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Business Law
Contract I
- Elements of Contract


What is a Contract?
A contract is an agreement which binds()
the parties concerned.
In other words, a contract is an agreement
which is enforceable by law.
To have an agreement, there must be an offer and
an acceptance of that offer or;
Offer + Acceptance = Agreement

To have a contract, certain essential elements must be

present. These are
intention to create legal relations ();
agreement (offerand acceptance);
Consideration (); and
Capacity ().
The contract must not be affected by circumstances which
render the contract unenforceable, voidable (i.e., capable
of being set aside), void or illegal.

Offer - What criteria?

An offer must
contain definite terms
be communicated to the offeree
the offeree can be a specific person,
or some specific class of persons or the world at
be promissory ()
the offeror must intend to be bound by
the offer immediately upon valid acceptance by the
offeree. 4
Offer - What are not?

Invitation to Treat :
Statements to others inviting THEM to make
offers; as the person inviting a response reserves
his position;
Advertisement in general, Display of goods on
shelf, Auction, Tender, etc.
Claims made to encourage people to enter into
contracts but which a reasonable person will find
exaggerating. 5

A invites B to B makes an offer

make an offer. to A
A does not - B is bound by A accepts Bs offer. A
have any legal his offer unless B & B are both bound by
commitment revokes his offer their agreement
before As
- A is still free


A makes an offer to B accepts As offer.

B Both B and A are bound by
-A is bound by his their agreement
-B is still free

Offer - an interesting case

Carlill v Carbolic Smoke Ball Co [1892]

The defendants were the proprietors of a medical
preparation called the Carbolic Smoke Ball. They
issued an advertisement in which they offered to pay
100 to any person who contracted influenza after
having used one of their smoke balls in a specified
manner and for a specified period.

Offer - an interesting case

Carlill v Carbolic Smoke Ball Co [1892]

To show their sincerity, they deposited a sum of
1,000 with their bankers. On the faith of the
advertisement, the plaintiff bought and used the
smoke ball as prescribed but she still contracted
influenza. She sued for 100.
Held: the company was bound to pay. It is an offer
made to the whole world; and would ripen into a
contract with anybody coming forward and
performing the condition.
Offer - Revocation

must be communicated to the offeree to be
can be revoked anytime before acceptance,
provided that revocation is also effectively

Offer - Revocation

must have actually been communicated to and
reached the offeree;
but need not be made by the offeror;
sufficient for the offeree to learn of the
revocation from a reliable source.

Offer - Revocation

Dickinson v Dodds (1876)

X agreed to sell property to Y by a document which
stated this offer to be left open until Friday, 9 am.
On Thursday X contracted to sell the property to Z. Y
heard of this from B who acted for him. On Friday at
7 am Y delivered to X an acceptance of his offer.
Held: Y could not accept Xs offer after he knew it
had been revoked by the sale of the property to Z.

Offer - Lapse of time

Ramsgate Victoria Hotel Co v Montefiore (1866)

M offered, on 8 June, to take shares in R company. M
heard nothing until 23 November when he received a
letter of acceptance. M refused to take the shares.
Held: M was entitled to refuse because his offer had
lapsed before 23 November and thus could not be
accepted. The offer lapses because it is deemed to
have been rejected if acceptance is not made within a
reasonable time.
Offer - Termination

Lapse of time
Rejection or Counter-offer by the offeree
Invalidation by conditions
condition precedent;
condition subsequent.
Death of offeror

A final and unqualified assent to the terms of

an offer made in the manner specified or
indicated by the offeror
without any additions, deletions or conditions
Who may accept?
to whom the offer is made
who have the offer in mind at the point of
Rules of Acceptance

Acceptance must be communicated to be

effective. Such communication may be by
words or actions.
Silence cannot be stipulated as the required
means of acceptance.
An offeror can waive her or his right to
communication of acceptance.
The offeror can require acceptance to be in a
prescribed manner. 16
Rules of Acceptance

Where an offeree makes a counter-offer

, the original offer
is deemed to have been rejected and cannot
subsequently be accepted.
An acceptance can be revoked provided the
revocation comes to the offerors attention
before he or she receives the acceptance.

Rules of Acceptance

Hyde v Wrench (1840)

On 6 June W offered to sell to H a farm for 1,000. H

made a counter-offer of 950. On 27 June, W rejected
the counter-offer. On 29 June H made a purported
acceptance of the offer of 6 June.
Held: the counter-offer operated as a rejection of the
original offer. There was no contract.

