In the coming months we will be publishing a series of 'module reviews', providing a brief outline of our first-year modules at Newcastle University to help students get a basic understanding of each topic. In the month of October, we will be looking at contract law, which is one of the seven required modules to obtain a qualifying law degree.
In this first review, we will looking at the basics of contract formation, specifically the 5 requirements for a contract to be legal. Within this there is a strong focus on case law so some cases will also be explained to help describe some more complicated principles, if not explained there will be links to an explanation from another source.
DISCLAIMER: all information in these module reviews are taken from our own notes and research so please do not cite this in your work.
Offer and Acceptance
Offers
The first requirement for a legally binding contract is the basic premise that someone must offer something that someone else accepts. This offer can be either 'unilateral', meaning only one party has an obligation and they are making an offer to the world at large, or 'bilateral', where both parties have an obligation and it is between two specific people/groups. Furthermore, the offer can either be 'expressed', in which there are clear terms to the contract, or 'implied' in which the terms of the contract are largely based on conduct.
Key Case: Carlill v Carbolic Smoke Ball (1893)
The smoke ball company created a product which supposedly protected people from illness and promised to give anyone that got sick from the ball £100, consequently creating a unilateral contract which they were obliged to fulfil, as held by the courts, if anyone complained at getting sick.
Invitations To Treat
Although it may appear someone is making an offer, they may only be making an 'invitation to treat' which does not create a binding contract as they are merely inviting the other party to make an offer. The difference between this and an offer can be seen in Gibson v Manchester City Council (1979) and Storer v Manchester City Council (1974) as in 'Gibson' the council letter simply stated "may be prepared to sell" whereas in 'Storer' the council gave an agreement for sale, indicating the difference between a strict offer and simply an invitation.
Special Circumstances
Sometimes the line differing 'offers' from 'invitations' can become blurred, such as in the cases of adverts and shops. As in the Carlill case above, if an advert suggests an intention to be bound, for example they stated they put money aside to be given out in the circumstance of the advert, this will form a unilateral offer. Contrastingly however, if the advert is merely for sale purposes this is treated as an invitation to treat as it is inviting someone to make an offer to buy them, which is the same principle used for products on shelves in shops (shown in Fisher v Bell (1961)).
Termination of Offers
The only circumstances in which an offer can be terminated are listed below:
If the offer was specified to be available for a certain amount of time
If a reasonable amount of time has passed (case dependent)
If not all terms have been followed
If an offer is rejected it no longer exists
If a counter offer is made (they enter into a negotiation period)
If the offeror dies
If the offeror withdraws the offer before it has been accepted (it cannot be withdrawn if it has been accepted)
Acceptance
The main rule of acceptance is that it must be clear, unambiguous and correspond to the terms offered. It must be communicated, generally through writing or orally, and sometimes through conduct. Importantly however, silence can never constitute acceptance unless it is indicated by the 'offeree' (the person accepting the offer). The key cases for this are Felthouse and Bindley (1862) and Re Selectmove (1995) between which the silence distinction can be made. Generally acceptance is classed as communicated when it is received by the other party, however there are exceptions to this if the terms state differently or if it is the fault of the 'offeror' (person who makes the offer) that they didn't receive the acceptance. This is also different in the case of post, in which acceptance occurs when a letter is posted, not received as shown in Adams v Lindsell (1818), unless the address is wrong or the offer states otherwise.
Intention to Create Legal Relations
The key defining factor between a legally binding contract and a simple agreement or promise is whether there is an intention to create a legal relation. This distinction starts with presumptions in courts: agreements in social and domestic relationships are presumed to be not legally binding whereas those between companies and individuals are presumed to have binding intentions. This is merely a starting point however and may be rebutted in court with relevant evidence.
Key case: Balfour v Balfour (1919)
A husband and wife made an agreement when the husband moved away that he would send payments back to the wife, however they later separated and he stopped paying. The courts found that as they made the agreement when they were a happy couple the agreement wasn't intended to be legally binding and therefore the husband was under no contractual obligation to continue the payments.
Certainty
Legal certainty refers to the clarity of the terms of the contract to ensure both parties are 'certain' of their obligations and these can consequently be enforced. If there are any ambiguous terms in a contract, particularly in the key terms (e.g. in a sale of goods, the quality and sale price of goods) the contract will cease to exist. This can be seen in Loftus v Roberts (1902) as a 'good west end salary' was promised, as opposed to a defined figure, and the courts ruled the contract wasn't binding. In some circumstances, if sufficient detail is given, courts can allow for contracts to exist despite terms not being finalised and they may look to what reasonable commercial parties would intend, as they work on the presumption of liberty.
Capacity
Another significant requirement for a contract to be viewed as legally binding depends on whether the parties were legally able to enter into the contract. Often this isn't a problem as most people can enter a contract, however there are often exceptions for minors, particular organisations and those with a mental incapacity.
Minors
Generally contracts with minors aren't legally binding, however if the subject matter is considered necessary and required then it can be binding. This may sound confusing however it can be seen in the case of Chapple v Cooper (1844) in which a minor's husband passed away and she held a funeral for him but refused to pay the company for it on the basis she was under 21. The courts held that the funeral was necessary and therefore she was bound by the contract to pay. Another exception with minors is they can pull out of contracts however they have to pay back whatever debts they owe, for instance giving back goods that haven't been paid for. Furthermore, in the case of very young children, if they can demonstrate they don't have the capacity to understand what is going on the contract will not be binding.
Particular Organisations
Some different types of organisations are governed by different legislations and consequently have different rules surrounding whether they are bound by a contract. For instance, registered companies are governed by the Companies Act 2006, whereas limited liability partnerships are governed by the Limited Liability Partnerships Act 2000 which provide different capacities for what is allowed to go into a contract.
Mental Incapacity
Under the Mental Capacity Act 2005 S.1(2), a person will be assumed to have capacity to enter into a contract unless it has been specifically established that they do not. This is very dependent on the specific circumstance at the time the contract was formed however as if the person is deemed able to make a decision for him/herself, regardless of any mental illnesses they may have, they will not fall into this exception. For instance, if someone is taking medication that significantly reduces or eliminates the side effects of their mental incapacity, they are likely to be regarded capable of entering into a contract. Overall this is a very complicated defence against a binding contract and each case would be decided based on the individual facts.
Consideration*
Consideration forms the final part of contract formation in England and Wales and necessitates that something must be given in return for something gained to distinguish a contract from a promise which isn't binding. For instance, if someone is buying flowers from someone else, they give money in return for the flowers which acts as the consideration for the contract. Consideration is always a benefit to the promisor or a detriment to the promisee as stated in Currie v Misa (1874) and must have economic value of some form (this can include a promise not sue).
There are two forms of consideration: executory and executed. Executory is when a contract is made before the action is completed, such as when ordering something online as the offer is accepted when a confirmation email is received but consideration doesn't occur until the goods are sent and money is debited from the offeror's account. Executed consideration therefore is the opposite, when something has already been done when the contract is formed such as in unilateral contracts. This must happen after the offer was made however or there is no legal effect.
*England and Wales only, not required in the rest of the UK
Overall, a contract is binding when an offer with certain terms is made by one party and accepted by another who has an intention to create a legal relation and is capable of entering into a contract. Under English common law, there is also a requirement that something must be given in return for what is gained (consideration).
If you have questions surrounding the formation of contracts or need any help then please get in contact with us either through our website or on any of our socials and we'll do our best to help!
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