Introduction to Law of Contract

“A contract could be defined as an agreement which intends to create a legal obligation between the parties “

The essence of a contract is that there should be an agreement between parties.

The agreement is normally constituted by one party making an offer and the other party accepting that offer.

Following elements are essential for a formation of a valid contract.

1. Offer and acceptance

2. Intention to create legal relations

3. Capacity to contract

4. Consideration

5. Adherence to legal formalities if any

Offer An offer is 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 it is addressed. ( G.H. Treitel- Law of Contract - p 8- 6ed. 1983)

Offer may be expressed or implied-

expressed- verbally or writing

Implied – by the conduct of parties

1. offer must be definitive- Not vague

◦ Gibson Vs. Manchester City Council

The council sent a letter to Gibson indicating “ The council may be prepared to sell the house to you at the price of Pounds 2725” The court held that “may” is not a definite offer.

Gunthing vs. Lynn

Offer was made as ‘ if your horse is lucky I will pay you more” The court held that it is not a valid offer as the term ‘lucky” is not specific and it is vague

2. A definitive offer may be made to a particular person, group or world at large

◦ Carlil Vs. carbolic Smoke Ball Co – 1893

A manufacture in UK produced a medicine for influenza called ‘smoke ball”. They advertised Pounds 100 will be rewarded to a person attract influenza after having used their smoke ball in the prescribed manner. The advertisement further indicated that they have already deposited pounds 1000 in the bank towards this reward in order to show their sincerity. Mrs. Carlill purchased the smoke ball and used in the prescribed manner but she got influenza and sued the company for the reward advertised.

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The company argued among other things that Mrs. Carlill cannot accept the offer as it was not specifically made to her. Further she did not inform the company that she has accepted the contract.

The court denied both arguments and said that a contract made to the whole world can be accepted by anyone. Further, it went on to say that there is no need to inform the acceptance as the acceptance takes place as soon as the plaintiff act upon the offer. That is buying and using in the manner prescribed amounts to acceptance. Therefore the Mrs. Carill was entitle to the money claimed.

3. All offers must be communicated to the offeree.

(A person cannot accept an offer without having knowledge of the offer- e.g. Ranil looses his dog and he put up an advertisement in the papers that any body brings his lost dog will be given a reward of Rs. 100,000. Weerawansa finds a dog on the road and he identifies that the dog is Ranil’s. He catches the dog and hand over it to Ranil and go home. On his way back he meets Mangala a good friend of Ranil and he tells him about the loss of Ranil’s dog and the reward available for the finder of the dog. Weerawansa will not be able to claim the reward now as he did not act upon the advertisement. He did not know that there was a reward before he finds and handed over the dog to Ranil)

4. A reply to an inquiry does not amount to an offer

Offer should be a definitive statement/promise and it cannot be just a statement of information

Harvey Vs. Facey

◦ The plaintiff telegraphed the Defendant whether defendant would sell a land and inquired the lowest cash price. Defendant telegraphed and mentioned that the lowest price for the land was pound 900.00 Then Plaintiff telegraphed and stated that he accepted his offer. However, it was held that there was no offer to accept as mere information of the selling price cannot be considered as an offer. There was no indication to prove that he was willing to sell that property to Plaintiff at the price quoted.

5. Declaration of intention to do something is not an offer

Harris Vs. Nickerson

An auctioneer advertised an auction of sale of furniture. However, he later withdrew the furniture from the auction. A broker came for the auction to buy furniture and found there was no furniture to be sold. He sued the auctioneer for his travel expenses and for the loss of time. However, court held that declaration of intention to do a thing does not amount to be an offer for the broker to accept, therefore a binding contract has not been created, and therefore the broker is not entitled to claim damages under breach of contract

6. An invitation to treat is not an offer.

◦ A. goods displayed in a shop is not an offer but an invitation to treat

Pharmaceutical society of Great Britain Vs. Boots Cash Chemist 1953

a self service pharmacy displays drugs in racks and allows customers to select and buy the product. A customer selects a product that cannot be sold without the authority of a pharmacist.

The pharmacy was sued for contravention of Drugs Act. However, it was revealed in evidence, even though the customer could select a drug, he will be allowed to buy it only when the

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pharmacist approves the purchase. However, it was argued that the contract takes place as soon as the drug is selected by the customer and therefore the pharmacy was in breach of law.

The court held that there was no breach of law as the mere display of goods in the shelf does not amount to an offer and offer is made by the customer ( can I buy this ? ) at the time he shows the product to the pharmacist and the contract takes place only if the pharmacist approves and accepts the offer of the customer.

B. An advertisement is generally treated as an invitation to treat

◦ Partridge Vs. Crittenden

◦ Partridge advertised to sell some birds ( Quality British Bramble Finch hens) that are prohibited to offer to sell or to sell under the Protection of Birds Act of UK. Partridge was sued for offering the birds for sale by advertising.

