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LAW OF CONTRACT

What is a contract? A contract may be defined as an agreement enforceable by law between two or more persons to do or abstain from doing some acts, their intention being to create legal relations and not merely to exchange mutual promises. Essentials of a valid contract. 1. Agreement . In order decide whether a contract has come into existence, it is necessary to establish that there has been agreement between the parties. In consequence it must in general be shown that an offer was made by one party( the offeror ) which was accepted by the other party (called the offeree). 2. Consideration. English law will recognize a bargain, not a mere promise. A contract, therefore, must be a two-sided affair, each side providing or promising to provide some consideration in exchange for what the offer is to provide. 3. Intention to create legal relations . The law will not concern itself with purely domestic or social arrangements. The parties must have intended their agreement to have legal consequences. 4. Form. Certain exceptional types of agreement are only valid if made in a particular form, for e.g. in writing. 5. Definite Terms . It must be possible for the courts to ascertain what the parties have agreed upon. If the terms are so vague as to be meaningless, the law will not recognize the agreement. 6. Legality. The purpose of the agreement must not be illegal or contrary to public policy. For e.g. , the courts would not allow a hired murderer to recover damages if his principal refused to pay the agreed price. 7. Capacity. The parties must be legally capable of entering into a contract. 8. Genuineness of assent. The agreement must have been entered into freely and involve a meeting of minds. FACTORS AFFECTING VALIDITY OF A CONTRACT Some contracts (not all) must be evidenced in writing or made in a particular form e.g. Contract of Employment. A contract must be legal (i.e. it must not be tainted with illegality) and not contrary to public policy. A contract can only be enforced if it is sufficiently complete and precise in terms. Some terms which the parties do not express may be implied and some terms which the parties do express are overridden by statutory rules. Both parties must have contractual capacity. Legal Capacity: Natural Person / Legal person or company PERSONS HAVING CONTRACTUAL LIMITATIONS 1. Minor 2. Mental patient. 3. Drunkards. 4. Aliens. 5. Undischarged BankruptcyUndischarged because a person who is bankrupt remains so for a limited period of time. 6. Corporations have contractual limitations because it is not a natural person. Parties must have capacity to act (person having 18 + years) There must be genuineness of consent: (i) (ii) Both parties must give consent genuinely. Contract must not be affected by mistake. If so, there is neither consensus nor consent. There should be no misrepresentation ( telling untruth )

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(iii)

Duress i.e. situation where a person does physical or economic threats. (iv) Undue influence.

OFFER
An offer sets out the terms upon which an individual is willing to enter into a binding contractual relationship with another person. It is a promise to be bound on particular terms, which is capable of acceptance. The essential factor to emphasise about an offer is that it may, through acceptance by the offeree, result in a legally enforceable contract. The person who makes the offer is the offeror; the person who receives the offer is the offeree. An offer is an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed. Offers, once accepted, may be legally enforced but not all statements will amount to an offer. It is important, therefore, to be able to distinguish what the law will treat as an offer from other statements which will not form the basis of an enforceable contract. An offer must be capable of acceptance. It must therefore not be too vague (Scammel v Ouston (1941)). An offer may be addressed to : a specific person, in which case it can only be accepted by that person; a group of people, where it can be accepted by any member of the group; to the world at large, such as where someone offers a reward for the return of a lost object.

