B.A BUSINESS STUDIES
BUS361
BUSINESS LAW
Lecture 6
Ms. Natalie Alkiviadou (LLB, LLM)
Definition of Contract
A legally enforceable agreement with specific terms between two or more parties in which there is a
promise to do something in return for a valuable benefit known as consideration.
Essential elements of a contract
The first step in a contract question is always to make sure that a contract actually exists. There are
certain elements that must be present for a legally binding contract to be in place:
An offer: an expression of willingness to contract on a specific set of terms, made by the offeror with
the intention that, if the offer is accepted, he or she will be bound by a contract.
Note: An offer can be revoked at any time before it is accepted, so long as you inform the person you
made the offer to that the offer no longer stands.
Termination of an Offer:
Revocation
- An offer may be revoked at any time before acceptance even if a time limit is specified - Routledge v
Grant
- The revocation must be communicated:
Byrne v Van Tienhoven (1880): The revocation must be communicated - The communication of a
revocation is effective from the time it is received (not from the time it is sent compare acceptance by
post).
Counter Offer/Refusal:
Hyde v Wrench (1840): An offer must be accepted as it stands. Any alteration by the offeree when he
or she purports to accept will be treated as a counter offer. A counter offer acts as a refusal of the
original offer and creates a new offer which the original offeror may accept or reject:
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Lapse of Time
- If an offer is open for a fixed time then it cannot be accepted after that time.
- If not time is stated then the offer lapses after a reasonable time. What is a reasonable time depends
on the circumstances e.g. the subject matter:
Acceptance:
An expression of absolute and unconditional agreement to all the terms set out in the offer. It can be
oral or in writing. The acceptance must exactly mirror the original offer made.
Communication of Acceptance:
A contract offer has only been accepted when the acceptance is brought to the attention of the offeror.
This applies in the case of instantaneous communication, such as by telephone, where the party giving
acceptance will often know at once if a communication is unsuccessful so will have the opportunity of
making a proper communication. The exception to this rule is when the acceptance is posted. The
offer is deemed to be accepted when the offeree posts their acceptance.
The now commonplace use of email raises the question of whether the "postal acceptance rule"
applies to emailed acceptances. Currently there is no statutory law on this point. The contract could be
formed when the email acceptance is read or when the email acceptance is sent. If the parties to a
contract wish to send notices by email then specific provisions should be included which set out when
a notice sent by email is deemed to be received.
As a general rule, silence does not constitute acceptance.
Consideration:
Each party to the contract must receive something of value. The mere fact of agreement alone does
not make a contract. Both parties to the contract must provide consideration if they wish to sue on the
contract. This means that each side must promise to give or do something for the other. (Note: if a
contract is made by deed, then consideration is not needed.)
For example, if one party, A (the promisor) promises to mow the lawn of another, B (the promisee),
A's promise will only be enforceable by B as a contract if B has provided consideration. The
consideration from B might normally take the form of a payment of money but could consist of some
other service to which A might agree. Further, the promise of a money payment or service in the
future is just as sufficient a consideration as payment itself or the actual rendering of the service. Thus
the promisee has to give something in return for the promise of the promisor in order to convert a bare
promise made in his favour into a binding contract.
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Lush J. in Currie v Misa (1875) referred to consideration as consisting of a detriment to the promisee
or a benefit to the promisor:
"... some right, interest, profit or benefit accruing to one party, or some forebearance, detriment, loss
or responsibility given, suffered or undertaken by the other."
The definition given by Sir Frederick Pollock, approved by Lord Dunedin in Dunlop v Selfridge Ltd
[1915], is as follows:
"An act or forebearance of one party, or the promise thereof, is the price for which the promise of the
other is bought, and the promise thus given for value is enforceable."
Types of Consideration:
1. Executory Consideration
Consideration is called "executory" where there is an exchange of promises to perform acts in the
future, eg a bilateral contract for the supply of goods whereby A promises to deliver goods to B at a
future date and B promises to pay on delivery. If A does not deliver them, this is a breach of contract
and B can sue. If A delivers the goods his consideration then becomes executed.
2. Executed Consideration
If one party makes a promise in exchange for an act by the other party, when that act is completed, it
is executed consideration, eg in a unilateral contract where A offers £50 reward for the return of her
lost handbag, if B finds the bag and returns it, B's consideration is executed.
