Contract Law (Part 2)
Essential Elements of a Contract.
OFFER, ACCEPTANCE, CONSIDERATION AND THE INTENTION TO CREATE LEGAL RELATIONS
OFFER
An offer is an expression of willingness to contract on specified terms, made with the intention that
it shall become binding as soon as it is accepted by the person to whom it is addressed.
Offer Distinguished from Invitation to Treat
When parties negotiate with a view to making a contract, many preliminary communications may
pass between them before a definite offer is made. One party may simply respond to a request for
information. That party is then said to make an "invitation to treat": he does not make an offer but,
invites the other party to do so. The distinction between an offer and an invitation to treat is often
hard to draw as it depends on the elusive criterion of intention. But there are certain stereotyped
situations in which the distinction is determined, at least prima facie, by rules of law.
Auction sales
The original advertising of the auction is just an invitation to treat.
When a bid is made, an offer is made. When the hammer falls, the winning ‘offer’ has been
accepted. The seller now has a legally binding contract with the winning bidder (so long as there is
no reserve price that has not been reached)
N.B: an offer can be revoked at any time before it is accepted, so long the person the offer is made
to, is informed that the offer no more stands.
At an auction sale, the general rule is that the offer is made by the bidder and accepted by the
auctioneer when he signifies his acceptance in the customary manner, e.g. by fall of the hammer.
Before acceptance the bidder may withdraw his bid and the auctioneer may withdraw the goods. It
seems, moreover, that 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a higher bid is made and withdrawn the auctioneer can no longer accept the next highest.
Display of goods for sale
The general rule is that a display of price-marked goods in a shop window is not an offer to sell
goods but is an invitation to a customer to make an offer to buy. Similarly, the display of goods on
the shelves of a self-service shop is merely an invitation to treat; the customer makes an offer to buy
when he carries the goods to the cash desk, where the shopkeeper may accept or reject it.
Fisher v. Bell
‘A shopkeeper displayed a flick knife in his shop window…..’
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Lecture Notes on Contract Law
Prepared by Miss Varuna
September 2010
It was held that a display of goods in a shop window with a price ticket attached was merely an
invitation to treat and not an offer for sale.
Advertisements and other displays
Advertisements of rewards for the return of lost or stolen property, or for information leading to the
arrest or conviction of the perpetrator of a crime, are invariably treated as offers: they are clearly
made with the intention to be bound as no further bargaining is expected to result from them. The
same is true of other advertisements of unilateral contracts.
Carlill v. Carbolic Smoke Ball Co.
An advertisement promising to pay f100 to any use of a carbolic smokeball who caught influenza was
held to be an offer. The intention to be bound was made particularly clear in this case by the
statement “that the advertisers had deposited £1000 in their bank shewing (sic) our sincerity”.
Tenders
The traditional doctrine of offer and invitation to treat generally places tenders in the category of
invitation to treat.
A party is merely being invited to make a bid which constitutes the offer and the party issuing the
invitation is merely seeking offers.
Typically, the party issuing the invitation for tenders is not bound to accept any submitted tender;
however, recent Commonwealth decisions indicate that the issue is not as straightforward as this
and there are circumstances under which a submitted tender must be considered by the party
inviting the tenders as the submission of the tender is deemed to be an acceptance of a tender
process and the person inviting (offering) the tenders is contractually bound to consider the bid.
Moreover, a person inviting tenders may not be permitted to accept a noncompliant bid and a
person whose bid was rejected in favor of non-compliant bid may take action against the person
inviting the tenders who accepted the non-compliant bid.
ACCEPTANCE
In order to be valid an acceptance must precisely conform to the terms required in the offer if a
contract is to result. The general rule of contract law is that a contract is made in the location where
the offeror receives notification of the offeree’s acceptance.
By Post
The postal rule was laid down in Adams v Lindsell. The general rule for acceptance by post is that it
takes effect when posted rather than when it is actually communicated.
