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Overview of Contract - Part 1 Formation of Contract
Overview of Contract - Part 1 Formation of Contract
A. Introduction
Unlike many other legal terms, contract is a word known to all students
well before they enter law school. But familiarity should not breed
contempt. There will be many instances where the layman’s approach
to contract will lead to an incorrect answer. What we will be striving to
do is to take a rigorous and analytical approach to the subject. This is
not to say that the eventual answer reached by the law of contract will be
out of line with commercial reality; far from it. But the way in which the
law reached the actual result may come as a surprise.
Contract is important in the law for many reasons. Many of the most
important aspects of our lives are governed by contracts. Our job is
governed by an employment contract. We buy a house using a contract
and pay for it with a mortgage contract with our bank and then insure it
with an insurance contract.
But contracts are not just about the big things in our lives. A trip to the
supermarket involves a contract as we buy our groceries. The clothes
we have purchased, the petrol we put in the car, the mobile phone we
use to call friends all involve contracts. It is hard to go through a day
without making another contract.
So contracts are all around us and have a huge impact on our personal
and business lives. But for a lawyer, contracts have another level of
importance. Most of the law we learn is reactive. There is a car
accident, was the driver negligent? The bank was robbed, is the robber
guilty? The law reacts to the facts which are given. This happens in
contract as well. Your client has purchased defective goods and wants
redress.
But the law of contract allows the lawyer to be proactive as well. You
can create a contract which can protect your client into the future. In a
sense, a contract is the one way in which you can create your own laws,
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at least between you and the other party. For example, if you rent a
house, the contract gives you a legal right to live in someone else’s
house. But it might also require that you keep your rubbish bins in a
certain place or require that you cut the grass in the garden. And so you
are subject to a new set of laws. This ability to plan and dictate into the
future is one of the practising lawyer’s greatest weapons.
1. What is a Contract?
(a) agreement
Definition: “Strict Liability” in Contract means that if there is a breach of the terms of the contract,
the innocent party does not need to prove that the contract breaker was at fault or negligent in
order to bring an action.
Definition: “Reliance Interest” – The amount needed to put the innocent party back to the
position prior to making the contract.
Definition: “Expectation Interest” means the amount needed to put the innocent party in
the position as if the contract had been performed as promised.
Reliance and Expectation focus on the position of the defendant and the
loss the defendant has suffered.
Time
A third possibility would be say that a contract breaker should not gain
from breaching the contract. This would take away any benefit which
has been gained by the other party by reason of breaching the contract.
This looks to the gain of the claimant rather than the loss of the
defendant.
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All of these ideas will come into the law of contract at one point or
another. But the dominant interest being protected is the expectation
interest. The reason for this is the planning function of contract. So
long as the expectation interest is protected, you can make your plans
based on your contracts.
Take a simple budget. You need a textbook for a course and a fellow
student offers to sell one to you for £20 whereas the bookshop will
charge you £30. If you have a binding contract with the student and he
fails to deliver as promised, how much do you need to compensate you?
If we look at the loss you have suffered because of the other student, the
loss may well be zero. Had he not offered to sell you the text, you would
still have had to buy it from the bookshop.
But this does not take into account the planning function. Because you
had a contract for £20, you then may have made arrangements based
on a budget where you only had to spend £20. A simple example would
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be that you spent the extra £10 buying a meal at the restaurant. If we
only protected your reliance interest, you could never make future plans
and budget, because you would not know who would perform and who
would not. So planning requires the enforcement of the expectation
interest.
Workers
Landlord
Insurance
Raw
Business Materials
Customers
Take the contract for raw materials. There is a contract for the
necessary raw materials for £1000. The supplier does not deliver. If the
remedy was on a reliance basis, the business would get its money back.
But if it cost more to obtain the materials from another source, the
business plan would be disrupted. But if the business can obtain an
expectation type remedy, it either gets the raw materials or else obtains
amount needed to buy the materials from someone else. So the
business plan can stay in place, once the contract was been made.
There are, of course, real world problems such as insolvency to disrupt
the business plan. But Contract Law does its best to allow for planning.
While the main remedy for breach of contract will be centred on the
expectation interest, the reliance interest will come into play in various
circumstances. The main use of the reliance approach will be when it is
concluded that a contract was created in an unfair manner such as
duress. The argument then is not that the contract has been breached
but rather that the contract should never have been made in the first
place. Protecting the reliance interest is much more appropriate in such
circumstances.
B. Contract Rules:
Types of Rules:
1L. L. Fuller and William R. Perdue, Jr., The Reliance Interest in Contract Damages, 46 Yale Law
Journal (1936) 52-96; can be found at http://www.cisg.law.pace.edu/cisg/biblio/fuller.html
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Contract Law first needs to answer the question, when do you have a
contract? An important aspect of this is that until you have a contract,
you can change your mind and not make the contract. The second
problem is exactly what have you agreed to under the contract. Are all
the terms on the retailer’s website binding parts of the contract with you?
