UNIT 2

Law of Contract
 Unit 2 :Outline
•Definition
•Formation
•Vitiating factors
•Termination
•Remedies
 Think!
•When you sign and date a document, does
that constitute a contract? In other words, is
the document the contract?
 Think!

•You sign a contract of employment

with unilus as a tutor, if the contract
is destroyed in a fire, does that mean
you no longer work for unilus?
 Definition
• Agreement which legally binds parties to the
agreement
• Objective standard (said, written, done) see BROGDEN
V METROPOLITAN RAILWAY CO: HL 1877
• Parties are judged by what they have said,
written or done, rather then by what they were
actually thinking (subjective standard)
• An objective person should be able to infer that
Mr X intended to be bound
 FOMATION OF A CONTRACT
• All the essential elements of a contract must be present at the time that the
contract is concluded

C.O.A.L.A
CONSIDERATION
OFFER
ACCEPTANCE
LEGAL CAPACITY
CONSENSUS AD IDEM
 AGREEMENT: offer + acceptance
•This means that one of the parties must make a
specific proposal and promises to be bound by
certain terms (offer) and the other party must
undertake to be bound by such terms
unreservedly
An offer is a promise or proposal by one party
(the offeror) to enter into a contract, on a particular set of
terms, with the intention of being bound as soon as the other
party to whom the proposal or promise is made (the offeree)
signifies his acceptance.
 Which one is an offer/at which point does an offer
occur?
• When you go into a restaurant and order food
• Where a person buys something from a shop
• Employment contract
• Insurance contract
 NATURE OF AN OFFER
An offer must be so definite in its essential terms. By
this we mean it must at least:
identify the parties;
the subject matter;
the time of performance and;
the price it must be made to a specific person.
 TO WHOM CAN AN OFFEROR MAKE AN OFFER?
Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 (UK)
Defendants placed an advertisement in a newspaper for their
products, stating that any person who purchased and used
their product but still contracted influenza despite properly
following the instructions would be entitled to a £100 reward.
Plaintiff used as instructed and still became sick. She wanted
to claim her £100. Defendants refused and said it was merely
sales puff.
 Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 (UK)
• Was there a valid offer?
• Def argument: The offer was so vague that it could not form
the basis of a contract, as no time limit was specified.
• It was not an offer which could be accepted since it was
offered to the whole world.
……………………………………………………………………………………………
• Crt: The smoke ball must protect the user during the period of
use (not vague)
• Such an offer was possible, as it could be compared to reward
cases.
 REWARDS

• Unilateral contracts

• One party makes performance

• Communication is not necessary in such cases

• There could not be acceptance without knowledge of the

offer (R v Clarke [1927] HCA 47 ) by converse Williams v
Carwardine [1833] EWHC KB J44 (UK)
• Therefore, there was a valid offer
 Scenario 1
• The Mr X smses Mr Y
• 'Will you sell us photocopy machines? Text lowest cash
price’.
• The Mr Y smes in reply 'Lowest price for photocopy
machines is, K700’.
• The Mr X smes to accept what he regarded as an offer;
Mr Y makes no further reply. Was there a valid offer
capable of acceptance?
 Harvey v Facey [1893] AC 552 (UK)
• Plaintiff telegraphed to the defendant 'Will you sell us
Bumper Hall Pen? Telegraph lowest cash price'. The
defendant telegraphed in reply 'Lowest price for Bumper Hall
Pen, £900'. The plaintiff telegraphed to accept what he
regarded as an offer; the defendant made no further reply.
• The defendant's telegram was merely a statement of their
minimum price if a sale were to be agreed.
• It was not an offer which the plaintiff could accept.
• supply of information
 Binding nature of an offer
WHAT IT MEANS TO BE BOUND is Agreeing to sue and
be sued on the agreement
• Rights-Receive payment
• Duties-Deliver goods
• Obligations-Incur liabilities
• E.g Contract of sale
 AN INVITATION TO TREAT
• Where a party is initiating negotiations they are
said to have made an invitation to treat.
• 'An indication that a person is prepared to receive
offers with a view to entering into a binding
contract.
• For example, an advertisement of goods for sale
• An invitation to treat cannot be accepted to form
a binding contract.
 AN INVITATION TO TREAT: READ
UP!
•Auction sales
•Advertisements for example, price lists or
newspaper advertisements
•Exhibition of goods for sale
•An invitation for tenders
 AN INVITATION TO TREAT: EXAMPLES