Also, use of the postal service must be reasonable.
Effects of the postal rule
A postal acceptance takes place when it is accepted, even if it gets lost and never reaches the
offeror. Furthermore, where an acceptance is posted after the offeror posts a revocation of the
Oxford College of London
Lecture Notes on Contract Law
Prepared by Miss Varuna
September 2010
offer, but before that revocation has been received, the acceptance will be binding (posted
acceptances take effect on posting, posted revocations on communications)
It is usually considered that an acceptance by post takes place at the time of the posting of the letter
of acceptance. This is the exception to the general rule that a contract is made in the location where
the offeror receives notification of the offeree’s acceptance.
Henthorn v Fraser [1892] 2 Ch 27
By Telex/Telegram
Telex and telegrams are considered as forms of instantaneous communications and they are treated
in accordance with the general rule of acceptance which is that a contract is formed at the place
where acceptance is communicated to the offeror.
Where an acceptance is made by an instant mode of communication, such as telephone or telex, the
postal rule does not apply. In such cases, the acceptor will usually know at once that they have not
managed to communicate with the offeror, and will need to try again.
In Entores v Miles Far East Corporation, it was held that telex is an instant means of communication
and the parties were in the same position as if they had negotiated in each other’s presence or over
the telephone, so the postal rule did not apply and an acceptance did not take effect until it had
been received by the plaintiffs.
Email
An offer by email with an acceptance by email, problems of proof aside, is clearly binding and just as
clearly in writing, even though no handwritten signature is in evidence.
Facsimile Transmission
An acceptance by facsimile transmission is treated in accordance with the general rule of place of
acceptance, in that the contract is formed at the place where acceptance is communicated to the
offeror.
Acceptance by Conduct
An offer may be accepted by conduct, e.g. by supplying or despatching goods in response to an offer
to buy.
Conduct will, however, only have this effect if the offeree did the act with the intention (ascertained
in accordance with the objective principle) of accepting the offer.
The battle of forms
The growing use of printed contract forms by one or both parties has given rise to problems with
regard to the rule that the acceptance must correspond to the offer.
Oxford College of London
Lecture Notes on Contract Law
Prepared by Miss Varuna
September 2010
Each party may purport to contract with reference to his own set of standard terms and these terms
may conflict.
This case gave some support to the so-called "last shot" doctrine: i.e. to the view that, where
conflicting communications are exchanged, each is a counter offer so that if a contract results at all
(e.g. from an acceptance by conduct) it must be on the terms of the final document in the series
leading to the conclusion of the contract.
Silence
The prima facie rule holds that silence does not constitute acceptance but in contract law, silence is
not normally construed as acceptance.
In Felthouse v. Bindley the plaintiff offered to buy his nephew's horse by a letter in which he said: "If I
hear no more about him, I shall consider the horse mine." Later, the horse was, by mistake, included
in an auction sale of the nephew's property. The plaintiff sued the auctioneer for damages for the
conversion of the horse. It was held that, at the time of the auction, there was no contract for the
sale of the horse to the plaintiff because "The uncle had no right to impose upon the nephew the sale
of his horse . . . unless he chose to comply with the condition of writing to repudiate the offer . . .”
In this case, the contract was being set up to show that the horse now belonged to the uncle so that
the uncle could sue a third party (the auctioneer) for the conversion of the horse. The rationale for
the rule is that the offeror should not be able to impose on the offeree the burden of rejecting an
offer.
Prolonged silence can also be treated as acceptance by conduct. (Rust v Abbey Life Assurance Co
Ltd).
COUNTER-OFFERS
When a person makes an offer and the person to whom the offer is made responds by proposing
changes to the terms of the offer, the law considers the response of that party not as an acceptance
but rather a counter-offer. Therefore, a counter – offer not only terminates an offer but can also be
converted into a contract by acceptance.