In Carlill v Carbolic Smoke Ball Co (1893) it was held that an offer could be made to the whole world and could be accepted and made binding through the conduct of the offeree. Case: Carlill v. Carbolic Smoke Ball Co Facts: The company inserted advertisements in a number of newspapers stating that it would pay 100 to anyone who caught flu after using its smoke balls as directed for 14 days. The company further stated that to show its sincerity in the matter it had deposited 1000 at the Alliance Bank to meet possible claims. Mrs Carlill bought one of the smoke balls, used it as directed but still caught flu. She claimed the 100 reward but was refused, so she sue the company in contract. The company put forward a number of arguments in its defence: 1. It claimed that it had attempted to contract with the whole world, which was clearly impossible. The Court of Appeal held that the company made an offer to the whole world and it would be liable to anyone who came forward and performed the required conditions. 2. The company further submitted that the advertisement was in the nature of a trade puff and too vague to be a contract. The court dealt with this argument by asking what ordinary members of the public would understand by the advertisement. The court took the view that the details of use were sufficiently definite to constitute the terms of a contract and that the reference to the 1000 deposited at a bank was evidence of an intention to be bound. 3. The company also argued that the plaintiff had not provided any consideration in return for its promise. The court held that the inconvenience of using the smoke ball as directed was sufficient consideration. 4. Finally, the company submitted that there was no notification of acceptance in accordance with the general rule. The court held that in this kind of contract, which is known as a unilateral contract, acceptance consists of performing the requested act and notification of acceptance is not necessary. Held: The court concluded that Mrs Carlill was entitled to recover the 100 reward.

Note: It is important to identify when a true offer has been made because once it is accepted, the parties are bound. A particular situation may give the impression that an offer is being made, but yet in law this may be construed otherwise, for e.g. it may be considered as an invitation to treat.

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This is where a persons behaviour implies the offer. An offer can be made to a particular person, to a class (group) of persons or even to the world at large. In addition an offer should be distinguished, from the following: (i) A mere statement of intention Such a statement cannot form the basis of a contract even although the party to whom it was made acts on it (Re Fickus (1900)). (ii) A mere supply of information As in Harvey v Facey (1893) where it was held that the defendants telegram, in which he stated a minimum price he would accept for property, was simply a statement of information, and was not an offer capable of being accepted by the plaintiff.

INVITATION TO TREAT
Offer distinguished from invitation to treat Invitations to treat are distinct from offers in that rather than being offers to others, they are in fact invitations to others to make offers. The person to whom the invitation to treat is made becomes the actual offeror, and the maker of the invitation becomes the offeree. An essential consequence of this distinction is that, in line with the ordinary rules of offer and acceptance, the person extending the invitation to treat is not bound to accept any offers subsequently made to them. The following are examples of common situations involving invitations to treat: 1 (a). The display of goods for sale. This is not an offer to sell but an invitation to make an offer to buy. The classic case in this area is Fisher v Bell (1961) in which a shopkeeper was prosecuted for offering offensive weapons for sale, by having flick-knives on display in his window. It was held that the shopkeeper was not guilty as the display in the shop window was not an offer for sale but only an invitation to treat. Case: Fisher v. Bell Facts: A shopkeeper had a flick-knife on display in his shop window. He was charged with offering for sale an offensive weapon contrary to the provisions of the Restriction of Offensive Weapons Act 1959. His conviction was quashed on appeal. Held: The divisional Court of the QBD held that display of goods with a price ticket attached in a shop widow is an invitation to treat and not an offer to sell (The Restriction of Offensive Weapons Act 1961 was passed soon after this case to close the loophole in the law.) 1.(b) the display of goods on the shelf of a self-service shop In this instance the exemplary case is Pharmaceutical Society of Great Britain v Boots Cash Chemists (1953). The defendants were charged with breaking a law which provided that certain drugs could only be sold under the supervision of a qualified pharmacist. They had placed the drugs on open display in their self-service store and, although a qualified person was stationed at the cash desk, it was alleged that the contract of sale had been formed when the customer removed the goods from the shelf. It was held that Boots were not guilty. The display of goods on the shelf was only an invitation to treat. In law, the customer offered to buy the goods at the cash desk where the pharmacist was stationed. Case : Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd Facts: Customers selected pharmaceutical good from self service counters, and paid later at the cash desk, where a pharmacist was in attendance with the cashier.

