The life of a contract

“Contract law is the law that governs contracts. A contract can take several forms - it can be written on a piece of paper or it can just be a verbal agreement. A contract is an agreement between two or more people that creates an obligation to do, or not to do, something (www.infoscouts.com). An agreement will be classed as a contract only if the parties intend legal consequences to result from it (Jill Poole). “The agreement creates a legal relationship of rights and duties. If the agreement is broken, then the law provides certain remedies (www.infoscouts.com).

A contract must possess key elements; offer, acceptance, consideration, form, legality, capacity and intention to create legal relations. If any of these are missing then the contract may be void.

Summary flowchart of the Life of a contract

Successful completion

Performance

Signing

Drafting

Formation of contract

Written Contract

Excused non-performance

Negotiations

Non Performance

Remedies for innocent party

Agreeing orally to terms

Oral Contract

Legal issues which may arise in the formation and performance stages of a contract

Stages

Legal Issues

Elements to be considered in deciding issue

Formation

Has an agreement been reached?

Offer

Acceptance

Is the agreement legally binding?

Intention to create legal relations

Consideration

Formalities

Are there factors present which could invalidate the contract?

Misrepresentation

Mistake

Duress

Undue influence

Unconscionable bargains

Illegality

Incapacity

Performance

Is there full performance?

Terms of contract

Performance / Breach

Is the non-performance excused?

Effect of exemption clauses

Variation or termination by agreement

Termination by frustration

Is there a breach?

Terms of contract

Performance / Breach

Dispute resolution

Remedies of innocent party

Formation of a contract

There are four basic elements in the formation of a contract:

An agreement between the parties (which is usually shown by the fact that one has made an offer and the other has accepted it).

An intention to be legally bound by that agreement.

Consideration provided by each of the parties – in simple words, this means that there must be some kind of exchange between the two or more parties.

Two type of contracts Unilateral and bilateral contracts

Bilateral contract

Each party takes on an obligation, usually by promising the other something - for example, X promises to sell something and Y to buy it (although called bilateral, there may be more parties involved)

Unilateral contract:

One party promises to do something if someone else does a certain thing. For example, you promise to pay a £100 reward to anyone who finds your lost purse. Only one party has assumed an obligation (you are obliged to pay a reward but nobody need actually have undertaken to do so) Simple example of unilateral contract is that between estate agents and people trying to sell their homes - the seller promises to pay a specified percentage of the house price to the agent if the home is sold, but the agent is not required to promise in return to sell the house.

An offer is a proposition put by one person to another person made with the intention that it shall become legally binding as soon as the other person accepts it. (www.legalmax.info).

An Offer

‘An offer is a proposal made on certain terms by the offeror, with a promise to be bound by that proposal if the offeree accepts the stated terms'(Keenan D & Riches S).

An offer can be made to one person, a group of people or the whole world as indicated by the case of Carlill v Carbolic Smokeball Co. 1983. The company had made an ‘offer’ to the whole world and was liable to anyone who accepted the stated conditions in their advertisement.

Invitation to Treat

This is an expression by a person encouraging anyone who is interested to carry out business with him or her. Displays, auctions, advertisements and tenders are all forms of 'invitations to treat'.

A genuine offer is different from what is known as an "invitation to treat", i.e. where a party is merely inviting offers, which he is then free to accept or reject. The following are examples of invitations to treat:

AUCTIONS

In an auction, the auctioneer's call for bids is an invitation to treat, a request for offers. The bids made by persons at the auction are offers, which the auctioneer can accept or reject as he chooses. Similarly, the bidder may retract his bid before it is accepted. See: Payne v Cave (1789) 3 Term Rep 148

DISPLAY OF GOODS

The display of goods with a price ticket attached in a shop window or on a supermarket shelf is not an offer to sell but an invitation for customers to make an offer to buy. See: P.S.G.B. v Boots Chemists (1953) 1 QB 401, Court of Appeal.

ADVERTISEMENTS

Advertisements of goods for sale are normally interpreted as invitations to treat. See: Partridge v Crittenden (1968) 1WLR 1204, Queen’s Bench Division.

Advertisements may be construed as offers if they are unilateral, i.e. open to all the world to accept. See: Carlill v Carbolic Smoke Ball Co (1893) 1 QB 256, Court of Appeal.

