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1BUSINESS LAW 1IBLAW OF CONTRACT2THE L AW OF CONTRACTMAKING T HE AGREEMENTREADINGIntroducton to Business Law, Third Editon, Lucy Jones, Oxford University Press: Chapter 4, Introducton pages 85-86 (nd ed. 82-83), Bilateral and Unilateral Contracts page 91 (nded. 8),The Offer pages 93-107 (nd ed-104),...

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BUSINESS LAW 1 IB113 LAW OF CONTRACT

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THE LAW OF CONTRACT MAKING THE AGREEMENT READING Introducton to Business Law, Third Editon, Lucy Jones, Oxford University Press: Chapternd4, nd Introducton pages 85-86 (2 ed.nd82-83), Bilateral and Unilateral Contracts page 91 (2 nd ed. 8),The Offer pages 93-107 (2 ed.90-104), Acceptance pages 107-114 (2 ed.104112).

INTRODUCTION Contracts are vitally important in the world of business. E.g. DEPARTMENT STORE LTD may enter into the following contracts:  Contracts with suppliers  Contracts with customers (in store and over the internet)  Contracts of employment with employees  Contracts with shareholders of DEPARTMENT STORE LTD  Contracts of insurance  Contracts for services e.g. cleaning, supplying power, decoratng etc  Contracts with building contractors Without the concept of a formal legal contract, businesses would have to rely entrely on trust in their dealings with other partes. Since many business arrangements involve substantal sums of money trust alone would not be suficient protecton.

A contract is defined as an agreement between two or more people or businesses which the law will enforce. Agreements are made all of the time but they are not all contracts. In order to create a contract certain formalites are required:

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1. 2. 3. 4. 5. 6.

There must be an OFFER The ofer must be ACCEPTED Both partes must provide CONSIDERATION Both partes must have an INTENTION TO CREATE LEGAL RELATIONS Both partes must have the CAPACITY to create a contract The PURPOSE of the contract must be valid

In many branches of law the fundamental purpose is to ensure that fairness is achieved. This is not generally relevant in contract law. Instead, the courts are primarily concerned to ensure that the partes keep to their promises – that they do what they have promised to do. Most contracts can be made either orally or in writng, with 2 main exceptons contracts for the sale of land and contracts to obtain credit must be in writng. A number of legal rules exist to determine whether each of the 6 formalites listed above has been satsfied:

1.THE OFFER A contract begins with an ofer made by one party to another. The maker of the ofer (the offeror) intends to be legally bound by the terms of the ofer if it is accepted by the offeree (the person to whom the ofer is made). Most contracts can be made either orally or in writng, with 2 main exceptons - contracts for the sale of land and contracts to obtain credit must be in writng. There are two distnct types of ofer: the traditional offer - which must be accepted to create a valid contract

the unilateral offer – where no formal communication of acceptance is required and the ofer is accepted by carrying out the conditons of the ofer Any ofer can only be accepted however if it is a valid ofer and for the ofer to be valid it must comply with certain legal rules:

a). An offer may be made to one individual, to a group of people or even to the whole world. CARLILL V CARBOLIC SMOKE BALL CO 1892 [page 96(93)] (see previous lecture notes – The English Legal System pg 31)

Held: - The advert was an OFFER made by the Co to the whole world - The ofer was ACCEPTED when the consumer purchased the ball and used it as directed - It was a unilateral contract so it was not necessary for Mrs C to notify the Co that she was accepting their ofer. - The fact that the Co deposited £1,000 in the bank showed that the advert was intended to create legal relations. So the Co was liable to Mrs C.

b). The offer must be communicated to the offeree. If a person does not know that an ofer exists when he acts in a partcular way he cannot later claim that his act consttuted acceptance of the ofer.

BLOOM V AMERICAN SWISS WATCH CO 1915 [page 100( 97)] The claimant gave information to the police which led to the arrest of some jewellery thieves. He later discovered that the defendant had previously advertised a reward for any information leading to the arrest and conviction of the thieves. The claimant applied for the reward but the def refused to pay.