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Held:

the display on the shelves was a mere invitation to treat. The customer made the offer when he took the goods to the cashier who could always refuse to sell. Therefore the pharmacist was present when the sale took place. 2. Advertisements, catalogues and brochures. Even if the word offer is used, the advertisement is still an invitation to treat. This can be seen from Partridge v Crittenden (1968) in which a person was charged with offering a wild bird for sale contrary to the Protection of Birds Act 1954, after he had placed an advert relating to the sale of such birds in a magazine. It was held that he could not be guilty of offering the bird for sale as the advert amounted to no more than an invitation to treat. The general position is that it will be an invitation to treat if further negotiations are intended or expected

Case: Partridge v. Crittenden Facts: Partridge placed an advertisement in the Cage and Aviary Birds magazine, which read Bramblefinch cocks, bramblefinch hens, 25s each. A Mr Thompson replied to the advertisement and was sent a bramblefinch hen. Partridge was charged with the offering for sale a wild bird contrary to the provisions of the Protection of Birds Act 1954 and was convicted at the magistrates court. His conviction was quashed on appeal to the Divisional Court of the QBD.
Held: The court held that since the advertisement constituted an invitation to treat and not an offer to sell Partridge was not guilty . Comment: It should be noted that the word offer did not appear in the advertisement in this case. However, in Spencer v. Harding a circular containing the word offer was held to be an invitation to treat. 3. Company prospectuses. Contrary to common understanding such a document is not an offer. It is merely an invitation to treat, inviting people to make offers to subscribe for shares in a company. A company which, in commercial language, makes an offer to the public asking them to subscribe for shares in it, does not in law offer to sell shares. It invites members of the public to apply for them, reserving the right to decide how many (if any) to allot to each applicant. However where a company resolves to make a rights issue of shares to its existing shareholders, entitling each shareholder to buy a number of new share in proportion to the shares he already holds, the letter informing the shareholder of his rights is regarded as an offer. 4. Auctions. At an auction sale the calls for bids by an auctioneer is an invitation to treat. The bids are offers. The auctioneer selects the highest bid and acceptance is completed by the fall of the hammer.

Case: Payne v. Cave Facts: The defendant made the highest bid for the plaintiffs goods at an auction sale, but he withdrew his bid before the fall of the auctioneers hammer. Held: It was held that the defendant was not bound to purchase the goods. His bid amounted to an offer which he was entitled to remove at any time before the auctioneer signified acceptance by knocking down the hammer.
Note: Before acceptance the bidder may withdraw his bid and the auctioneer may withdraw the goods. Moreover the offer made by each bidder lapses as soon as a higher bid is made. Thus if a higher bid is made and withdrawn the auctioneer can no longer accept the next highest. Advertising a forthcoming auction sale does not amount to an offer to hold it. According to obiter dicta comments in Warlow v. Harrison, advertising that an auction will be without reserve amounts to an offer by the auctioneer that once the auction commenced the lot will be sold to the highest bidder however low the bids might be. 5. Tenders

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A statement that goods are to be sold by tender is not normally an offer, so that the person making the statement is not bound to sell to the person making the highest tender. Similarly a statement inviting tenders for the supply of goods or for the execution of works is not an offer. The offer comes from the person who submits the tender and there is no contract until the person asking for the tenders accepts one of them. The position is different where the person who invites the tenders states in the invitation that he binds himself to accept the highest offer to buy (or lowest offer to sell or to provide services). In such cases, the invitation for tenders may be regarded either as itself an offer or as an invitation to submit offers coupled with an undertaking to accept the highest (or as the case may be the lowest) offer; and the contract is concluded as soon as the highest offer to buy (or lowest to sell etc.) is communicated.

6. Passenger tickets It has been said that railway companies made offers by issuing advertisements stating the times and conditions under which trains would run; and that a company which run buses by so doing made offers to intending passengers. Note: There is a diversity of views on the question just when a contract is made between a carrier and an intending passenger. One can only say that the exact time of contracting depends in each case on the wording of the relevant document and on the circumstances in which it was issued. Termination of offer 1. By acceptance: An offer which has been accepted constitutes a contract. That offer is no longer available for acceptance. 2. By rejection: An offer is rejected if :a. The offeree notifies the offeror that he does not wish to accept the offer. b. The offeree attempts to accept the offer but subject to certain conditions. c. the offeree makes a counter offer.