Rules of Acceptance

Request for Information Not Counter-offer

Stevenson v McLean (1880)
The defendant offered to sell to the plaintiffs 3,800
tons of iron at 40s net cash per ton, open till
Monday. On Monday morning the plaintiffs
telegraphed: Please wire whether you would accept
40s for delivery over 2 months or if not, longest limit
you would give. Having received no reply at 1.34 pm,
the plaintiffs dispatched a telegram accepting the
original offer.
Forms of Acceptance

Acceptance by electronic means

Where acceptance is by a direct, near-instantaneous,
or instantaneous form of communication (telephone,
facsimile, e-mail, internet etc), acceptance occurs
when and where the offeror (addressee) actually
receives the communication of the acceptance.
Email is direct, near-instantaneous but not
instantaneous communication.
Click wrap is an instantaneous communication.
Forms of Acceptance

Electronic Transactions Ordinance

Unless otherwise agreed between the parties,
time of receipt of an electronic record is at the
time when
it is accepted by the information system
designated by the addressee, s19(2)(a)(i); or
it comes to the knowledge of the addressee if the
information system is non-designated,
s19(2)(a)(ii), s19(2)(b).
Forms of Acceptance

Entores v Miles Far East Corporation (1955)

An English company in London made an offer which was
accepted by the Amsterdam company by telex. The court
had to decide the time and place at which the contract was
made: at Amsterdam where the acceptance was sent or in
London where it was received.
Held: the contract was made in London where the
notification of acceptance was received. Communication by
telex was no different from cases where the parties were
negotiating in the presence of each other.

Forms of Acceptance

The Postal Rule

Where acceptance by mail or telegram is
contemplated by the parties, acceptance is
effective when the letter is posted or the
telegram is sent.
It does not matter if the letter is lost or
delayed or never delivered, except if this is
caused by the offeree (eg, address incorrectly
stated). 23
Forms of Acceptance

Adam v Lindsell (1818)

L made an offer by letter to A requiring an answer in
course of post. The letter of offer was misdirected and
delayed in the post. A posted a letter of acceptance
immediately. But L assumed that the absence of a reply
within the expected period indicated non-acceptance and
sold his goods to another buyer.
Held: the acceptance was made in course of post (no
time limit was imposed) and effective when posted.

Forms of Acceptance

Byrne v Van Tienhoven (1880)

A by letter of 1 October offered to sell goods to B in

New York. On the 8th, A wrote revoking his offer and
this reached B on the 20th.
On 15 October, B telegraphed his acceptance.
Held: the revocation was of no effect until it reached
B and a contract was made when B telegraphed his
Forms of Acceptance

The effect of the postal rule can be

the offeror requiring actual communication of the
acceptance to reach him, or
the offeror excluding the postal rule specifically,
the offeror stipulating that acceptance must be
made by a certain method, or
circumstances which indicate that acceptance by
post is unreasonable or not contemplated. 26

The price paid by the promisee for the promisors

Consideration is some benefit received by a party
who gives a promise or performs an act or some
detriment (e.g. injury or damage) suffered by a party
who receives a promise
Must move from the promisee (or from someone
acting as the promisees agent). BUT it need not
move to the promisor
Rules of Consideration

A bare promise or gift, i.e. given for no consideration

is, accordingly, not binding. It is not given as part of
a contract.
If A voluntarily promises to give B the sum of $100
and later changes his mind, giving B nothing, B
cannot succeed against A for breach of contract. B
gave no consideration in return for As promise.
Consideration can be executory, executed but NOT
in the past (past consideration is no consideration).
Rules of Consideration

Consideration need not be adequate

According to the doctrine of freedom of
contract, the courts will not interfere with a
bargain freely reached by the parties.
It is not part of the courts duty to assess the
relative value of each partys contribution to
the bargain.
Rules of Consideration

Consideration must be something of value

in the eyes of the law.
BUT it need not be of an EQUIVALENT
value to the promisors promise (ie. It needs
to be SUFFICIENT but it does not need to
Love and affection are not sufficient
consideration, nor is moral obligation. 30
Value of Consideration

Chappell & Co v Nestl Co (1960)

The Nestl Company offered to the public gramophone

records of a certain dance tune for 1s 6d each together with
three chocolate bar wrappers. The wrappers were thrown away
on receipt by the company. The question was whether the
wrappers were part of the consideration given for each record.
Held: by the House of Lord, the wrappers were part of the
consideration even though they were of no further value.

