Formation of Contract

Md. Rashed Khan MBA

Barrister-at-Law
Advocate
Supreme Court of Bangladesh
 Formation of Contract

• A contract is only formed in law where the following can be shown

to exist:
– An agreement : consensus ad idem
Contractual agreement is said to exist when a valid offer is followed by a
valid acceptance

– Consideration: quid pro quo

Both sides are bound to give something to each other

– Intention
Intention of both the parties to be legally bound the terms of the agreement.
 Offer

• Unconditional statement of a persons intention to be

bound by the terms of offer made and
• the intention to contract (ITCLR) with the other person.
• The terms will become binding upon acceptance by the
offeree
• Strorer vs Manchester City Council
– The tenant had signed and returned a form
– That was headed ‘Agreement for Sale’
– Court accepted that specific character of the form made it an
offer
– The tenant accepted it by signing and returning it.
 Offer

• Statement of price is not an offer

• Harvey v Facey (1893)
– Telegram:Will you sell me Bumper Hall Pen?
– Reply telegram: Lowest price acceptable $ 900
– Harvey argued: he accepted this
– Court said statement of price is not an offer open to acceptance.
– An offer CAN NOT be implied by writing. It can only be concrete
and sound…The appellants can’t imply that Facey made an offer
when he, as a matter of fact, did not make an offer.
 Offer
• Harvey v Facey (1893)
• Letters were written back and forth

• Harvey – Will you sell us bumper hall pen? Telegraph lowest price -answer
paid.

• Facey – Lowest price for bumper hall is $900.

• Harvey – We agree to buy bumper hall for the sum of $900 asked by you.

• Harvey sued for specific performance of this agreement and for an injunction
to restrain the town of Kingston from taking conveyance of the property
(Facey was previously engaged in negotiations to sell the land to Kingston)

• Court said statement of price is not an offer open to acceptance.

 ITT: Invitation to Treat

• An invitation to the other party to make an offer.

A. Goods and services advertised in

newspaper/Magazine/media/web are ITT

• Patridge v Crittenden

– Advertisement for selling wild bird ‘Bramblefinch cocks, branmlefinch hens 25s
each.’

– ITT
– Did not violate protection of Birds Act 1954
 ITT: Invitation to Treat

• An invitation to the other party to make an offer.

• Patridge v Crittenden
 ITT: Invitation to Treat

B. Invitation of Application by City Council

• Gibson v Manchester City Council

– Letter and application to sell council houses was sent to sitting
tenants
– Gibson returned completed application form
– Council changed policy and no action was taken
– Gibsons action for breach of contract failed
– Completed application form was an offer not acceptance
– The letter was ITT
 ITT: Invitation to Treat
C. Display of goods in shop window:
• Fisher v Bell

– Shopkeeper displayed flick knife in the window

– Offensive Weapons Act 1959 prohibited offering for sale of offensive
weapons.

– Displaying was ITT

– Did not violate the Act.
 ITT: Invitation to Treat

D. Display of goods in shop shelves:

• Pharmaceutical Society of GB vs Boots Cash Chemists

Ltd.
– Prescription drugs could not be sold other than supervision of
pharmacist-The Pharmacy and Poisons Act 1933

– CA held that sale completed when customers took medicine to

the desk not when taken from shelves
 ITT: Invitation to Treat
E. Lots at Auction:

• Harris v Nickerson (1873)

– Catalogue of auction included some furniture
– Auctioneer withdrawn the items from auction
– Harris sued for breach of Contract
– Court held advertising of goods in the catalogue was Invitation to bid (ITT)
• British Car Auction v Wright (1972)

