers call “consideration”.

This is the idea that, in order to be able to hold the other party to the deal, you need
to’ve agreed to provide “something in return”. And it’s this “something in return”
which lawyers call “consideration”.

Most contracts are very clearly like this: you pay your money and you get your car,
groceries, insurance, whatever. Or your employer pays you wages and gets the
benefit of your services. Each party brings something to the table, and each party
gets something from it. There’s an exchange, or deal, going on.

In each of these cases, it’s the fact that you’ve agreed to do something in return for
the other party’s commitment which justifies you being able to hold them to it.

So if I agree to buy a laptop off you for £500, I can hold you to the deal because I’ve
agreed to pay for it. That’s what the law regards as a sufficient justification for
holding you to the deal. We would say I had “provided consideration” for your
commitment to sell me the laptop. The consideration would be my agreement to pay
£500 for it.

You could equally well hold me to the deal: you have agreed to do something in
return for getting my £500: you’ve agreed to hand over the laptop.

Contrast this with agreements which are all one-sided. Suppose we’re agreed that I’ll
give you £1,000 for your birthday. Can you sue me for it if I don’t cough up?

Well, no you can’t: the law doesn’t regard the simple fact that I’ve agreed to pay, as
a sufficient justification for making me pay. It’s all one way: I made a promise to you,
but nothing was agreed in return.

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So the law would say you’ve provided no consideration for my agreement to pay you
£1,000. Not very nice of me not to stick to my word, perhaps - but not a place where
the law of contract will help you out.

The law in this area characterises the parties’ obligations as “promises”, and we
might talk about a contract as being an “exchange of promises”. Let’s see how this
works.

Imagine we’ve agreed that you’ll sell me your company for a million pounds. In the
language of “promises”, we could say that you’ve promised to hand over the
company in exchange for my promise to hand over the million pounds.

You could hold me to my so-called “promise” to pay, because you would have
“promised” to hand over the company in exchange.

Equally, I could hold you to your promise to hand over the company on the basis that
I had promised to pay for it. Each of us would have “provided consideration” for the
other’s promise, by promising something in return.

So far then, we can spot where there’s an exchange going on, even if lawyers dress
it up in the fancy language of consideration and promises. So what are the issues?
There are two main issues at stake. One of them, contract lawyers call “adequacy of
consideration”; the other, they call “sufficiency of consideration”. They sound similar,
but lawyers mean different things by them.

Let’s look first at adequacy of consideration. Think of “adequacy” as concerned with

the amount or value of the “something in return”. Does the law only uphold deals
where what is provided in return is of the same value? Put another way, does the law
require consideration to be adequate?

Imagine you go along to the travel agents to book your holiday. There’s your dream
holiday in the window – three weeks for two in the Maldives, all inclusive: £1000. And
let’s assume there aren’t any mistakes being made here. The shop means £1,000,
not £5,000: it just wants to sell the holiday as soon as possible. You strike the deal
there and then.

Now in one sense at least, what you’ve provided in return isn’t the true value of what
you stand to get. Nevertheless, if you’re like me, you wouldn’t see the deal as any
less binding as a result. You’d still expect to be entitled to the holiday you’d agreed
to pay for.

You’d find the law would be on your side: you can hold the shop to the deal, even
though the consideration you have provided isn’t “adequate”, in the sense in which
we are using it. The fact that you paid less than the “going rate” doesn’t give the
shop a reason to get out of the deal. We might say that the law doesn’t question the
adequacy of consideration.

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There’s a good reason for this: contracts are voluntarily entered into, and the law
takes the view that, by and large, people should be free to strike the deals they want.
If the shop wants to sell its holidays off cheap, that’s its own free choice.

So much for the adequacy of consideration. Now what about sufficiency of

consideration? Well, you’ll get the basic idea if you think of sufficiency as concerned
not with the amount of the consideration, but with the sort of thing it is.

Here, we’re asking whether what’s provided in return is the sort of thing the law
regards as being the appropriate subject matter of a bargain at all.

So far as the formation of a contract is concerned, it’s very clear in most cases. Such
things as money, goods and services are provided in exchange for the other party’s
commitment. These are definitely the right sort of thing - they’re at the heart of what
contracts are all about.

In fact, cases are very thin on the ground where the law has not regarded
consideration as the right “sort” of thing – one case was where a promise was made
“in consideration of natural love and affection”; another where what was promised in
exchange was “to stop complaining about being disinherited”. The law hasn’t
regarded such things as the proper subject matter of true “exchanges”.

Needless to say, such things are hardly the bread and butter of commercial
activities. So, as with intention to create legal relations, it’s important not to get too
hung up about the requirement for consideration at the point of formation of a
contract you certainly do need consideration but it’s rarely a worry – almost all
contracts turn out to have valid consideration.

The law relating to sufficiency of consideration is of greater consequence in relation

to the variation of contracts. But this would take us beyond our present concern
which is only with formation of contracts.
Stage 8: Knowledge Check

Now for a quick review of the elements of formation of a contract. We know that the
three main elements of an enforceable contract are agreement, intention to create
legal relations and consideration.

See if you can put the right words and phrases by dragging and dropping them into
place to create a summary of the rules on formation of a contract.

Available online.
Stage 9: Conclusion

So that brings us to the end of this Tutorial on formation of contract.

Having worked through this Tutorial, you should now be able to:

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  Explain the mechanism of offer and acceptance by which agreement is
reached, and decide in simple cases whether it has been
 Explain how an intention to create legal relations is required for the formation
of an enforceable contract, and decide in simple cases whether it’s present
 Explain the need for consideration before a contractual obligation can be
enforced, and decide in simple cases whether it’s present

End of document

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