Held: the defendant wasn’t legally obliged to pay the reward as no contract existed between the two partes - the ofer of the reward hadn’t been communicated to the claimant before he gave the informaton to the police. - so his actons couldn’t be classified as acceptance of the ofer

INLAND REVENUE COMMISSIONERS V FRY 2001 The IRC claimed that Fry owed them £113,000. She sent the IRC a cheque for £10,000 together with a leter stating that the cheque was ‘in full and final setlement’ and that if it was presented for payment then this would be acceptance of her offer by the IRC. IRC procedure was for cashiers to bank cheques as they received them and to pass any accompanying correspondence to a caseworker to deal with. On reading the leter, the caseworker immediately telephoned Fry and said that the £10,000 payment could be treated as part-payment or she could have her money back. Fry however insisted that the Revenue had accepted her offer as they had banked her cheque. Held: While an oferee could accept a unilateral ofer by carrying out the terms of the ofer, there had to be knowledge of the ofer when the act was done - As the IRC were ignorant of the ofer when they cashed the cheque, their actons didn’t amount to an acceptance of the ofer.

c). An offer may be terminated before it is accepted in a number of ways: i). It can be revoked by the offeror at any time BEFORE it is accepted. Revocation means that the offer to make a contract is withdrawn. A person making an ofer may wish to withdraw it and as contract law is based firmly on the principle of freedom of contract any party is perfectly free to do so. However, he can only do so BEFORE the ofer has been accepted.

ROUTLEDGE V GRANT 1828 [page 102(99)] The claimant owned a house which the def was interested in leasing. The def put a leter through the claimant’s door offering to lease the house for a specified price and indicating that if the claimant wished to accept then he must do so within 6 weeks. Three weeks later the def informed the claimant that he had found alternative accommodation and was no longer interested in leasing the house, but the following week (and well within the 6 week deadline) he received a leter from the claimant purporting to accept the original offer. The claimant applied to court claiming that a binding contract had been made between the parties.

Held: There was no binding contract between the partes - the def was enttled to withdraw the ofer at any tme before acceptance - once the ofer had been withdrawn it was too late for the claimant to accept it - it didn’t mater that the acceptance was within the 6 week period, as there was no legal obligaton on the Def to keep that arrangement Note: If payment is made in order to keep an ofer open then that promise is binding, but a mere promise to hold an ofer open isn’t binding. In addition, the offeror must COMMUNICATE his decision to withdraw his offer to the other party. Communication of the decision to withdraw can be made by the offeror himself or by any RELIABLE THIRD PARTY

DICKINSON V DODDS 1876 [page 103 (100)] Monday – def offered, by leter, to sell a house to the clm and said he’d keep the offer open until 9.00am Friday Thursday – Berry (a property dealer) informed the clm that the def had sold the house to someone else Friday 7.00am – the clm handed a leter of acceptance to the def The issue before the court was whether the original offer to sell the house had been revoked.

Held: the claimant was unable to ‘accept’ the ofer at 7am Friday morning. - the ofer had already been revoked by then, when the claimant heard, through a reliable source that the house was no longer for sale - the def was under no legal obligaton to keep the ofer open untl Friday morning and could withdraw it at anytme before it was accepted - an ofer can be revoked personally or through a reliable third party.

ii). The offer may be terminated by lapse of time If the offer is stated to last for a specific period of time then it can no longer be accepted after that date has expired. Where no specific time is indicated an ofer which has not been accepted nor revoked will remain valid for a reasonable period of time, after which it will lapse automatcally. What is reasonable will depend upon the circumstances.

RAMSGATE VICTORIA HOTEL CO LTD V MONTEFIORE 1866 [page 104 (101)] Def ofered by leter to buy shares in the Clm’s company in June In November the Clm Co. alloted shares to the Def and wrote to inform him The Def refused to take them up as, having heard nothing, he had assumed that his ofer had been rejected The Clm Co. sued for the purchase price of the shares claiming breach of contract

Held: The length of tme taken by Co. to allot the shares was excessive - the Defs ofer to take uo shares had automatcally elapsed due to the unreasonable tme delay - so the claimanet could not ‘accept’ the def’s ofer in November - as no contract was formed so the def wasn’t in breach of contract

iii). The offer may be terminated by the offeror making a revised offer If the oferor makes an ofer which he subsequently revises before the first ofer is accepted then the first ofer will be terminated by implicaton. (See later notes on Pickford Ltd v Celestica Ltd).

iv). The offer may be terminated if the offeree makes a counter-offer If the oferee changes any of the terms of the ofer then he is efectvely rejectng the ofer and making a new ofer which is called a counter-ofer. This will terminate the original ofer. (See later notes on counter-ofers)

d). An offer must be distinguished from an invitation to treat. An invitaton to treat is an invitaton to others to make ofers to you. An auctoneer, for example, invites customers to make ofers by bidding and he accepts the ofer when he hits his hammer on the table following the highest bid. The following cases illustrate the difference between an ofer and an invitaton to treat. Note: can’t insist on buying wrongly priced item for the wrong price Note: Partridge is name of prosecutng officer, stll a criminal case even though it’s not R