• Fisher v Bell (1961) 1 QB 394 (UK)

• Partridge v Crittenden [1968] 1WLR 1204 (UK)

• Pharmaceutical Society of Great Britain v Boots Cash

Chemists (Southern) [1953] 1 QB 401 (UK)
• Certain drugs could only be sold under the supervision
)
of a registered
Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401 (UK

pharmacist.
• The plaintiff claimed this rule had been broken by Boots who displayed these
drugs in a self-service shop.
• Boots contended that there was no sale until a customer brought the goods
to the cash desk and offered to buy them. A registered pharmacist was
stationed at this point.
• The court found for Boots and said that if it were true that a customer
accepted an offer to sell by removing goods from the shelf, he could not then
change his mind and put them back as this would constitute breach of
contract.
 Fisher v Bell (1961) 1 QB 394 (UK)

• A shopkeeper was prosecuted for offering for sale an offensive weapon

by exhibiting a flick knife in his shop window.

• The display of an article with a price on it in a shop window is merely an

invitation to treat.

• Invitation to treat is a preliminary step to enter into a contract and shop

owner could refuse offer created by anyone wishing to purchase the
flick knife

• Thus, display of goods does not create and offer capable of acceptance
 Partridge v Crittenden [1968] 1WLR 1204 (UK)

• Partridge placed an advertisement for 'Bramblefinch cocks, bramblefinch

hens, 25s each’.
• The RSPCA brought a prosecution against him for offering for sale a brambling
in contravention of the Protection of Birds Act 1954.
• Partridge convicted and he appealed.
• The conviction was quashed. Although there had been a sale in contravention
of the Act, the prosecution could not rely on the offence of 'offering for sale',
as the advertisement only constituted an invitation to treat.
• Relied on the holding in Fisher v Bell
 TERMINATION OF OFFER
• Rejection
• Outright rejection terminates an offer.
• A counter-offer, when the person to whom the
offer was made proposes new or amended terms,
also terminates the original offer.
 Hyde v Wrench [1840] 3 Beav 334; 49 ER
132
• The defendant offered to sell property to the plaintiff for £1 000 on
6 June.
• Two days later, the plaintiff made a counter-offer of £950 which the
defendant rejected on 27 June.
• The plaintiff then informed the defendant on 29 June that he
accepted the original offer of £1 000.
• Decision: The original offer of £1 000 had been terminated by the
counter-offer of £950
• A counter-offer is a final rejection of the original offer.
If a counter-offer is made, the original offeror may accept it, but if
they reject it their original offer is no longer available for acceptance
 TERMINATION OF OFFER
• Lapse of time
• An offer may be expressed to last for a specified
time. If, however, there is no express time limit
set, it expires after a reasonable time.
• Court will deal with this matter on a case by case
basis
 TERMINATION OF OFFER

•Revocation by the offeror.

•The offeror may revoke, which means to
withdraw or remove, their offer at any time
before acceptance:
 REVOCATION BY THE OFFEROR

• Dickinson v Dodds [1876] 2 Ch D 463 (UK)

• Byrne & Co v Van Tienhoven [1880] 5 CPD 344

• Routledge v Grant [1828] 130 ER 920 (UK)

 Routledge v Grant [1828] 130 ER 920 (UK)
 The defendant offered to buy the plaintiff's house for
a fixed sum, requiring acceptance within six weeks.
Within the six weeks specified, he withdrew his offer.
• The defendant could revoke his offer at any time
before acceptance, even though the time limit had
not expired.
• Revocation may be an express statement or may be
an act of the offeror. Their revocation does not take
effect until the revocation is communicated to the
offeree
 Dickinson v Dodds [1876] 2 Ch D 463 (UK)

