Contract Law Revision Notes - Formation of Contract PDF

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Contract Law Revision Notes – Formation of a ContractFormation of a Contract Definition: A contract may be defined as an agreement giving a rise to obligations which are enforced or recognised by law Contractual obligations are not imposed by the law, but undertaken by the parties • Agreement is ass...

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Contract Law Rev Revision ision Notes – Form Formation ation of a Co Contract ntract Formation of a Contract • Definition: A contract may be defined as an agreement giving a rise to obligations which are enforced or recognised by law • Contractual obligations are not imposed by the law, but undertaken by the parties

• Agreement is assessed objectively (E.g. How the agreement is formed, what will a reasonable person think about the agreement) ➢ Gibson v Manchester City Council

Gibson v Manchester City Council [1979] 1 WLR 294 Formation of Contract Facts: The defendant City Council had adopted a policy of selling council houses to its tenants. The claimant was a tenant of such a council house, who had applied for details of the house he was renting and applicable mortgage terms, using the printed form designated and supplied by the defendant for this purpose. In February 1971, the city treasurer responded to this application stating that ‘The [council] may be prepared to sell you the house at the purchase price…’, and providing details of the mortgage. This letter also stated that it did not amount to a ‘firm offer’ of a mortgage, and invited the claimant to make a formal application using an enclosed form. In March 1971, the claimant returned the completed form to the defendant. Following local elections in May of the same year, control of the Council passed from the Conservatives to Labour. The new Labour Council policy was that council houses would not be sold under the previous Conservative policy unless a legally binding contract was already in place. The defendant refused to sell to the claimant, who brought an action against them in breach of contract. This action was successful at first instance and the Court of Appeal, upon which the defendant appealed to the House of Lords. Issue: The issue on appeal was whether the defendant’s letter of February 1971 was properly construed as an offer or as an invitation to treat. Held: The House of Lords held that there was no concluded contract and the defendant was not legally bound to sell the property, as the council’s letter did not state the price and was not an offer but an invitation to treat. ➢ Storer Manchester City Council

Storer v Manchester City Council [1974] 1 WLR 1403 Formation of Contract Facts: The defendant City Council refused to proceed with the sale of a council property to the claimant under an arrangement which had been agreed with its predecessor. All of the terms of the contract had been agreed but for the date on which the lease was to end and the mortgage payments were to Contract Law Revision Notes – Formation of a Contract

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begin, which had been left blank on the form returned to the defendant by the claimant. The claimant alleged that the contract was completely concluded and sought specific performance of the agreement. Issue: The question was whether the contract had been concluded, despite the fact that the date on which the claimant became a purchaser rather than a tenant was still to be determined. Held: The Court of Appeal held that the contract was complete despite the absence of this term. In distinguishing between an offer and an invitation to treat, it is necessary to look. not to the subjective intentions or beliefs of the parties, but rather on what their words and conduct might reasonably and objectively be understood to mean. In this case the defendant had made clear by their conduct and language that they intended to be bound upon the acceptance of the offer despite the fact that some terms remained to be agreed. In the words of Lord Denning MR: “In contracts, you do not look into the actual intent in a man’s mind. You look at what he said and did. A contract is formed when there is, to all outward appearances, a contract” (p. 827). ➢ Smith v Hughes

Smith v Hughes (1870) LR 6 QB 597 Contract – Mistake – Breach of Contract – buyer beware – Caveat Emptor Facts: The complainant, Mr Smith, was a farmer and the defendant, Mr Hughes, was a racehorse trainer. Mr Smith brought Mr Hughes a sample of his oats and as a consequence of what he had seen, Mr Hughes ordered 40-50 quarters of oats from Mr Smith, at a price of 34 shillings per quarter. To begin with, 16 quarters of oats were sent to Mr Hughes. When they arrived, he said that the oats were not what he had thought they were. As he was a racehorse trainer and he needed old oats, as this was what the horses had for their diet. The oats that were sent to Mr Hughes were green oats, the same type as the initial sample. Mr Hughes refused to pay Mr Smith for the delivery and remaining order. Issues: Mr Smith argued that Mr Hughes had breached the contract as he had not paid for the delivery and future oats to be delivered. The issue in this case was whether the contract could be avoided by Mr Hughes, as Mr Smith had not delivered the type of oats he had expected. Held: It was held that there was a contract between Mr Smith and Mr Hughes and that it would not be avoided. There had been no discussion between the parties regarding the delivery of old oats. An objective test revealed that a reasonable person would expect the sale of good quality oats in a similar contract, since there was no express discussion of old oats. The sample gave him the chance to inspect the oats and this was an example of caveat emptor (buyer beware).