◦ It was held that he was not guilty for the offence as the advertising does not amount to an offer. It was merely an invitation for treat.

7. Tender Notice is not an offer

Calling for Tenders to sell a product or buy a product or service will not amount to an offer. All the prices quoted by others to the tender Notice are offers. He can either accept or reject the offer. Tenderer is not bound to accept the lowest price or highest bid.

8. Auctions

Auctions are requests for bids. Bids are the offers. Auctioneer may accept or reject the offer. Unless there is a condition that the highest bid will be accepted.

Revocation (withdrawal) of offer An offer may be revoked at any time before it is accepted.

However a revocation of an offer will not take place until it is actually communicated to the offeree.

Byrne Vs. Van Tienhoven ( 1880)

B in Cardiff sends an offer to T in NewYork. T accepts in on 11th by telegraph. B revokes in on 8th by posting a letter. T receives in on the 20th. Held revocation will not have effect until it reaches T and therefore T ‘s acceptance is valid and there is a contract.

3. Revocation is possible at any given time even if there has been a promise to keep it open until a specific period. However, if it is given by a deed or supported by consideration, then it cannot be revoked until the date specified.

4. Revocation can be communicated directly by the the offeror or by a third party

Dickinson Vs. Dodds ( 1876)

◦ A offered to sell a property to B, through a document which stated that this offer is valid until Friday 9.00 a.m. On Thursday A sold the house to Y and B came to know about this sale through the brother in law of A. B, before 9.00 a.m. of Friday delivered his letter of acceptance through his Brother in law.

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Court held that there is no contract. By knowing that the sale was concluded and having not paid any consideration to keep for a period of time, B has no offer valid to accept.

Rejection of offer1. Offeree can reject the offer at anytime saying that he has no interest in accepting the offer.

2. A counter offer from offeree also makes the offer rejected.

Hyde Vs. Wrench ( 1840)

Wrench offered a sell a property for pounds 1000. Hyde then offered to buy it for pounds 950 but Wrench did not accept the offer. Then he agreed to pay pound 1000.

Court held; As soon as the counter offer of pound 950 was offered the original offer is rejected and therefore there is no offer to accept in the second time.

3. By accepting the offer with conditions

Such as I accept the price of Rs. Five Million for your House, but I will pay in three installments ,

I will buy the car at the price quoted by you only if you can do the repairs I mentioned in my visit.

4. Lapse of time

Lapse of reasonable time depending on the mode of offer, nature of the product and also of the nature of the trade practice.

ACCEPTANCE Acceptance to be valid, it should be accepted when the offer is valid.

1. Acceptance must be unconditional

Eg.I will buy the car at the price quoted by you only if you can do the repairs I mentioned in my visit.

2. Acceptance has to be communicated to the offeror.

◦ In an instantaneous contracts , such as telephone or telex ( may be chat on internet or fax ) The contract will be completed only when the acceptance is actually received by the offeror. Mere transmission will not be sufficient.

Postal rule for acceptance

When the option is given by the offeror to accept the offer by way of post or telegram, courts adopt a different theory in constructing a contract.

The theory adopted is that as soon as the letter is duly posted or telegram is handed over to the postal counter, the acceptance takes place and a contract will be formed. This could be effective even if the letter of acceptance or telegram reaches the offeror or not.

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Adams Vs. Lindsell ( 1818)

“A” by Letter dated Sept 2nd offered goods( wool) to “L” and wrote “ receiving your answer in course of post” . The letter was misdirected and did not reach ‘L” untill 5th, when the offer was immediately accepted. The acceptance reached ‘A” on the 9th. But on the 8th “A” not receiving an answer as expected by 7th, sold the goods to “X” .

Held that there is a contract on 5th September when “L” posted the acceptance.

However, in order for this theory to be effective, there shall not be a postal strike or any unusual delay in the post and the correct address etc. has to be written on the envelop. Further, international acceptance ( beyond boundaries of a country) is excluded on this theory and the letter should reach the offeror for the acceptance to be valid.

In the modern day communications, postal rule could apply for emails. If offeror allows the oferee to confirm the acceptance by way of an email, then the email is properly sent to the inbox of the offeror then the postal rule may apply even if the offeror, has not opened the mail.

One principal that the court may follow, is that the offeror has selected the method and therefore, if there are any drawbacks or risks of the method, the offeror should bear it.

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Termination of offer 1. Revocation of the offer ( already discussed)

2. Rejection of the offer ( already discussed)

3. Lapse of Time ( already discussed)

4. Death of one of the Parties or insanity or change of status

5. Failure of a condition subject to which the offer was made

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