LAW OF CONTRACT

INTRODUCTION

• The law applicable: Contracts Act 1950 and

case law.
• Definition of contract-
an agreement between 2 or more parties that is
legally binding between them.
S.2(h) CA 1950: ’…an agreement enforceable by
law is a contract’.
ELEMENTS OF CONTRACT

• Proposal and Acceptance

• Consideration
• Intention to Create Legal Relations
• Certainty
• Legal Capacity
• Free Consent
• Legality of the Objects
• Required Formalities
PROPOSAL AND ACCEPTANCE

Proposal + Acceptance = Agreement

Proposal
• Also known as ‘offer’ or ‘promise’ .

 S.2(a) CA- A proposal is made when one person signifies

to another his willingness to do or to abstain from doing

anything, with a view to obtaining the assent of that other
to such act or abstinence.
• Made by a person called as ‘offeror’ or ‘promisor’ who

offers of promises something to another person.

Acceptance
• S.2(b) of CA- ‘’When the person to whom the

proposal is made signifies his assent thereto, the

proposal is said to be accepted’.
• A proposal, when accepted, becomes a promise.
Proposal vs. Invitation to Treat

 ITT: it is not a proposal but a sort of preliminary

communication which passes between the parties
at the stage of negotiation.
 Examples of ITT:
1. Display of goods
2. Advertisement
3. Price list
4. Auction, etc.
 Auction
 The auctioneer's request for bids was an invitation to treat.
 Each bid constituted an offer which could be withdrawn at any
time until it's accepted.
 The fall of the auctioneer's hammer constituted acceptance of
the highest bid.
 Case: Payne v. Cave (1789)
 Defendant made the highest bid for plaintiff’s goods at an
auction. But then, defendant changed his mind and he
withdrew his bid before the auctioneer brought down his
hammer.
 It was held that the defendant was not bound to purchase the
goods. His bid amounted to an offer which he was entitled to
withdraw at any time before the auctioneer signified
acceptance by knocking down the hammer.
 Display Of Goods In A Self-service Shop

• The act of the seller displaying the goods with the price tags, in a
self service shop is an ITT.
• The customer would make the offer when they select the desired
goods and bring them to the counter for payment.
• The cashier will make the acceptance.
 Case :Pharmaceutical Society of Great Britain v. Boots Cash
Chemist Ltd. (1953)
 Whether the display of goods with the price tags in a self-
service shop is an offer or an ITT.
Held: The display of goods was only an ITT. An offer is made when
the customer placed the articles into the basket and brings them to
the counter for payment. Acceptance would only be made when the
cashier or shop owner accepted the payment made by the customer.
So long as the cashier did not accept the payment, there is no
contract yet.
 Case: Fisher v. Bell
Held: Display of several kinds of flick-knives in a
glass shop window is not an offer but only an
invitation to the customers to make an offer to buy.
Whether the offer is accepted or not, it depends on
the discretion of the shop owner.
Advertisement
 2 types of advertisement:
a) Advertisement made to specific person
b) Advertisement made to public/ world at large
Advertisement to specific person
 It is only an ITT and not a proposal.
 Case: Coelho v. The Public Services Commission
[1964]
 The court affirms the general rule that an
advertisement is only an invitation to applicants to
make an offer and not an offer itself.
 Held: the advertisement was an invitation to qualified
persons to apply and the resulting applications were
offers. Such offers could either be accepted simply or
with the imposition of conditions as terms of the
contract, additional to those set out in the
advertisement. In this case, the letter to the applicant
was an unqualified acceptance and there was no
question of his appointment being on probation.
Therefore, the termination was invalid.
Advertisement to public
 It is a proposal.
 Anyone who meets all the terms of the proposal
may accept.
 Case: Carlill v. Carbolic Smoke Ball Co. [1893]
Held: The plaintiff had accepted the offer of the
company made to the world at large and is,
therefore, entitled to the money.
 Similarly, an advertisement of reward for the return
of lost property would, as a general rule, be treated
in the same manner in the absence of other terms
attached to the offer.
 TO WHOM CAN A PROPOSAL BE
MADE?
1) To a particular person
• Only the addressee may accept the proposal –
s.2(b)
2) To the general public
• Anyone who meets all the terms of the proposal
may accept.
 COMMUNICATION OF
PROPOSAL
• A proposal must be communicated to the proposee/offeree.
Otherwise the proposal is not valid.
• Communication of proposal is only complete when it comes to
the knowledge of the person to whom it is made.
• Refer to S.2(a) CA: ‘When one person signifies to another…’
• The word ‘signifies’ in this section indicates that the offer
must be ‘communicated’, which means that the offer must
reach the knowledge of the offeree.
• S.3 CA: ‘The communication of proposals ……………,
respectively, are deemed to be made by any act or omission of
the party proposing ………….., by which he intends to
communicate the proposal ……………., or which has the
effect of communicating it.’
• S.4(1) CA: ‘The communication of a proposal is
complete when it comes to the knowledge of the
person to whom it is made.’
• S.4 - Illustration (a) CA: A proposes, by letter, to
sell a house to B at a certain price. The
communication of the proposal is complete when B
receives the letter.
 Case: R v. Clarke (1927)
 Held: His claim failed on the grounds that the
information was given to clear himself and not in
reliance on the offer of reward. Higgins J: “There
cannot be assent without knowledge of the offer;
and ignorance of the offer is the same thing
whether it is due to never hearing of it or to
forgetting it after hearing.”
Acceptance
 S.7: In order to convert a proposal into a promise the
acceptance must –
(a) be absolute and unqualified.
● The acceptance must be made on exactly the same
terms as proposed without modifications or
variations.
 Any modification or variation of the proposal does

