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Overview of the Law 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.

In the commercial sector, contracts are even more important. A

company will have contracts for employees, leases, insurance contracts,
raw material contracts, energy contracts. It will also have sales
contracts. The profitability of the company will be closely centred on the
question of whether its sales contracts generate more money than it
spends with its expenses contracts.

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?

The simplest definition of a contract is that it is a legally enforceable

agreement. We can break this down into two parts:

(a) agreement

A fundamental aspect of contract is the idea of agreement. There must

be a very good reason before the law imposes obligations on people.
For many areas of law, it involves some sort of fault or wrong. So we
impose obligations on you if you intentionally punch someone in the
nose or carelessly drive your car. In contract, the justification for the
intervention is that you agreed to do something and then failed to honour
your agreement. There is no requirement to show that it was your fault
that you failed to honour the agreement. You are in breach of contract
whether you were at fault or not. This is typically referred to as strict
liability in contract and makes it generally easier to sue in contract than
in tort. So if you buy a can of peas at the supermarket and they are
mouldy when you open the tin, there is no need to inquire as to the fault
of the supermarket. The store is in breach of contract because they
promised you good quality peas and failed to honour their agreement.
And the converse is true. If you wish to avoid contractual liability, just do
not agree.

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.

The concept of agreement will require some study and how we

determine if the parties have agreed will be an important part of Contract
Law.

(b) legally enforceable

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Agreement is not enough to make a contract. There are some

agreements that are not legally enforceable. Agreements between
family and friends are typically not contracts. Also gifts are not contracts
but have their own set of legal rules.

But a contract is legally enforceable. So what does that mean? The

answer is that if you fail to honour your contract, the law will respond
with a remedy. The non-breaching (or “innocent”) party could, if they
wish, go to court and have the court make an order arising from the
breach. So the agreement between the parties can lead to a right to
invoke the power of the state to enforce that agreement.

Definition: “Innocent Party” – the party who is not in breach of contract.

But it is not enough to know there is a remedy. It is vital to know the

nature of the remedy and how it will be calculated. Both parties need to
know not only what they can sue for if the other party fails to perform,
but equally they need to know what they will be sued for if they fail to
perform. A party may choose not to perform as the remedy against it for
non-performance is more acceptable than the trouble and cost it will take
to perform.

2. Possible Interests that Might be Protected by Contract Law

An important aspect of determining the remedy for the breach of a

contract is to first know what the remedy is trying to accomplish. There
are various approaches that could be taken,

(a) Reliance Interest:

One reaction we might take to a breach of contract is to try to put the

innocent party back into the position they were in before they entered
into the contract. This would be the same approach as taken in tort.
The innocent party is compensated for the damage caused by entering
into the contract in the first place.

Definition: “Reliance Interest” – The amount needed to put the innocent party back to the
position prior to making the contract.

Example: A agrees to drive B to Oxford for a fee of £50 payable in

advance. B then refuses to perform the contract. The reliance approach
would give A the right to sue B for the £50 back.
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(b) Expectation Interest:

Another possibility is to put the innocent party in the same position as

they would have been in had the contract been performed as promised.

Example: As above. The expectation interest approach would allow A

to sue B for the cost of a replacement ride to Oxford. This might cost
£50, but it easily could cost more or less.

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.

Reliance is backwards looking. It puts the defendant back where he

would have been had the contract never been made. Expectation is
forward looking. It puts the defendant where he would have been had
the contract actually been performed.

Pre-Contractual ACTUAL Expected

Position POSITION Position

Time

(c) Unjust enrichment interest:

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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Example: As above. B is able to make £1000 during the time he would

have spent driving A to Oxford. The unjust enrichment approach would
allow A to sue for the £1000.

(d) Moral Interest:

A final possibility would be to deter all breaches of contract. This would

punish the contract breaker by such means as fines, imprisonment or
punitive damages.

Example: As above. A would be able to sue B for punitive damages in

an amount that would deter persons in B’s position from breaching the
contract.

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.

3. Planning Function of Contract Law

A key use of contracts in society is to allow for people to plan their

affairs. This is the way in which contract facilitates planning - because
your expectation interest is protected, you can make your plans based
on the contract.

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.

This concept can be expanded into the business world. A typical

business will have certain expenses and certain incomes. For example:

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.