– Acutioneer were prosecuted for offering to sell and unroadworty vehicle

– Prosecution failed
– At the auction there was no offer to sell; only an invitation to bid.
 ITT: When considered as offer
F. Auction advertised as without reserve
• Dr. Md Habibullah vs RAJUK 4BLC (AD) (1999) 270
– Deputy Director (Estate) RAJUK invited applications for bid in auction of two
commercial/ residential plots being No. 33 and 36 measuring an area of 6 kathas
16 chataks at Gulshan North Commercial area for lease of 99 years.
– RAJUK had prescribed Taka 5 lakh as the reserved bid.
– Petitionar filed an application in the prescribed form on 11.2.90 along with a
payorder of taka 5 lakhs as security deposit.
– He has also filed an anffidavit declaring and affirming that he does not have any
residential/commercial plot in his own name or in the name of his wife, children
or parents.
– On 13 February 1990 auction was held at the conference room of RAJUK
– There were 4 bidders for plot No. 33 and the petitioners bid was for the highest
amount of taka 8,12,000 per katha.
 ITT: When considered as offer
F. Auction advertised as without reserve
• Dr. Md Habibullah vs RAJUK 4BLC (AD) (1999) 270
– After closing the bid for plot No. 33 it was confirmed that the petitioner will get letter
of allotment in due course.
– The highest bid for plot No. 33 having been accepted the petitioner was considered
ineligible to bid for the second plot.
– In clause 8 of the terms of auction it was clearly stated that Chairman, RAJUK reserves
the right to accept or reject any or all bids without assigning any cause or reason
whatsoever
– The bid made by the petitioner was much lower in comparison to earlier auction bids
for the same kind of lands in the same area and therefore the petitioners bid was
considered unsatisfactory.
– Since the rate quoted by the petitioner was found to be unacceptable the respondents
had to issue fresh notice of auction for plot no. 33 dated 21.3.1990.
– The petitioner was requested to take back his earnest money but he did not do so.
 ITT: When considered as offer
D. Auction advertised as without reserve
• Dr. Md Habibullah vs RAJUK 4BLC (AD) (1999) 270
– By an affidavit in reply the petitioner stated that he was ready to
make payment for the plot in question at the time as which
similar plots were actually sold.
– From this fact it was clear that the petitioner also admitted he
was also aware that the bid offered by him was inadequate.
– The court did not find any arbitrariness, lack of transparency in
the action of RAJUK.
 ITT: Invitation to Treat
G. Statement of Price:
• Harvey v Facey (1893)
– Telegram:Will you sell me Bumper Hall Penn?
– Reply telegram: Lowest price acceptable $ 900
– Harvey argued: he accepted this
– Court said statement of price is not an offer open to acceptance.
 ITT: When considered as offer

• ITT + Other words used Offer

– Circumstances+ Nature of words used Distinguishes ITT from
Offer
Choice of word is important
–
– special offer ITT
– Special offer: 10p only to first 10 customers: specific
offer that could only be accepted by first 10 customers
• ITT + Action Prescribed Offer
 ITT: When considered as offer
A. Advertisement involving unilateral offer:
• Carlill v the carbolic Smoke Ball Co Ltd. (1893)
– Company advertised a patent medicine: Smoke ball
– With promise if a purchaser used it correctly and still got flu then company would pay
£ 100
– Mrs. Carlill did get flu after using the smoke ball in the correct fashion.
– Court enforced claim of Mrs. Carlill
– The promise amounted to an offer that could be accepted by anyone who used smoke
ball and still got flu.
– The company was contractually bound by the offer to pay the sum which was
accepted when Mrs. Carlill purchased smoke ball.
– The offer was unilateral offer unlike bilateral offer where both offer and acceptance
are stated
– Here performance and acceptance were same.
 ITT: When considered as offer
B. Statement of Price + Subsequent action statement
of seller:
• Biggs v Boyd Gibbins(1893)
– Negotiation of sale of house
– Offer of lower price by the Purchaser (counter offer)
– Seller wrote’ For quick sale I shall accept £2600” (statement of
price-------subsequent action (thanking) converted it to----OFFER)
– Purchaser replied I accept your offer (actually statement of price)
– In response seller wrote ‘ I thank you for accepting my price. My wife
and I are both pleased that you are purchasing my property”
– Sellers first letter was an offer.
 ITT: When considered as offer

C. ITT (Auction) + Statement (work will be given

to lowest/highest bidder) Offer
• Harvela Investments Ltd v Royal Trust Co of Canada

– Invitation of tender : land sale

– Statement: Land would go to the party making the higher bid
– Wording of invitation to tender made it an offer that could only
be accepted by highest bidder..
 ITT: When considered as offer

