UNIVERSITY OF THE WEST INDIES

CAVE HILL CAMPUS

DEPARTMENT OF MANAGEMENT STUDIES
FACULTY OF SOCIAL SCIENCES

MGMT 2021 – BUSINESS LAW I

Lecture 4: Law of Contract 1

Definition of a Contract: “A legally binding agreement” That agreement is

formed when one party accepts an offer made by another & is backed by some
form of consideration.

Basic elements of a legal contract: Offer , Acceptance, Consideration, The

Intention to Create Legal Relations and Capacity

Contracts may be created by spoken words or in writing. Oral contracts are

difficult to prove before a court of law. Word relied upon as forming the contract
must be sufficiently clear & must establish an offer made by one party to the
conversation & an acceptance of it by the other party.

Before some contracts come into existence there is a pre-contractual stage. It is

important to distinguish this pre-contractual stage – which may include:

 an invitation to treat (e.g. advertisement)

 pre-contractual negotiations

These are preliminary but do not form part of the contract which follows from
them.

Elements of a Contract

 An offer made by the offeror to the offeree

 An acceptance of the terms of the offer by the offeree
  Some recognised form of consideration given by the offeree in return for
what is promised by the offeror
 An intention on the part of both the offeror & the offeree to create a legal
relationship between them.
 Capacity of the parties to contract; meaning that the parties are not minors
(children) & they are of sound mind.

Parties to a contract: Offeror - the party making the offer to contract and Offeree
- the person to whom that offer is addressed.

OFFER: “An expression of willingness to contract on certain terms, with the

intention that it shall become binding as soon as it is accepted by the person to
whom it is addressed”: To constitute an offer the words used, whether oral or
written, must be sufficiently clear & certain. An offer is effective only when
communicated by the offeror (or a reliable third party) to the offeree.

Requirements

 There must be a clear intention to be bound by the terms of the offer

 There must be definite terms as to parties & subject matter
 The offer must be communicated
 Both parties must be free of duress

An offer may be made to a specific person in which case it can only be accepted
by that person or a group of people when any one member of the group may
accept it.

Prior to the point in time when the offeror makes an offer to contract there may
be a number of pre-contractual stages which, whilst they may be steps on the
way towards the making of an offer, are not an offer to contract. These are
referred to as the Invitation to Treat.

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Invitation to Treat: This is where a person holds him/herself out as ready to
receive offers that s/he may then either accept or reject e.g. the display of goods
with a price ticket attached in a shop window or a supermarket shelf is not an
offer to sell the goods. It is an invitation to the customer to make an offer to buy.

1. Advertisements: Advertisements fall short of amounting to an offer & are

known as an invitation to treat: Partridge v. Crittenden: Partridge placed an
advertisement in a magazine, advertising the sale of certain birds, which were
protected & could not have been sold under the Protection of Bird’s Act 1954.
He was convicted (of offering to sell), but on appeal, his conviction was quashed
because the advertisement amounted to an invitation to make an offer & not a
genuine offer. Held: A classified advertisement in a magazine did not amount to
an offer to contract.

The reasoning for this is: there is not sufficient in an advertisement to amount to
an offer. An advertisement is usually silent on matters which are vital to the
contract, e.g. availability of the product or service advertised.

Grainger & Son v Gough: The advertisement described wines for sale by a
merchant. Lord Herschell observed: “the transmission of such a price list does
not amount to an offer to supply an unlimited quantity of the wine described at
the price named, so that as soon as an order is given there is a binding contract to
supply that quantity. The advertisement described wines for sale by a merchant

2. Auctions: At an auction sale the auctioneer’s request for bids is not an offer
which can be accepted by the highest bidder. Instead it is a bid (from the bidder)
that constitutes an offer & the auctioneer may accept or reject. The call for bids
by an auctioneer amounts to an invitation to make an offer. The sale is
completed by the fall of the hammer & until then any bid may be withdrawn.

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Payne v Cave: The defendant made the highest bid for the plaintiff's goods at
an auction sale, but he withdrew his bid before the fall of the auctioneer's
hammer. It was held that the defendant was not bound to purchase the goods.
His bid amounted to an offer which he was entitled to withdraw at any time
before the auctioneer signified acceptance by knocking the hammer. The
auctioneer's request for bids was an invitation to treat & each bid constituted an
offer which could be withdrawn at any time until accepted the fall of the
auctioneer's hammer constituted acceptance of the highest bid.