And if they are, how do we interpret those words. What provisions can
we say are so obvious that they go without saying?
Often it will be clear that the parties have agreed and exactly what their
agreement means. But this is not always the case so there need to be
rules to deal with such situations.
Most contract rules are not really rules at law. They are default
positions. If the parties agree, they can set their own default positions.
There are also general doctrines which act as default positions. If the
obligations under a contract become radically different after the
formation of the contract, the contract is said to be frustrated and
Contract Law will specify a result. But it is possible for the parties to
agree to a force majeure clause in their contract which sets out a
different result. The contractual doctrine of frustration is not mandatory
but it gives the answer if the parties have not agreed.
But there are also controls based purely on public policy, either made by
judges or by Parliament. For example, a contract for an illegal purpose
will be unenforceable even though the parties wish it to be enforceable.
Every legal rule must have a purpose. The law is not just an arbitrary
set of rules. Every rule is attempting to achieve a goal. Sometimes
these goals conflict with each other and have to be balanced. But
without an understanding of its purpose, the rule cannot be understood
and cannot be properly applied.
1. Efficiency
There it is. Justice does not come in at number one on this chart. But
what most of Contract Law is about is an attempt to make contract as
efficient as possible. We want it to be easy to make a contract. We
want it to be easy to understand the obligations under a contract so the
parties do not need a judge to tell them what it means. We want the
results of not performing a contract to be clear. We do not want to
enforce agreements where there is no need to enforce them but we want
other agreements to be clearly enforceable so that they can be used for
planning. All of this maximises the efficiency of contracts.
Contracts serve to move goods and services from the people who value
them least to the persons who value them the most. In doing so, the
world becomes a richer place. Take a simple example. Retail Store A
has a television which it purchased from a wholesaler for £300. It has it
on sale in its shop for £500. Customer B is looking to acquire that type
of television. B would be willing to buy that type of television for £600
and so is happy to see it advertised for £500 and contracts to buy the
television.
If we show the value of the world before and after the contract, it is as
follows:
But there is a fly in the ointment. The economists would call these
“transaction costs”. Retail Store A has costs of advertising, premises,
sales staff etc. Each of these subtracts from the value created by the
contract.
Definition: “Transaction costs” means all of the costs necessary to the process of
forming the contract including negotiation costs, advertising etc.
2. Certainty
Hand in hand with efficiency is the idea of certainty. If the cost of having
a lawyer negotiate a contract is high, the cost of having lawyers and
judges tell you what the contract means is enormous. So ideally it
should be simple to know whether you have a contract, what has been
agreed and the consequences of the contract not being performed. For
every contract that goes to court, there should be millions that do not
need a court to resolve.
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This can create a conflict as there is also the desire to reach the correct
result. A certain rule can reach the right result 99 times out of 100 but to
always reach the correct result might require the flexibility that also
makes the rule uncertain.
The starting point of Contract Law has been that the parties must fend
for themselves. If they do not want the contract, then don’t agree to the
contract. The Latin expression caveat emptor, or buyer beware
encapsulates this position. This is the most efficient position to take.
But it has never been that straightforward. Contract Law has a number
of doctrines whose purpose is to ensure that the contract is made in
circumstances that is considered fair. An extreme example is duress.
You cannot bully the weaker party into a contract. But also
misrepresentation will often stop a party from tricking the other and
undue influence will often stop a party from taking advantage of their
relationship with a weaker party.
Contract Law is not a salami. You cannot just slice off a few pieces and
they will taste good. Without an understanding of the whole, the parts
are difficult to understand, let alone comprehend.
1. Is there a Contract?
2. What are the terms of that Contract?
3. What remedy is given if a party does not perform the terms
of their contract?
4. Has the Contract been formed in a way which is acceptable?
5. Have the Obligations under the Contract been discharged?
6. What are the rights of persons who are not parties to the
Contract?
Even with such a simple structure, there is considerable scope for taking
a different order to the subject. So aspects of whether the contract has
been formed in an acceptable manner could be rolled together whether
there is a contract in the first place. But the above order is probably as
good a way of doing it as any.
1. IS THERE A CONTRACT?
A. AGREEMENT
The classical approach in Contract Law is to prove that there has been
an agreement by showing that one party made an offer to the other and
that such offer was accepted. This has typically been a very formalistic
approach and in many cases the analysis will involve a party making a
statement that they call one thing but which is treated in law as
something else. For instance, the law may classify a statement as an
"offer" even though the party who made the statement called it an
"acceptance".
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CASE INSERT:
Lord Diplock
“My Lords,
the houses which they occupied had reached substantially the same
stage as that of Mr. Gibson. The two documents in the same standard
form as those on which he principally relies had passed between each
one of them and the corporation. So their rights too are likely to depend
upon the result of this appeal.