PARTRIDGE V CRITTENDON 1968 [page 96 (93)] The Def placed an advertisement in a local paper which stated ‘Bramble Finches for Sale 10sh each. Tel 7251436’. Bramble Finches were wild birds and it was a criminal ofence to ofer wild birds for sale. The Def was charged with ‘Ofering for sale wild birds, contrary to THE PROTECTION OF BIRDS ACT’. The Court had to decide whether he was guilty of this offence. Held: Not guilty of the ofence charged – advertsing goods privately is not an ofer for sale but an invitaton to treat - the Def should have been charging with ‘selling’ wild birds instead Most adverts that are placed in newspapers, magazines or posted on websites are invitations to treat even if they are headed ‘Offer for Sale.’

FISHER V BELL 1961 [page 96 (93)] The Def owned a corner shop. He placed a flick knife in the shop window with a label atached which stated ‘For Sale’. A flick knife was an ofensive weapon and the Def was charged with ‘Ofering for Sale an ofensive weapon contrary to THE RESTRICTION OF OFFENSIVE WEAPONS ACT’

Held: Not guilty of the ofence charged - displaying goods in a shop window isn’t an ofer for sale, it’s an invitaton to treat.

BRITISH CAR AUCTIONS V WRIGHT 1972 The Def put a car up for sale at a public auction. The car had defective stearing, defective brakes and bald tyres. The Def was charged with ‘Ofering for sale an unroadworthy vehicle contrary to THE ROAD TRAFFIC ACT’. Held: Not guilty og the ofence charged - putting goods on sale at an aucton is not an ofer for sale but an invitaton to Auctions advertised as ‘without reserve’ A common feature of an auction sale is that the seller specifies a minimum price that he is prepared to sell his product for. If no-one bids that price or higher then the offer is not accepted and the product is withdrawn from the sale. However some auctions are described as being ‘without reserve’. This means that the seller will sell his product to the highest bidder whatever the price so in these circumstances puting goods on sale at an auction amounts to AN OFFER not an invitation to treat. If, for some reason, the auctioneer refuses to sell to the highest bidder then, although the bidder cannot sue the seller, he would have a legal claim against the auctioneer as a collateral contract is created between the auctioneer and the bidder. This was confirmed in the recent case of

BARRY V DAVIES t/a HEATHCOTE BALL & CO (COMMERCIAL AUCTIONS) LTD 2000 [page 98 (95)] An auction was advertised as being ‘without reserve’ but the auctioneer withdrew two lots of machinery from the auction after the claimant had bid £200 for each of the machines. No other bids had been placed. The auctioneer then sold the machines privately for £750 each. The claimant sued for breach of contract claiming that as the highest bidder he should have been awarded the 2 machines. Held: the auctoneer is in breach of contract for failing to sell the machines to the bidder and must pay them in damages - what is the bidder’s loss? £14,000 + £14,000 - £400 = £27,600 - As the aucton was advertsed as being without reserve, the auctoneer has entered into a contract with the bidder to sell each machine for £200 - as a result the claimant shoul have been in possession of 2 machines at £14,000 each

Tenders A tender is a competitive offer to provide goods or services. In some areas of business it is common to allocate work by inviting tenders and the request for tenders is classified as an invitation to treat as the person inviting tenders is free to choose whichever tender he prefers. If however, the invitation for tenders specifies that the work will go to the lowest tender then this would be classified as an OFFER which is ACCEPTED by the person who submits the lowest tender. In any event there is a legal obligation to consider all submited tenders and failure to do so will give rise to legal rights.

Blackpool & Fylde Aero Club v Blackpool Council 1990 [page 97(94)] The Club had an exclusive licence to run pleasure flights from the Council’s airport. When the licence was due to expire the Council invited tenders from interested parties to bid for the licence. Seven companies applied, including the Club, but due to an error the Club’s tender was never opened and considered. The licence was offered to another Co and the Club sued for breach of contract.