This type of planning is usual for most households. The monthly

paycheque is balanced against the monthly outgoing contracts such as
mortgages, telephone, TV, insurance, etc. What is left over can be used
to plan for other expenses and savings.
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Protecting the expectation interest also allows for greater reliance on

contracts you have made. An example used by Fuller and Perdue1 is
the case of a private doctor making appointments. A patient makes a
contract for an hour appointment at 10AM on a Monday for a fee of
£300. The patient fails to show up. If the expectation interest is
protected, the doctor can charge the patient the £300. If the doctor had
to show a reliance loss, he would have to show that he lost the
opportunity to book someone else in at 10AM because of the first
patient. That would require the receptionist to ask every prospective
patient for a list of all possible times they might be able to attend, just in
case someone fails to show up. So the protection of the expectation
interest makes it more efficient to rely on the contract.

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:

It is fair enough to consider that Contract Law has a number of rules

which guide the courts to reach decisions about contracts. But it is a
mistake to think that Contract Law is just a long list of rules that merely
need to be blindly applied. Every rule in Contract Law will have a
reason. And almost every rule in Contract Law will have exceptions
because of the reason for the rule. As well, there will always be
situations where it is difficult to know how to apply the rule. A rule is
useless unless you know how to properly apply it. And the proper
application of the rule will always be argued with reference to the reason
for the rule.

Types of Rules:

Broadly speaking, there are three main types of Contract 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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(a) Agreement Finding Rules – What exactly was the agreement

between the parties.
(b) Default Rules – What result do we use if the parties have not agreed
(c) Mandatory Rules – What do we impose regardless of what the
parties have agreed.

(a) Agreement Finding Rules

The starting point to analysing a contractual problem is to determine if

there is a contract in the first place. You are interested in buying a
mobile phone. You see one in a newspaper advertisement. You then
follow this up by checking specifications on the manufacturer’s website.
You then send in an e-mail to order one from a retailer. The retailer
sends an e-mail to confirm your order. The retailer charges your credit
card. The phone is delivered. You use the phone for the first time. You
pay your monthly credit card account including the charge for the phone.

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.

(b) Default Rules

Most contract rules are not really rules at law. They are default
positions. If the parties agree, they can set their own default positions.

A good example of default positions is the standard word processor.

When you start your word processor, it will give you certain default
positions such as the type and size of font or the paper size and
margins. If you are happy with these, you do not need to do anything.
But if they do not work for the document you are trying to create, you are
free to change them. The software company creating the word
processor will try to choose the most convenient default positions so that
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they usually do not need to be changed and so the word processor is

easier to use.

The same process applies to default rules in Contract Law. To have a

binding contract, you need to show an agreement but you do not need to
have agreement on every possible detail. These default positions can
take various forms. The most direct form is the implied term. In certain
circumstances, Contract Law will say that the contract contains terms,
even though they have not been agreed. One of the most well known of
these is the implied term in a sale of goods contract that the goods will
be of satisfactory quality. A supermarket selling milk does not have to
expressly promise that the milk will not be sour. By making the contract
to sell the milk, the default position is that it will be promised that the milk
is not sour. But if the store wants to sell sour milk, it can do so. It just
has to agree with the customer to change the default position.

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.

(c) Mandatory Rules

The concept of allowing the parties to reach their own agreement is

fundamental to Contract Law. But it is not absolute. Some aspects of
Contract Law cannot be overturned by the agreement of the parties.
The obvious case is a doctrine which questions the validity of the
agreement which was reached. A simple example is duress. A
threatens to kill B’s spouse if B does not enter into a contract with A.
The controls on duress will apply even though the agreement contains a
term whereby B agrees that A has the right to make the threat.

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.

Mandatory rules have a much greater importance to the contract drafter

as they will be cases where the contract is not enforceable in
accordance with its terms.
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C. What are the Goals of Contract Law?

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.

The order of importance of these purposes can be debated. But the

importance of understanding these purposes cannot be debated. It is
essential to the understanding of Contract Law.

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:

Value to A Value to B Total Value

Before £300 £500 £800
Contract (money in
pocket)
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After £500 £600 £1100

Contract
Net Gain £300

So the world is richer by £300 because of the contract. Every contract is

the same. One party values what the other has more than what he is
giving up.

Is that overly simplistic? Yes it is but in general this is a basic truth of

contracts. They generally create wealth.

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.

Arguably the biggest transaction cost is the cost of lawyers. If every

contract had to involve a lawyer, the cost would be prohibitive. Even the
cost of putting every contract into writing would be extreme. The cost of
negotiating each term is a cost.