In the Manchester County Court where the action started, the case was
pleaded in the conventional way. The particulars of claim alleged an
offer in writing by the corporation to sell the freehold interest in the
house to Mr. Gibson at a price of £2,180 and an acceptance in writing of
that offer
by Mr. Gibson. The judge (Judge Bailey) followed the same conventional
approach to the question that fell to be decided. He looked to see
whether there was an offer of sale and an acceptance. He held that,
upon their true construction, the documents relied upon as such in the
particulars of
claim did amount to an offer and an acceptance respectively and so
constituted a legally enforceable contract. He ordered specific
performance of an open contract for the sale to Mr. Gibson of the
freehold interest in the house at the price of £2,180.
...
KEY QUOTE: My Lords, there may be certain types of contract, though I think they are
exceptional, which do not fit easily into the normal analysis of a contract as being constituted by
offer and acceptance; but a contract alleged to have been made by an exchange of
correspondence between the parties in which the successive communications other than the first
are in reply to one another, is not one of these. I can see no reason in the instant case for
departing from the conventional approach of looking at the handful of documents relied upon as
constituting the contract sued upon and seeing whether upon their true construction there is to
be found in them a contractual offer by the corporation to sell the house to Mr. Gibson and an
acceptance of that offer by Mr. Gibson. I venture to think that it was by departing from this
conventional approach that the majority of the Court of Appeal was led into error.
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" I refer to your request for details of the cost of buying your Council
house. The Corporation may be prepared to sell the house to you at "
the purchase price of £2,725 less 20% =£2,180 (freehold).
....
" Maximum mortgage the Corporation may grant : £2,177 repayable over
20 years”
....
" If you would like to make formal application to buy your Council house,
please complete the enclosed application form and return it to me as
soon as possible.”
open contract for the sale of land by Mr. Gibson's written acceptance of
it. The
words " may be prepared to sell " are fatal to this; so is the invitation, not,
be it noted, to accept the offer, but " to make formal application to buy "
upon the enclosed application form. It is, to quote Geoffrey Lane L.J., a
letter setting out the financial terms on which it may be the council will be
prepared to consider a sale and purchase in due course.
Mr. Gibson did fill in the application form enclosed with this letter.
My Lords, the application form and letter of 18 March 1971 were relied
on by Mr. Gibson as an unconditional acceptance of the corporation's
offer to sell the house; but this cannot be so unless there was a
contractual offer by the corporation available for acceptance, and, for the
reason already given 1 am of opinion that there was none. It is
unnecessary to consider whether the application form and Mr. Gibson's
letters of 3 and 18 March 1971 are capable of amounting to a
contractual offer by him to purchase the freehold interest in the house at
a price of £2,180 on the terms of an open contract, for there is no
suggestion that, even if it were, it was ever accepted
by the corporation.
Definitions:
The key to unilateral contracts is that the offer anticipates that the offer is
to be accepted by the offeree performing the required act. Therefore,
the completion of performance and the acceptance are simultaneous. It
is also important to notice that the term unilateral contract is indicating
that only the offeror is bound to the contract. The offeree may perform
or not as he or she chooses.
The most typical type of unilateral contract is the reward. "If you find my
dog and return him to me, I will give you £25." Once the dog has been
found and returned it, there is a binding contract and so the promisor
must pay the promised amount. Until full performance, there is no
contract so the offeree is not contractually obliged to find the dog. The
most famous example of a unilateral contract is the case of Carlill v
Carbolic Smoke Ball Co. [1893] 1 QB 256
While advertisements are generally not offers, it is not a rule that they
can never be offers. Carlill is an example on an advertisement which is
an offer. It is important not to take shortcuts when applying legal rules or
the exceptions will cause you to reach the wrong answer.
The second element is that the offer must be communicated. If the offer
is not communicated to the offeree, then no acceptance is possible.
Therefore, if you make an offer but put it in your desk drawer, the fact
that you receive an offer from someone else on exactly the same terms
cannot be viewed as an acceptance.
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Another situation where this can arise is in the case of cross offers
where two identical offers are made by the parties and then cross in the
post. There is no contract as there is no offer until it has been
communicated.
These are examples where you can show subjectively the parties were
thinking the same thing at the same time but Contract Law will say there
is no agreement. This is where the need for certainty takes precedence.
- the courts will in certain circumstances imply terms into a contract. But
they will not make the agreement for the parties. The courts will just
imply terms to make an agreement function.
(i) an acceptance;
(ii) a counter-offer;
(iii) a refusal;
(iv) a request for information.
(i) Acceptance
The acceptance must exactly match the offer. This was demonstrated in
the case of Jones v. Daniel [1894] 2 Ch 332. Daniel had offered to sell
land to Jones for £1,450. Jones purported to accept the offer, but sent a
draft contract containing new but minor and reasonable terms. It was
found that there was no contract for the sale of the land. The effect of
putting forward the additional terms, even though they were minor and
reasonable, was to make the purported acceptance a counter-offer.
to Vienna. It was found that the contract was formed in Vienna as the
acceptance must be actually communicated to be effective.