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• Be aware that Subjectivity still has a residual (minor) role to play with regard to the mind of the promisee:➢ The Hannah Blumenthal

The Hannah Blumenthal [1983] 1 AC 854 Arbitration agreement not frustrated by delay caused by the parties Facts: A contract was made for the sale of a ship. A dispute arose between the parties regarding alleged defects. The dispute was referred to arbitration but the requirement for a third arbitrator under the contract was not fulfilled and the arbitration was delayed. The sellers raised proceedings for a declaration that the arbitration agreement was discharged by repudiation, consensual rescission or frustration. Issue: At first instance, it was held that there had been no agreement to abandon the arbitration but it had been discharged by frustration. The Court of Appeal agreed that the agreement had been frustrated because, due to the long period of time that had passed, it would be impossible for there to be a fair trial of the buyer’s claim. The buyer further appealed to the House of Lords. Held: The House of Lords allowed the appeal. The arbitration agreement was not frustrated. Both parties were in default of the agreement by not applying to the arbitral tribunal for direction to prevent delay. Such a default excluded the operation of the doctrine of frustration. Lord Diplock held that the virtual impossibility of a satisfactory trial following the delay was incapable of being classified as a frustrating event; even If it had come about without the default by either party. Furthermore, the sellers had not proven abandonment of the arbitration as they had not shown that they believed that the buyers had intended to abandon the action and there were actions by them which were inconsistent with such a belief. ➢ The Leonidas D → Where the offeree knows, or ought reasonably to know, that the offeror did not intend to make the offer or did not intend it in those terms, there will be no contract if the offeree seeks to accept.

Allied Marine Ltd v Vale do Rio Doce SA (The Leonidas D): CA 1985 One party sought to construct an agreement to abandon an ongoing, if stalled, arbitration out of mere silence. Held: Robert Goff LJ said that silence will not normally amount to acceptance of an offer since acceptance cannot be inferred from silence alone ‘save in the most exceptional circumstances’, and ‘We should add that we see the same difficulty in invoking the principle of equitable estoppel in such circumstances. It is well settled that that principle requires that one party should have made an unequivocal representation that he does not intend to enforce his strict legal rights against the other; yet it is difficult to imagine how silence and inaction can be anything but equivocal.’

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➢ Hartog v Colin and Shields → The offeror offered by mistake, hare skins at a price per pound in weight rather than per skin. This meant the offer was at about 1/3 of the normal price. Held that the purchaser must have realised the mistake and could not therefore accept the offer at that price.

Hartog v Colin and Shields [1939] 3 All ER 566 Contact – Void – Mistake – Acceptance – unilateral mistake Facts: The defendants, Colin and Shields, were hide merchants that were based in London. The complainant, Hartog, was a furrier from Belgium. The defendants entered into an oral agreement with the complainant to sell him 30,000 Argentinian hare skins and this would be at a price of 10d per skin. However, the defendant made a mistake on their written agreement that said they would sell the complainant 30,000 hare skins at 10d per pound. This would mean that the price difference was one third cheaper for the complainant than had previously been agreed. Hartog accepted this offer, but the defendants refused to fulfil contract. Issues: The complainant argued he suffered a loss of profit and claimed damages when the defendant did not honour the contract. The defendant argued that Hartog would have known that this was a mistake to the price of hare skin and that he had fraudulently accepted the offer. The issue in this case was whether the contract would be rescinded for the mistake to the price of hare skin. Held: It was held that there was no contract between the complainant and the defendant. Any contract would be void by the mistake of the hare skin price; the complainant would have known that it was normally sold per piece and not by pound. The court said that there is a duty to correct a mistake that is known to not be the real intention of the person making it. You cannot simply take advantage and ‘snap up’ the offer. ➢ Chwee Kin Keong v Digilandmall.com → internet site where in error the goods were priced so absurdly low that the buyer ought reasonably to have known that the seller was making a mistake.

