Explain the rules concerning consideration in contracts

Discussion of the QUITNOW advertisement and recommendations for Jennifer regarding whether or not a binding contract existed and if she has a claim to the £10,000.

In this case it would appear that Jennifer has a claim to the £10,000 as the advertisement can be construed as a unilateral contract, the terms of which are met by conduct, i.e. Jennifer purchased the product and followed the instructions carefully. This case can be compared to the Carbolic Smoke Ball case.

Explain the rules concerning consideration in contracts. Give examples as to past consideration, and explain how the Courts’ attitude to this concept is changing.

Prior to conducting a meaningful discussion concerning Contracts and Consideration in contracts, it is necessary to first review a definition of a contract. A generally accepted definition is: ‘a contract is a promise or set of promises for the breach of which the law gives a remedy or the performance of which the law in some way recognizes as a duty’ (American Law Institute, Restatement of the Law of Contracts 1932). From this definition we learn several important points; firstly, that a contract is defined in law and can be enforced by the court system, as long as it truly meets the criteria that define it as a contract in the first place. Secondly, a contract can be simple or complicated as indicated by the terms ‘promise or set of promises’. A third and very important aspect is that there are legal consequences if there is a ‘breach’ of contract, and this occurs when one of the parties fails to meet the obligations set forth in the legally binding ‘promise’ or contract.

Consideration in Contract evolved as a remedy when the traditional avenues of legal resolution were unsatisfactory, or when a solution eluded the court system. ‘During the early period of the development of the law of contracts in England, only those promises which were in writing and sealed were enforced. As trade expanded and the law merchant began to be absorbed into the common law of England, the courts were frequently called upon to determine the rights of parties to a simple contract , and the law of covenants (promises under seal) was inadequate’(Business Law: Principles and Cases).

During the 18th century, several remedies emerged, but the most suitable, was ‘the bargain theory of consideration’. So, ‘today the general rule is, with some exceptions, that a promise is not enforceable by court action unless it is supported by consideration; and the general test for consideration applied by the courts is whether or not detriment to the promise or benefit to the promisor has been bargained for and given in exchange for the promise’ (Business Law: Principles and Cases).

On the surface, the rules of consideration in contract appear quite simple and straightforward. However, when they pertain to a case, they can be quite intricate and difficult to interpret. The rules of consideration in contracts are as follows:

It must not be past

It must be sufficient, but need not be adequate

It must not be in respect of an existing contract or duty (Oxford Law Diploma 2009)

A brief analysis of these rules tells us that the ‘consideration of contract’ must not occur in the past. The rule of law in this instance dictates that the event must be in the future, as defined by Business Law: Principles and Cases ‘a promise looks to the future, and the person to whom it is made is justified in expecting that it will be fulfilled’. A reasonably straightforward illustration of this rule might be McCardle 1951 – where ‘a wife and her three grown-up children lived together in a house. The wife of one of the children did some decorating and later the children promised to pay her £488 and they signed a document to this effect. It was held that the promise was unenforceable as all the work had been done before the promise was made and was therefore past consideration’.

In contract law – consideration is concerned with the ‘deal’ or ‘bargain’ portion of the contract. Consideration must be sufficient, but need not be adequate. In their wisdom the Courts have left it to the parties to the contract to determine the worth or value of a contract, with the exception of fraud. Therefore, the parties are responsible for assigning the value to the contract, as in the case of Thomas v Thomas (1842) 2 QB 851 – where £1 rent was paid to keep the house of the deceased plaintiff’s husband in repair; the assigned value in this case is clearly inadequate but is considered sufficient in the eyes of the law.

The third rule of consideration of contract states that consideration must not be in respect of an existing contract or duty – where a party has a public duty to act, this cannot be used as consideration for a new promise or contract as demonstrated in the case of Collins v Godefrey (1831), in this case it was held that Collins was under a public duty to attend court due to the subpoena, therefore this could not be used as consideration for a new promise, resulting in a favourable decision for Godefrey.

Much time and precious resources are spent on futile debates and criticisms of our existing statutes and common law. It can be argued that we squander time and financial resources, which could be used to improve or create fresh and innovative solutions to our legal dilemmas. Some of our learned friends and judges are taking a more proactive position in this respect and it has been shown that the rule that past consideration is not good consideration is subject to the exception discussed by the Privy Council in Pao On v Lau Yiu Long (1980). In that case, their Lordships held that past consideration can be good consideration where:

The promisee performed the original act at the request of the promisor;

It was clearly understood or implied between the parties that the promisee would be rewarded for the performance of the act;

The actual promise made, if made before the promisee provided the consideration, must be capable of being enforced, in other words giving rise to a legally binding contract.