Past Consideration

Re McArdle (1951)

M and his wife lived in a house which was part of the

estate of Ms father, in which M and his brothers and
sister were beneficially interested expectant on the
death of their mother, who was tenant for life. In
1943 and 1944, Mrs M paid 488 for improvements
and decorations to the house. In 1945, the
beneficiaries all signed a document addressed to Mrs
M which provided:
Past Consideration

Re McArdle (1951)
In consideration of your carrying out certain alterations and
improvements to the house, we the beneficiaries under the will
(of their father) hereby agree that the executors shall repay you
from the said estate the sum of 488 in settlement of the
amount spent on such improvements. In 1945, the tenant for
life died and Mrs M claimed payment of 488.
Held: by the Court of Appeal that, as the work had been done
and paid for before the beneficiaries made their promise to
repay Mrs M, the consideration was past and the promise
contained in the document was not binding.
What is not Consideration?

Where a party performs an act which is merely

a discharge of a pre-existing obligation, there
is no consideration.

Where a party does more than he was already

bound to do, there may be consideration.

Pre-existing Obligation

Stilk v Myrick (1809)

The captain of a ship promised his crew that, if they

shared between them the work of two seamen who
had deserted, the wages of the deserters would be
shared out between them.
Held: the promise was not binding because the
seamen gave no consideration - they were already
contractually bound to do any extra work to complete
the voyage
Fresh Consideration

Hartley v Ponsonby (1857)

A ships crew had been seriously depleted by a number of

desertions. The captain promised the remaining crew members
40 extra pay if they would complete the voyage.
Held: the promise was binding. It was dangerous to put to sea
in a ship so under-manned. The seamen were not obliged to do
this under their contracts of service and were, therefore, free to
enter into a fresh contract for the remaining part of the voyage.

Consideration and Rights

Consideration must move from the promisee

No stranger to the consideration may by
himself sue on a contract. Any action for
breach of contract must be brought by a party
who gave consideration.

Consideration and Rights

X, Y and Z enter into an agreement under

which X promises to do certain work for Y if Y
will pay 10 to Z.
If X does the work, he can sue Y on his
promise: but Z cannot sue by himself, for he
gave no consideration to Y.

Waiver of Rights

Waiver of Rights must be supported by

consideration Pinnels Case
Agreement to accept a smaller sum of a debt
owed must be supported by consideration
Exception to this rule
If debt paid before due date
If payment made at place other than agreed
If payment is partly in kind
If payment is made by a third party 39
Promissory Estoppel

Equitable Estoppel (or Promissory Estoppel)

occurs when the promisor makes a voluntary
promise (not to enforce his strict legal rights) and
the promisee acts on the promise to his detriment;
then the promise is to be honoured even though it
is not supported by consideration.

Suspension of Rights

Central London Property Trust Ltd v High Trees

House Ltd [1947]
In 1937 the Ps granted a 99 year lease on a block of flats in
London to the Ds at an annual rent of 2500. Because of the
outbreak of war in 1939, the Ds could not get enough tenants
and in 1940 the Ps agreed in writing to reduce the rent to
1250. After the war in 1945 all the flats were occupied and
the Ps sued to recover the arrears of rent as fixed by the 1937
agreement for the last two quarters of 1945.

Suspension of Rights

Held: Ps could not claim the original rent for the

wartime period. A promise intended to be binding,
intended to be acted on and in fact acted on, is binding
so far as its terms properly apply. The conditions
prevailing at the time when the reduction of rent was
made had lapsed by early 1945. The promise was
understood by all parties to apply only when the flats
were only partially let, and that it did not extend to early
1945 when the flats became fully let, by then the
reduction of rent ceased to apply.

Promise under duress

D&C Builders Ltd v Rees [1966]

D&C Builders claimed 482 for work done for Rees, debtor.
Mrs Rees knowing D&C Builders were in financial
difficulties, offered 300 by cheque in full settlement, stating
that D&C Builders would get nothing if the 300 was
D&C Builders reluctantly accepted 300, but later sued for
the balance 182.
Held: D&C Builders could recover the balance, as the waiver
was made under duress, being threatened by the Rees, who
could not rely on promissory estoppel.
Promissory Estoppel - Requirements
The promisor must voluntarily make a clear and
unambiguous statement that his strict legal rights will not be
enforced. The promise is not made under duress.
The promisee must have acted to his detriment in reliance on
the promise, but the better view is that it is sufficient to
show that the promisee committed himself to a course of
action which he would not otherwise have adopted.

Promissory Estoppel - Requirements
Inequitable to revert
It must be inequitable to the promisee if the promisor to go
back on his promise and revert to his strict legal rights.