Rules governing Consideration:
1. Consideration must not be past
If one party voluntarily performs an act, and the other party then makes a promise, the consideration
for the promise is said to be in the past. The rule is that past consideration is no consideration, so it is
not valid and cannot be used to sue on a contract. For example, A gives B a lift home in his car. On
arrival B promises to give A £5 towards the petrol. A cannot enforce this promise as his consideration,
giving B a lift, is past.
2. Consideration must be sufficient but need no to be adequate
Providing consideration has some value, the courts will not investigate its adequacy. Where
consideration is recognised by the law as having some value, it is described as "real" or "sufficient"
consideration. The courts will not investigate contracts to see if the parties have got equal value.
3. Consideration must move from the promisee
The person who wishes to enforce the contract must show that they provided consideration; it is not
enough to show that someone else provided consideration. The promisee must show that
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consideration "moved from" (ie, was provided by) him. The consideration does not have to move to
the promisor.
4. An existing public duty will not amount to valid consideration
5. An existing contractual duty will not amount to valid consideration
6. Part payment of a debt is not valid consideration for a promise to forego the balance
Intention to create Legal Relations
The requirement of intention to create legal relations in contract law is aimed at sifting out cases
which are not really appropriate for court action. Not every agreement leads to a binding contract
which can be enforced through the courts. For example you may have an agreement to meet a friend
at a pub. You may have a moral duty to honour that agreement but not a legal duty to do so. This is
because in general the parties to such agreements do not intend to be legally bound and the law seeks
to mirror the party's wishes. In order to determine which agreements are legally binding and have an
intention to create legal relations, the law draws a distinction between social and domestic agreements
and agreements made in a commercial context.
In social and domestic agreements the law raises a presumption that the parties do not intend to create
legal relations:
Jones v Padavatton [1969]
Balfour v Balfour [1919]
This presumption may be rebutted by evidence to the contrary. This evidence may consist of:
A written agreement:
Errington v Errington Woods
Where the parties have separated:
Merritt v Merritt
Or, where there is a third party to the agreement:
Simpkins v Pays
Intention to create legal relations in commercial agreements:
Where an agreement is made in a commercial context, the law raises a presumption that the parties do
intend to create legal relations by the agreement:
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Esso Petroleum v Commissioners of Customs & Excise [1976]
Edwards v Skyways Ltd [1964]
Other significant terminology:
A counter-offer is not the same as an acceptance. A counter-offer extinguishes the original offer: you
can’t make a counter-offer and then decide to accept the original offer!
A request for information is not a counter-offer. If you ask the offeror for information or clarification
about the offer, that doesn’t extinguish the offer; you’re still free to accept it if you want.
It is very important to distinguish an offer from an invitation to treat – that is, an invitation for other
people to submit offers. Some everyday situations which we might think are offers are in fact
invitations to treat:
Goods displayed in a shop window or on a shelf 
When a book is placed in a shop window priced at €8, the bookshop owner has made an
invitation to treat.

When I pick up that book and take it to the till, I make the offer to buy the book for €8.

When the person at the till takes my money, the shop accepts my offer, and a contract comes
into being.
Formation of a Contract:
Essential Terms
In general the following terms should be included in any contract:
1. Parties – The names and addresses of all the contracting parties should be clearly stated.
2. Definitions and Interpretations – If there are any defined terms in the contract this section should
provide specific and clear definitions. For example, a "Business Day" means any day which is not a
Saturday or Sunday or public holiday in England or "Associate" has the meaning given to it in section
435 of the Insolvency Act 1986. Provisions dealing with general matters of interpretation should also
be included where applicable, e.g. "unless the context otherwise requires the singular shall include the
plural and vice versa and the words 'day', 'month' and 'year' shall mean calendar day, calendar month
and calendar year."
3. Payment Provisions – The exact price to be paid for the goods or services provided and the date or
dates for payment to be made should be clearly set out. It may be relevant to provide for adjustments
to the price to be made upon the occurrence of certain events or at certain intervals (e.g. where there is
a change in any relevant exchange rate or to take into account inflation). This section should also note
any agreed rate of interest payable on overdue amounts and the consequences for failure to pay.
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4. A specific description of the goods or services that will be provided under the contract including
the level of service if the contract is for services. This section should also include who is responsible
for supporting and maintaining any products throughout the term of the contract.
5. Term of contract – The length of the contract should be stated and it should also be noted whether
there are any options to continue the contract. For example, 'This agreement will continue for another
year unless otherwise notified to [other party] by 31 January each year'.
6. Timescale – The specific timescale for the project should be noted including any deadlines that
have to be met. This section should include any pre-agreed payments (or liquidated damages) payable
by the supplier if the deadlines are not met.