3. Display of Goods for sale: As a general rule, a display of goods at a fixed

price in a shop window or on a self-service store is an invitation to treat & not an
offer; an offer may be made by a prospective buyer & this the shopkeeper may
accept or reject.

 Fisher v Bell: A shopkeeper had a flick-knife on display in his shop

window as a result of this. He was charged with a criminal offence of
offering for a sale, an offensive weapon. The case was decided in his
favour because the court held that displaying the goods with a price was
not an offer to sell goods but was an invitation to customers to make an
offer.
 Pharmaceutical Society of Great Britain v Boots Cash Chemists: The
Defendants operated a self-service supermarket system at their Edgeware
Branch, in London. Drugs, including drugs on the poisons list were laid
out on open shelves around the shop. Customers selected their purchases
from the shelves, placed them in a wire basket & paid for them at a cash
desk, which was supervised by a registered pharmacist. The
Pharmaceutical Society sued Boots Chemists & claimed that the Poisons
Act had been broken, because the Act required that the sale of drugs on
the poisons list must take place in the presence of a qualified pharmacist.

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 The Society’s argument, which they lost, was that the sale took place
when a customer placed his purchase in the basket & this was not
supervised. The English Court of Appeal held that the display of goods on
a shelf amounted to an invitation to the customer to make an offer. The
customer made the offer to buy at the cash desk & the sale was completed
when the cashier accepted the offer. Since a registered pharmacist
supervised the cash desk, the requirement of the Act had been fulfilled &
the chemists had not committed an offence.

4. Advertisements of unilateral contracts: Carlill v. Carbolic Smoke Ball

Co. Limited: The Defendant company advertised that it would pay £100 to
anyone who caught influenza after using their smoke ball as directed 3 times a
day for 2 weeks. They showed their sincerity by depositing money in a specific
bank. Mrs. Carlill used the smoke ball but still caught influenza & sued the
company for the promised £100. Amongst the many defences argued for the
company, it was suggested that the advertisement could not have been an offer,
as it was not addressed to Mrs. Carlill.

Held: The advertisement was an offer to the whole world, which Mrs. Carlill had
accepted by her conduct. The deposit of funds on an account by the Defendant
company, demonstrated its willingness to be bound by the terms of the offer
There was, therefore, a valid contract between her & the company.

5. Tenders: The acceptance of a tender or offer amounts to a contract. This legal

principle is illustrated in the case of Spencer v Harding (1870), Where the
defendants offered to sell certain goods by tender & the court held that they had
not undertaken to sell to the person who made the highest tender, but were
inviting offers which they could then accept or reject as they saw appropriate.

Contrast Harvela Investments Ltd v Royal Trust Co. of Canada: The

Respondents (vendors –RT of C) invited the Appellants (H) to purchase shares

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in the company whereby they would ‘accept the highest offer’ but changed the
conditions of the invitation to retain majority ownership. H sought to have the
original invitation enforced by the Courts. The Court looked at the wording and
held that the clause bound them to accept the highest offer which was received
and it was clearly not an invitation to treat. As the offer complied fully with the
terms of the telex, it was an offer which when the highest bid was received, was
a completed contract of sale.

6. Request for Information: During the pre-contractual stage, one party may
simply ask for information, or s/he may invite the other to make an offer. A
statement of a selling price may be regarded as an invitation to treat but it is
definitely not an offer.

 Harvey v Facey: The plaintiffs telegraphed to the defendants, “Will you

sell us Bumper Hall Pen? Telegraph lowest cash price”. The defendants
replied, “Lowest cash price for Bumper Hall Pen £900.” The plaintiffs
then telegraphed, “we agree to buy Bumper Hall Pen for £900 asked for
by you.” The Judicial Committee of the Privy Council held that the
defendants’ telegram was not an offer but merely a statement as to price

Termination of Offers:

A valid offer may be terminated by:

1. Lapse of time if the expiration date contained in the offer has passed, the offer
is terminated e.g. an offer expressing a stipulation that it will only last for
specified time only cannot be accepted after the expiry of the date given. If there
is no express expiration date, the offer expires after the passage of a reasonable
time.