not constitute an acceptance but amounts to a

counter-proposal.
Counter-proposal
 A counter-proposal is treated as a rejection of the original
proposal.
 It has the effect of destroying the original proposal.
 Case: Hyde v. Wrench (1840)
 D offered to sell a piece of land to the P for £1000 on June 6.
P then made a counter-offer to purchase at £950 on 8th of
June. However, D refused to accept the new price. P then
immediately wrote to D accepting the original offer of £1000
on June 27.
Held: There was no acceptance because the plaintiff’s letter
on 8th of June had rejected the original proposal which could
not be revived. Therefore, there was no valid contract.
 A distinction needs to be drawn between a counter-
proposal and a request for further information.
 Case: Stevenson Jaques & Co. v. McLean (1880)
COMMUNICATION OF
ACCEPTANCE
 General rule: acceptance of a proposal must be
communicated to the proposer for there to be a
binding contract.
 The communication of acceptance is only complete
when it comes to the knowledge of the proposer.
 S.7(b): acceptance must ‘be expressed in some usual
and reasonable manner, unless the proposal
prescribes a manner in which it is to be accepted.
Exceptions to the general rule
1. The proposer has dispensed with the need for it.
2. The proposer allows the party to whom the
proposal is made to perform the condition of a
proposal. (s.8)
3. Reciprocal promise. (s.8)
4. Acceptance by post. (s.4(2))
POSITIVE ACT OF
ACCEPTANCE
 S.2(b) requires the person to whom the proposal is
made to signify his assent thereto to a proposal.
 ‘Signify his assent thereto’ implies a positive act of
acceptance on the part of the addressee.
 Silence, absence of response or total disregard of
the proposal is not acceptance.
Silence cannot amount to acceptance

