Tuesday 30 January 2007

A new subject for you. I intend to teach you the law of contract, followed by consumer protection. When we have done that we shall turn to wills & probate.

People enter into contracts every day, and there is no difference between buying a bottle of pop and a Rolls Royce. Both require five elements to exist if the contract is to be valid.

We’ll start by looking at what a contract is, and fill out the framework over the coming weeks.

Definition of a contract: “an agreement that the law will enforce”. This is essential, but there are five elements which must exist before a party can enforce a contract.

Whilst all contracts are agreements, all agreements are not contracts. Learning the law is more difficult than learning to ride a bicycle? If you agree we have an agreement, but we do not have a contract.

The best way of analysing a problem question in an examination on what purports to be a contract in real life, is to ensure that the five basic elements are present. Without them there can be no contract. Having found all five to be present, only then do you need to dig deeper into the law itself.

1. Offer


2. Acceptance – these are the basic building blocks that must lead to an agreement


3. Consideration – what both parties contribute of value to the bargain. A gratuitous promise is not binding unless in a deed (later)


4. Intention to be legally bound – is it that sort of transaction which the parties intended should be enforceable against each other, or was it merely a social arrangement? If the former there is a presumption of being bound, but not in the latter.


5. Capacity - the law will protect those that cannot protect themselves, so the mentally disordered (permanently or not), the drunk and those under the influence of drugs and the young do not have the capacity to enter into contracts.

None of this needs to be written down, although the law does require some contracts to be in the form of a deed, and some must be evidenced in writing. If disputes arise it is for the courts to ascertain the rights and wrongs, the same as other areas of the law.

So there is our basic simple contract:

Offer “Daily Telegraph, please”
Acceptance “Sixty pence, please sir”
Consideration The newspaper and the money
Intention to be Commercial transaction, so
legally bound intention is presumed
Capacity Both 18 years or older and sane

Write this out on a card and learn it quickly.
OFFER
A statement of the terms by which the offeror is prepared to be bound.

If the offer is accepted then there is an agreement. If the other three elements exist, there is a contract.

• Party making the offer = offeror


• Parting to whom offer is made = offeree


• Unilateral Offer - A one sided offer, the offeror has no idea whether anyone will accept the offer, e.g. Carlill; reward cases


• Bilateral Offer – more common, one person makes an offer to another

The majority of the law of contract is based upon common law, developed over the years by the Judiciary by reference to previous decisions and the rules of precedent. Because of this it is important to cite cases when covering a point of law, or at least having a knowledge of the details of the case from which the point arises.
THE INVITATION TO TREAT
Some statements look like offers, but are, in fact, something else. No offer means no contract.

Pharmaceutical Society v Boots [1953] – Boots ran a supermarket type layout in their stores, and the question to be decided is whether the sale is made at the shelves or at the cash desk. It was important because the PHARMACY AND POISONS ACT 1933 stated that certain merchandise could be sold only under the supervision of a pharmacist. The pharmacist was near the cash desk, not the shelves, and Boots were being prosecuted for this heinous offence.

When is the contract made? At the cash desk said LJ Somerville, and so Boots were not guilty as they had a pharmacist there. Prior to that moment of sale the display of goods was an “invitation to treat” as opposed to an offer.

It is important that you understand the term, and are able to differentiate between it and an offer. You should be able to work out the decision in:

Fisher v Bell [1960] – flick knives were displayed in a shop window being ‘offered for sale’. If that was true then the owner was guilty of an offence under the RESTRICTION OF OFFENSIVE WEAPONS ACT 1959, but it isn’t true. The display of an article with a price on it in a shop window is merely an invitation to treat. In no sense is it an offer for sale, the acceptance of which would constitute a contract.

Classified ads are the same, an invitation to readers to make offers, not offers in themselves. It must be so by illustration:

“Rolex watch for sale. Brand new, unwanted gift. £500.”

The advert gets twenty replies and the sale is made. It would be ludicrous for the disappointed nineteen to be able to bring an action for a breach of contract and, of course, they can’t. The ad was simply an invitation to treat, the replies are the offers which the advertiser can accept or reject as he wishes.

Partridge v Crittenden [1968] – a man was acquitted of offering to sell a Bramble Finch, a protected bird, on the basis that the ad in Cage and Aviary Birds was an invitation to treat, not an offer.