So Contract Law must above all else strive to be efficient and to

minimize the transaction costs. So while contract is the best weapon the
practising lawyer has to work with, the vast majority of contracts are
made without lawyers. Very few contracts have to be in writing. And the
default rules of contract mean that parties can quickly and efficiently
make their contracts without needing to have extensive negotiations.

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.

3. Protecting the Weaker Party

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.

There are also a growing number of types of contract which contain

rules to protect the weaker party; Consumer Law and Employment Law
being prime examples. Both build on the foundation of Contract Law but
then add their own rules as the general law of contract does not do
enough to protect the weaker party.

D. Overview of the Law of Contract

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.

Because of this, the starting point will be to do a quick overview of the

entire subject. This will involve a lot of simplification and
oversimplification. The overview will not give the proper level of
understanding and will skip over a lot of the problem areas. But
hopefully, the overview will give a structure of Contract Law that allows
the subject as a whole to fit together and so when the details are being
studied, it can be done with reference to the subject as a whole.

Contract Law can be broken down as follows:

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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?

As a contract is a legally enforceable agreement, it is not surprising that

finding a contract requires two things. The first is that there is an
agreement. The second is that the agreement is one the law chooses to
make enforceable. This second component breaks down into two parts.
First is the need for a bargain or the requirement in law of consideration.
Second, the agreement must have the requisite intention to create legal
relations.

A. AGREEMENT

1. OFFER & ACCEPTANCE

(1) The Need for Offer and Acceptance

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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There has been some criticism of this formalism as in many cases it is

highly artificial. But this formal approach has been supported in the
House of Lords in the case of Gibson v Manchester C.C. [1979] 1 WLR
294.

CASE INSERT:

Gibson v The Council Of The City Of Manchester [1979] WLR 294,

[1979] UKHL 6, [1979] 1 WLR 294

Lord Diplock

“My Lords,

This is an action for specific performance of what is claimed to be a

contract for the sale of land. The only question in the appeal is of a kind
with which the courts are very familiar. It is whether in the
correspondence between the parties there can be found a legally
enforceable contract for the
sale by the Manchester Corporation to Mr. Gibson of the dwelling-house
of which he was the occupying tenant at the relevant time in 1971. That
question is one that, in my view, can be answered by applying to the
particular documents relied upon by Mr. Gibson as constituting the
contract, well-settled, indeed elementary, principles of English law. This
being so, it
is not the sort of case in which leave would have been likely to be
granted to appeal to your Lordships' House, but for the fact that it is a
test case.

The two documents principally relied upon by Mr. Gibson were in

standard forms used by the corporation in dealing with applications from
tenants of council houses to purchase the freehold of their homes under
a scheme that had been adopted by the council during a period when it
was under Conservative Party control. Political control passed to the
Labour Party as a result
of the local government elections held in May 1971. The scheme was
then abandoned. It was decided that no more council houses should be
sold to any tenant with whom a legally binding contract of sale had not
already been concluded. At the date of this decision there was a
considerable number of tenants, running into hundreds, whose
applications to purchase
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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.

My Lords, the contract of which specific performance is sought to be

enforced is a contract for the sale of land. It is thus subject to the
requirements as to writing laid down in section 40 of the Law of Property
Act 1925; but nothing turns on this since the only contract that is alleged
is
one made by letters and accompanying documents passing between the
parties. The outcome of this appeal depends upon their true
construction.

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.

The corporation's appeal against this judgment was dismissed by a

majority of the Court of Appeal (Lord Denning M.R. and Ormrod L.J.);
Geoffrey Lane L.J. dissented. Lord Denning M.R. rejected what I have
described as the conventional approach of looking to see whether upon
the true construction of the documents relied upon there can be
discerned an offer and acceptance. One ought, he said, to " look at the
correspondence " as a whole and at the conduct of the parties and see
therefrom whether the parties have come to an agreement on
everything that was material."

This approach, which in referring to the conduct of the parties where

there is no allegation of part performance appears to me to overlook the
provisions of section 40 of the Law of Property Act 1925, led him
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however to the conclusion that there should be imported into the

agreement to be specifically performed additional conditions, against
use except as a private dwelling-
house and against advertising and a restriction not to sell or lease the
property for five years. These are conditions which would not be implied
by law in an open contract for the sale of land. The reason for so varying
the county court judge's order was that clauses in these terms were
included
in the standard form of " Agreement for Sale of a Council House " which,
as appears from the earlier case of Storer v. Manchester City Council
[1974] 1 WLR 1403, was entered into by the Corporation and council
tenants whose applications to purchase the freehold of their council
house reached the stage at which contracts were exchanged. There
was, however, no reference to this standard form of agreement in any of
the documents said to constitute the contract relied on in the instant
case, nor was there any evidence that Mr. Gibson had knowledge of its
terms at or before the time that the alleged contract was concluded.

