Legally Binding Contract - Case Study Example

Law in Business For a contract to be legally binding, it must contain many essential elements. Critically discuss by reference to decided cases. The formation of contracts and its legal effectiveness is a subject which has been critically reviewed in case law and statutes. A contract can exist even if it is oral or informal but in strict legal terms for it to be legally effective, certain criterion must be met. Firstly, there must be an ‘offer’, which must be followed by an acceptance. Secondly, there must be consideration, intention to create legal relations and sufficient certainty. These are the most essential elements which are said to be of the essence when deciding whether a contract is legally binding or not. Each of these elements and their significance will now be discussed. The main starting point for the conclusion of a contract can be found in Smith v Hughes1, where both a subjective as well as objective test was laid down in order to determine the existence of a contract. The subjective test determines the actual intention of the contracting parties, whereas the objective test ascertains what had been said by the parties, what they did and not and what their actual intention of saying or doing was. As per Professor Atiyah, the issue of offer and acceptance has been determined by courts in two ways, that is ‘reason forwards’ and ‘reason backwards’, the former is where existence of offer and acceptance are determined first and then the conclusion on the dispute is made; the latter is where the courts can reason from the appropriate solution back to the legal concepts of offer and acceptance. An offer has been defined as an expression of willingness by one party known as the offeror, to contract or be bound on stated terms, provided that such terms are accepted by the party to whom the offer is made that is the offeree. The courts have distinguished between an offer and an invitation to treat, this is because the latter is merely an expression of willingness by one party to enter into negotiations and so is not unconditional and there is a lack of intention. The most important cases which distinguished between an offer and invitation to treat are of Gibson v Manchester City Council2 and Storer v Manchester City Council3. In Gibson, where treasurer had sent a letter to Mr. Gibson, stating that council may be prepared to sell, was held to be an invitation to treat, which was further confirmed by the fact that Mr. Gibson was asked to make a formal application to purchase the house. The courts therefore took into account the correspondence between the parties. However, in Storer the courts found that a contract had come into existence as negotiations had moved beyond what had happened in Gibson but an exchange of contracts had not taken place. These case clearly point out that fact that judges can interpret and differ in the results and so the decision would be said to be based on its own facts. On account of a display of goods in a shop, the general rule adopted by courts is that it is an invitation to treat. (Fisher v Bell)4. A rigid application of such a rule has lead to injustice. However, there have been cases where the courts have found display of goods to constitute as an offer (Chapleton v Barry)5. As for advertisements, it has been strictly said to be an invitation to treat (Partridge v Crittenden)6, however, the courts have interpreted advertisements in a manner which allows for certain exceptions to be created and the main reasons for that has been cited to be intention to be bound and certainty (Carlill v Carbolic Smoke Ball Co.)7. Further, the advertisement of an auction sale is generally only an invitation to treat (Harris v Nickerson)8. The opinions as to when an offer is made have differed. Special rules for posts are applied that is the postal rule (Adams v Lindsell)9. The postal rule states that when an acceptance is sent by means of a post, it takes place as soon as the letter is validly posted. Instantaneous modes of communication has lately been scrutinized by the courts (Lord Wilberforce in Brinkibon Ltd. v Stahag Stahl GmbH), however the problem of when acceptance is effective has clearly not been addressed and still lies in an area of uncertainty. Offer and invitation of treat have often been scrutinized by courts and there have been times when the difference on the facts of cases have been marginal or none, but the finding of courts have had differing interpretations. The element of offer is said to be crucial but under modern day dealings it would normally not be an issue. The next step is that of acceptance. The general rule for the acceptance of an offer is that the offer should be accepted unconditionally and must be communicated to the offeror. ( Holwell Securities v. Hughes10) . However there are certain exception to this general rule and one of them is the infamous postal rule. The postal rule states that when an acceptance is sent by means of a post, it takes place as soon as the letter is validly posted. (Adams v. Lindsell) . Another exception is that of a unilateral offer (Carlill v. Carbolic Smoke Ball Co.) An acceptance can take place without words, can be by conduct, but acceptance by conduct is dependent upon the fact that the offeree performed the act with the intention of accepting the offer and this is assessed objectively. (Day Morris Associates v. Voyce)11. Acceptance must be looked into carefully, as the fact that it must be unconditional is strict and so if new terms and conditions are introduced that would not be acceptance and would merely be a counter offer, which can then be accepted by the original offeror, who know becomes the offeree. (Hyde v Wrench)12. The general rule for acceptance is that communication must actually be made to the offeror and must be heard. (per Lord Denning in Entores v. Miles Far East Corporation)13. If a prescribe mode of communication is specified it must be followed. Further, silence does not constitute as acceptance. (Felthouse v Bindley)14. Acceptance can therefore be quite simplistic on the face of it but an interpretation by the judges has clearly allowed for certain situations to be decided contrary to what a reasonable man would have construed on the facts. Clearly, this would constitute as a hurdle as a person without legal knowledge would be unaware