The general rule is that you cannot require the party to respond or else
they are deemed to have accepted, so pure silence cannot be an
acceptance.
CASE INSERT:
Felthouse v Bindley [1862] EWHC CP J35, 142 ER 1037
WILLES, J.. The horse in question had belonged to the plaintiff's nephew, John
Felthouse. In December, 1860, a conversation took place between the plaintiff and
his nephew relative to the purchase of the horse by the former. The uncle seems to
have thought that he had on that occasion bought the horse for 30l., the nephew that
he had sold it for 30 guineas: but there was clearly no complete bargain at that time.
On the 1st of January, 1861, the nephew writes, "I saw my father on Saturday. He
told me that you considered you had bought the horse for 30l. If so, you are
labouring under a mistake, for 30 guineas was the price I put upon him, and you
never heard me say less. When you said you would have him, I considered you were
aware of the price." To this the uncle replies on the following day, " Your price, I
admit, was 30 guineas. I offered 30l.; never offered more: and you said the horse
was mine. However, as there may be a mistake about him, I will split the difference.
If I hear no more about him, I consider the horse mine at 30l. 15s." It is clear that
there was no complete bargain on the 2nd of January: and it is also clear that the
uncle had no right to impose upon the nephew a sale of his horse for 30l. 15s. unless
he chose to comply with the condition of writing to repudiate the offer. The nephew
might, no doubt, have bound his uncle to the bargain by writing to him: the uncle
might also have retracted his offer at any time before acceptance. It stood an open
offer: and so things remained until the 25th of February, when the nephew was about
to sell his farming stock by auction. The horse in question being catalogued with the
rest of the stock, the auctioneer (the defendant) was told that it was already sold. It is
clear, therefore, that the nephew in his own mind intended his uncle to have the
horse at the price which he (the uncle) had named, 30l. 15s.: but he had not
communicated such his intention to his uncle, or done anything to bind himself.
Nothing, therefore, had been done to vest the property in the horse in the plaintiff
down to the 25th of February, when the horse was sold by the defendant. It appears
to me that, independently of the subsequent letters, there had been no bargain to
pass the property in the horse to the plaintiff, and therefore that he had no right to
complain of the sale.
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A more modern example of how you have to be careful with silence was
the case of Northstar Land Ltd v Brooks [2006] EWCA Civ 756.
Northstar had exercised an option to purchase land which would require
completion of the purchase on 2nd January. Northstar’s solicitors asked
Brooks’ solicitors for deferral of completion to 9th January to make it
easier during the holiday season. Brooks’ solicitors said they would
need to take instruction from their client. Because they did not hear
anything, Northstar’s solicitors assumed that the agreement had been
amended to extend the completion date. The Court of Appeal disagreed
and held that there was no obligation to respond to request for extension
and saying nothing was not an acceptance to request for amendment
said nothing about whether they had accepted Fry’s offer or not. As it
was ambiguous, it could not be treated as an acceptance.
(ii) Counter-offers
CASE INSERT:
The Defendant being desirous of disposing of an estate, offered, by his agent, to sell
it to the Plaintiff for £1200, which the Plaintiff, by his agent, declined; and on the 6 th
of June the Defendant wrote to his agent as follows: "I have to notice the refusal of
your friend to give me £1200 for my farm; I will only make one more offer, which I
shall not alter from; that is, £1000 lodged in the bank until Michaelmas, when the title
shall be made clear of expenses, land tax, etc. I expect a reply by return, as I have
another application." This letter was forwarded to the Plaintiff's agent, who
immediately called on the Defendant; and, previously to accepting the offer, offered
to give the Defendant £950 for the purchase of the farm, but the Defendant wished to
have a few days to consider.
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On the 11th of June the Defendant wrote to the Plaintiff's agent as follows: "I have
written to my tenant for an answer to certain enquiries, and, the instant I receive his
reply, will communicate with you, and endeavour to conclude the prospective
purchase of my farm, I assure you I am not treating with any other person about said
purchase."
The Defendant afterwards promised he would give an answer about accepting the
£950 for the purchase on the 26th of June; and on the 27th he wrote to the Plaintiff's
agent, stating he was sorry he could not feel disposed to accept his offer for his farm
at Luddenham at present.
This letter being received on the 29th of June, the Plaintiff's agent on that day wrote
to the Defendant as follows: "I beg to acknowledge the receipt of your letter of the
27th instant, informing me that you are not disposed to accept the sum of £950 for
your farm at Luddenham. This being the case, I at once agree to the terms on which
you offered the farm, viz., £1000 through your tenant Mr. Kent, by your letter of the
6th instant. I shall be obliged by your instructing your solicitor to communicate with
me without delay, as to the title, for the reason which I mentioned to you."