 The proposer cannot, without the promisee’s consent,

put a condition in his proposal that the promisee’s
silence shall amount to acceptance.
 Case: Felthouse v. Bindley (1826)
 The P had discussed with his nephew John, the
purchase of a horse belonging to Johnand wrote to
him offering to buy his horse and added ‘If I hear no
more about him, I consider the horse is mine at £30
15s’. The nephew did not reply.
 Whilst selling his farming stock, the nephew told
the auctioneer to keep the horse out of the sale but
the auctioneer sold it by mistake and the plaintiff
sued the auctioneer.
 Held: there was no acceptance of the P’s proposal
by the nephew and that the P had no right to impose
upon his nephew a sale of his horse by silence.
 Case: Fraser v. Everett (1889)
 Held: There is no rule of law ‘Silence gives
consent’ applicable to mercantile contracts.
 Acceptance must be made within a
reasonable time
 Refer s. 6(b)
 Case: Fraser v. Everett
 The court laid down the rule that an acceptance of a
proposal must be made within a reasonable time.
 Case: Ramsgate Victoria Hotel Co. v. Montefiore
(1866)
 The rationale for the rule was provided in Macon
Works & Trading Sdn Bhd v. Phang Hon Chin &
Anor. [1976]
 Held: ‘An offer lapses after a reasonable time not
because this must be implied in the offer but
because failure to accept within a reasonable time
implies rejection by the offeree.’
ACCEPTANCE THROUGH
POST
 General rule: acceptance is effective / complete
only when it is communicated to the proposer.
 It is communicated when it comes to the actual
knowledge of the proposer.
 Exception to the general rule: s.4(2) – Postal Rule.
Section 4(2) CA 1950
 The communication of an acceptance is
complete:-
a) As against the proposer, when it is put in a course
of transmission to him, so as to be out of the
power of the acceptor; and
b) As against the acceptor, when it comes to the
knowledge of the proposer.
Illustration (b) of section 4
 B accepts A’s proposal by a letter sent by post.
The communication of the acceptance is complete:
as against A, when the letter is posted;
as against B, when the letter is received by A.
 According to para. (a) and supported by illustration
(b), the proposer is bound when the offeree posts the
letter even though the former has no knowledge of
the acceptance.
 The transaction becomes binding irrespective of any
delay or disappearance in the course of transit.
 Postal rule applies to letter or telegram sent through
the post office.
Cases
 Entores Ltd. v. Miles Far East Corporation [1955]
 Denning L.J.: ‘when a contract is made by post it is
clear law throughout the common law countries that
acceptance is complete as soon as the letter is put
into the post box, and that is the place where the
contract is made.’
 Ignatius v. Bell (1913)
 Held: acceptance is complete upon posting where
communication by post is the method contemplated
by the parties.
 Acceptance is only complete as against the acceptor,
when it comes to the knowledge of the proposer.
 This implies that while the proposer is bound upon
dispatch of acceptance by the acceptor, the latter is
not bound until it is actually received by the
proposer.
 The proposer is severely disadvantaged by the rule
and is placed in an unequal position.
Solution?
 Proposers should provide adequate protection for
themselves by, for instance, stipulating in a
proposal that acceptance is complete only upon
receipt.
 That would exclude the postal rule by express
terms of the proposal.
 Instantaneous communications such as telephone,
fax, telex etc. are governed by the general rule.
REVOCATION OF PROPOSAL
 S.5(1): a proposal may be revoked at any time
before the communication of its acceptance is
complete as against the proposer, but not
afterwards.
 S.6: Circumstances in which a proposal is
revoked.
Section 6(a)
(a) by the communication of notice of revocation by
the proposer to the other party;
• The revocation of the proposal must be
communicated by the proposer to the other party
before he accepts.
• Case: Byrne v. Tienhoven (1880)
 Held: there was a contract between the parties
because the revocation of the offer posted on 8 Oct.
was not effective till 20 Oct. when it was received
by the P but in the meantime, the P had already
accepted the offer on 11 Oct. when the telegram
was sent.
Section 6(b)
(b) by the lapse of the time prescribed in the
proposal for its acceptance, or, if no time is so
prescribed, by the lapse of a reasonable time,
without communication of the acceptance.
 What a reasonable time is depends on the facts
and circumstances of each case.
Cases
 Fraser v. Everett
 Held: The acceptance of the P was not made within a
reasonable time taking into consideration that the
shares in question were mining shares of a very
fluctuating character.
 Ramsgate Victoria Hotel Co. v. Montefiore (1866)
 Held: The refusal justified because such a proposal
should have been accepted within a reasonable time.
Section 6(c)
(c) by the failure of the acceptor to fulfill a condition
precedent to acceptance;
 Eg.: a company offers to employ an applicant on
condition that he passes a skills test. If the
applicant fails the test, the proposal is obviously
revoked because the applicant has failed to fulfill
a condition precedent.
Section 6(d)
(d) by the death or mental disorder of the proposer, if
the fact of his death or mental disorder comes to
the knowledge of the acceptor before acceptance.
 The fact of the death or mental disorder must be
known to the acceptor before acceptance.
 It is only upon such knowledge that the proposal is
no longer available for acceptance.
 Acceptance without prior knowledge of the death
or mental disorder of the proposer is a good
acceptance.
REVOCATION OF
ACCEPTANCE
 S.5(2): An acceptance may be revoked at anytime
before the communication of the acceptance is
complete as against the acceptor, but not
afterwards.