...

Lord Justice Geoffrey Lane in a dissenting judgment, which for my part I

find convincing, adopted the conventional approach. He found that upon
the true construction of the documents relied upon as constituting the
contract, there never was an offer by the corporation acceptance of
which
by Mr. Gibson was capable in law of constituting a legally enforceable
contract. It was but a step in the negotiations for a contract which, owing
to the change in the political complexion of the council, never reached
fruition.

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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The genesis of the relevant negotiations in the instant case is a form

filled in by Mr. Gibson on 28 November 1970 inquiring what would be the
price of buying his council house at 174 Charlestown Road, Blackley,
and expressing his interest in obtaining a mortgage from the corporation.
...As a result of that inquiry Mr. Gibson's house was inspected by the
corporation's valuer and on 10 February 1971 the letter which is relied
upon by Mr. Gibson as the offer by the corporation to sell the house to
him was sent from the City Treasurer's Department. It was in the
following
terms:

" Dear Sir,

Purchase of Council House

Your Reference Number 82463 03

" 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”

" Annual fire insurance premium : £2.45

" Monthly Repayment charge calculated by (i) flat rate repayment
method: £19.02”

....

" 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.”

" Yours faithfully,

" (Sgd) H. R. PAGE

" CITY TREASURER
" Mr. Robert Gibson "

My Lords, the words I have italicised seem to me, as they seemed to

Geoffrey Lane L.J., to make it quite impossible to construe this letter as
a contractual offer capable of being converted into a legally enforceable
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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.

I therefore feel compelled to allow the appeal. “

The other Law Lords reached the same result.

END CASE INSERT

In many cases, there is no difficulty in showing an agreement. If two

parties sign a contract, there is no doubt that they have agreed. To say
that one made an offer and the other made an acceptance is artificial but
has there is clearly an agreement between the parties so the question of
who made the offer is also irrelevant.

Where there is uncertainty as to whether there is an agreement,

probably the best approach is to analyze any agreement question from
the classical point of view of offer and acceptance. If it shows that there
is an agreement, then there can be a contract. If not, ask the question
whether it is abundantly clear that the parties were in agreement. In the
exceptional cases where it is clear that there is agreement but this
conclusion cannot be reached by the route of offer and acceptance, then
you can try an exceptional approach.
 19

(2) Note on an Objective Approach

Issues as to whether there is a contract are determined objectively. So it

does not matter what the party thinks, it is how an objective observer
would believe that party was thinking. The objective approach can be
justified on grounds of certainty. It is hard to determine what someone is
thinking. It is more certain to determine what a reasonable person would
think the party was thinking based on the party’s actions.

Definitions:

“Objective Approach” means looking at what a reasonable person would think.

“Subjective Approach” means looking at what that individual thinks.

(3) Note on Unilateral Contracts

It is probably appropriate at this time to introduce the difference between

unilateral and bilateral contracts. A unilateral contract is a special form
of contract. An offer to form a unilateral contract can normally be
expressed in the form "If you do this, then I promise you that ..." For this
reason, unilateral contracts are often called "if" contracts.

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

An offer to form a unilateral contract must satisfy the same requirements

as a bilateral contract but the way in which they are then treated is
 20

somewhat different. This will be tackled when a more detailed approach

is used. For now, it is therefore useful, when you are deciding whether
or not something is an offer to note that it might be an offer to form a
unilateral contract.

(4) Elements of an Agreement

In order to determine whether agreement has been reached, there must

be an offer which has been accepted. This problem breaks down into
three main questions:

(a) has an offer been made;

(b) what are the responses that can be made to an offer;
(c) has the offer come to an end.

(a) Has an Offer been Made

This question is normally treated by trying to make a distinction between

offers and what are called invitations to treat.

Treitel defines an offer as "an expression of willingness to contract on

certain terms, made with the intention that it shall become binding as
soon as it is accepted by the person to whom it is addressed.” 2

Breaking this down, an offer requires three elements. It must be:

(i) intended to create a contract if accepted;

(ii) communicated to potential offerees; and
(iii) certain & complete enough to be a contract if accepted.