Case:

Hyde v. Wrench (see above)


Sometimes it is difficult to decide whether the offeree is making a counter offer or simply asking for more information about the offer. A request for more information will not reject the offer.

Case: Stevenson v. McLean Facts: The defendant offered to sell a quantity of iron to the plaintiffs for cash. The plaintiffs asked whether they could have credit terms. When no reply to their enquiry was forthcoming, the plaintiffs accepted the terms of the original offer. Meanwhile, the defendant had sold the iron elsewhere.
Held: It was held that the enquiry was a request for more information, not a rejection of the offer. The defendant was liable for breach of contract. 3. By revocation before acceptance Revocation Revocation is the technical term for the cancellation of an offer and occurs when the offeror withdraws their offer. The rules relating to revocation are as follows: (i) An offer may be revoked at any time before acceptance. However, once revocation has occurred, it is no longer open to the offeree to accept the original offer (Routledge v Grant (1828)). (ii) Revocation is not effective until it is actually received by the offeree. This means that the offeror must make sure that the offeree is made aware of the withdrawal of the offer, otherwise it might still be open to the offeree to accept the offer (Byrne

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v Tienhoven (1880)). (iii) Communication of revocation may be made through a reliable third party. Where the offeree finds out about the withdrawal of the offer from a reliable third party, the revocation is effective and the offeree can no longer seek to accept the original offer (Dickinson v Dodds (1876)). (iv) A promise to keep an offer open is only binding where there is a separate contract to that effect. Such an agreement is known as an option contract, and it must be supported by separate consideration for the promise to keep the offer open. (v) In relation to unilateral contracts, i.e. a contract where one party promises something in return for some action on the part of another party, revocation is not permissible once the offeree has started performing the task requested (Errington v Errington & Woods (1952)). An offer may be revoked (withdrawn) at any time before acceptance but it will only be effective when the offeree learns about it.

Case: Byrne v. Van Tienhoven Facts: The defendants posted a letter in Cardiff on 1 October to the plaintiffs in New York, offering to sell them 1000 boxes of tinplates. On 8 October the defendants posted a letter withdrawing the offer, which was received by the plaintiffs on 20 October. However, on 11 October the plaintiffs telegraphed their acceptance which they confirmed by letter posted on 15 October.
Held: It was held that a revocation takes effect only when communicated to the offeree. The contract in this case came into existence when the defendants offer was accepted by the plaintiffs on 11 October. The letter of revocation was ineffective as it was received after the acceptance was complete. It is not necessary that the offeror himself should tell the offeree that the offer has been revoked; the information may be conveyed by a reliable third party.

Case: Dickinson v. Dodds Facts: The defendant, on Wednesday, offered to sell some property to the plaintiff, the offer to be left open until 9.00 a.m., Friday. On Thursday, the plaintiff heard from a Mr Berry that the defendant had sold the property to someone else. Nevertheless the plaintiff wrote a letter of acceptance which was handed to the defendant at 7.00 a.m. on the Friday morning.
Held: The Court of Appeal held that as the plaintiff had heard about the revocation from Berry, who was a reliable source, the offer was no longer available for acceptance. No contract had been formed. 4. Lapse of time An offer which is expressly stated to last for a fixed time cannot be accepted after that time. Even if no time limit is mentioned the offer will not remain open indefinitely. It must be accepted within a reasonable time.

Case: Ramsgate Victoria Hotel Co v. Montefiore Facts: The defendant offered to buy shares in the plaintiffs company in June. The shares were eventually allotted in November. The defendant refused to take them up.
Held: The court held that the defendants offer to take shares had lapsed through an unreasonable delay in acceptance.

What is reasonable time depends on such circumstances as the nature of the subject matter and the means used to communicate the offer.

5. Death

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a. If the offeror dies after having made an offer and the offeree is notified of the death, any acceptance will be invalid. However, where the offeree accepts in ignorance of what has happened, the fate of the offer seems to depend on the nature of the contract. An offer which involves the personal service of the offeror clearly cannot be enforced, but other offers may survive, be accepted and carried out by the deceaseds personal representatives. b. If the offeree dies there can be no acceptance. The offer was made to that person and no one else can accept. 6. Failure of a condition to the offer An offer may be made subject to conditions. Such a condition may be stated expressly by the offeror or implied by the courts from the circumstances. If the condition is not satisfied the offer is not capable of being accepted.