This case teaches us that from its inception the law has possessed certain innate characteristics that ensure its continued existence and more importantly its continued growth and development. It instinctively knows that it must absorb and deal with change. It must also be willing to relinquish some of its own steadfast beliefs and convictions in favour of creating new judgements and opportunities whilst maintain and impartial and just position.

If we consider that the law exists to serve and protect us then we must also be willing to accept that mankind is constantly creating new and unprecedented events. As members of society we have a duty to support the law and consequently ourselves by identifying the need for significant change to our existing laws through the medium of amendments and the creation of new law in the absence of statute or precedent.

Explain the difference between and offer and an invitation to treat. Using decided cases, state whether the following are offers or invitations to treat:

Goods on display in a shop window

Goods on a supermarket shelf

Advertisements in a magazine

Goods at auction

Goods in a vending machine

A car park ticket machine

A notice in a shop window offering a reward for a lost watch

It is imperative in Contract Law to have a clear and thorough understanding of what constitutes an offer and what constitutes an offer to treat. An offer is a promise or set of promises, that are made under certain conditions. ‘A proposal or offer looks to the future and is an expression of what the party making the offer – the offeror- promises shall be done or happen or shall not be done or happen- provided the party to whom the offer is made-the offeree- complies with stated conditions’ (Business Law: Principles and Cases p 92).

An invitation to treat on the other hand is ‘an invitation to another person to make an offer to contract. ‘An invitation to treat is a mere declaration of willingness to enter into negotiations; it is not an offer, and cannot be accepted so as to form a binding contract.’ The invitation to treat may provide minimal terms of a proposed offer’ (Legal Dictionary – Duhaime. Org).

Goods on display in a shop window

Under normal circumstances the Courts have held that Goods on display in a shop window, represent an offer to treat

Goods on a supermarket shelf

Advertisements in a magazine

‘As a general rule the courts have held that advertisements for goods for sale at a stated price is not an offer to sell the goods at that price, it is merely an invitation to negotiate for the sale of the goods’ (Business Law: Principles and Cases).

Goods at auction

‘Unless, in the terms governing the auction, language is used which clearly expresses the intention to sell without reservation to the highest bidder or to the lowest bidder, as the case may be, the bidder will be the offeror, and the seller will be free to accept or reject bids, as the case may be’ Business Law: Principles and Cases).

‘Under English law there is no overarching definition of what amounts to an auction at law. This means that for each legal provision the question of whether that specific provision applies to auctions may have to be answered differently. A satisfactory answer can only be found by applying a functional equivalence test, i.e. looking at the purpose of the legal provision and to what extent an online auction is functionally equivalent to a traditional auction in that respect. For example, if the question were whether an online auctioneer is subject to the law of agency as it applies to auctioneers, the answer would usually be 'No'. Online auction terms usually make it clear that the provider merely operates the auction platform, and that control over whether a bid is accepted is in the hands of the seller, not the provider. A similar analysis will need to be undertaken for each and every legal or regulatory provision that applies to auctioneers’.

The Legal Issues Of Electronic Commerce And Communications (2007) 8 EBL 12, 7 1 January 2007

Is an online auction an 'auction' in law? Julia Hörnle © Reed Elsevier (UK) Ltd 2007

Drew v. John Deere Co. Of Syracuse, Inc. 241 N.Y. S. 2d 267 (App. Div. N.Y. 1963).

Barry v Davies (t/a Heathcote Ball & Co) (2000) 1 WLR 1962

SIR MURRAY STUART-SMITH

said that withdrawing a lot from sale because it had not reached the level which the auctioneer considered appropriate was tantamount to bidding on behalf of the seller, which was unlawful unless section 57(4) of the Sale of Goods Act 1979 was complied with. The highest bid could not be rejected simply because it was not high enough.