An invitation to treat is more difficult to define. It is sometimes said to be

a statement made to attract offers or a statement trying to start
negotiations. The easiest definition of an invitation to treat is that an
invitation to treat is something that is not an offer. So if a statement fails
to meet the three elements required for there to be an offer, then it is
only an invitation to treat and therefore cannot be accepted to form a
contract.

2 G.H. Treitel, The Law of Contract, 10th edn, p.8.

 21

(i) intended to create a contract if accepted

The most difficult element of an offer is the idea of intention. Intention to

be capable of acceptance to form an agreement is somewhat different
from the separate question of intention to create legal relations which will
be looked at below.

The concept is that an objective observer must be able to conclude that

the person who made the statement intended that the party to whom the
statement was communicated could merely say: "I accept" and that a
binding contract would arise. A contract is something that affects the
rights and obligations of the parties to it and a valid offer puts the offeror
at risk that someone will accept and form a contract. Contract Law
requires that the offeror intend this result or at least that an objective
observer would think that he intended that result. Otherwise, it cannot
be shown that the party agreed to be contractually bound.

A good example of this element is the advertisement. A widely

distributed advertisement looks like an offer that could be accepted. But
it is usually not an offer. If it were an offer, anyone reading the
advertisement would be able to accept and form a binding contract. As
the person placing the advertisement will only have a limited supply of
the product, they could not intend to potentially have a huge number of
contracts. The objective observer in the position of the person reading
the advertisement would see that they lacked the intention that only
acceptance was required to make a contract.

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.

(ii) Communication of the offer

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.
 22

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.

(iii) Sufficiently in Detail to form a contract

The third element necessary to make a statement into an offer is that it

must have enough detail to be enforced as a contract. Obviously if
someone says "I offer you five" and other says “I accept”, there is no
contract as there are insufficient details. As the only way to accept an
offer is to make a mirror-image acceptance, the acceptance cannot add
anything to the contract. Therefore the offer must contain enough for the
courts to make out a sensible contract. How much is enough will
depend on the nature of the contract.

Two points should be noted:

- an offer may be considered by the courts to contain the terms

contained in previous invitations to treat or previous offers. So if you go
to a market stall where an item has a tag which says "£6" and you say "I
offer you five" and the stall owner says "I accept", then you would have a
binding contract.

- 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.

(b) Responses to an Offer

There are four possible responses to an offer. They are:

 23

(i) an acceptance;
(ii) a counter-offer;
(iii) a refusal;
(iv) a request for information.

(i) Acceptance

For there to be a valid acceptance of an offer, there must be two

elements satisfied:

(A) The acceptance must be a mirror-image of the offer without adding

anything new;
(B) The acceptance must be communicated to the offeror.

(A) The mirror-image rule

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.

Similarly in Brogden v. Metropolitan Ry. (HL) (1877) 2 App Cas 666,

Brogden had supplied coal to the Railway Company for some years.
The parties wanted to formalise the arrangements and so the Railway
drew up a new draft contract and sent it to Brogden. Brogden filled in
the blanks, wrote "approved" on it and returned it. It was found that
returning the completed draft contract was construed as the offer. It
could not have been an acceptance as the blanks being filled in it was
not a mirror image.

(B) Communication of acceptance

Where there is instantaneous communication of the acceptance, the

communication must be received to be effective. It was used in the case
of Brinkibon v. Stahag Stahl (HL) [1983] 2 AC 34 where offer and
acceptance by were communicated by telex during office hours between
London & Vienna. A counter-offer was accepted by a telex from London
 24

to Vienna. It was found that the contract was formed in Vienna as the
acceptance must be actually communicated to be effective.

Note that there may be different considerations where the

communication of the acceptance is non-instantaneous, the so-called
“postal rule” and also where one party is at fault for the delay in the
communications.

(C) Silence as an acceptance

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.
 25

END OF CASE INSERT

So you are not entitled to dictate that silence would be treated as

creating a contract.

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

(D) Acceptance by Conduct

It is possible for an offeree to accept the offer by conduct rather than by

an express acceptance. This will happen when the offeree's conduct is
such that it can only be explained by his acceptance of the offer. An
example of this comes from Brogden v. Metropolitan Ry. (1877 HL).
Above it was described that the Railway had sent Brogden a new draft
contract and Brogden filled in the blanks. This was found to be an offer
and not an acceptance. The company's manager just put the draft
contract in a drawer. He then ordered 250 tons of coal per week. In due
course, the parties fell out and Brogden refused to supply any more coal.
It was held that Brogden was obliged to provide the coal pursuant to the
contract. The general rule is that acceptance must be communicated
words or by conduct. The company ordering coal and paying for it in
accordance with the draft agreement showed that they must have
accepting the offer from Brogden by their conduct.