of the point at which acceptance is made. It has been argued by commentators that the current law on offer and acceptance is uncertain and this could possibly be achieved by legislation. Further, the current law could give rise to injustice in certain cases. However, it can be said that the current has struck a balance between the need for certainty and the achieving of a just result in line with the intention of the parties. After establishing offer and acceptance, the element of certainty is looked into, which is vital as a binding contract can exist only if the parties express their agreement in a sufficiently certain form so that the courts can enforce it. This is because the court does not want to insert its own terms within a contract that has been agreed between the parties(Viscount Maugham in Scammell and Naphew Ltd. v. Ouston)15. Uncertainty can be due to the fact that the terms of the contract are vague. Alternatively, the contract may be incomplete , however there are a number of options available, which allow the court to avoid the issue of incompleteness and making the contract void, for example s.8(2) of Sale of Goods Act 1979 which provides for a reasonable price to be inserted where the price has not been determined. The next element that has been looked into by courts is the fact that consideration for the contract has been made or not and this will now be discussed. The doctrine of consideration has been developed to so as to give a ‘badge of enforceability’ to contracts. The classic definition of consideration was given in Currie v. Misa16 as ‘a valuable consideration, in the sense of the law, may consist either in some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.’ However, this definition has been challenged by Professor Atiyah (1986c) who argues that the doctrine is not based upon reciprocity. Subsequently, Professor Treitel argues that such rules and a doctrine of consideration do exist. However, it is evident that there have been cases where the courts have invented consideration even though there was no evidence that the parties regarded it as consideration. Thus the difference in thoughts lies in the fact that one relies on benefit/detriment principles while the other states that there are other reasons which allow for the enforcement of a promise. The amount of consideration for a contract is left for the parties to decide and even the smallest of consideration has been held to suffice. ( Thomas v. Thomas)17. The rules which make up the doctrine of consideration will now be stated. The first one being, that consideration must be sufficient but it need not be adequate. Thus, something of value must be given in return, if a promise is to be enforced, thereby satisfying what is called ‘sufficient’. Further, adequate consideration is not a concern of the courts. The principle might at times be disadvantageous, as there might be other factors involved which led to such a bargain. (Chappell & Co. v. Nestle)18. When considering intangible returns, the courts have held a promise by a son, not to constitute as consideration (White v. Bluett)19. However the promise of not applying for an injunction was held to be consideration (Pitt v. PHH Asset Management Ltd.)20. If a promise not to enforce a claim which is known to be invalid is made, that would not be good consideration (Wade v. Simeon)21. However, if a genuine belief is held, then such a belief would constituted to be consideration (Cook v. Wright)22. Until recently it was an established principle that performance of an existing contractual duty owed to the promisor was no consideration (Stilk v. Myrick)23. This was recently changed, when the Court of Appeal in Williams v. Roffey Brothers24adopted a wider approach whereby it was found that the claimant had derived a practical benefit by promising to finish the work on time and it was sufficient to constitute as consideration. However, it has been argued that the defendant was under an existing duty to finish the work on time and secondly, the element of duress was present. Further, the courts have found past consideration not to be treated as good consideration (Roscorla v. Thomas)25 . Finally the doctrine of consideration must move from the promise, that is the promise can only be enforced by a promisee if there is a consideration for the promise; the benefit can move to a third party as well. The doctrine in the modern day had caused problems in the twentieth century, when looked at, along with the new doctrines, like duress. Finally the fact that an agreement has been reached between the parties does not necessarily mean that a legally enforceable contract has been concluded. There must be an intention to create legal relations, that is the intention of the parties which is construed objectively. The case Balfour v. Balfour26 determined the position of domestic arrangements, where there is a presumption that the parties did not intend to create legal relations and rebuttal is needed. This is because in most cases there is no apparent intention in such arrangements and secondly such a presumption is quite difficult to rebut and clear evidence is required for such an intention. Thus the elements that have been discussed above, have been taken into account by the court when determining the validity of a contract and its enforceability. BIBLIOGRAPHY McKendrick, Ewan. Contract Law: Text, Cases, and Materials. Oxford: Oxford University Press, 2010. Print. Atiyah, P S, and Stephen A. Smith. Atiyahs Introduction to the Law of Contract. Clarendon law series. Oxford: Oxford University Press, 2006. Print. Furmston, Michael P, and Cheshire-Fifoot-Furmston. Cheshire, Fifoot and Furmstons Law of Contract. Oxford [u.a.: Oxford Univ. Press, 2007. Print. Beale, H G. Contract Law. Ius Commune casebooks for the common law of Europe, no. 4. Oxford: Hart, 2006. Print. McKendrick, Ewan. Contract Law. Basingstoke: Palgrave Macmillan, 2009. Print. Duxbury, Robert. Contract Law. London: Sweet & Maxwell, 2009. Print. Fafinski, Stefan, and Emily Finch. Contract Law. Harlow, England: Pearson/Longman, 2009. Print Contract Law. London: Routledge-Cavendish, 2010. Print. Taylor, Richard D, and Damian Taylor. Contract Law. Directions. Oxford: Oxford University Press, 2009. Print. Elliott, Catherine, and Frances Quinn. Contract Law. Harlow (England: Pearson Longman, 2009. Print. Read More