Formation of Contract
AIMS:
- Definition of contract
- Four elements of a contract
- Bilateral contract and unilateral contract
What is a contract?
- A contract is a legally enforceable agreement between two or more parties
Four elements of a contract:
1. Offer – a proposal to make a contract
2. Acceptance – an unconditional assent to the offer
3. Consideration – the value exchange by the parties
4. Intention to create legal relations
Example:
1. Offer
- I promise to sell my laptop to you for £800.
2. Acceptance
- You unconditionally agree to pay my laptop for £800.
3. Consideration
- Consideration which I give to you is my promise to transfer the ownership
of my laptop to you.
- Consideration which you give to me is your promise to give me £800.
4. Intention to create legal relations
- Both of us are willing to make a contract for the sale of the computer.
Bilateral and unilateral contract:
Bilateral contract
- An agreement in which a promise exchanges for a promise
- E.g. I sell my computer to you for £800 – the promise to sell the computer and the promise
to give £800
Unilateral contract
- An agreement in which a promise exchanges for performance
- E.g. I promise to give £1000 to the student who achieves the highest mark in the contract
law exam – only one promise (to pay £1000) in exchange for performance (highest mark in
exam)
, Formation of Contract
How to judge if the parties have reached an agreement?
Two tests:
1. The objective test/ the reasonable person’s test
- What would a reasonable person, in the shoes of the parties, think?
- The actual parties intention is irrelevant
- Normal test used in contract law
2. The subjective test
- What have the parties actually intended to do?
- This is the exceptional test used in contract law
Application of the objective test:
Smith v Hughes (1871) LR 6 QB 597
- The seller sold oaks and didn’t say if oaks were new or old
- The buyer mistakenly thought that the oaks were old and made the contract with the seller
- The buyer argued that there had not been a valid contract due to his mistake
Legal question – did the parties make a valid contract?
Judgement – there had been a valid contract
Application of the subjective test:
- The subjective test is applied when the non-mistaken party intends to take advantage of the
mistaken party’s mistake
Hartog v Colin [1939] 3 All ER 566
- The parties had agreed in the contract for the sale of rabbit skin that the price was
calculated on the basis of per piece
- But the written contract mistakenly documented that the price was calculated on the basis
of per pound
- The buyer was aware of the fact that the seller had made a mistake and intended to take
advantage of the buyer
Legal question – did the parties make a valid contract?
Judgement – no, the subjective test was applied
- If one party makes a mistake as to a term of the contract, and the other party is, or should
be, aware of this mistake, the contract is void
, Offer
AIMS:
1. What is an offer?
2. What are the key elements of an offer?
3. How is an offer distinguished from an invitation to treat?
What is an offer?
- An offer is a statement made by one party (the offeror) to make the contract on the stated
terms to another party (the offeree) or a group of people
- A statement can be made orally or in written form – there’s no particular requirement
What are the elements of an offer?
An offer must meet two requirements:
1. Firstly, it must show a clear intention to be bound on the stated terms
2. Secondly, an offer must contain specific key terms
- It does not need to have every term of a contract, but it must have key terms for a contract.
There is no need for further negotiation on the key terms.
- This is decided on a case to case basis
What is an invitation to treat?
- A statement indicating willingness to receive offers or negotiation
Invitation to treat Offer Acceptance = Agreement
The main difference between an offer and invitation to treat is the intention of the party making the
statement
- Does the party intend to make an offer i.e. show the intention to be bound on the stated
terms?
- Does the party intend to invite an offer/negotiation from the other party?
How to distinguish an offer from an invitation to treat:
Example 1:
Harvey v Facey [1893] AC 552
- The dispute was about whether the parties had made a contract for the sale of a property in
Jamaica
Claimant:
- “Will you sell us Bumper Hall Pen? Telegraph the lowest price”
Defendant:
- “Lowest price for Bumper Hall Pen £900.”
Claimant:
- “We agree to buy Bumper Hall Pen for the sum of nine hundred pounds”
This is an offer – the claimant shows a clear intention to be bound under the stated
terms in this telegraph
AIMS:
- Definition of contract
- Four elements of a contract
- Bilateral contract and unilateral contract
What is a contract?