• The defendant, on 10 June, wrote to the plaintiff to offer property for sale at
£800, adding 'this offer to be left open until Friday 12 June, 9.00 am.' On 11
June the defendant sold the property to another buyer, A.
• B, who had been an intermediary between Dickinson and Dodds, informed
Dickinson that the defendant had sold to someone else. On Friday 12 June,
before 9.00 am, the plaintiff handed to the defendant a formal letter of
acceptance.
• The defendant was free to revoke his offer and had done so by sale to a third
party; the plaintiff could not accept the offer after he had learnt from a
reliable informant of the revocation of the offer to him.
• Revocation of offer may be communicated by any third party who is a
sufficiently reliable informant.
 Byrne & Co v Van Tienhoven [1880] 5 CPD 344
• Plaintiff and defendant lived in different locations and conducted
negotiations via letter.
• 1 October Letter posted in Cardiff, offering to sell 1 000 boxes of tinplates.
• 8 October Letter of revocation of offer posted in Cardiff.
• 11 October Letter of offer received in New York and telegram of acceptance
sent.
• 15 October Letter confirming acceptance posted in New York.
• 20 October Letter of revocation received in New York. The offeree had
meanwhile resold the contract goods. Decision: The letter of revocation
could not take effect until received (20 October); it could not revoke the
contract made by the telegram acceptance of the offer on 11 October.
• Revocation could not take effect as communicated after acceptance
 TERMINATION OF OFFER
• Failure of a condition to which the offer was
subject.
• An offer may be conditional in that it is
dependent on some event occurring or there
being a change of circumstances.
• If the condition is not satisfied, the offer is not
capable of acceptance.
 TERMINATION OF OFFER
• Death of one of the parties
• The death of the offeree terminates the offer.
• The offeror's death terminates the offer, unless the offeree accepts
the offer in ignorance of the death, and the offer is not of a personal
nature.
• Bradbury v Morgan [1862] 158 ER 877 (UK)
 Scenario 2
• For many years Mr X supplied coal to the Mr Y. Mr X
suggested that they should enter into a written
agreement and Mr Y's agent sent a draft to him for
consideration.
• The parties applied to their dealings the terms of the
draft agreement, but they never signed a final version.
Mr X later denied that there was any agreement
between him and Mr Y.
• Was there a contract or not?
 • Brogden v Metropolitan Railway Co [1877] 2 App
Cas 666 (UK)
• Contract was established by conduct
 ACCEPTANCE
• Acceptance is an unqualified agreement to all the terms of the
offer
• Acceptance may be in writing, or oral or it may be inferred or
deduced from conduct e.g by dispatching goods in response to an
offer to buy.
• Acceptance is generally not effective until communicated to the
offeror, except where the 'postal rule' applies.
 Postal Rule - Adams v Lindsell (1818) 1 B &
Ald 681
• Defendants mailed their offer to sell on the 2nd of September,
1817. The Defendants’ letter was misdirected and did not reach
the plaintiffs until 7:00 p.m., Friday the 5th. That night, Plaintiffs
accepted Defendant’s offer, and mailed it directly back in a
timely manner. It was received by Defendant on the 9th, but
they expected to receive it on the 7th and, in the meanwhile,
had offered and sold their wool to another person. Plaintiffs
brought suit for the losses they sustained by not receiving the
fleeces.
• Acceptance is complete and effective as soon as it is posted.
• See also Henthorn v Fraser [1892] 2 Ch 27
 ACCEPTANCE
• The contract comes into effect once the offeree has accepted the
terms presented to them.
• After acceptance, the offeror cannot withdraw their offer and both
parties will be bound by the terms that they have agreed.
 HOW IS ACCEPTANCE
COMMUNICATED?
• There must be some act on the part of the offeree
to indicate their acceptance
• It is also a requirement that acceptance must be
communicated by the offeree himself or by
somebody with his express authority.
 HOW IS ACCEPTANCE
•
COMMUNICATED?
It therefore follows that communication by a person who does not have
the offeree’s authority is not effective communication of acceptance

See Powell v. Lee (1908) - Powell applied for the post of a

headmaster and his application was accepted by the
School Board. Before the formal appointment, one of the
Board member had informed Powell of the decision which
was later rescinded by the Board. Powell sued the School
for breach of contract. Held: His action failed because the
acceptance was not communicated by someone
authorized and thus there was no valid contract.
 Consideration
• There must be a bargain by which the obligations assumed by
one party are supported by consideration (value) given by the
other.

