CIE 531/EGM 501

LAW OF CONTRACT

Lecture 10

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Introduction
Contracts are the basis of many of our daily activities
They provide the means for individuals and businesses to
sell and otherwise transfer property, services, and other
rights
Without enforceable contracts, commerce would collapse

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Definition of a Contract

 A contract may be defined simply as a legally binding

agreement.
 Alternatively, it may be defined as a promise or set of
promises which the law will enforce.
 All contracts are agreements – but not all agreements are
contracts
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Definition of a Contract
Agreement is usually reached by a process of negotiation, which
will culminate in one party (called the offeror) making an offer
which the other party (called the offeree) accepts.
An important requirement of a contract is that: the terms must be
certain.

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Definition of a Contract
Case Scammell v Ouston (1941)
 In Scammell v Ouston (1941) Ouston agreed to purchase a van from Scammell on "hire
purchase terms".
 Before the precise nature of the terms were agreed between the parties, Scammell decided
not to go ahead and the court had to decide whether a contract existed between the parties.
 The House of Lords held that there was no contract since the phrase "on hire purchase
terms“ could be interpreted in a number of different ways and the parties had therefore not
reached an agreement which was sufficiently certain to constitute a contract.

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The Offer : definition
Once an offer bas been accepted the parties will be bound by the terms of the
contract, as long as all the essential elements of a contract are present.
It is therefore necessary to know at what point in the negotiations the parties are
legally bound, so the process must be analysed in order to determine when an
offer was made and when it was accepted.
An offer, capable of being converted into an agreement by acceptance, must
consist of a definite promise to be bound provided that certain specified terms
are accepted"
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The Offer : definition
An offer is a statement by one party of a willingness to
enter into a contract on stated terms.
An offer has to be communicated to the offeree:

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 The Offer : definition
 Several rules relating to offers were established in the famous case of Carlill v Carbolic Smoke Ball
Company (1891).
 The defendants had issued an advertisement for their product in which they had claimed that it would prevent
influenza if it were inhaled three times a day over a period of two weeks.
 They further promised that if anyone could show that they had bought and used the smokeball and still
contracted flu, then the company would give that person £100.
 £1000 was deposited in the bank to show the company's "sincerity in the maker".
 Mrs Carlill bought and used the smokeball as prescribed and developed influenza in the course of treatment.
 When the company refused to pay her the £100, she brought an action against them.
 A number of issues were raised before the court.

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The Offer
The company's defense was that the advertisement was an advertising and
there was no intention to create legal relations.
They argued that the advertisement could not be construed as an offer because
it was too vague - no time limit had been stipulated in which the user was to
contract influenza, there had been no communication of acceptance, nor had
the plaintiff supplied consideration, and that it was impossible to contract with
the whole world.

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The Offer
The court rejected these arguments.
They held that the deposit of £1000 at the bank was a clear indication that
claims would be met and therefore was evidence of an intention to create legal
relations; the plaintiff's use of the inhalant as prescribed was sufficient
consideration.
Finally the court, by analogy with reward cases took the view that it was
possible by way of an advertisement to make an offer to the whole world which
was capable of being accepted by the conduct of the person who responded to
the advertisement.
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 The Offer
The contract in this case was a unilateral contract, which may be described as a contract in which
one party makes an offer which the other accepts by doing whatever is required.
In a situation where the offer is made to the public at large the contract which results will usually
be a unilateral contract.
Some contracts are bilateral, where one person makes a promise in exchange for a promise by
the other, so that both parties have an obligation to perform the contract.
An everyday example of a bilateral contract is the sale of a car for a certain sum of money - the
seller is obliged to deliver the car and the buyer is obliged to pay for it.

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 The Offer
Other requirements of an offer are that it must be definite in its terms and it is only
effective when communicated to the offeree, but an offer can be made in any form.
In Carlill the offer was made in writing (in the advertisement), but words or
conduct may be equally effective.
For example a shopper unloading his trolley at the till in a supermarket is, by his
conduct, offering to purchase the goods at the marked price.
On acceptance of the offer, as long as the other essential elements are present, the
parties will be in agreement and will be legally bound.

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Distinction between an offer and an invitation to treat
 An invitation to treat is simply an expression of willingness to enter into negotiations which may lead to the
conclusion of a contract.
 Gibson v Manchester City Council : Mr Gibson was a council tenant in Manchester. In 1970 the council
adopted a policy of selling council houses to tenants and in 1971 the City treasurer wrote to the plaintiff saying
"the Council may be prepared to sell the house to you et the purchase prise of £27251 less 20 per cent.
 The letter invited Mr Gibson to make a formal application, which he did. In May 1971 political control of the
council changed hands and the policy of selling council houses was reversed. The council decided to proceed
only with those sales where exchange of contract had taken place. Gibson, in a test case which would affect
some 350 other tenants in the same position, asserted that he had a binding contract with the council and
claimed specific performance. The House of Lords held that the council's letter was an invitation to treat, so
Gibson's application was an offer which the council was free to reject.