MERE STATEMENTS OF PRICE

A statement of the minimum price at which a party may be willing to sell will not amount to an offer. Gibson v Manchester County Council (1979) 1 WLR 294, House of Lords.

TENDERS

Where goods are advertised for sale by tender, the statement is not an offer, but an invitation to treat; that is, it is a request by the owner of the goods for offers to purchase them. The process of competitive tendering came under scrutiny in the following cases: Harvela Investments v Royal Trust Co. of Canada (CI) Ltd (1986) AC 207 House of Lords, Blackpool and Fylde Aeroclub Ltd v Blackpool Borough Council (1990) WLR 1195, Court of Appeal.

An invitation to treat was highlighted in Partridge v Crittenden 1965. Partridge was charged with 'offering for sale' wild birds under the Protection of Birds Act 1954 when he advertised them for sale in a magazine. He was not found guilty. Held it was not an 'offer' but an 'invitation to treat'.

ACCEPTANCE

An acceptance is a final and unqualified acceptance of the terms of an offer. To make a binding contract the acceptance must exactly match the offer. The offeree must accept all the terms of the offer.

However, in certain cases it is possible to have a binding contract without a matching offer and acceptance. See: Brogden v Metropolitan Railway Co. (1877) 2 App Cas 666, House of Lords.

The following rules have been developed by the courts with regard to acceptance:

COUNTER OFFERS

If in his reply to an offer, the offeree introduces a new term or varies the terms of the offer, then that reply cannot amount to an acceptance. Instead, the reply is treated as a "counter offer", which the original offeror is free to accept or reject. A counter-offer also amounts to a rejection of the original offer which cannot then be subsequently accepted. See: Hyde v Wrench (1840) 3 Beav 334.

A counter-offer should be distinguished from a mere request for information. See: Stevenson v McLean (1880) 5 QBD 346.

If A makes an offer on his standard document and B accepts on on a document containing his conflicting standard terms, a contract will be made on B's terms if A acts upon B's communication, e.g. by delivering goods. This situation is known as the "battle of the forms". See: Butler Machine Tool Co Ltd v Ex-Cell-O Corporation (England) Ltd (1979) 1 WLR 401, Court of Appeal.

CONDITIONAL ACCEPTANCE

If the offeree puts a condition in the acceptance, then it will not be binding.

TENDERS

A tender is an offer, the acceptance of which leads to the formation of a contract. However, difficulties arise where tenders are invited for the periodical supply of goods:

(a) Where A advertises for offers to supply a specified quantity of goods, to be supplied during a specified time, and B offers to supply, acceptance of B's tender creates a contract, under which B is bound to supply the goods and the buyer A is bound to accept them and pay for them.

(b) Where A advertises for offers to supply goods up to a stated maximum, during a certain period, the goods to be supplied as and when demanded, acceptance by A of a tender received from B does not create a contract. Instead, A's acceptance converts B's tender into a standing offer to supply the goods up to the stated maximum at the stated price as and when requested to do so by A. The standing offer is accepted each time A places an order, so that there are a series of separate contracts for the supply of goods. See: Great Northern Railway Co. v Witham (1873) LR 9 CP 16.

COMMUNICATION OF ACCEPTANCE

The general rule is that an acceptance must be communicated to the offeror. Until and unless the acceptance is so communicated, no contract comes into existence: Lord Denning in Entores v Miles Far East Corp. [1955] 2 QB 327, Court of Appeal.

The acceptance must be communicated by the offeree or someone authorised by the offeree. If someone accepts on behalf of the offeree, without authorisation, this will not be a valid acceptance. See: Powell v Lee (1908).

The offeror cannot impose a contract on the offeree against his wishes by deeming that his silence should amount to an acceptance. see: Felthouse v Bindley (1862) 11 CB (NS) 869 Court of Common.

Where an instantaneous method of communication is used, eg telex, it will take effect when and where it is received. See: Entores v Miles Far East Corp [1955], Brinkibon v Stahag Stahl [1983] 2 AC 34.