7. Limitation of liability – This section caps the liability of either party to the contract. For example,
'Neither party shall have any liability to the other party for a claim of loss of profits...'. In an ideal
world both parties would be seeking to have no liability to the other side. However, in a commercial
context this is unlikely to be agreed and so both parties should try and limit their liability during the
negotiation stage to appropriate levels. It is worth noting that there are statutes in force (discussed
below) that forbid exclusion of liability in certain circumstances.
8. Termination provisions – The circumstances under which the parties can terminate the contract
should be stated clearly. The procedure for giving notice to the other party should be in the contract.
For example, 'This agreement can be terminated by either party giving to the other not less than three
months written notice...'.
9. Change of Control – During the course of a contract one party may change the structure of their
company. In these circumstances the other party may wish to terminate the contract, for example if
the first party transfers a controlling interest to a competitor of the other party. The procedure for this
situation should be in the contract.
10. Dispute Resolution – The procedure to be followed if the parties have a dispute should be
included. For example, if there is an option for arbitration or mediation where the issue cannot be
resolved through internal escalation.
11. Confidentiality – Some contracts deal with commercially sensitive information and the parties
are likely to want to keep this information confidential. There should be confidentiality clauses
drafted in the contract which identify the information being protected and the circumstances in which
it can be used or disclosed.
12. Intellectual Property Rights – Many commercial contracts include a clause stating who will own
the intellectual property rights to any products provided under the contracts. This clause should
specifically state who owns such rights. Particular attention should be given to the ownership of
intellectual property rights in relation to products created specifically for or in connection with the
contract.
13. Warranties – It is common for the party providing goods or services under a contract to provide
certain warranties in relation to the delivery of the goods or services. For example, if the contract is
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for provision of a licence the provider should warrant that it has the necessary rights to grant the
licence. Warranties give the other party a contractual right to sue for damages if there is a breach of
the warranty.
14. Indemnity – Indemnity clauses are an express obligation to compensate the indemnified party by
making a money payment for some defined loss or damage. They provide for an immediate right to
compensation, without the need for a lengthy dispute as to the circumstances giving rise to the
specified loss or damage. For this reason careful attention should be given to the agreement of any
indemnities. An example of a typical indemnity is in a software contract under which the supplier
indemnifies the customer against any claims made by a third party that the normal use of the software
is infringing the rights of the third party.
15. Force Majeure – This clause should cover situations where performance of the contract is
impossible through no fault of either party. For example, if there is a natural disaster or civil unrest.
16. Assignation (Scotland) / Assignment (England/Wales) – If there is an option for one party to
transfer their contractual rights and responsibilities to another party this should be set out in the
contract along with the procedure to be followed. If there is no right to assign the contract this should
also be noted.
17. Applicable law – There should be a clause indicating which law governs the contract. For
example, 'This Agreement shall be governed by and construed in accordance with the laws of
England'.
Misrepresentation,
A misrepresentation is a false statement of fact or law which induces the representee to enter a
contract. Where a statement made during the course of negotiations is classed as a representation
rather than a term an action for misrepresentation may be available where the statement turns out to be
untrue. There are three types of misrepresentation: innocent misrepresentation, negligent
misrepresentation and fraudulent misrepresentation.
The effect of a finding of misrepresentation is the contract is voidable ie the contract exists but may
be set aside by the representee. The remedy available depends on the type of misrepresentation, but
generally consists of rescission and or damages. The right to rescind the contract may be lost in some
circumstances. The law relating to misrepresentation is mainly found in common law with the
Misrepresentation Act 1967 providing further details.
Innocent Misrepresentation
An innocent Misrepresentation exists where the representor can demonstrate reasonable grounds for
belief in the truth of the statement. See s.2(1) MA 1967
Negligent Misrepresentation under the Misrepresentation Act 1967
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Under s.2(1) Misrepresentation Act 1967, a negligent misrepresentation is a statement made without
reasonable grounds for belief in its truth. The burden of proof being on the representor to demonstrate
they had reasonable grounds for believing the statement to be true.
This burden of proof is difficult to discharge:
Howard Marine v Ogden [1978]
Fraudulent Misrepresentation:
Lord Herschell defined fraudulent misrepresentation in Derry v Peek as a statement which is made
either:
i) knowing it to be false,
ii) without belief in its truth, or
iii) recklessly, careless as to whether it be true or false
The burden of proof lies on the claimant:
Derry v Peek (1889) 5 T.L.R. 625 (Case summary)
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