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Common types of invitations to treat:
 Display of Goods: Fisher v Bell & Pharmaceutical Society v Boots
Cash Chemists
 Advertisements: Partridge v Crittenden & Carlill v Carbolic Smoke
Ball & Lefkowitz v Minneapolis Stores
 Auctions: Harris v Nickerson & Barry v Davies
 Tenders: Harvela v Royal Trust Co. of Canada & Blackpool Aero Club
v Blackpool Borough Council
 Time Tables and Automated Machines
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 Distinction between Offers and Tenders
 One situation where it is important to distinguish between an invitation to treat and an offer
is when a business, local authority or other such organisation invites others to tender for a
contract.
 Generally, an invitation to tender is an invitation to treat and the tender itself constitutes an
offer

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Methods of terminating an Offer

 If the offer is revoked (withdrawn) before acceptance: Routledge v Grant

 (Knowledge of the revocation may come from a third party rather than the offeror:
Dickinson v Dodds)
 If the offer is rejected or a counter offer is made: Hyde v Wrench ‘Note that a request for
further information is not a counter offer: Stevenson v McLean)
 On the lapse of set time or reasonable time: Ramsgate Victoria Hotel v Montefiore
 On the failure of a contingent condition precedent: Financings v Stimpson

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 Acceptance
Rules of Acceptance
An acceptance is an unqualified expression of assent to the terms proposed by the offeror.
 Acceptance must be communicated to the offeror: Entores v Miles Far Eastern Corporation
 Acceptance may be inferred from conduct: Brogden v Metropolitan Railway
 Acceptance cannot be silence: Felthouse v Bindley
 Acceptance cannot occur if offeree does not have knowledge of the offer: R v Clarke & Gibbins v Proctor†
 Motive for acceptance is irrelevant: Williams v Cowardine
 Acceptance must be made by the offeree or his agent: Powell v Lee
 Acceptance cannot be in the form of a cross offer: Tinn v Hoffman
 Acceptance must be the “last shot” in a “battle-of-the-forms”: Butler Machine Tool v Ex-Cell-O Corporation
 Complete performance amounts to acceptance in unilateral contracts: Daulia v Millbank

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Methods of Acceptance:
1. By post:
 Adams v Lindsell - the postal rule is established
 Hentorn v Fraser - it must be reasonable for the offeree to use the post
 Holwell Securities v Hughes – the postal rule does not apply where it would lead to
manifest absurdity
 Byrne v Van Tienhoven - the postal rule does not apply to letters of revocation

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Methods of Acceptance:
(b) By instantaneous mediums: Entores v Miles Far Eastern & The
Brimnes Allianz Insurance v Aigaion Insurance
(c) Prescribed method: Manchester Diosecean Council v Commercial
Investments

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Parties to a contract

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 Consideration
Consideration is defined as, “Some right, interest, profit, or benefit accruing to one
party, or some forbearance, detriment, loss or responsibility given, suffered or
undertaken by the other” (per Lush J in Currie v Misa).
Consideration is needed for the formation and variation of a contract.
There are three forms of consideration:
Executory consideration: Consideration is called executory where there is an
exchange of promises to perform acts in the future. For example, a bilateral
contract for the sale of goods wherein A promises to deliver goods to B at a future
date and B promises to pay on delivery.
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Consideration
 Executed consideration: This arises in unilateral contracts where the act of acceptance is
also the consideration.
 If one party makes a promise in exchange for an act by the other party, when that act is
completed, it is executed consideration.
 However, this label is also used to describe the situation where, in a bilateral contract, one
party has performed as per his promise – in the above example it would be when A delivers
the good to B.
 Past consideration: Consideration that comes before the promise.
 If one party voluntarily performs an act and the other party then makes a promise, the
consideration for the promise is said to be in the past. Past consideration is not a valid form
of consideration. 22
Elements of a Contract

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Intention to create legal relations

 contract law should be confined to the commercial sphere and should not
operate in social or domestic situations
 Social and domestic agreements are presumed not have legal effect:
 (i) Husband and wife: Balfour v Balfour & Merritt v Merritt
 (ii) Parent and child: Jones v Padavatton
 (iii) Friends: Simpkins v Pays & Coward v MIB

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Intention to create legal relations

Commercial and business agreements are

presumed to have legal effect

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Certainty and Completeness

Uncertainty may be caused by vagueness and/or incompleteness :

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Formalities

The general rule is that a contract may be made in any form: in

writing, orally or by conduct.

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 Contracts which must be made in writing
Contracts for the sale or other disposition of land, regulated consumer credit
agreements.
These contracts must be made in writing and that all the terms of the contract
must be included in the written agreement.
Further, the contract must be signed by the debtor and by or on behalf of the
creditor.
If the contract is not 'properly executed', then it will not be enforceable against
the debtor

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Contracts which must be evidenced in writing
In these cases, it is not necessary for the actual contract to be in writing, but
there must be written evidence of the contract otherwise it will not be
enforceable by the courts.

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Contracts which must be made by deed
Contracts witch are nor supported by valuable consideration (ex : a
promise of gift, the lease of land for more than three years).
A deed is a document which (a) bears the word ‘deed’, (b) is signed by the
maker of the deed, (c) is attested by at least one witness and (d) is delivered
i.e. some conduct that shows that the person executing the deed intends to
be bound by it.

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THANK YOU

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