At an auction the bidder makes the offer to buy, acceptance is made at the fall of the hammer. In Barry v Heathcote Ball Ltd [2001] the Court of Appeal held that the auctioneer who rejected the highest bid because he considered it too low was in breach of contract, as there was a collateral contract that the goods would be sold to the highest bidder.

A statement as to the price may be an invitation to treat as opposed to an offer, as happens during negotiations.

Harvey v Facey [1893] – the claimants telegraphed the defendant in relation to a piece of land:

C: “Will you sell us Bumper Hall Pen? Telegraph lowest price”
D: “Lowest cash price for Bumper Hall, £900”
P: “We agree to buy Bumper Hall for £900 asked by you”

The Privy Council stated that the original message was not an offer. The second one was, but there was no acceptance.
REWARDS
Is a reward an offer? If it is, does it need to be accepted to form the basis of a contract?

“The Sun has offered a reward of £10,000 to any person who can provide information leading to the arrest and subsequent conviction of the killer of WPc Blue”

B provides the information, and X is later convicted. Must The Sun pay? B did not communicate his acceptance of the offer to The Sun, so are they bound? Yes. In practice there is no problem with this, as long as you spot that there is a reward. It is a unilateral offer - you do this and I will pay.

Possibly second only to Donoghue v Stevenson in fame is the case of:

Carlill v Carbolic Smoke Ball Company [1893] – a good example of quack medicine, although not to take off in the same way as Coca-Cola. Full page ads were taken in papers and magazines:

• Coughs cured in 1 week


• Snoring cured in 1 week


• Whooping Cough relieved at first application


• Hay Fever cured in every case

and so it went on, eighteen claims in all. At the time of the ads there was an epidemic of influenza, and this must have seemed to be a marvel come to save everyone. All you had to do was set fire to the ball and inhale the fumes. A truly miracle cure. I have given you a copy of the ad.

To bolster their claims the ad stated that £1,000 had been lodged at a bank with £100 rewards available for everyone who had bought the ball and subsequently caught flu. Mrs Carlill bought the ball, used it, and caught flu. She claimed £100 from the company and was refused. She sued for breach of contract. The case was to raise a number of important issues, which are still valid today. From what you know so far, there seems to be an:

(image placeholder) Offer - Buy the ball
(image placeholder) Acceptance - The cash
(image placeholder) Consideration - The ball and the cash
(image placeholder) Presumption of legally bound - Commercial transaction
(image placeholder) Capacity - No problem here

so why didn’t the company pay up?

Held:

(image placeholder) Firstly it was argued that the document was too vague to be enforceable. Yet it isn’t a contract at all, it is only an offer to the public.

• The defendant then contends that it is an offer which is too vague to be treated as a definite offer; there is no time limit on catching the flu and it cannot be supposed that they seriously intended to pay money to everyone who caught flu after inhaling the smoke ball.


• It is further argued as being too vague as its terms were wide enough to cover all those who had used the ball prior to the ad, and in any event it was an offer to the whole world in general. It was unreasonable to suppose it to be a definite offer because no-one would contract themselves out of the opportunity of checking the experiment which was going to be made at their own expense.


• It was also contended that this was a mere trade puff or proclamation, rather than an offer intended to mature into a contract when accepted.

The main point, rejected by the Judge, was that the vagueness of the document showed that no contract was intended. The intention was to increase the use of the smoke ball.

Was the intention that the £100 should be paid if the conditions were met in full? It was intended to be so understood by the public as an offer to be acted upon, but the defendant argued that there is no check by them. That is their problem, an extravagant promise is no reason as to why he shouldn’t be bound by them.

Is this a contract made with all the world? No. It is an offer made to all the world which can be accepted by anyone who comes forward and performs the conditions:

• buy the ball


• use the ball


• catch the flu


• claim the cash

TERMINATION OF AN OFFER
An offer which is accepted becomes an agreement, and may become a contract. An offer will not last forever if it remains unaccepted; it can end by:
Rejection
An offer is rejected when the person to whom it is made turns the offer down. This is not as silly as it seems, as we shall see.
Revocation
The offeror withdraws the offer. Provided it is effectively communicated to the offeree by either the offeror or a reliable third party, and provided it is done before acceptance, it is revoked and no longer exists to be accepted.