- A contract is a legally enforceable agreement between two or more parties
Four elements of a contract:
1. Offer – a proposal to make a contract
2. Acceptance – an unconditional assent to the offer
3. Consideration – the value exchange by the parties
4. Intention to create legal relations
Example:
1. Offer
- I promise to sell my laptop to you for £800.
2. Acceptance
- You unconditionally agree to pay my laptop for £800.
3. Consideration
- Consideration which I give to you is my promise to transfer the ownership
of my laptop to you.
- Consideration which you give to me is your promise to give me £800.
4. Intention to create legal relations
- Both of us are willing to make a contract for the sale of the computer.
Bilateral and unilateral contract:
Bilateral contract
- An agreement in which a promise exchanges for a promise
- E.g. I sell my computer to you for £800 – the promise to sell the computer and the promise
to give £800
Unilateral contract
- An agreement in which a promise exchanges for performance
- E.g. I promise to give £1000 to the student who achieves the highest mark in the contract
law exam – only one promise (to pay £1000) in exchange for performance (highest mark in
exam)
, Formation of Contract
How to judge if the parties have reached an agreement?
Two tests:
1. The objective test/ the reasonable person’s test
- What would a reasonable person, in the shoes of the parties, think?
- The actual parties intention is irrelevant
- Normal test used in contract law
2. The subjective test
- What have the parties actually intended to do?
- This is the exceptional test used in contract law
Application of the objective test:
Smith v Hughes (1871) LR 6 QB 597
- The seller sold oaks and didn’t say if oaks were new or old
- The buyer mistakenly thought that the oaks were old and made the contract with the seller
- The buyer argued that there had not been a valid contract due to his mistake
Legal question – did the parties make a valid contract?
Judgement – there had been a valid contract
Application of the subjective test:
- The subjective test is applied when the non-mistaken party intends to take advantage of the
mistaken party’s mistake
Hartog v Colin [1939] 3 All ER 566
- The parties had agreed in the contract for the sale of rabbit skin that the price was
calculated on the basis of per piece
- But the written contract mistakenly documented that the price was calculated on the basis
of per pound
- The buyer was aware of the fact that the seller had made a mistake and intended to take
advantage of the buyer
Legal question – did the parties make a valid contract?
Judgement – no, the subjective test was applied
- If one party makes a mistake as to a term of the contract, and the other party is, or should
be, aware of this mistake, the contract is void
, Offer
AIMS:
1. What is an offer?
2. What are the key elements of an offer?
3. How is an offer distinguished from an invitation to treat?
What is an offer?
- An offer is a statement made by one party (the offeror) to make the contract on the stated
terms to another party (the offeree) or a group of people
- A statement can be made orally or in written form – there’s no particular requirement
What are the elements of an offer?
An offer must meet two requirements:
1. Firstly, it must show a clear intention to be bound on the stated terms
2. Secondly, an offer must contain specific key terms
- It does not need to have every term of a contract, but it must have key terms for a contract.
There is no need for further negotiation on the key terms.
- This is decided on a case to case basis
What is an invitation to treat?
- A statement indicating willingness to receive offers or negotiation
Invitation to treat Offer Acceptance = Agreement
The main difference between an offer and invitation to treat is the intention of the party making the
statement
- Does the party intend to make an offer i.e. show the intention to be bound on the stated
terms?
- Does the party intend to invite an offer/negotiation from the other party?
How to distinguish an offer from an invitation to treat:
Example 1:
Harvey v Facey [1893] AC 552
- The dispute was about whether the parties had made a contract for the sale of a property in
Jamaica
Claimant:
- “Will you sell us Bumper Hall Pen? Telegraph the lowest price”
Defendant:
- “Lowest price for Bumper Hall Pen £900.”
Claimant:
- “We agree to buy Bumper Hall Pen for the sum of nine hundred pounds”
This is an offer – the claimant shows a clear intention to be bound under the stated
terms in this telegraph