Held:  Although the council wasn’t under a duty to accept any of the bids,  It was under a duty to CONSIDER all of the bids before reaching a decision  As it hadn’t even looked at the Club’s bid, the council was in breach of contract and damages were awarded to the club

2. ACCEPTANCE OF THE OFFER Acceptance is of vital importance because a contract comes into existence the moment that it is accepted. From that moment onwards all of the dutes, obligatons and liabilites of the contract become binding on the partes. It is therefore vitally important to know exactly when the ofer has been accepted. A number of rules have been developed by the courts to establish when the ofer has been accepted.

a). Acceptance must be absolute and unqualified [The Mirror Image Rule] The oferee cannot purport to accept an ofer while at the same time altering the terms of the ofer for if he does so he is efectvely making a new ofer, known as a counter-ofer. The oferor is then at liberty to accept or reject the counter-ofer.

HYDE v WRENCH 1840 [page 105 (102)] This case occurred before the rule that all contracts to buy or sell land must be made in writing was introduced. The parties entered into the following negotiations: • • • • • •

DEF: writes to CLM offering to sell his house to CLM for £1,000 CLM replies: ‘I’ll give you £950 for it’ DEF: refuses CLM: ‘OK I’ll pay the full price of £1,000’ DEF: ‘Sorry, I’ve changed my mind, the house is no longer for sale’ CLM sues for breach of contract

Held:  When the claimant ofered to pay £950 for the house, he was making a counter offer  He was efectvely rejecting the original offer and making a new offer to pay £950 for the house.  Once an ofer has been rejected it is no longer open to be accepted  So the claimant couldn’t later insist on buying the house for £1,000

In business cases if the oferee wishes to discuss the terms of an ofer he must be aware that if, in doing so, he introduces any new terms then they may be construed as a counter ofer which will terminate the original ofer and leave the original oferor free to negotate elsewhere should he wish. In reality modern commercial contracts are rarely formed with one party simply acceptng the straightforward ofer of another. Commercial enterprises contract in a variety of ways and negotatons are often complex and lengthy, involving considerable compromise. An added complicaton is the use of ‘standard forms’ by businesses. A business will draft a standard set of contract terms which are advantageous to them and will attempt to use those terms when concluding deals. Since this is a common practce followed by many businesses it often means that two contracting partes are each trying to enter into the contract using their own standard terms – this is known as ‘The Battle of the Forms’. If a contractual dispute arises a court is often faced with the difficulty of determining whose standard terms prevail and govern the contract.

BUTLER MACHINE TOOL CO LTD V EX-CELL-O CORPORATION LTD 1979 [page 108(105)] The Clm offered to lease a piece of machinery to the Def for a specified price. The offer was set out on the Clm’s standard terms which included a Price Variation Clause, allowing the Clm to alter the lease price in certain specified circumstances. The Def wrote back accepting the offer but did so on the Def’s own standard terms which did not include the Price Variation Clause. The Clm acknowledged the order and delivered the machine and the contract proceeded well for some time. However, 6 months later the Clm tried to claim a price increase using their Price Variation Clause but the Def refused to pay the increased price. The question before the court was whose terms prevailed?

Held:  The Def didn’t unconditionally accept the Claimant’s offer.  In effect, he was making a counter offer.  This counter offer, which incorporated the Def’s own standard terms, was accepted by the Claimant when he acknowledged the offer.  So the Def’s terms prevailed (no price variation clause) – wasn’t that term in the final contract  The claimant couldn’t therefore demand the additional payment

The counter-offer rule was applied by the courts in the case of

PICKFORDS LTD V CELESTICA LTD 2003 [page 105(102)] th

The defs wished to move their business from Stoke-on-Trent to Shropshire. On 13 September 2001, the claimants faxed an ofer to do the work at a specified price of £890 per load, plus additonal costs such as insurance, VAT etc. During thethnext fortnight the claimants carried out a more detailed analysis of the move and on 27 September they sent a second (revised) ofer to do the work for a fixed price (£98,760) (including insurance, th VAT etc). On 15 October the defs faxed a ‘confirmaton’ statng that the cost of the work should be capped at £100,000. The claimants carried out the work and claimed the fixed sum of £98,760. The defs only paid £33,000 however, which they calculated was the amount due based on the original price + VAT + insurance etc – relatng calculatons to first ofer. The claimants sued for breach of contract. 13 Sept Claimants faxed OFFER (£890 per load) 27 Sept Claimants faxed revised OFFER (fixed price £98,760) 15 Oct DEFs faxed ‘ACCEPTANCE’ statng work capped at £100,000 Held:  The second offer made by the Claimant was inconsistent with the first, so it effectively revoked the first offer.  When the Def c...