• In short it is n exchange of:

“something for something”

Or
Benefit for a benefit
 Consideration
• This means that there must be something of value (eg. the price) or
some sacrifice or something that has foregone the promise
• Consideration can be an act, forbearance, or promise
bargained for and given in return for a promise. Any
agreement where there is no consideration such as
agreements for giving of gifts are not legally binding and
cannot be sued upon.
 Some important Rules for Consideration
• 1.Consideration must be sufficient but necessarily
adequate
• Chappell & Co Ltd v Nestle Co Ltd [1960] AC 87 (UK)
• Chocolate wrappers part of consideration

• Thomas v Thomas [1842] 2 QB 851; 114 ER 330 (UK)

• Promise to pay the £1/year and maintenance of the
house
 Sufficiency v adequacy

• Consideration need not be adequate that is, equal in

value to the consideration received in return.
• But there is no remedy at law for someone who simply
makes a poor bargain.
• Consideration must be sufficient. It must be capable in
law of being regarded as consideration by the courts.
 Some important Rules for Consideration
• 2.Past consideration is not sufficient to make the
promise binding. (there are exceptions which will not be
discussed here)

• 3.Performance must be legal

• 4Performance must be possible

• 5.Consideration must pass from the promisee (Tweddle

v Atkinson [1861] EWHC J57 (QB), (1861) 1 B&S 393)
 Forms of Consideration
• Consideration may be:
• executed eg. If the price is paid at the same time
that the goods are delivered.
• executory eg. Insurance company promises to
indemnify the insured upon the happening of the
event
 Intention to create legal relations + ad idem

• Parties to a contract intend to be legally bound by it.

• When business people enter into commercial

agreements it is presumed that there is an intention to
enter into legal relations unless this is expressly
disclaimed or the circumstances indicates otherwise.
 Intention to create legal relations + ad idem

• This means that the parties must have intended that any
mis-understanding or failure by either party to fulfill his
promise may be taken to courts of law for adjudication. In
other words it must have been the intention of the parties
that the agreement be legally binding.

• Finally, there must not be any factors that would render the
contract void, voidable or unenforceable.*to be dealt with
under a separate heading
 Legal Capacity
• Parties to the contract must appreciate what it means to be
bound on that agreement
• Must be legally able to enter into a contract
• Those who lack mental capacity or who were intoxicated
can avoid contracts if they can show they did not understand
the nature of their actions and the other party ought to have
known about their disability.
• Minors cannot enter into contracts for goods other than
necessities
• Legal fictions have a separate legal personality from their
owners, thus, can be held accountable of their own accord
 Minors
• A person below the age of 18
• Minors can enter into any contract
• But such a contract is voidable at the instance of the minor
• Voidable means it can be enforced by the minor but not
agaist the minor
• Voidable at the instance of the minor
• (disaffirm in its entirety)
• Words, conduct must indicate desire to repudiate the
contract
• May do so soon after turning 18 (on a case by case basis)
 Minors
• Contract for “necessaries”
• Food, shelter, clothing, employment, education etc
• See Green v Thompson [1899] 2Q.B. 1 DC

• See Peters v Fleming (1840) 151 ER 314 for the meaning of

necessaries

• See also Nash v Inman (1902) 2 KB 1 what happens when a

minor already has a good supply of the item in question
 Mentally Incapacitated
• Voidable contracts if x knew or ought to have known
that Y was mentally incapacitated /had diminished
capacity
 Intoxicated
• X should have been so drunk that he could not
understand the consequences of his actions

• Objective standard

• Can be voidable
 Diminished Capacity
• When x later obtains full capacity, he can repudiate or ratify
 Companies
• Companies – valid contract if in line with company’s
articles of association
• void (ultra vires)
• voidable (ratification)
 Legal Capacity
• Appreciate the consequences of being bound

• Minor – Valid, Void*, voidable

• Mentally incapacitated – valid, void*, voidable

• Companies – /valid/ void (unltravires)/ voidable (ratification)

 Validity of Contracts
• Valid contract is binding on the parties
• Void Contract is not a contract at all
• Voidable contract is a contract which one party may set
aside but for all intents and purposes, is a valid and binding
contract.
• Unenforceable contract is a valid contract and property
transferred under it cannot be recovered
• even from the other party to the contract.
 Gentlemen’s agreements
• Informal or legally non-binding agreement
• Relies upon honour of the parties

• See Jones v Vernon’s Pools Ltd [1938] 2 All ER 626 (UK)

• The claimant argued that he had sent to the defendant a football pools
coupon on which his predictions entitled him to a dividend.

• The defendants denied having received the coupon. A clause on the coupon
stated that the transaction should not 'give rise to any legal relationship … but
… be binding in honour only'.

• This clause was a bar to an action in court.