D. Auction advertised as without reserve

– A reserve price is the minimum price that will be acceptable to the seller.
– Auctioneer enters into a collateral (separate) contract
– The Collateral contract is that the auctioneer shall accept highest bid.
• Barry v Heathcote Ball & Co (Commercial Auctions) Ltd (2000)
– Auction advertised as without reserve (no minimum price was fixed)
– 2 lots machinery worth £ 14251 were removed
– Claimants highest bid of £2000 for each machine was refused.
– Highest bid rule applied, claimant got £27600 as damages.
 ITT: When considered as offer
D. Auction advertised as without reserve
• Dr. Md Habibullah vs RAJUK 4BLC (AD) (1999) 270
– Deputy Director (Estate) RAJUK invited applications for bid in auction of two
commercial/ residential plots being No. 33 and 36 measuring an area of 6 kathas
16 chataks at Gulshan North Commercial area for lease of 99 years.
– RAJUK had prescribed Taka 5 lakh as the reserved bid.
– Petitionar filed an application in the prescribed form on 11.2.90 along with a
payorder of taka 5 lakhs as security deposit.
– He has also filed an anffidavit declaring and affirming that he does not have any
residential/commercial plot in his own name or in the name of his wife, children
or parents.
– On 13 February 1990 auction was held at the conference room of RAJUK
– There were 4 bidders for plot No. 33 and the petitioners bid was for the highest
amount of taka 812,000 per katha.
 ITT: When considered as offer
D. Auction advertised as without reserve
• Dr. Md Habibullah vs RAJUK 4BLC (AD) (1999) 270
– After closing the bid for plot No. 33 it was confirmed that the petitioner will get letter
of allotment in due course.
– The highest bid for plot No. 33 having been accepted the petitioner was considered
ineligible to bid for the second plot.
– In clause 8 of the terms of auction it was clearly stated that Chairman, RAJUK reserves
the right to accept or reject any or all bids without assigning any cause or reason
whatsoever
– The bid made by the petitioner was much lower in comparison to earlier auction bids
for the same kind of lands in the same area and therefore the petitioners bid was
considered unsatisfactory.
– Since the rate quoted by the petitioner was found to be unacceptable the respondents
had to issue fresh notice of auction for plot no. 33 dated 21.3.1990.
– The petitioner was requested to take back his earnest money but he did not do so.
 ITT: When considered as offer
D. Auction advertised as without reserve
• Dr. Md Habibullah vs RAJUK 4BLC (AD) (1999) 270
– By an affidavit in reply the petitioner stated that he was ready to
make payment for the plot in question at the time as which
similar plots were actually sold.
– From this fact it was clear that the petitioner also admitted he
was also aware that the bid offered by him was inadequate.
– The court did not find any arbitrariness, lack of transparency in
the action of RAJUK.
 Communication of Offer

A. To be effective an offer must be communicated

– Contract is an agreed bargain
– There can be no meeting of minds if one mind is unaware of the offer.
– An acceptance can not mirror an offer if the acceptance is made in ignorance of
offer.
– The fact that the offer is unilateral makes no difference

• Tailor v Laird (1856)

– Tailor was commander of ship
– During voyage he quit his post of captain and worked as crew
– This was not communicated to owner
– Could not recover his salary as crew
– Laird was unaware about the offer to work as crew.
 Communication of Offer

• Gibbons v Proctor
– Policeman was allowed to recover a reward when he sent
information in ignorance of the offer of reward.
• R v Clarke
– Ignorance of the offer and forgetting the offer is the same thing.
– Policeman was allowed to recover a reward when he sent
information in ignorance of the offer of reward.
• Tinn v Hoffmann
 Revocation of Offer

A. It is possible to withdraw offer before

acceptance.
• Routledge vs Grant (1828)
– Grant offered to sale his house
– Offer was open for 6 weeks
– Grant took the house out of market before 6 weeks
– Court said action was legitimate as there had been no
acceptance before revocation.
 Revocation of Offer
B. Withdrawal of offer must be communicated to the offeree.