Legal effect
- The effect of promissory estoppel is generally suspensory;
it does not extinguish the promisors rights. It is
suspended and can be resurrected by giving reasonable

Promissory Estoppel - Requirements
Promissory estoppel is a shield (to defend a legal action) but
not a sword (to bring a legal action).

Estoppel can be used as a shield to defend a claim, but it

cannot be used to create a cause of action where none existed
apart from the estoppel : Combe v Combe [1951] 2KB 215.

Intention to Create Legal
Intention - Social agreements
For domestic and social agreements there is a
rebuttable presumption that there is no
intention to create legal relations - this is
because the agreements are considered to be
based on mutual trust and affection.

Intention - Social agreements

Jones v Padavatton [1979]

A mother wanted her daughter to study law in England. At a

time when mother and daughter were very close, the mother
bought a house in London to enable the daughter to reside
there during her studies. Later, differences arose and the
mother claimed possession of the house.
Held: the arrangement in relation to the house was not
intended to be legally binding and that the mother was entitled
to possession of the house.

Intention - Social agreements

The presumption that there is no intention to

create legal relations in domestic and social
agreements may be rebutted.
Even if the parties are in a domestic or social
relationship but intend their agreement to have
legal consequences, an enforceable contract is
Intention - Social agreements

Simpkins v Pays [1955]

A widow, her grandmother and a paying lodger
agreed to take part together each week in a newspaper
competition. The entries were made in the defendants
(grand-mothers) name but there was no rule as to the
payment of postage.
One week the entry was successful and the defendant
obtained the prize money. The plaintiff (lodger)
claimed a third of the prize money. But the defendant
refused to pay.
Intention - Social agreements

Simpkins v Pays [1955]

The Defendant explained that there was no intention
to create legal relations but only a friendly adventure.
Held: the plaintiff won the case. It was a joint
enterprise to which each contributed in the
expectation of sharing any prize that was won. In
other words, the parties intended to create legal
relations, i.e. to form an informal syndicate and that
the recipient of the prize money had to share it with
the others.
Intention to Create Legal
Intention - Commercial agreements
In commercial agreements there is a rebuttable
presumption that the parties do intend to make
a binding contract.
A provisional or preliminary agreement that
contains all the essential terms is also legally
A memorandum marked subject to contract
is not intended to be binding. 52
Intention - Commercial
Rose & Frank Co v Crompton Bros Ltd [1923]

Company R made an agreement with Company C

whereby Company R was appointed the agent for the
sale of paper supplied by the Company C. A clause in
the agreement was: This arrangement is not entered
into as a formal or legal agreement and shall not be
subject to legal jurisdiction in the law courts.
Held: no contract was made between the parties and
that the agreement could not be sued upon.

Intention How to Decide?
Objective Test
What would a reasonable person who considers all the
circumstances decide what the parties intended
Factors to be considered:
what was said by the parties?
how was it said?
what were the surrounding circumstances?
was there an agreement?
what would be the effect of the agreement on the parties
(especially the effect of a breach of the agreement)?
how did the parties behave after the agreement (did they
act as if they were bound)?

A contracting party may lack the capacity if

he does not know the nature of his act.
A contract is voidable for want of contractual
The party lacking contractual capacity may
elect to affirm or avoid the contract.
If avoided, the contract lose its legal effect
from the date of the court order, not from the
date of contract. 55
Capacity - Minors

A minor is someone under 18

A contract entered into by a minor can
generally be enforced BY but cannot be
enforced AGAINST the minor
Contracts for NECESSARIES.
BENEFICIAL contracts of service

Capacity - Minors

What are necessaries?

Factors to be considered:
the nature of the item, goods and services
essential to the minor such as clothing, food,
education and medical services etc;
the infants station in life; and
whether the infant is already sufficiently supplied.

Capacity - Minors

A minor need only pay a reasonable price for

necessaries supplied to him or her.
Non-necessaries obtained by fraud can be recovered
through an application of the restitution if the trader
can show that the property obtained is identifiable and
is still in the minors possession.

Capacity - Minors


Contracts (apprenticeship etc) under which a minor:
Provides himself with a MEANS OF SUPPORT;
suitable trade or profession.
To be enforceable such contracts must be

Capacity - Mentally
incapacitated persons
If a mentally incapacitated person, either by
disability or drunkenness, wishes to avoid or
repudiate a contract, he has the burden to
prove that:
he did not know the nature of his act when the
contract was made; and
the other contracting party knew him to be
incapable of understanding his act (or to be