CONSIDERATION
Consideration is an essential part of most contracts; it is in fact what each party brings to the
contract. The long established rule is that consideration need not to be adequate but I tmust be
sufficient.
In English law, a promise is not, as a general rule, binding as a contract unless it is either made in a
deed or supported by some "consideration." The purpose of the requirement of consideration is to
put some legal limits on the enforceability of agreements even where they are intended to be legally
binding and are not vitiated by some factor such as mistake, misrepresentation, duress or illegality.
The issue of consideration usually arises in relation to one party‘s promise when that party has
refused to perform it.
Oxford College of London
Lecture Notes on Contract Law
Prepared by Miss Varuna
September 2010
The basic feature of that doctrine is the idea of reciprocity: "something of value in the eye of the
law" must be given for a promise in order to make it enforceable as a contract. An informal
gratuitous promise therefore does not amount to a contract.
The doctrine of consideration has, however, also struck at many promises which were not
"gratuitous" in any ordinary or commercial sense. These applications of the doctrine were brought
within its scope by stressing that consideration had to be not merely "something of value," but
"something of value in the eye of the law". The law in certain cases refused to recognise the "value"
of acts or promises which might well be regarded as valuable by a layman.
In Currie v Misa ,it was noted that ‘ a valuable consideration in the sense of the law, may consist
either in 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. ,
Benefit and detriment
The traditional definition of consideration concentrates on the requirement that "something of
value" must be given and accordingly states that consideration is either some detriment to the
promisee (the person providing the consideration) or some benefit to the promisor (the person for
whose promise it is being given ). Usually, this detriment and benefit are merely the same thing
looked at from different points of view.
Under the traditional definition it is sufficient if there is either a detriment to the promisee or a
benefit to the promisor. Thus detriment to the promisee suffices even though the promisor does not
benefit. Simply put, it can be described as the price for which the promise is bought.
Consideration need not be Adequate
Under the doctrine of consideration, a promise has no contractual force unless some value has been
given for it. But the courts do not, in general, ask whether adequate value has been given, or
whether the agreement is harsh or one- sided. It is rather that they should not interfere with the
bargain actually made by the parties.
Gaumont-British Pictures Corp. v. Alexander [19360 2 ALL ER 1686
Nominal Consideration
The rule that consideration need not be adequate makes it possible to evade the doctrine of
consideration, i.e. to make a gratuitous promise binding by means of a nominal consideration, e.g.
for the promise of valuable property, or a peppercorn for a substantial sum of money. Such cases are
merely extreme applications of the rule that the courts will not judge the adequacy of consideration.
CONSIDERATION MUST BE OF SOME VALUE
Must be of Economic Value
An act, forbearance or promise will only amount to consideration if the law recognises that it has
some economic value. It may have such value even though the value cannot be precisely quantified.
But natural affection of itself is not a sufficient consideration.
Oxford College of London
Lecture Notes on Contract Law
Prepared by Miss Varuna
September 2010
Intention to Create Legal Relations
An agreement is not binding as a contract if it was made without any intention of creating legal
relations. The establishment of the intention to create legal relations is a question of fact and may
be established by evidence.An agreement, though supported by consideration, is not binding as a
contract if it was made without any intention of creating legal relations.
Even a statement that is perfectly precise may nevertheless not be binding if the court considers that
it was not seriously meant.
Letters of Intent or of Comfort
An issue of contractual intention may arise where parties in the course of negotiations exchange
"letters of intent" or where one party gives to the other a “letter of comfort." The terms of such
documents may negative contractual intention.
The fact that the parties envisage that the letter is to be superseded by a later, more formal,
contractual document does not, of itself, prevent it from taking effect as a contract.
Revocation of offers
The prima facie rule is that revocation must be communicated and there is no ‘postal rule’
exception to this.