Dickinson v Dodds [1876] – on Wednesday 10/6/1874 the defendant delivers a letter to the claimant containing a signed offer to sell a house for £800, including the words “this offer to be left over until Friday 12/6/1874 at 9 a.m.”. On 11/6 the claimant hears from someone else, a Mr Berry, that the defendant had been negotiating with another prospective purchaser. He went straight round to the defendant’s house and left a formal written acceptance. This never reached the defendant. On the following morning, Friday 12th, the defendant was handed another copy of the acceptance by the same Mr Berry. The defendant said he sold the house the day before. The claimant brought an action for specific performance, i.e. asked the court to order the defendant to do as he had agreed, the defendant argued that there was no agreement and so there was no contract to breach, his offer having been revoked as a consequence of the events.

It was held that to constitute a contract it must appear that two minds are as one at the same moment of time, i.e. an offer continuing up to the time of acceptance. If there was no continuing offer the acceptance comes to nothing. It may well be that the one man is bound in some way or other to let the other man know that his mind has been changed with regard to the offer, but here the claimant knew that the defendant was no longer minded to sell as plainly as if he had told him in so many words “I withdraw the offer”. So the communication by Mr Berry (a third party) was enough to withdraw the offer.
Counter Offers
An offer answered with another offer destroys the first offer. This counter offer can be converted into a contract by acceptance. Note: a request for further information which leaves the original offer untouched is not a counter offer.

Hyde v Wrench [1840]
A farm is offered for sale at £1,000.
Offeree offers £950 (counter offer destroying first offer)
Offeror refuses
Offeree then suggests £1,000, an acceptance of the first offer

The counter offer destroyed the original offer, so when he then purports to accept it there was nothing for him to accept.

Businesses check that both sides are in agreement at the end of negotiations, and many use standard forms. What happens when these ‘standard’ forms are different? It is known as “the battle of the forms”.

Butler Machine Tool Co v Ex-Cell-O Corporation [1979] – a contract was made for a machine tool, and a dispute arose over the price. The buyer had enquired and on 23/5/69 the seller quoted a price of £75,535 with a delivery date some ten months later. The machine was offered subject to terms “which shall prevail over any terms and conditions in the buyer’s order”. The vital term that caused the dispute concerned variation. This meant that the price for the goods was that prevailing at the time of delivery, which was ten months after the enquiry. The order was made on the prospective buyer’s order form, which differed in several respects from the seller’s standard form. The buyer’s form, not surprisingly, contained no price variation clause. At the bottom was a tear off slip which read “We accept your order on the terms and conditions stated thereon”. This order was placed on 27/5. The slip was completed and returned on 5/6, but was accompanied by a letter stating that the order was accepted in accordance with the quote of 23/5.

Upon delivery the price had risen by £2,892 and the action was brought on whether this was payable. Which of the two ‘standard’ forms applied?

The Court of Appeal decided that the buyer’s order of 27/5 was a counter-offer which destroyed the sellers offer of 23/5. The return of the acknowledgement slip amounted to an acceptance of the counter-offer and, therefore, the contract was made on the buyers terms and the increase was not payable. The letter with the slip was irrelevant and did not operate to incorporate the seller’s terms back into the contract.

What seems to have been overlooked is the simple question: were the parties ever in agreement?

This kind of trading goes on every day, with hundreds of thousands of pounds worth of business done on these non-existent contracts. Professor Atiyah suggests distinguishing between executed and executory contracts. Once executed it would be ridiculous to say that there never was a contract, and so the court will find a way of preferring one set of terms to the other. Where it is executory, i.e. to be performed in the future, the court may well decide that there is no agreement and refuse to enforce it.
Delays
The problem here is:

• The making of the offer


• Goods get damaged


• Delay


• Offer accepted

Financings v Stimson [1962] – the offeror was awaiting a response from a finance company to his offer to buy a car and vehicle. In the interim the vehicle was wrecked by thieves. The offer is deemed to have lapsed at that moment, the offer having been based upon the condition the vehicle was in when it was inspected.

Just how long is too long will depend upon the goods.
Death
The general rule can be found in Reynolds v Atherton [1912] –upon the death of either party negotiations are brought to an end.

However, if the subject of the contract is not dependent upon the deceased’s personal activity, his executors could carry out the deal and if the offeree has not heard of the death when he accepted then a contract could be made. Don’t worry too much over this.

We will begin with an acceptance next week.