The Master of the Rolls (Lord Langdale): Under the circumstances in this bill, I think
there exists no valid binding contract between the parties for the purchase of the
property. The Defendant offered to sell it for £1000, and if that had been at once
unconditionally accepted, there would undoubtedly have been a perfect binding
contract; instead of that, the Plaintiff made an offer of his own, to purchase the
property for £950, and he thereby rejected the offer previously made by the
Defendant. I think that it was not afterwards competent for him to revive the proposal
of the Defendant, by tendering an acceptance of it; and that, therefore, there exists
no obligation of any sort between the parties; the demurrer must be allowed.
So the effect of the counter-offer was to reject the original offer. The
original offer could not be revived unless the offeror chose to revive it.
(iii) Rejection
of iron at 40 shillings per ton which offer was open until Monday. The
plaintiff telegraphed on Monday "Would you accept 40s for delivery over
two months or, if not, the longest delivery you would give.” There was
no reply so the plaintiff telegraphed again accepting the offer. It was
found that the plaintiff's first telegraph was merely a request for
information and so did not kill the offer which was therefore still available
to be accepted.
There are various ways in which an offer can come to an end. If the
offer has come to an end before acceptance, then obviously the
acceptance cannot form a contract.
What is a reasonable length of time will depend upon the nature and
subject matter of the offer.
(ii) Death
Generally death of either party will revoke the offer. There are some
exceptions to this where an offer can be enforced against the estate of
the offeror.
(iii) Revocation
The general rule is that an offer can be terminated at any time provided
that the communication of the revocation comes before the
communication of the acceptance. For example, in Offord v. Davies
(1862) 12 CBNS 748, Davies offered to act as guarantor for certain
transaction. He withdrew the offer before the first transaction. He was
entitled to do so as it had not been accepted by the time of his
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B. CONSIDERATION
The most difficult element required to form a contract is the need for
there to be an exchange of consideration in order for the agreement to
be enforceable.
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There are various explanations for why Contract Law requires that there
be consideration in order for there to be a contract. One possibility is
that it is a rule based on efficiency. Only some agreements need to be
enforced for a commercial society to function such as bargains.
Gratuitous promises do not need to be enforced. So it is more efficient
for the courts to only enforce those promises where it is necessary to do
so and the rules of consideration help sort this out.
This overview section will look at the general rules of consideration and
leave amending contracts to the more detailed sections. So care should
be taken with cases which deal with amending contracts.
1. Definition
But the courts, while deciding that there must be some bargain aspect to
the Contract Law, have shied away from the notion that the bargain must
be a good one. Since value tends to be personal (or subjective) to the
individual, it is not for the courts to say that the bargain made has to be a
good one or even a fair one. As long as there is some bargain and both
parties are in agreement, it is not for the courts to second guess the
judgment of the parties.
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But there is some method in the madness. The courts are willing to
intervene in the lives of the parties to enforce their agreements because
such intervention is necessary to the functioning of a complicated
modern society. But the courts do not have to intervene in order to
enforce gifts. Commercial planning does not require this sort of
intervention and so the courts do not intervene in the case of gratuitous
promises. It is an acceptable approach to say that the courts should
refrain from intervening in the lives of individuals unless they have a
compelling reason to do so.
But this is not to say that we will never enforce gifts. There is a law of
gifts and rules as to when a gift will be enforced. This normally requires
a degree of formality such as a deed under seal or the physical delivery
of the gift. The parties can always choose to create an artificial contract
to create an enforceable gift as they could have, just as easily, put a red
sticker on their agreement and made it enforceable in that way.
(a) Benefit/detriment:
The problem is that there may be some situations where the agreement
requires one party to do something that is of no demonstrable benefit to
the promisee and of no demonstrable detriment to the promisor. A party
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agrees to pay £100 if the other gives up smoking for six months. Not
smoking is of no benefit to the promisor and arguably refraining from
smoking is not a detriment to the promisee but rather a benefit. But
clearly there is a bargain being made between the parties.
Definition: Pollock in "Principles of Contract" says consideration is: "An act or forbearance 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."
(i) an act
AND
(b) that this is the price for which the promise of the other is bought.
Definitions:
Executory consideration: the exchange of a promise for a promise (example: a credit sale for goods
to be delivered – neither party has performed what they have promised)
Executed consideration: the consideration has already been performed (example: you pay your fare
on the bus - you have already performed your side of the bargain)
(2) Adequacy
(a) Generally
It has been said that consideration must be sufficient but need not be
adequate. This means that the consideration must meet the legal test of
sufficiency but need not need be a good bargain or adequate. A good
example of this comes from the case of Thomas v Thomas (1842). Mr.
Thomas told his executors that, when he died, his wife should be
allowed to continue to live in his house. On his death, the executors, in
order to fulfil his wishes, promised Mrs. Thomas that she could live in the
house. The question then arose as to whether there was consideration
given by Mrs. Thomas to the estate in order to find a contract between
the estate and Mrs. Thomas. It was found that the mere motive to
satisfy the wishes of the dead man could not be consideration for the
promise. However, as Mrs. Thomas had also agreed in exchange for
the promise to pay £1 p.a. rent and to keep the house in repair, there
was sufficient consideration for the promise.