Compare this to Inland Revenue Commissioners v Fry [2001] NLJ 1820

(ChD) where Fry sent a cheque to Inland Revenue saying that if they
cashed it, they would be taken to have accepted his settlement offer.
The court found that Inland Revenue had a standing policy of cashing all
cheques sent to them and therefore their conduct in cashing the cheque
 26

said nothing about whether they had accepted Fry’s offer or not. As it
was ambiguous, it could not be treated as an acceptance.

Even performance of the obligations under the expected contract does

not make it inevitable that there was an acceptance. In BSC v.
Cleveland Bridge & Engineering (1984 HC) Cleveland Bridge had asked
British Steel to make steel nodes which were to be part of the structure
of a new bank in Saudi Arabia. Cleveland put forward an order on their
standard terms. British Steel indicated that they would not accept these
terms. During the negotiations, Cleveland requested that British Steel
start to make the nodes which were then delivered. The parties never
reached agreement on all the major terms. Robert Goff J held that as
major matters had not been agreed, it was impossible to find or imply a
contract despite the fact that performance had commenced. In the
absence of a contract, the court had to turn to the law of restitution to
resolve the matter.

(ii) Counter-offers

A counter-offer is a response to an offer which does not meet the mirror-

image rule of acceptance but otherwise qualifies under all of the
elements needed to form an offer. Therefore it must be intended to be
capable of acceptance to form a contract, must be communicated and
must have sufficient certainty.

The effect of a counter-offer is simple enough. Sending a counter-offer

is considered to be a rejection of the offer.

CASE INSERT:

Hyde v Wrench (08 December 1840) [1840] EWHC Ch J90, 49 ER 132

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.
 27

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.

END OF CASE INSERT

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

It is possible to merely reject an offer without making a counter-offer.

This has the effect of ending the original offer while not creating a new
offer.

(iv) Request for Information

It is possible to ask for more information without impliedly rejecting the

offer. Such a request has no significance and the offer is still open for
the offeree to accept. An example comes from Stevenson v. McLean
(1880) 5 QBD 346. The defendant offered to sell the plaintiff 3,800 tons
 28

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.

(c) Ways in Which an Offer can come to an end

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.

(i) Lapse of time

An offer is only open for a reasonable time. In Ramsgate Victoria Hotel

v. Montefiore (1866) LR 1 Ex 109, Montefiore applied for shares in the
company at the beginning of June. The shares were not allotted to him
until the end of November. He refused to pay. It was found that his offer
had lapsed and so the company could not accept it.

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
 29

revocation. The revocation must actually be communicated to the

offeree to be effective.

It appears that revocation of an offer may be communicated to the

offeree by third parties so the communication need not come from the
offeror. In Dickinson v. Dodds (CA) (1876) 2 Ch D 463, Dodds, on 10th
June, offered to sell Dickinson his house for £800. The offer was
expressed to be open until 12th June. On 11th June Dodds sold his
house to someone else. Dickinson got to hear of the sale the same day
via the grapevine. Dickinson then immediately purported to accept
Dodds offer. It was found that as Dickinson knew, albeit unofficially, of
the sale, this had the effect of revoking the offer.

It is also possible for a subsequent offer made by the offeror to be

treated as a revocation of the first offer. In Pickford v Celestia Limited
[2003] EWCA Civ 1741, Pickfords had sent a fax making an offer to do
moving work at a rate per unit moved. Pickfords then sent out another
offer at a rate for the whole package. Celestia sent an acceptance that
referred to the first offer. Pickfords did the work but a dispute arose as
to whether the contract was on the terms of the first offer or the second.
At first instance, the judge found that the first offer had been accepted
and those were the terms of the contract. On appeal, the Court of
Appeal found that the second offer had impliedly revoked the first offer
as it was intended to be the only offer, as opposed to Pickfords giving
Celestia a choice between the offers. Celetia, by purporting to accept on
the terms of the first offer was making a counter-offer going back to the
terms of the first offer. Pickfords then accepted the counter-offer by its
conduct.