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  Ramsgate Victoria Hotel v Montefiore: Montefiore made an application
to buy shares in Ramsgate Victoria Hotel Co Ltd. Five months later the
company informed him he had been allotted the shares applied for.
Montefiore refused to accept the allotment on the grounds the offer had
lapsed due to the passage of five months. Held: the Company in taking
five months to respond to the application had not responded 'reasonably'.
Although no time was stipulated in which the acceptance was to take
place, on the facts of the case this passage of time was too long to be held
as reasonable. Thus, the offer to buy the shares had lapsed through the
passage of time.

2. Revocation: The general rule is that an offer may be revoked at any time prior
to acceptance. This rule applies even though the offeror has promised to keep the
offer open for a certain time. Such a promise is unsupported by consideration &
therefore not binding.

 Routledge v Grant: Grant offered to buy Routledge’s house & gave him
six weeks to accept the offer. Within that period, however, he withdrew
the offer. Held: Grant was entitled to withdraw the offer at any time
before acceptance even though the six weeks had not not expired & upon
withdrawal Routledge could no longer create a contract by purporting to
accept it.
 Dickinson v Dodds: The defendant offered to sell his house to the
plaintiff & said that the offer was to be “left over till Friday.” Held: He
could nevertheless withdraw (the offer) before Friday.

Revocation must be communicated to the offeree: This means that the offeror
must make sure that the offeree is made aware of the withdrawal of the offer;
otherwise it might still be open to the offeree to accept the offer. The notice must

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actually reach the offeree. This requirement of communication applies to
revocations sent through the post, telegram as well as other methods.

 Byrne v Van Tienhoven: The defendant carried out its business in

Cardiff & the plaintiff was based New York. On 1 October, an offer was
made by post. On 8 October, a letter of revocation was posted, seeking to
withdraw the offer. On 11 October, the plaintiffs telegraphed their
acceptance of the offer. On 20 October, the letter of revocation was
received by the plaintiffs.
 Held: The revocation did not take effect until it arrived & the defendants
were bound by the contract, which had been formed by the plaintiffs’
earlier acceptance (which was effective on sending under the postal rule)

A letter of revocation could take effect once it has reached the offeree’s address,
even though the offeree has not actually read the letter.

Revocation via a reliable third party: Communication of revocation may be

made through a reliable third party. Where the offeree finds out about the
withdrawal of the offer from a reliable third party, the revocation is effective &
the offeree can no longer seek to accept the original offer. See Dickinson v
Dodds

3. Rejection: An offeree rejects an offer when s/he expresses an unwillingness to

accept the offered terms.

4. Counter offer: A counteroffer by the offeree operates as a rejection of the

original offer. The counteroffer stops the original offer & starts a new offer.

 Hyde v Wrench: Wrench offered to sell a farm to Hyde for ₤1,000. This
offer was rejected & Hyde made a counter-offer for ₤950. Wrench
rejected the counter-offer & after this, Hyde tried to accept the original
offer of ₤1,000. Held: That was not possible because the original offer

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 was revoked by the counter-offer & it was not revived by a subsequent
attempt to accept.

5. Death: The death or insanity of either party terminates the offer automatically.

6. Destruction of the subject matter: If the subject matter of the offer is

destroyed, the offer is terminated automatically. In such a case, the contract is
said to be frustrated

Acceptance & Consideration

Acceptance: A final expression of assent by the offeree to the terms set out in the
offer or an unqualified acceptance of the terms of an offer. The offeree must clearly
accept the terms of the offer and communicate this to the offeror before the
acceptance is said to be effective and the contract formed.

It is important therefore to identify when there has been an acceptance sufficient to

establish a contract between the parties.

 In most cases the acceptance must exactly match the offer in order to make a
binding contract.
 The offeree must ordinarily accept all the terms of the offer.
 The acceptance must be absolute & unqualified:
 An enquiry as to whether payment can be made on terms or a request for
clarification of certain provisions is not a counteroffer & does not destroy the
original offer. See Stevenson v. Mcclean (1880) where the defendant offered
to sell a quantity of irons to the plaintiff who responded by enquiring of the
credit limit. The defendant sold the iron to a third party and the plaintiff sent a
second telegram accepting the offer. Held: the 1st telegram was a mere request
for information and not a counter-offer, there had been no revocation by the
defendant and there was a valid contract.
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An acceptance may be verbal, written or displayed through conduct, and must
actually be communicated to the offeror. Silence cannot amount to acceptance.