• Byrone v Van Tienhoven (1880)

–1 st October- V wrote letter from Cardiff to Grant in Newyork to sell goods
(offer-letter)
– 8th October-V changed his mind revoked offer and sent a letter (Revocation-
letter)
– 11th October-B received letter, accepted and sent telegram (acceptance-
telegram)
– 15th October- B also sent letter about acceptance (acceptance-letter)
– 20th October-B received letter of V regarding withdrawal of offer.
– Revocation was invalid as it was received after acceptance of offer through
telegram on 11th October.
 Revocation of Offer

C. Communication of revocation of the offer by the

reliable third party is sufficient.
• Dickinson v Dodds(1876)
– Dodds offered to sell his house on 10 June
th

– Offer was open till 9 am on 12 June.

th

– Dickinson did not accept the offer immediately

– Barry a common friend informed Dickinson that the offer was withdrawn
– Dickinson then sent acceptance
– By the time acceptance was received the house was sold
– Court said revocation through mutual friend was valid
 Revocation of Offer
D. Unilateral offer can not be revoked once the offerfor has started performance.

• Carlill v The Carbolic Smoke Ball Co (1876)

– Continuing act amounts to aceptance
– Offeror is unable of revoke.
• Unilateral contract
– Contract arising where one party (the promisor) makes an offer to pay another party (the promisee) in
return for the performance of an act,
– and the promisee gives his or her assent by performing the said act.
– A reward offered for providing certain information is an example of a unilateral contract.
 Termination of Offer
A. Acceptance of offer by the offeree
B. Rejection of the offer by the offeree
C. Revocation of the offer by the Offeror
D. Lapse of time

– Fixed date-After expiry of date

– No fixed date-Expiration of reasonable time.
– Ramsgate Victoria Hotel Co. Ltd v Montefiore (1866)
− M offered to buy share in june
−Company issued share in Novemer
−Court said offer expired due to lapse of time
− If value of goods and services changes rapidly reasonable time is likely to be short.
 Termination of Offer

E. Death of the parties

– Death of offeree-Representatives can not accept (Reynolds vs atherton)
(1921)

– Death of offeror:- Representatives may be bound if offer is accepted in

ignorance of death of offeror (Bradbury v Morgan)

– If knowledge of death of offeror-No acceptance

 Acceptance
A. Acceptance must be mirror image of the offer
• Jones v Danniel
– D offered to buy land from J for £ 1450
– J accepted sent document with additional terms on payment,
– Court said ancillary terms were counter offer
– Amounted to rejection of offer
B. Acceptance by conduct
• Brodgen vs Metropolitan Railway company
• Confetti Records v Warner Music UK Ltd.
• Day Morris Associates v Voyce
C. Addition of new terms is counter offer no
acceptance.
• Jones v Danniel
 Acceptance
D. Counter offer destroys original Offer
• Hyde v Wrench (1840)
– W wanted to sell his farm to H for £ 1000
– H offered £ 950
– W rejected
– H then tried to accept original price
– W sold to others
– H sued, Court said counter offer amounted to rejection of original
offer.
 Acceptance
E. Query about the offer and seeking more info is
neither acceptance nor rejection. Original offer
stands.
• Stevenson v McLean (1880)
– Offer for sale of Iron
– Price and quantity was accepted
– S wished to know whether delivery could be segregated
– Otherwise he could accept total
– Heard nothing from M
– Later heard Iron was sold
– M claimed there was counter offer
– Court said it was enquiry about details not counter offer
– S was successful in his claim form breach.
 Acceptance
F. A counter offer can become term of contract if
accepted
• Davies & C v William Old (1969)