Case: Financings Ltd v. Stimson


Facts: The defendant saw a car at the premises of a dealer on 16 March. He wished to obtain the car on hire purchase. He signed a form provided by the plaintiff finance company which stated that the agreement would be binding only when signed by the finance company. The defendant took possession of the car and paid the first installment on 18 March. However, being dissatisfied with the car, he returned it to the dealer two days later. On the night of 24-25 March the car was stolen from the dealers premises, but was recovered badly damaged. On 25 March the finance company signed the hire purchase contract, unaware of what had happened. The defendant refused to pay the installments and was sued for breach of the hire purchase agreement. Held: The Court of Appeal held that the hire purchase agreement was not binding because the defendants offer to obtain the car on hire purchase was subject to an implied condition that the car would remain in substantially the same state until acceptance. Since the implied condition had not been fulfilled at the time the finance company purported to accept no contract had come into existence. A counter-offer arises where the offeree tries to change the terms of the original offer that has been made rather than directly accepting it. The consequence of making a counter-offer is to bring the original offer to an end so it is no longer possible for that original offer to be accepted at a later time. For example, in Hyde v Wrench (1840), Wrench offered to sell his farm for 1,000. Hyde offered 950, which Wrench rejected. Hyde then informed Wrench that he accepted the original offer. It was held that there was no contract. Hydes counter-offer had effectively ended the original offer and it was no longer open to him to accept it. A counter-offer must not be confused with a request for information. Such a request does not end the offer, which can still be accepted after the new information has been elicited. See Stevenson v McLean (1880), where it was held that a request by the offeree as to the length of time the offeror would give for payment did not terminate the original offer, which he was entitled to accept prior to revocation.

Unilateral offer
A unilateral offer is one where one party promises something in return for some action on the part of another party. In relation to unilateral offers, revocation is not permissible once the offeree has started performing the task requested. Reward cases are examples of such unilateral promises. There is no compulsion placed on the party undertaking the action but it would seem to be unfair if the promisor were entitled to revoke their offer just before the offeree was about to complete their part of the contract. An example of unilateral contracts may be seen in Carlill v Carbolic Smoke Ball Co (1993), where the company promised to pay 100 to anyone who caught infl uenza after using their product. No one was forced to buy the product but once they did and started using it, the company was bound by its promise. In Errington v Errington (1952), a father promised his son and daughter-in-law that he would convey a house to them when they had paid off the outstanding mortgage. After the fathers death, his widow sought to revoke the promise. It was held that the promise could not be withdrawn as long as the mortgage payments continued to be met.

Collateral contract
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A collateral contract arises where one party promises something to another party if that other party enters into a contract with a third party, for example, A promises to give B something if B enters into a contract with C. In such a situation, the second party can enforce the original promise, that is, B can insist on A complying with the original promise. It may be seen from this that, although treated as an exception to the privity rule, a collateral contract conforms with the requirements which relate to the establishment of any other contract: consideration for the original promise being the making of the second contract. An example of the operation of a collateral contract will demonstrate, however, the way in which the courts tend to construct collateral contracts in order to achieve what they see as fair dealing. In Shanklin Pier v Detel Products Ltd (1951), the plaintiffs contracted to have their pier repainted. On the basis of promises as to its quality, the defendants persuaded the pier company to insist that a particular paint produced by Detel be used. The painters used the paint but it proved unsatisfactory. The plaintiffs sued for breach of the original promise as to the suitability of the paint. The defendants countered that the only contract they had entered into was between them and the painters to whom they had sold the paint, and that as the pier company were not a party to that contract they had no right of action against Detel. The pier company were successful. It was held that, in addition to the contract for the sale of paint, there was a second collateral contract between the plaintiffs and the defendants by which the latter guaranteed the suitability of the paint in return for the pier company specifying that the painters used it.

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