The judge based his decision on the reasoning of the majority of the Court of Exchequer Chamber in Warlow v Harrison ((1859) 1 E & E 309, 316–317:

“the highest bona fide bidder at an auction may sue the auctioneer as upon a contract that the sale shall be without reserve the auctioneer who puts the property up for sale upon such a condition pledges himself that the sale shall be without reserve; or, in other words, contracts that it shall be so; and that this contract is made with the highest bona fide bidder; and, in case of a breach of it, that he has a right of action against the auctioneer."

Goods in a vending machine

A car park ticket machine

A notice in a shop window offering a reward for a lost watch

‘Advertisements of rewards for the return of lost property or for the capture of criminals are common examples of offers made through advertising. Such offers are for unilateral contracts. The offer is accepted by the performance of the requested act – the return of the lost property or the capture of the criminal. The nature of the offer is such that there can only be one acceptance and only one resulting contract; consequently it is logical to conclude that when a person advertises to pay a reward for the return of the lost property or the capture of the criminal, he does so with the intent to make an offer ‘(Business Law: Principles and Cases). These conditions are illustrated nicely in the case of Lefkowitz v.

Explain the rules for accepting an offer. Please mention when the postal rule is applicable. When is revocation of an offer effective? Please demonstrate your answers using decided cases.

It is vital at this point to possess an understanding of both the definition of a legitimate offer and what constitutes acceptance of such an offer. As mentioned in the preceding question and response of this module assignment ‘A proposal or offer looks to the future and is an expression of what the party making the offer – the offeror- promises shall be done or happen or shall not be done or happen- provided the party to whom the offer is made-the offeree- complies with stated conditions’ (Business Law: Principles and Cases p 92).

Acceptance of an offer must comply with certain rules in order to maintain the validity of the offer. These ‘rules’ will be discussed in detail, beginning with ‘intent’. This essential element requires that the parties to the offer must intend to create a contract and abide with the stated terms of the offer. ‘Any attempt on the part of the offeree, in his acceptance to alter the terms of the offeror’s proposition will terminate the offer’ (Business Law: Principles and Cases p116).

A second vital component to an offer is communication – in order for an offer to exist in the first place it must be relayed to interested parties. By the same token, acceptance of an offer by the offeree must be communicated to the offeror, in order for it to represent a valid offer. An offer may be communicated verbally, in writing, through acts or a combination of all or any three of the aforementioned avenues.

If the parties to an offer agree to use the Post as a means of communication- the Postal Rule is said to apply. The Postal Rule states that where a letter is properly addresses and stamped – the acceptance takes place as soon as the letter is placed in the post box. This vital legally binding element was illustrated in the case of Adams v Lindsell (1818), and it should be noted that this is the case that actually established the Postal Rule.

Contracts may be classified as unilateral and bilateral. ‘A unilateral contract is one in which only one of the parties makes a promise, whereas in a bilateral contract, both of the contracting parties make promises’ (Business Law: Principles and Cases p 87). Therefore, it is important to note that with regards to acceptance ‘in the case of a unilateral contract the offeree must perform the requested act, and in the case of a bilateral contract the offeree must make the requested promise’ (Business Law: Principles and Cases p 119).

It should be further noted that the contract or offer may dictate the manner in which an offer is accepted. If an offeree uses an unauthorized agency of communication to accept the offer, he assumes the risk that the acceptance of the offer may not reach the offeror in time, which may possibly void the terms of the offer.

A third and equally important component of acceptance is certainty of terms – which simply means that if a reasonable person reviews the offer, he/she must be able to determine what was agreed upon in the offer.

‘As a general rule the offeror may revoke his offer at any time before acceptance. This rule applies even though the offer states that it will remain open or the offeror promises to hold it open for a stated period of time (Business Law: Principles and Case p 103). There are however, some exceptions to this rule:

If the contract contains an Option – whereby the offeror agrees to hold the offer open for a period of time for an agreed consideration, then the offer must stand for the agreed period.

If it is a contract under Seal – such an offer is irrevocable for the stated period.

Please note that the rule that requires an on offer to be communicated to the offeror, also require that a revocation of an offer must also be communicated to the offeror, in order to be valid. Revocation of an offer may occur under the following circumstances: the law holds that if the offeree rejects the offer, it is then considered to be terminated or revoked. ‘It is a well established rule that the death or insanity of either party will terminate the offer’ (Business Law: Principles and Cases p 105). If the subject matter of the offer is destroyed before the offer is accepted, then the courts hold that the offer is revoked and finally if the terms or acts of the offer are deemed illegal before the offer is accepted, then the offer is terminated.