See: Felthouse v. Bindley: The Plaintiff had been negotiating to buy his nephew’s
horse. He eventually wrote to his nephew, ‘if I hear no more about him, I shall
consider the horse mine.’ The horse had been listed for sale at an auction & by
mistake the Auctioneer sold the horse. Held: The uncle had no claim. Some form of
positive action was required for a valid acceptance. Silence was not enough.

Communication of Acceptance: The general rule is that acceptance must be

communicated to the offeror either by the offeree him/herself or by someone
authorised by the offeree. The contract is formed at the time & place the acceptance
is received by the offeror.

Exceptions:

Postal rule: Where an offeree replies to the offeror’s offer in writing & posts a reply
to the offeror, it is at the point in time when the reply (acceptance) is posted that it is
effective & the contract is formed provided the letter is properly stamped, addressed
& posted. The contract is formed even if the letter is delayed or never reaches its
destination.

See: Adams v Lindsell: Lindsell made an offer to Adams requiring an answer “in
course of post”. September 2: The letter of offer was posted but was misdirected &
delayed in the post. September 5: Adams posted a letter of acceptance immediately
upon receiving the offer letter. September 8: Lindsell, not receiving a reply within
the expected time, sold the goods to another buyer. September 9: Lindsell received
the letter of acceptance. Held: A valid contract was formed when the acceptance
letter was posted as the acceptance had indeed been given “in course of post”.

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See: Household Fire and Carriage Insurance Co. Ltd. v. Grant: Grant applied
for shares in an insurance company. The company replied by sending a statement of
allotment of shares. Grant claimed never to have received this & therefore was not
bound by the company's terms & conditions. Held: He had made an offer (i.e., he
offered to pay some money in return for shares) & the company had accepted his
offer by posting his share certificate. There was therefore an enforceable agreement.

Acceptance of an offer by post occurs at the moment of posting, not when the
acceptance is received

Acceptance using Instantaneous Modes of Communication: An acceptance which is

made verbally or by some instantaneous mode of communication e.g. telegram must
actually be communicated to the offeror in order to be effective & form a binding
contract.

See: Entores Ltd. v. Miles Far East Corp: Lord Denning found that the regular
postal rule did not apply for instantaneous means of communications such as a telex.
Instead, acceptance occurs where the message of acceptance is read. Held: in the
case of a telexed acceptance, the acceptance took effect where it was actually read
(printed out) & not in the country from which it was sent.

Email, faxes & voice mail: the law has not definitively settled the question as to
when acceptance occurs. The question arises as to whether acceptance takes effect
on arrival in the inbox, when printed out on the fax machine or recorded on the
messaging device? Or does it instead take effect when read or listened to?

In a series of cases the courts have held that it varies from circumstance to
circumstance as to when acceptance takes effect.

Withdrawal of Offer using Instantaneous Means: Therefore, communication of

withdrawal of an offer by telex is effective when it could be read, rather than when it
is in fact read.

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CONSIDERATION: The basic feature of the doctrine is the idea of reciprocity:
"something of value in the eye of the law" must be given for a promise in order to
make it enforceable as a contract. An informal gratuitous promise therefore does not
amount to a contract.

The doctrine of consideration stresses that consideration has to be something of

value in the eye of the law

Consideration: Characteristics

1. Benefit & detriment: consideration is either some detriment to the promisee

(in that s/he may give value) or some benefit to the promisor (in that s/he may
receive value). Usually, this detriment & benefit are merely the same thing
looked at from different points of view. It is sufficient if there is either a
detriment to the promisee or a benefit to the promisor.

2. Consideration need not be Adequate: Under the doctrine of consideration, a

promise has no contractual force unless some value has been given for it. But
the courts do not, in general, ask whether adequate value has been given, or
whether the agreement is harsh or one- sided. It is rather that they should not
interfere with the bargain actually made by the parties.

3. Nominal Consideration: The rule that consideration need not be adequate

makes it possible to evade the doctrine of consideration, i.e. to make a
gratuitous promise binding by means of a nominal consideration, e.g. for the
promise of valuable property, or a peppercorn for a substantial sum of money.
Such cases are merely extreme applications of the rule that the courts will not
judge the adequacy of consideration.

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4. Consideration must be of Some Value: An act, forbearance or promise will
only amount to consideration if the law recognises that it has some economic
value. It may have such value even though the value cannot be precisely
quantified.

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