This shows that motive is not consideration. Even gifts have some kind
of motive but are not contracts.
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The fact that it is a small amount does not stop it from being sufficient
consideration. Once there is sufficient consideration, the court will not
inquire as to whether it was adequate for what was given in return. This
has often led to the use of a peppercorn as being the stated
consideration to support a contract.
Where the benefit/detriment test falls down is where there is not a small
value to that which is being exchanged but no value at all. In these
circumstances, the Pollock test works better to describe the idea of
consideration. An example of this comes from the case of Chappell &
Co v Nestle Co (1960 HL 3-2 majority).
CASE INSERT:
Nestle had offered a record of a dance tune called "Rockin' Shoes" for 1 shilling and 6 pence and 3
chocolate wrappers. They were entitled to sell the record provided that they offered the copyright
owners 6.25% of the selling price. They paid this commission on the basis of the percentage of the
money they received. The copyright owners sought an injunction to restrain Nestle from selling the
records claiming that the wrappers were also part of the consideration.
“MY LORDS,
Section 8 of the Copyright Act, 1956, provides for a royalty of an amount,subject to a minimum,
equal to 61/4 per cent, of the ordinary retail selling price of the record. This necessarily implies, in
my opinion, that a sale to be within the section must not only be retail but one in which there is
no other consideration for the transfer of property in the record but the money price. Parliament
would never have based the royalty on a percentage of a money price if the section was to cover
cases in which part, possibly the main part, of the consideration was to be other than money. This is
in no sense a remarkable conclusion as in most sales money is the sole consideration, It was not
argued that the transaction was not a sale.
The question, then, is whether the three wrappers were part of the consideration or, as Lord Jenkins
held, a condition of making the purchase, like a ticket entitling a member to buy at a co-operative
store.
I think they are part of the consideration. They are so described in the offer. " They ", the wrappers,
" will help you to get smash-hit recordings. They are so described in the record itself—" all you have
35
to do to get each NEW STARS record is to send three wrappers from Nestlé’s 6d. Milk Chocolate
bars, together with postal order for 1/6." This is not conclusive but, however described, they are, in
my view, in law part of the consideration.
KEY QUOTE: It is said that when received the wrappers are of no value to Nestlé’s. This I would have thought
irrelevant. A contracting party can stipulate for what consideration he chooses. A peppercorn does
not cease to be good consideration if it is established that the promisee does not like pepper and will throw
away the corn. As the whole object of selling the record, if it was a sale, was to increase the sales of
chocolate, it seems to me wrong not to treat the stipulated evidence of such sales as
part of the consideration.
Giving up the wrappers was not a detriment to the buyer and was not a
benefit to Nestle as it was established that they immediately threw away
the wrappers when they were received. However, sending in the
wrappers was an act and was part of the price paid to receive the
promise of the record and was therefore part of the consideration.
(b) Settlements
promise was that the wife would not sue him for rectification of the first
agreement. The question of whether there was any prospect of
succeeding was irrelevant, as long as the wife believed she might win.
So on these facts, the wife has agreed not to sue the husband and he
has increased the payment in exchange. The wife's promise is clearly a
forbearance - a promise not to act and is good consideration. It is
irrelevant that at the end of the day the wife would not have succeeded
and therefore her promise was of no detriment to herself or benefit to the
husband. She agreed to forebear and that was the promise that bought
the agreement of the husband to pay more.
PRACTICE POINT: If the action is totally without foundation, then the courts will intervene and
will not enforce the promise to settle. While this is sometimes analyzed as being without
consideration, the better analysis is that the threat of groundless actions in the courts is an
abuse of the process of the courts and that practice is not condoned by the courts.
(c) Forbearance
This case can be contrasted with the case of Combe v. Combe where a
wife tried to argue that her forbearance from suing her husband for
maintenance was consideration for his promise of payments. It was held
that as he had not requested her not to sue, she could not use the
forbearance as consideration i.e. her forbearance was not the price for
which his promise was bought.
possible for the courts to decide that there is not a legally enforceable
agreement.
The example used to demonstrate the need for this third element to
contract is a simple one. A invites B to dinner saying that A will supply
the food if B agrees to provide the wine. B agrees. Could A sue for the
loss of the wine if B fails to show up for dinner? Likely not. The
explanation is that there is agreement, consideration but a failure to
meet the third element of intention to create legal relations.
CASE INSERT
Esso Petroleum Limited v Commisioners of Customs and Excise [1976] WLR 1, [1976] 1 WLR 1, [1975]
UKHL 4
38
Esso gave away one World Cup Coin bearing a picture of a member of the England Squad to each
customer buying 4 gallons of petrol. For tax purposes, it was necessary to determine if the promise
to provide the coin was contractually enforceable or was an unenforceable gift.
“My Lords,
I have had the advantage of reading in draft the speech prepared by my noble and learned friend.