So the issue to be determined is whether the intention of the second

offer is to replace the first offer or is to be in addition to the first offer.

B. CONSIDERATION

In order for an agreement to be legally enforceable, two things are

required. There must be consideration and there must be an intention to
create legal relations.

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.
 30

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.

One consequence of this is that while it is efficient to exclude from

enforcement agreements to create new obligations, it is less necessary
to exclude from enforcement agreements to amend existing contracts as
the courts have to already enforce such agreements. So a different
approach might be taken to consideration required for an original
contract than the approach which will apply when looking at the
consideration required to support an agreement to amend an existing
contract.

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

A definition for consideration has caused a substantial amount of

concern to contract lawyers over the years.

On its simplest level, consideration is a requirement that goes along with

the planned exchange aspect of contract. If Contract Law as an
institution to support the structure of an industrialized society, then the
notion of a bargain or exchange of value seems to be an integral part of
it. On its simplest analysis, the law of consideration is merely an attempt
to give effect to this bargain aspect of contract.

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.
 31

But this leads to a rather technical aspect of the law of consideration.

The courts will not enforce a gratuitous promise but will enforce an
agreement to pay £10,000 for a pint of milk. This appears to be rather
absurd on the face of it. Many writers would state that the English law
requirement of consideration is absurd.

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.

But if the underlying reason for the requirement of consideration is the

notion that as we have a reason to enforce bargains but no reason to
enforce gratuitous promises, then can we give a definition to
consideration:

(a) Benefit/detriment:

Definition: Patteson J in Thomas v Thomas said: "Consideration means something which is of

some value in the eye of the law, moving from the plaintiff. It may be some detriment to the
plaintiff or some benefit to the defendant, but at all events it must be moving from the plaintiff."

If it can shown that there is a detriment to the promisor or benefit to the

promise, then there will be able consideration. The promisor being the
person who has made the promise and is arguing that the promise is not
enforceable because he did not receive consideration.

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
 32

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.

(b) Price or inducement:

This defect has led to a somewhat more inclusive definition of

consideration:

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."

This definition received judicial recognition in the case of Dunlop v.

Selfridge.

So what this definition requires is two things:

(a) One of:

(i) an act

(ii) a forebearance - i.e. not acting;

(iii) a promise to act;

(iv) a promise to forebear - i.e. a promise not to act.

AND

(b) that this is the price for which the promise of the other is bought.

This definition also highlights a piece of jargon which is the difference

between executory and executed consideration.
 33

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)

Note that it is good consideration to support the formation of the contract

to promise to do something (executory consideration) even though it is
not done. There would be a contract and the non-performance would be
a breach of that contract.

(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.

Look at this case compared to the definitions of consideration. The

wishes of the deceased were of no demonstrable benefit to his estate
and living in the house was clearly no detriment to Mrs. Thomas.
Similarly, satisfying the wishes of the deceased could not be said to be
an act or forbearance on the part of Mrs. Thomas.

This shows that motive is not consideration. Even gifts have some kind
of motive but are not contracts.
 34

But the payment of £1 a year clearly satisfies both definitions of

consideration. It is a benefit to the estate and a detriment to Mrs.
Thomas. It is also an act or an agreement to act for which the promise
of the estate has been bought.

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:

Chappell & Co Ltd v Nestle Co [1959] UKHL 1, [1960] AC 87

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.

Lord Somervell of Harrow

“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.

For these reasons I would allow the appeal.”

END OF CASE INSERT

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

Another example of the problem of benefit and detriment analysis comes

in the case of the settlement of legal actions. A starts an action against
B claiming damages of £5000. Negotiations start between the solicitors
and the action is settled for £2500. So A agrees to stop suing and B
agrees to pay money. What if B contests the enforceability of this
agreement claiming that he has received no benefit from A because A's
action against him would have failed? If the court hearing this action
determines that B is right and that A would have lost the first action, has
A provided consideration that would support the contract to pay £2500?

An example of this situation came in the case of Horton v Horton (1961

CA). A husband promised to pay his wife £30 per month in a written
separation agreement. He should have deducted tax, but did not. Later
he agreed to a sum that would amount to £30 after tax. After 3 years he
stopped paying the clear sum. Wife sued & he claimed no
consideration. It was found that the consideration for the second
 36

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

An agreement not to act can be good consideration even before the

formal court proceedings have started. In Alliance Bank v Broom
(1864), Broom had an unsecured overdraft with the bank for £22,000.
The bank asked for security and Broom promised to provide some. He
never did. The bank sued to obtain the security. It was found that the
consideration for the security lay in the actual forbearance from suing for
the £22,000, even though no explicit promise to that effect had been
made by the bank. Broom had impliedly asked the bank not to sue.