Key Issues
Unilateral and Bilateral Contracts
Obligation is important in differentiating between a unilateral and a bilateral contract. If only one
party assumes an obligation, i.e., promises to do anything it refers to a unilateral contract whereas in
a bilateral contract, both parties assume obligations and make promises.
The well-known case of Carlill v Carbolic Smoke Ball Company illustrates this point well. The Smoke
Ball Co promised £100 to anyone who bought and used their product and who nonetheless caught,
so clearly they made a promise and the court enforced their obligation to pay Mrs Carlill. She,
however, did not make any promises, she merely bought and used the smoke ball and caught flu.
Therefore, the contract is unilateral, only the company was under an obligation. Another important
significance of this case is that an advertisement was treated as an offer even though
advertisements are often construed as invitations to treat.
Exemption Clauses.
They are clauses which may be in the interest of consumers on occasions for a supplier to exclude a
certain type of liability if that enables the service to be provided at a lower charge , particularly, if
the consumer is already likely to be insured against that sort of loss.
Sometimes a party to a contract will include a term designed to exclude or limit his liability in the
event of a breach of contract. Such a term might read “X plc. is not liable for any property damage
however caused”, or “X plc. will only accept liability up to the amount of £50”.
Oxford College of London
Lecture Notes on Contract Law
Prepared by Miss Varuna
September 2010
This might be a problem if one party is, for example, a big company, and the other is an ordinary
customer: the parties have unequal bargaining power, so the stronger party might be able to take
advantage of the weaker party. The ordinary customer is in no position to start negotiating with the
sales assistant at the till! The law does its best to level the playing field here. If a party is trying to
rely on an exemption clause, they have to show that the other party specifically agreed to it at the
time the agreement was reached.
The Unfair Contract Terms Act 1977 includes some main provisions of which are:
Liability for personal injury or death cannot be excluded as it results from a party’s negligence.
Exemption clauses have to be reasonable. If the court thinks the term in question is unreasonable,
that term will be void. Liability cannot be excluded for defective goods supplied to a consumer (that
is, a non-business user).
Moreover, contracts cannot be altered unilaterally, i.e. without the agreement of the other party.
The term ‘reasonable’ as defined in the Unfair Contract Terms Act must be “a fair and reasonable
one to be included having regard to the circumstances which were, or ought reasonably to have
been, known to or in the contemplation of the parties when the contract was made”.
The Unfair Terms in Consumer Contracts Regulations 1999 protects consumers from unfair standard
terms in contracts. If the courts think a term is unfair, then it is not binding on the consumer.
In this context, an “unfair” term is essentially one that puts undue burdens on the consumer, or
seeks to reduce his or her statutory rights. The Regulations put it like this:
“A contractual term which has not been individually negotiated shall be regarded as unfair if,
contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and
obligations arising under the contract, to the detriment of the consumer.”
How long does an offer last?
Where an offeror states that an offer will remain open for a specific length of time, it lapses when
that time is up though it can be revoked before that.
Other factors which lead to the lapse of an offer are failure of a precondition i.e that conditions no
more exist for the offer to exist. E.g. you get a conditional offer for a seat at Cambridge University
and you fail to get the excellent results.
In short, an offer may only be accepted while the offer is still open. In the absence of an acceptance,
an offer may be terminated in any of the following ways.




Rejection
Counter – Offer
Lapse of Time
Revocation by the Offeror
Oxford College of London
Lecture Notes on Contract Law
Prepared by Miss Varuna
September 2010
 Failure of a condition to which the offer was subject to
 Death of one of the parties ( Offeror or offeree)
Reading List:
1. Contract Law by Catherine Elliott and Frances Quinn.( latest edition)
2. BTEC Higher National in Business (Edexcel), Pages 121 to 157. ( Common Law : Contract )
3. Contract Law (Palgrave Macmillan Law Masters) by Ewan McKendrick.
Oxford College of London
Lecture Notes on Contract Law
Prepared by Miss Varuna
September 2010