Lord Russell of Killowen. I beg to take advantage of his explanation of the facts that have led to the
appeal and the statutory provisions by which they are to be judged.
I am, however, my Lords, not prepared to accept that the promotion material put out by Esso was
not envisaged by them as creating legal relations between the garage proprietors who adopted it
and the motorists who yielded to its blandishments. In the first place, Esso and the garage
proprietors put the material out for their commercial advantage, and designed it to attract the
custom of motorists. The whole transaction took place in a setting of business relations. In the
second place, it seems to me in general undesirable to allow a commercial promoter to claim that
what he has done is a mere puff, not intended to create legal relations (c.f. Carlill v. Carbolic Smoke
Ball Co. [1893] 1 Q.B. 256). The coins may have been themselves of little intrinsic value ; but all the
evidence suggests that Esso contemplated that they would be attractive to motorists and that there
would be a large commercial advantage to themselves from the scheme, an advantage in which the
garage proprietors also would share. Thirdly, I think that authority supports the view that legal
relations were envisaged. In Rose and Frank Co. v. J. R. Crompton and Bros. Ltd. [1923] 2 K.B. 261,
Scrutton L.J. said at p. 288:
" Now it is quite possible for parties to come to an agreement by accepting a proposal with the
result that the agreement concluded does not give rise to legal relations. The reason of this is that
the parties do not intend that their agreement shall give rise to legal relations. This intention may
be implied from the subject matter of the agreement, but it may also be expressed by the parties. In
social and family relations such an intention is readily implied, while in business matters the
opposite result would ordinarily follow."
" To create a contract there must be a common intention of the parties to enter into legal
obligations, mutually communicated expressly or impliedly. Such an intention ordinarily will be
inferred when parties enter into an agreement which in other respects conforms to the rules of law
as to the formation of contracts. It may be negatived impliedly by the nature of the agreed promise
or promises, as in the case of offer and acceptance of hospitality, or of some agreements made in
the course of family life between members of a family as in Balfour v. Balfour [1919] 2 K.B. 571."
In Edwards v. Skyways Ltd. [1964] 1 W.L.R. 349 Megaw J. quoted these passages at p. 355, and
added:
" In the present case, the subject-matter of the agreement is business relations, not social or
domestic matters. ... I accept the proposition... that in a case of this nature the onus is on the party
who asserts that no legal effect was intended, and the onus is a heavy one."
39
I respectfully agree. And I would venture to add that it begs the question to assert that no motorist
who bought petrol in consequence of seeing the promotion material prominently displayed in the
garage forecourt would be likely to bring an action in the county court if he were refused a coin.
He might be a suburb Hampden who was not prepared to forego what he conceived to be his rights
or to allow a tradesman to go back on his word.
Believing as I do that Esso envisaged a bargain of some sort between the garage proporietor and the
motorist, I must try to analyse the transaction. The analysis that most appeals to me is one of the
ways in which Lord Denning M.R. considered the case ([1975] 1 W.L.R. 406 at p. 409 B-D).
namely a collateral contract of the sort described by Lord Moulton in Heilbut, Symons & Co. v.
Bucckleton [1913] A.C. 30. 47:
"... there may be a contract the consideration for which is the making of some other contract. ' If
you will make such and such a contract ' I will give you one hundred pounds ', is in every sense of the
word a complete legal contract. It is collateral to the main contract. . . ."
So here. The law happily matches the reality. The garage proprietor is saying, "If you will buy four
gallons of my petrol, I will give you one of these coins ". None of the reasons which have caused the
law to consider advertising or display material as an invitation to treat rather than an offer applies
here. What the garage proprietor says by his placards is in fact and in law an offer of consideration
to the motorist to enter into a contract of sale of petrol. Of course, not every motorist will notice the
placard, but nor will every potential offeree of many offers be necessarily conscious that they have
been made. However, the motorist who does notice the placard, and in reliance thereon drives in
and orders the petrol, is in law doing two things at the same time. First, he is accepting the offer of
a coin if he buys four gallons of petrol. Secondly, he is himself offering to buy four gallons of petrol:
this offer is accepted by the filling of his tank.”
He then went on to find the tax was not payable for other reasons and dismissed the appeal.
So it was found that there was such an intention to create legal relations
despite it being unlikely that anyone refused a coin would choose to sue
Esso.
pledge clause". The clause said it recorded the parties’ intentions but
was not a legal agreement. The court would not enforce the general
agency agreement because the honourable pledge clause showed that
there was no intention to create legal relations for this agreement.
However, individual orders placed for goods during the currency of that
agreement were enforceable. Each time an order was given and was
accepted, this formed a separate contract which was enforceable.