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.

C. Intention To Create Legal Relations

Even if there is an agreement supported by consideration, it is still

 37

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.

The best explanation for this requirement is one of efficiency. It costs

resources to enforce contract. Judges and courts are expensive so the
fewer agreements that are enforced, the better. But there are many
agreements that need to be enforced in order for a commercial society
to operate and to allow businesses to create wealth for society.
Therefore, the simplest approach is to presume that we will enforce
commercial agreements and presume that we will not enforce other
agreements. And this is the approach the courts have taken. So
intention to create legal relations is best considered by considering
separately:

(1) commercial relationships;

(2) domestic and social relationships.

(1) Commercial Relationships

(a) The strong presumption

Where there is an agreement in a commercial setting, there is a strong

presumption that the contract is intended to create legal relations. An
example of this comes from the case of Esso Petroleum Co v Customs &
Excise Commissioners (1976 HL).

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.

Lord Simon of Glaisdale:

“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."

In the same case Atkin L.J. said at p. 293:

" 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.

END OF CASE INSERT

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.

(b) Rebuttal of the presumption

(i) express words of rebuttal

The next question is how this presumption can be rebutted. The

simplest method is for the parties to agree that there agreement is not to
be enforced in the courts. In Rose & Frank v Crompton (1925 HL),
Crompton employed Rose & Frank as its agents to sell tissues for
carbon papers in America. The agreement contained an "honourable
 40

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.

(ii) Implication from the words of the agreement

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.

The statement of intention would have given a remedy in the tort of

deceit had it been shown that the defendant never held such an
intention, i.e the statement was made fraudulently.

Practice Point: The ability to expressly control the enforceability of agreements is

useful in complex negotiations. It can be agreed that nothing is enforceable until the
parties agree completely. That allows for parts of the deal to be agreed without the
danger of that partial agreement being enforceable. And it allows for contracts to be
signed and sealed but not be enforceable until the deal is closed.

(2) Social & Domestic Agreements

(a) Husband and Wife

The general presumption is that agreements between husband and wife

are not intended to create contractual relations. In the case of Balfour v
Balfour (1919 CA), a civil servant went to Ceylon with his wife. While
back home on leave, it became clear that she needed to stay in England
for her health. He promised to send her £30 per month maintenance
while away. The couple became estranged and the wife sued to enforce
the agreement. It was found that the agreement lack the necessary
intention to create legal relations. Atkin LJ said "In respect of these
promises, each house is a domain into which the King's writ does not
seek to run."

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.

(b) Other domestic agreements

Generally agreements between a parent and a child can are not

 42

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.

LORD JUSTICE DANCKWERTS:

“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.

In my opinion, therefore, the appeal should be allowed.”

END OF CASE INSERT:

(c) Rebutting the presumption

Rebutting the presumption can be done in different ways.

(i) Significant Reliance

It is necessary to be careful with reliance as there is generally reliance

on any agreement. In Jones v Padavatton as we saw above, the
daughter did rely on the mother’s agreement but it was still
unenforceable.

But it is possible for there to be sufficient reliance compared to the

relationship of the parties that the parties must have intended that their
agreement would be enforceable. An example come from Parker v
Clark (1960 HC). An older couple agreed with a younger couple that
the latter should sell their house and move in with the former. The
women were aunt and niece. It was also agreed that the younger couple
would contribute to household expenses, and that the older man would
leave something to the others in his will. The couples had a falling out.
It was found there was a contract between the parties that was
enforceable. Given the actions of the younger couple, especially selling
their house, the parties must have intended their agreement would have
legal consequences.

(ii) Mutuality

Another situation where the presumption can be rebutted is where the

arrangement of the parties is to share a win where the parties are so
equal that not enforcing the sharing agreement would be clearly unfair.
 44

An example of this was in Simpkins v. Pays [1955] 3 All ER 10. A

grandmother, granddaughter and paying boarder took part in a regular
competition in a Sunday newspaper. Entries were made in the name of
the grandmother but postage and other expenses were shared in an
irregular fashion between all three. The grandmother won and was sued
by the boarder for a 1/3 share. It was found that there was sufficient
mutuality in the relationship between the parties which showed an
intention for there to be a joint enterprise that was enforceable.