EXCEPTIONS TO THE COMMUNICATION RULE

a) In unilateral contracts the normal rule for communication of acceptance to the offeror does not apply. Carrying out the stipulated task is enough to constitute acceptance of the offer.

b) The offeror may expressly or impliedly waive the need for communication of acceptance by the offeree, eg, where goods are dispatched in response to an offer to buy.

c) The Postal Rule - Where acceptance by post has been requested or where it is an appropriate and reasonable means of communication between the parties, then acceptance is complete as soon as the letter of acceptance is posted, even if the letter is delayed, destroyed or lost in the post so that it never reaches the offeror. See: Adams v Lindsell (1818) 1 B & Ald 681, Household Fire Insurance Co. v Grant (1879) 4 Ex D 216.

The postal rule applies to communications of acceptance by cable, including telegram, but not to instantaneous modes such as telephone, telex and fax. The postal rule will not apply:

(a) Where the letter of acceptance has not been properly posted, as in Re London and Northern Bank (1900), where the letter of acceptance was handed to a postman only authorised to deliver mail and not to collect it.

(b) Where the letter is not properly addressed. There is no authority on this point.

(c) Where the express terms of the offer exclude the postal rule, i.e. if the offer specifies that the acceptance must reach the offeror. In Holwell Securities v Hughes, the postal rule was held not to apply where the offer was to be accepted by "notice in writing". Actual communication was required.

(d) It was said in Holwell Securities that the rule would not be applied where it would produce a "manifest inconvenience or absurdity".

Revocation of posted acceptance

Can an offeree withdraw his acceptance, after it has been posted, by a later communication, which reaches the offeror before the acceptance? There is no clear authority in English law. The Scottish case of Dunmore v Alexander (1830) appears to permit such a revocation but it is an unclear decision. A strict application of the postal rule would not permit such withdrawal. This view is supported by decisions in: New Zealand in Wenkheim v Arndt (1873) and South Africa in A-Z Bazaars v Ministry of Agriculture (1974). However, such an approach is regarded as inflexible.

METHOD OF ACCEPTANCE

The offer may specify that acceptance must reach the offeror in which case actual communication will be required. See: Holwell Securities v Hughes [1974] 1 All ER 161.

If a method is prescribed without it being made clear that no other method will suffice then it seems that an equally advantageous method would suffice. See: Tinn v Hoffman (1873) 29 LT 271, Yates Building Co. v Pulleyn Ltd (1975) 119 SJ 370.

KNOWLEDGE OF THE OFFER

An offeree may perform the act that constitutes acceptance of an offer, with knowledge of that offer, but for a motive other than accepting the offer. The question that then arises is whether his act amounts to a valid acceptance. The position seems to be that:

(a) An acceptance which is wholly motivated by factors other than the existence of the offer has no effect. See: R v Clarke (1927) 40 CLR 227

(b) Where, however, the existence of the offer plays some part, however small, in inducing a person to do the required act, there is a valid acceptance of the offer. See: Williams v Carwardine (1833).

CROSS-OFFERS

A writes to B offering to sell certain property at a stated price. B writes to A offering to buy the same property at the same price. The letters cross in the post. Is there (a) an offer and acceptance, (b) a contract? This problem was discussed, obiter, by the Court in Tinn v Hoffman (1873) 29 LT 271. Five judges said that cross-offers do not make a binding contract. One judge said they do.

TERMINATION OF THE OFFER

ACCEPTANCE

Once an offer has been accepted, a binding contract is made and the offer ends.

REJECTION

If the offeree rejects the offer that is the end of it.

REVOCATION

The offer may be revoked by the offeror at any time until it is accepted. However, the revocation of the offer must be communicated to the offeree(s). Unless and until the revocation is so communicated, it is ineffective. See: Byrne v Van Tienhoven (1880) 5 CPD 344.

The revocation need not be communicated by the offeror personally, it is sufficient if it is done through a reliable third party. See: Dickinson v Dodds (1876) 2 ChD 463.

Where an offer is made to the whole world, it appears that it may be revoked by taking reasonable steps. See: Shuey v United States (1875) 92 US 73.

Once the offeree has commenced performance of a unilateral offer, the offeror may not revoke the offer. See: Errington v Errington [1952] 1 All ER 149, Daulia v Four Millbank Nominees (1978) 2 All ER 557.

COUNTER OFFER

See above for Hyde v Wrench (1840).