The fact that there are words in the agreement which might indicate an
intention not to create legal relations has caused more problems. In
Edwards v. Skyways Ltd. [1964] 1 All ER 494, the plaintiff was employed
as an aircraft pilot. He was given notice by the defendant to terminate
his employment. This gave the pilot an option to either accept the return
of his pension contributions or else to keep his right to a paid-up pension
when he was 50. At a meeting between the defendant and the Pilot's
Association (who were acting for the plaintiff), the defendant stated that
they would make an "Ex gratia" ("as of favour") payment equal to the
contributions that the plaintiff had made if he chose to take the first
option and take the return of his contributions. The plaintiff therefore
took that option but the defendant refused to make the payment which
they had agreed saying that the words "ex gratia" showed that they were
not legally bound. The court disagreed and said there was an
enforceable agreement. The words “ex gratia” were not sufficient in
these circumstances to rebut the heavy burden of the presumption of
intention to create legal relations.
This can be contrasted with the case of Kleinwort Benson Ltd v Malaysia
Mining Co (1989 CA). Malaysia Mining had a subsidiary called Metals.
Kleinwort Benson was prepared to lend money to Metals, if the parent
company, MM, guaranteed the loan. MM refused to guarantee but sent
"letters of comfort" saying "It is our policy to ensure that the business of
Metals is at all times in a position to meet its liabilities to you under the
loan facility arrangements." The letters of comfort also stated that MM
would continue to be involved at the same level in Metals until the loans
had been paid off. The loan was made but at a slightly higher rate of
interest than had been anticipated if there had been a guarantee.
Metals went broke and the plaintiff sought to recover from the parent
company based on the letter of comfort.
41
It was found that the statement relating to Metals was only a statement
of intention and did not contractually bind the parent company in a way
that they could not change this intention. The court did find that parts of
the letter of comfort did have contractual force but that none of the
enforceable provisions gave the plaintiff a remedy.
But agreement made after the couple have separated will have the
requisite intention to create legal relations such as in Merritt v Merritt
[1970] 2 All ER 760 and Pettitt v. Pettitt [1970] AC 777.
intended to be enforceable.
CASE INSERT:
Jones v Padavatton [1969] 2 All ER 616, [1969] 1 WLR 328, [1969] WLR 328, [1968] EWCA Civ 4
A mother lived in Trinidad. Her daughter worked at Indian Embassy in Washington. The mother
offered to give her daughter an allowance if she agreed to go to England to study for the Bar. Later
the mother bought a house which the daughter could use to live in and to rent parts to generate an
income. After a number of exam failures the mother fell out with her daughter and sued to evict her
from the house.
“At any rate, two questions emerged for argument: (1) Were the arrangements (such as they were)
intended to produce legally binding agreements, or were they simply family arrangements epending
for their fulfilment on good faith and trust, and not legally enforceable by legal proceedings ? (2)
were the arrangements made so obscure and uncertain that, though intended to be legally binding,
a court could not enforce them ?
Mr Dillon argued strenuously for the view that the parties intended to create legally binding
contracts. Be relied upon the old case of Shadwell v. Shadwell, (1960) 9 Common Bench New Series,
159, (142 English Reports, 62), and Parker v. Clark, 1960 1 Weekly Law Reports, 236.
Mr Sparrow argued on the mother's behalf for the contrary view that there were no binding
obligations, and that if there were they were too uncertain for the court to enforce. His stand-by was
Balfour v. Balfour, (1919 8 King's Bench Division, 571). The principles involved are very well discussed
in Cheshire & Fifoot on Contract (6th edition) at pages 94-96.
Of course, there is no difficulty, if they so intend, in members of families entering into legally binding
contracts in regard to family affairs. A competent equity draftsman would, if properly instructed,
have no difficulty in drafting such a contract. But there is possibly in family affairs a presumption
against such an intention (which, of course, can be rebutted). I would refer to Lord Justice Atkin's
magnificent exposition of the situation in regard to such arrangements in Balfour v. Balfour at
pp.578-580.
There is no doubt that this case is a most difficult one, but I have reached a conclusion that the
present case is one of those family arrangements which depend on the good faith of the promises
which are made and are not intended to be rigid, binding agreements. Balfour v. Balfour was a ease
of husband and wife, but there is no doubt that the same principles apply to dealings between other
relations, such as father and son and daughter and mother This, indeed, seems to me a compelling
case. Mrs Jones and her daughter seem to have been on very good terms before 1967. The mother
was arranging for a career for her daughter which she hoped would lead to success. This involved a
visit to England in conditions which could not be wholly foreseen. What was required was an
arrangement which was to be financed by the mother, and was auoh as would be adaptable to
circumstances, as it in fact was The operation about the house was, in my view, not a completely
fresh arrangement, but an adaptation of the mother's financial assistance to her daughter due to the
situation which was found to exist in England. It was not a stiff contractual operation any more than
the original arrangement.
43
In the result, of course, on this view, the daughter cannot resist hep mother's rights as the owner of
the house to the possession of which the mother is entitled.
What the position is as regards the counterclaim is another matter. It may be that, at least in
honesty, the daughter should be reimbursed for the expenditure which she had incurred.
(ii) Mutuality