Chwee Kin Keong v Digilandmall.com Pte Ltd [2005] 1 SLR(R) 502 Contract – unilateral mistake – Internet Contract – Consensus ad Idem – Meeting of the Minds – Acceptance – Offer – Void – Error Facts: The defendant, Digilandmall.com Pte Ltd, were an online IT company that sold related software and hardware from Singapore. They were selling a HP laser printer and an employee accidently made a mistake as to the price of the printer on their website. It was listed at the price of $66, when it was advertised on the official HP website for $3,854. This was not noticed by the company until over 4,000 printers were ordered. The complainants had ordered over 100 printers each at this price. When the defendants discovered this mistake on their website, they sent an email to the complainants to say they would not be fulfilling this order. Issues:

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The complainants argued that they were not aware that this price was a mistake and wanted the binding contract to be fulfilled. The defendants argued this pricing was a unilateral mistake and that the complainants took advantage of this. The issue in this case was whether the pricing was a mistake and if the contract would be fulfilled. Held: It was held that the contract between the parties was void. This pricing was a mistake, which was fundamental to the contract and the complainants must have known that this ‘absurdly low’ pricing was an error by the defendants. In this case, there was no consensus ad idem or meeting of the minds between the parties, which meant that there could be no binding contract between them.

• Distinguish between a unilateral contract (a promise for an act) and a bilateral contract (a promise for a promise). (Poole textbook) • Nature of the unilateral contract is a promise in return for an act ➢ Great Northern Railway v Whitham → “if you will go to York, I will give you £100” Great Northern Railway Company v Witham [1873] LR 9 CP 16 Court of Common Pleas (England) – 6 November 1873 Facts: Great Northern advertised for tenders for the supply of iron for a period of twelve months. Witham tendered to supply the iron required for the period at certain fixed prices and “in such quantities as the company’s store-keeper might order from time to time”. Great Northern accepted the tender but eventually Witham stopped supplying the iron. Great Northern sued for breach of contract. Witham defended the claim and alleged that the agreement was not an enforceable contract as the was no consideration by Great Northern. Issues: The court had to decide the obligation of a party who submits a tender guaranteeing their ability to provide goods and services at fixed prices when this tender is accepted by the party inviting tenders. Finding: There was a sufficient consideration for Witham’s promise to supply the iron, despite Great Northern not being obliged to order any iron. The Court did say that if Witham had given notice to Great Northern that the fixed prices would no longer apply then it was possible that the obligation to supply the iron at the fixed prices would end, even if the period of the supply arrangement had not ended. Brett J said: “So, if one says to another, ‘If you will give me an order for iron, or other goods, I will supply it at a given price;’ if the order is given, there is a complete contract which the seller is bound to perform. There is in such a case ample consideration for the promise. So, here, the company having given the defendant an order at his request, his acceptance of the order would bind them.” – page 19 of [1873] LR 9 CP 16 Impact: A person who submits tenders which outline their ability to provide goods and services at set prices must be able to do so when called upon should their tender be accepted. The Courts deem the contract to be created at the time the tender is accepted.

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However, performance of the contract will not take place until the tender is called upon to perform and supply the goods or services. The tenderer however, may be allowed to give reasonable notice to withdraw their set prices, and thus withdraw their offer. ➢ Carlill v Carbolic Smoke Ball Co → The carrying out of the act is both the acceptance and the consideration, e.g. use of the smoke ball as directed.

Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 Emphasised the significance of offer and acceptance in contract law; distinguishes between offers and invitations to treat. Facts: The defendant, the Carbolic Smoke Ball Company, 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. The advert further stated that the company had demonstrated its sincerity by placing £1000 in a bank account to act as the reward. The claimant, Mrs Carlill, thus purchased some smoke balls and, despite proper use, contracted influenza and attempted to claim the £100 reward from the defendants. The defendants contended that they could not be bound by the advert as it was an invitation to treat rather than an offer on the grounds that the advert was: mere ‘puff’ and lacking true intent; that an offer could not be made ‘to the world’; the claimant had not technically provided acceptance; the wording of the advert was insufficiently precise; and, that there was no consideration, as necessary for the creation of a binding contract in law. Issue: Whether the advert in question constituted an offer or an invitation to treat. Held: The Court of Appeal found for the claimant, determining that the advert amounted to the offer for a unilateral contract by the defendants. In completing the conditions stipulated by the advert, Mrs Carlill provided acceptance. The Court further found that: the advert’s own claim to sincerity negated the company’s assertion of lacking intent; an offer could indeed be made to the world; wording need only be reasonably clear to imply terms rather than entirely clear; and consideration was identifiable in the use of the balls. • The requirement of offer and acceptance to form a contract. Question on the agreement that the court is looking offer by the offeror with a corresponding acceptance from the offeree • Gibson v Manchester City Council, HL(Mentioned before) – Lord Diplock, except in exceptional cases, whether a contract exists will be determined by offer and acceptance. • Therefore Lord Denning’s suggested approach in the CA in Gibson v MCC and also Butler Machine Tool v Ex-Cell-O, of looking at the circumstances as a whole, has not been supported; although • Trentham Ltd v Archital Luxfer Ltd – LJ Steyn accepted that offer and acceptance was the approach in the vast majority of cases, but added that it is not necessarily so and there would be cases where this analysis would not apply, e.g. an agreement based on the conduct of the parties. Contract Law Revision Notes – Formation of a Contract

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Offer/Invitation to Treat • Offer – An expression of willingness to be bound by specified contract terms, acceptance of which leads to a legally binding agreement (Treitel) • Offer must be distinguished from an Invitation to Treat – which is merely an invitation to make offers ➢ Gibson v Manchester City Council (Mentioned before) – “may be prepared to sell the house to you”, did not amount to an offer. It was merely an invitation to make an offer. ➢ Contrast with Storer v Manchester City Council (Mentioned before) – “sign the agreement and return it to me, I will send you the agreement signed on behalf of the [Council] in exchange”, was held to be an offer. **1. Objective willingness to be bounded (Willingness); 2. Objective specific certain terms (Sufficient certainty of terms)

Advertisements ➢ Partridge v Crittenden → Parker LCJ highlighted that “unless they come from manufacturers, there is business sense in their being construed as invitations to treat and not offers for sale…” the case related to a magazine advert which read “Bramblefinch cocks…25s each”.

Partridge v Crittenden [1968] 2 All ER 421 Formation of Contract – Statutory Interpretation Facts: The defendant advertised for sale a number of Bramblefinch cocks and hens, stating that the price was to be 25 shillings for each. Under the Protection of Birds Act 1954, it was unlawful to offer for sale any wild live bird. The Royal Society for the Prevention of Cruelty to Animals (RSPCA) brought a prosecution against the defendant under the Act. At his trial, the defendant was found guilty of the offence by the magistrates; he appealed this conviction. Issue: The issue on appeal was whether the advertisement was properly construed as an offer of sale (in which case the defendant was guilty) or an invitation to treat (in which case he had committed no offence). A further issue was whether it was appropriate to adopt a different interpretation of the phrase ‘offer for sale’ in the context of criminal law than was accepted in the context of contract law. Held: The court held that the advertisement was not an offer but an invitation to treat, and as such the defendant was not guilty. The court also rejected the suggestion that the court should adopt a stricter interpretation of the phrase ‘offer for sale’ in the criminal context compared to the contractual context, reasoning that to do so would usurp the legislative function. The legislature had chosen the phrase ‘offer for sale’ based on its existing understanding, and to alter this understanding under the pretext of ‘interpretation’ was not the proper role of the court. Contract Law Revision Notes – Formation of a Contract

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➢ Grainger v Gough → Transmission of a wine pricelist is not an offer