LAPSE OF TIME

Where an offer is stated to be open for a specific length of time, then the offer automatically terminates when that time limit expires. Where there is no express time limit, an offer is normally open only for a reasonable time. See: Ramsgate Victoria Hotel v Montefiore (1866) LR 1 Ex 109.

FAILURE OF A CONDITION

An offer may be made subject to conditions. Such a condition may be stated expressly by the offeror or implied by the courts from the circumstances. If the condition is not satisfied the offer is not capable of being accepted. See: Financings Ltd v Stimson [1962] 3 All ER 386.

DEATH

The offeree cannot accept an offer after notice of the offeror's death. However, if the offeree does not know of the offeror's death, and there is no personal element involved, then he may accept the offer. See: Bradbury v Morgan (1862) 1 H&C 249

Remedies for Breach of Contract

In this section, I am going to look at how the balance is resolving disputes between those who break their contractual promises and those injured by these breaches.

The remedies available to the injured party will depend on the nature of the breach because the results will defer as between the parties.

 1. Rescission

Rescission is available for non-performance and defective performance.

It aims to restore the parties to the positions they were in before they entered into the contract. This means, for example, that a person who obtains goods on the basis of a misstatement of fact may only rescind the contract if they are willing and able to restore the goods they received. If this cannot be done, the remedy of rescission is lost.

2. Damages

The aim of an action for damages is to enable an innocent party to receive monetary compensation from the party responsible for the breach of contract. Generally, it is to put the injured party in the position that they would have occupied if the contract had been performed as was originally intended. Therefore, damages are calculated on the basis of looking at what the position should have been if the contract had been properly performed.

The types of damages that may be awarded to an injured party under a contract are nominal damages (minimal), normal or ordinary and exemplary (or punishment) damages.

Four questions need to be considered when a claim is made for damages:

Causation

The injured party has to prove that the loss or damage that they have suffered is a result of the defendant's breach.

Remoteness of damage

The court will only be interested in those losses reasonably related to the contract. Was the loss suffered by the plaintiff reasonably foreseeable as a result of the breach of contract? Hadley v Baxendale (1854) suggests that the only losses that a plaintiff can recover are:

Those that arise from the usual or normal course of events; and

Those that arise from special or exceptional circumstances which the defendant knows of before entering into the contract. See, for example, Victoria Laundry v Newman Industries (1949). Where the damages are not foreseeable, they are considered to be too remote and the defendant will not be liable.

Case: Hadley v Baxendale (1854) 9 Ex 341

Facts: Hadley, a mill owner, had to stop work in the mill because of a broken crankshaft. The shaft had to be sent back to the manufacturer as a pattern had to be made for a new one. Baxendale, a carrier, promised Hadley that the crankshaft would reach the manufacturer on the following day. His negligence, however, resulted in its delay and the mill was out of commission for months longer than it should have been.

Issue: Could Hadley recover damages for loss of profit caused by the delay? The carrier's defence was that he had no way of knowing that the delay in delivery of the shaft would cause the mill to be shutdown.

Decision: The carrier was not liable for the loss of profits caused by the delay, as the loss did not flow directly from the breach of contract. It was too remote to have been foreseen by a reasonable person.

Case: Victoria Laundry v Newman Industries (1949) 2 KB 528:

Facts: Newman Industries contracted to deliver a boiler to the plaintiffs. They knew that the plaintiffs required the boiler urgently to enable them to take advantage of positive trading conditions and to undertake expansion of their business. The boiler was damaged in the course of delivery by Newman and was late in installation.

Issues: Could the plaintiffs recover for:

Loss of profit the laundry would have made had the boiler been delivered on time; and

Loss of profit from the dyeing contracts?

Decision: The court held that the laundry profits were recoverable as the defendants must have contemplated that there would be a loss if there was a delay. However the loss on the dyeing contracts was not recoverable. The defendants were not in a position to know of the highly profitable nature of such contracts for which the plaintiff was negotiating. As a result this was not foreseeable.

Measure of damages

Once the court has decided the question of remoteness, the next question to be considered is how much the plaintiff should recover in compensation. This generally is the amount that should place the plaintiff as close to the position they would have enjoyed had the breach never occurred.

The injured party must be able to show that they have suffered some loss if they are to recover ordinary damages. If this cannot be shown, then at best, the injured party will be entitled to recover nominal damages by proving that the other party did breach the contract.