G. Acceptance must be made in the form prescribed by

offeror.
• Compagnie de Commerce et Commissions SARL v Parkinson Stove
co (1953)
– P made offer with, supplied form of acceptance.
– Stated firmly that no other form of acceptance would be valid
– C accepted in writing but not through the prescribed form
– C A said the acceptance was not valid as appropriate method of
acceptance was not followed.
 Communication of Acceptance
A. Acceptance is not effective until communicated
to the Offeror
• Powell v Lee (1908)
– Interview for appointment of Headmaster of school
– Interview committee decided to appoint P, did not communicate
the acceptance
– One member of the committee who was not authorized
communicated to P about appointment
– Later committee changed decision
– P sued
– Court said P was not in a contractual position until the official
notification of the committee was given to P
 Communication of Acceptance
B. Acceptance can not be made through silence
• Felthouse v Bindley (1863)
– Uncle and nephew negotiated to sell horse
– Uncle said ‘ If I hear no more from you I shall consider the horse
mine at £30
– Nephew did not reply
– Sold the horse in auction to another
– Uncle sued
– Court said nephew had not accepted the offer to buy
– Nephew’s silence on the matter was no indication of acceptance.
 Communication of Acceptance
C. Acceptance can be in any form if no mode of
acceptance is prescribed
• Yates v Pulleyn (1975)
– Land sale
– Prescribed mode of acceptance was registered post
– Acceptance by ordinary post was invalid.
D. If other method of communication is not less
advantageous to the offeror the acceptance is
good and contract is formed
E. Unilateral offer requires no acceptance other
than performance.
• Carlill v The Carbolic Smoke Ball Co Ltd (1893)
 Communication of Acceptance
F. Postal rule: contract is formed when the letter of
acceptance is posted not received (Exception to general
rule)
• Adams v Lindsell (1818)
– Offer for sale of wool
– Seller asked for acceptance by post
– Prospective purchaser accepted on the date of offer
– Replied through post
– Acceptance was received after sale of wool
– Court said letter of acceptance was effective from the date of
posting.
– Binding contract existed at that point.
• Household Fire Insurance v Grant (1879)
– Letter of acceptance did not reach despite that the contract was
formed.
 Communication of Acceptance
G. Postal rule: Will prevail
– Use of postal rule is prescribed by the offeror
• Adams v Lindsell (1818)

– Post is the only reasonable form of communication available

• Household Fire Insurance v Grant (1879)
– Letter of acceptance did not reach despite that the contract was
formed.
 Communication of Acceptance
G. Exception to Postal rule:
• Indicaition by offeror that there will be no contract if
acceptance is not actually received by him
• Contract is formed when the letter of acceptance is
received not posted.
• Holwell Securities v Hughes (1974)
– Offer to purchase certain land
– H said the acceptance must reach to H by certain date.
– Actual communication of acceptance was required
– Postal rule did not apply.
 Communication of Acceptance
H. Modern method of communication
– Has made postal rule irrelevant in many circurmstance.
• Entores Ltd v Miles Far East Corporation (1955)
– Dispute as to place of contract.
– Offer made by British company (purchaser)
– Dutch agent of US company accepted offer for sale of equipment
– Acceptance was made by telex
– Dispute arose, E was unable to sue unless the contract was made
in UK
– CA said the contract was made in England when the telex was
received not when it was transmitted in Holland
• Brinkibon Ltd v Stahag Stahl (1983)
– HL held that the acceptance could only be and the contract
formed once the office was reopened.
 Intention to Create Legal Relation

“To create a contract there must

be a common intention of the
parties to enter into legal
obligations, mutually
communicated expressly or
impliedly”
Atkin LJ in Rose & Frank Co v JR Crompton & Bros Ltd [1923] 2 KB 261 at 293
Intention to Create Legal Relation
A. Purely domestic agreement: No ITCLR
• Balfor v Balfor (1955)
– Husband promised to pay wife £30 per month
– After divourced wife claimed
– Court held it was purely domestic agreement between wife and
husband
– Promise was not made in contemplation of divource
– The agreement was not legally made.
• Merrit v Merrit (1955)
– Husband deserted wife for another woman
– Agreement that husband would pay £40 per month if wife paid
mortgage insalment of house and
– after completion he would transfer title to wife
– Court said there was ITCLR and the agreement was enforceable.
Intention to Create Legal Relation
B. Commercial agreement: Presumed to demonstrate
ITCLR
• Edward v Skyways (1955)
– An attempt was made to avoid Golden Handshake
– Although Golden Handshake make no pre-existing liability to make
payment
– Because of the context it was binding
• Esso Petroleum co Ltd vs Commissioner of Customs (1976)
– Free world cup coin with every four gallon of Petrol
– Customs claimed purchse tax from the transaction
– Purchase of petrol was claimed as consideration for free coin
– HL held Esso was trying to get more business from such promotion
– Esso had ITCLR
Thank you.