Law (9084) | Formation of a valid contract

Law of Contract (9084) Study Notes:
Formation of a Valid Contract (Topic 3.1)

Hello future lawyers! Welcome to the very start of contract law. This chapter is the most foundational part of the whole course. If you understand how a contract is formed, the rest of the course (contents, discharge, remedies) will make much more sense.

We are looking for the 'ingredients' that must all be present for a simple agreement to become a legally binding promise that the court will enforce. Think of this as checking a box for five essential elements: Agreement, Intention, Consideration, and Capacity.

3.1.1 The Nature of a Contract: The Blueprint

What is a Contract?

A contract is essentially a legally enforceable agreement. It doesn't have to be written down (though often it is); it must simply satisfy the legal requirements for formation.

Key Concept: Agreement

The core of any contract is agreement, often called a 'meeting of the minds' (or consensus ad idem). English law assesses this objectively—what would a reasonable person conclude based on what the parties said and did? It's about looking at the outward actions, not what they secretly thought.

Types of Contracts You Need to Know

Contracts are often classified based on how the promises are exchanged:

• Bilateral Contracts: This is the most common type. It involves an exchange of promises between two parties.
  Example: Anya promises to sell her bike to Ben, and Ben promises to pay £50. (A promise for a promise).
• Unilateral Contracts: This is a promise made by one party in exchange for an act (performance) by another party. The party performing the act is never required to promise to perform.
  Example: A poster offering a £100 reward for finding a lost cat. You don't promise to look for the cat; you simply perform the required act (finding the cat) to accept the offer.
  Key Case: Carlill v Carbolic Smoke Ball Co (1893) – This case established that unilateral offers can be made to the world and accepted by conduct.
• Collateral Contracts: This is a secondary contract that sits alongside the main contract. It is usually a promise made by one party to induce the other party to enter into the main contract.
  Example: A property developer promises a bank that they will personally guarantee the loan (collateral promise) if the bank agrees to lend money to the developer’s new company (main contract).

3.1.2 Offer and Acceptance: Building the Agreement

The agreement is typically broken down into two components: a definite Offer, and an unqualified Acceptance of that offer.

1. The Offer

An offer is a clear expression of willingness to contract on specified terms, made with the intention that it is to become binding as soon as it is accepted by the person to whom it is addressed.

A. Offers vs. Invitation to Treat (ITT)

Don't worry if this seems tricky at first! This is the most common confusion point for students. An Offer shows an intention to be bound immediately, whereas an ITT is merely an invitation to negotiate or to make an offer.

Analogy: An ITT is like a restaurant menu—it displays the available items and prices, but you haven't bought anything yet. Your order (saying "I'll take the burger") is the Offer. The waiter accepting the order is the Acceptance.

Key Rules for Invitation to Treat:

• Goods displayed in shops (Shelves/Windows): These are generally ITTs. The customer makes the offer when they take the goods to the till, and the shopkeeper accepts or rejects the offer there.
  Case: Pharmaceutical Society of GB v Boots Cash Chemists (1953)
• Advertisements: Generally ITTs.
  Case: Partridge v Crittenden (1968) (Adverts are usually invitations to trade).
  EXCEPTION: If the advertisement is very specific and promises something in return for a certain act (like a reward), it may be a unilateral offer (e.g., Carlill).
• Auction Sales: The auctioneer's call for bids is an ITT. Each bid is an offer, which the auctioneer accepts by the hammer falling.
• Contracts by Tender: A request for tenders is usually an ITT. The submitted tenders are the offers.

B. Counter Offers vs. Requests for Information

• Counter Offer: This happens when the offeree introduces a new term or changes the terms of the original offer. A counter offer destroys the original offer, meaning it cannot be accepted later.
  Case: Hyde v Wrench (1840) (A £1,000 offer was rejected and destroyed by a £950 counter offer).
• Request for Information: This is merely clarifying the terms of the offer. It does not destroy the original offer, which can still be accepted.
  Case: Stevenson v McLean (1880) (Inquiry about credit terms was held to be a request for information, not a counter offer).

C. Termination of an Offer

An offer can be terminated (killed off) before acceptance by:

1. Revocation (Withdrawal): The offeror can withdraw the offer anytime before acceptance. Revocation must be communicated to the offeree (Byrne v Van Tienhoven).
2. Lapse of Time: The offer automatically ends after a fixed period, or if no period is specified, after a "reasonable time."
3. Rejection: The offeree declines the offer.
4. Counter Offer: As discussed above, this terminates the original offer.
5. Death of one of the parties.