Courts will generally not grant damages for anything other than provable losses. However, in certain instances, for example in Jarvis v Swan Tours (1972), the courts will allow claims for anxiety, disappointment, discomfort, inconvenience, frustration and mental distress.

Case: Jarvis v Swan Tours (1972) 3 WLR 954:

Facts: Jarvis arranged a holiday in Switzerland through Swan Tours' office based on information contained in one of its brochures. However, the statements contained in the brochures proved to be inaccurate and the holiday was a disaster.

Issue: Could Jarvis sue for breach of contract based on anxiety, distress, disappointment and frustration?

Decision: The court held that Jarvis was entitled to damages caused by the breach.

Mitigation of damages

A plaintiff is expected to take all reasonable steps to reduce the damage. If they don't, the amount of damages they can expect to recover will be reduced.

It only remains to say that reference is often made to damages being liquidated, unliquidated or being a penalty. Liquidated damages mean that the injured party has been able to precisely estimate the amount of their loss. Unliquidated damages mean that the injured party has left it to the court to decide on the amount of damages. A penalty is a threat to ensure performance. Unlike liquidated damages, a penalty is not a genuine pre-estimate of the injured party's likely loss. As a result, it is not enforceable in court.

Specific Performance

Specific performance is an equitable remedy granted at the discretion of the courts and usually only when damages prove to be inadequate.

 Injunction

An injunction is also an equitable remedy and discretionary. It is a court order restraining a party from breaking their contract or from committing a wrongful act. It aims at enforcing a negative promise in an agreement and can be used to enforce even contracts of personal service, e.g., see Lumley v Wagner (1852).

Case: Lumley v Wagner (1852) 42 ER 687:

Facts: Wagner contracted to sing at Lumley's theatre for a fixed period of time during which she was not to sing elsewhere. She broke this promise.

Issue: Could Lumley stop her from singing for another employer, i.e., obtain an injunction?

Decision: While it could not grant a decree of specific performance to compel Wagner to sing at Lumley's theatre, the court would enforce the negative promise 'not to sing elsewhere' by granting an injunction against Lumley. This prevented her from singing anywhere else during the term of the contract.

 Quantum meruit

Quantum meruit means 'as much as he has earned' and only arises in cases of part performance. Where the contract is one of service of goods, there is a new implied contract by the party taking the benefit that they will pay a reasonable amount for the quantum or portion given.

1. An express agreement to pay a reasonable sum.

2. No price fixed. If the contractor does work under a contract express or implied, and no price is fixed by the contract, he is entitled to be paid a reasonable sum for his labour and the materials supplied.

3. A quasi-contract. This may occur where, for instance, there are failed negotiations. If work is carried out while negotiations as to the terms of the contract are proceeding but agreement is never reached upon essential terms, the contractor is entitled to be paid a reasonable sum for the work carried out. See: British Steel v Cleveland Bridge (1984) 1 All ER 504.

4. Work outside a contract. Where there is a contract for specified work but the contractor does work outside the contract at the Employer's request the contractor is entitled to be paid a reasonable sum for the work outside the contract on the basis of an implied contract. In Parkinson v Commissioners of Works (1949) 2 KB 632 the contractor agreed under a varied contract to carry out certain work to be ordered by the Commissioners on a cost plus profit basis subject to a limitation as to the total amount of profit. The Commissioners ordered work to a total value of £6,600,000 but it was held that on its true construction the varied contract only gave the Commissioners authority to order work to the value of £5,000,000. It was held that the work that had been executed by the contractors included more than was covered, on its true construction, by the variation deed, and that the cost of the uncovenanted addition had therefore to be paid for by a quantum meruit.

Judge Bowsher QC in his judgment in the case of Laserbore Ltd v Morrison Biggs Wall Ltd (1992) had to decide the meaning of "Fair and reasonable payments for all works executed".    He considered that the costs plus basis was wrong in principle even though in some instances it may produce the right result. The appropriate approach was to adopt general market rates.

Extinction of remedies

The Limitation of Actions Act determines the time limits within which an injured party must act if they are to maintain an action. The aim of such legislation is to prevent the possibility of legal actions remaining open indefinitely though the courts have the power to waive the time limit in appropriate cases.