2. Acceptance

Acceptance must be an unqualified and final assent to all the terms of the offer.

A. Rules of Acceptance Communication

1. Acceptance Must be Communicated: Generally, acceptance must be brought to the notice of the offeror. Until the offeror knows the acceptance has happened, there is no contract.
Case: Entores v Miles Far East Corp (1955) (Acceptance via instantaneous communication, like telex, takes effect when received).
Key Rule: Silence cannot amount to acceptance. (Felthouse v Bindley (1862))

2. The Postal Rule (The Big Exception):

Where acceptance is made by post, the rule is that acceptance takes place the moment the letter is posted, even if the letter is delayed, lost, or never reaches the offeror (Adams v Lindsell (1818)).

• Did you know? The postal rule only applies to acceptance, not to offers or revocation.
• When does the Postal Rule NOT apply?
  • If instantaneous methods of communication are used (email, fax, phone).
  • If the offeror specifies a method of acceptance that excludes the post.
  • If it would lead to a "manifest absurdity."

D. Standard Form Contracts (The "Battle of the Forms")

When two businesses negotiate using their own pre-printed contract forms (e.g., one company sends a form with their T&Cs, the other replies with their own conflicting T&Cs), this is known as the battle of the forms.

The general rule is that the contract is concluded on the terms of the party who fired the "last shot"—i.e., the last set of terms sent without objection before performance began (Butler Machine Tool v Ex-Cell-O Corp (1979)).

3.1.3 Intention to Create Legal Relations (ICLR)

Even if two parties have reached a perfect agreement (offer + acceptance), the law requires that they must also have intended their agreement to be legally enforceable. This requirement protects casual promises made between friends and family.

1. Social and Domestic Agreements

The law presumes that parties in a social or domestic relationship (family, friends) DO NOT intend to create legal relations.

• Presumption: NO ICLR.
  Classic Case: Balfour v Balfour (1919) (Husband promised to pay wife an allowance; agreement made while they were happily married. Held: Domestic arrangement, no contract).
• Rebutting the Presumption: This presumption can be overturned if there is clear evidence of serious intent, such as when the parties are separated or hostile.
  Case: Merritt v Merritt (1970) (Agreement between separated spouses regarding the marital home. Held: The relationship had broken down, meaning they were dealing in a serious, commercial way; ICLR was present).

2. Commercial Agreements

In a business or commercial context, the law presumes that the parties DO intend to create legal relations.

• Presumption: ICLR IS present.
  Rebutting the Presumption: It is very difficult to rebut this. The only way is if the agreement explicitly contains words stating that the agreement is binding in honour only (e.g., 'gentlemen’s agreement') (Rose and Frank Co v JR Crompton & Bros Ltd (1925)).

3.1.4 Consideration: The Price of the Promise

Consideration is what one party promises to give or do in return for the promise of the other party. It is the essential element that makes the contract a bargain rather than a mere gift. It must be present in every simple contract.

Definition: Consideration is defined as 'some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility, given, suffered, or undertaken by the other.' (Currie v Misa (1875))

Key Rules Governing Consideration

1. Consideration Must Be Sufficient, But Need Not Be Adequate

The courts will not assess whether the exchange is a fair deal (adequacy). They only ensure that something of value (sufficiency) is provided.
Example: Selling a diamond ring worth £5,000 for only £1 is perfectly valid consideration, provided the £1 is genuinely exchanged.
Case: Chappell & Co Ltd v Nestle Co Ltd (1960) (Chocolate bar wrappers, though worthless in themselves, were held to be part of the consideration).

2. Consideration Must Not Be Past

Consideration must be given at the time of the contract formation or later. If the act was completed before the promise of payment was made, it is past consideration and is not valid.
Case: Re McArdle (1951) (Work was completed on a house before the promise to pay was made. The promise was unenforceable.)

Exception: The Implied Promise (Lampleigh Exception)
If an act is performed at the request of the promisor, and later the promisor promises to pay for it, the consideration will be valid if it was clearly understood all along that the work would be paid for.
Case: Lampleigh v Brathwait (1615)

3. Performance of Existing Duties

Generally, simply doing what you are already legally or contractually bound to do is NOT good consideration.

• Existing Contractual Duty (To the Promisor):
  Rule: Performing an existing duty owed to the same party (promisor) is not consideration for a new promise. (Stilk v Myrick (1809))
  EXCEPTION: If the promisee goes beyond their existing duty, or confers a "practical benefit" on the promisor, this may count.
  Case (Practical Benefit): Williams v Roffey Bros & Nicholls (Contractors) Ltd (1991) (Roffey gained a practical benefit from avoiding a penalty clause by ensuring Williams completed the work on time. This practical benefit was valid consideration.)
• Existing Duty Imposed by Law (Public Duty):
  Rule: Performing a legal duty (e.g., a police officer’s duty) is not consideration.
  EXCEPTION: If the party does something *over and above* their legal duty. (Glasbrook Bros v Glamorgan CC (1925) - police providing a static guard was beyond their duty and was good consideration).

4. Part Payment of Debt (The Rule in Pinnel's Case)

The general rule is that paying only part of a debt is NOT sufficient consideration to discharge the whole debt, even if the creditor agrees to accept the smaller amount. The debtor is only doing what they were already obliged to do.
Case: Foakes v Beer (1884) confirmed this harsh rule.

Exception: If the debtor provides something extra, even trivial, alongside the partial payment (e.g., paying early, or giving a hawk, horse, or robe). This is known as the "something different" rule.

5. Promissory Estoppel (The Equitable Shield)

This is a rule developed in Equity that stops a person from going back on a clear promise, even if the other party didn't provide fresh consideration for that promise.

It acts as a shield, not a sword (you cannot *start* a lawsuit using Estoppel, only use it as a defence).

Key Conditions for Promissory Estoppel (per High Trees case):

1. There must be a clear and unequivocal promise.
2. The promise must be intended to affect the existing legal relationship.
3. The promisee must have acted in reliance on the promise.
4. It must be inequitable (unfair) for the promisor to go back on the promise.
   Case: Central London Property Trust v High Trees House Ltd (1947) (Landlord promised to accept reduced rent during wartime; stopped from demanding back rent for the war period).

3.1.5 Capacity (Minors Only)

The law restricts who can enter into contracts to protect vulnerable individuals. Capacity refers to the legal ability of a party to enter into a contract.

The Rule for Minors (Under 18)

A minor lacks full capacity to contract. The general policy reason is to protect minors from entering into disadvantageous agreements and being exploited.

Most contracts entered into by minors are either voidable (the minor can cancel it) or unenforceable against the minor.

Valid Contracts (Binding on the Minor)

A minor is bound only by contracts that are deemed essential for their well-being, provided they are reasonable:

1. Contracts for Necessaries

The minor is bound to pay a reasonable price for goods that are suitable to their station in life and their actual requirements at the time of delivery (Sale of Goods Act 1979).
Example: Food, clothing, basic lodging, educational items.
Note: Luxury items, even if suitable for a rich minor, may not be classed as necessaries if the minor already has plenty of them.

2. Beneficial Contracts of Service (Education, Training, Employment)

A minor is bound by an employment, apprenticeship, or training contract, provided that the contract, taken as a whole, is for the minor's benefit.
Case: If a contract contains terms that are detrimental, the court must weigh them against the beneficial terms. If the contract is overwhelmingly oppressive, it will be voidable (De Francesco v Barnum (1890)).

Voidable Contracts (Continuing Obligations)

Certain contracts that impose continuing obligations on the minor (such as leases, share purchases, or partnerships) are voidable. This means the contract is binding unless the minor repudiates (cancels) it either before turning 18 or within a reasonable time afterward.

Remedies Against Minors

Because contracts are generally unenforceable against a minor, there are limited remedies available:

• Restitution (Equity): If a minor obtained property by falsely representing their age, the court may compel them to return that property (in equity).
• Minors' Contracts Act 1987, s.3: If a contract is repudiated (cancelled) by the minor, the court has the discretion to order the minor to return any property acquired under the contract if it is just and equitable to do so. This helps prevent unjust enrichment of the minor.
  Example: If the minor bought a phone, cancelled the contract, but still possesses the phone, the court can make them return it.
• Minors' Contracts Act 1987, s.2: Any guarantee given in respect of a minor’s contract is valid. This means the third-party guarantor (often a parent) remains liable even if the minor is not.

Congratulations! You have now mastered the five essential elements required for the Formation of a Valid Contract: Offer, Acceptance, Intention to Create Legal Relations, and Consideration, combined with legal Capacity.