Tuesday 6 February 2007

We began this week by looking at the second element of a contract, that of the ACCEPTANCE. This is defined as “An unconditional assent of the offeree to all the terms of the offer.” A conditional acceptance is of no use, they can be considered as counter-offers: Hyde v Wrench [1840], that we discussed last week.

The phrase ‘acceptance subject to contract’ is typically used in house purchases and sales. The parties do what is necessary with surveyor’s, building societies etc., and in the meantime the contract is prepared and routine enquiries before contract are made.

Winn v Bull [1877] – acceptance ‘subject to contract’ means what it says. It is subject to and dependent upon a formal contract being prepared.

Where an offeree decides to accept an offer he must generally communicate the decision by informing the offeror that he is now a party to an agreement. There are various ways of communicating the acceptance, and there are exceptions to the general rule.

Felthouse v Bindley [1863] – a horse was to be sold by auction. The vendor’s uncle offered to buy it. He said, “If I hear no more about him, I consider the horse mine at £30/15/- (£30.75p).” So does the nephew accept by saying nothing? The trial Judge pointed out what could have occurred, e.g. the nephew could bind his uncle by writing to him, or the uncle revoking the offer before acceptance. When the farming stock was to be sold the nephew told the auctioneer, the defendant, that the horse had already been sold. Therefore, in his own mind, the nephew had sold the horse to the uncle, but hadn’t communicated this to him. Nothing was done to vest the horse in the claimant down to 25/2 when the defendant auctioneer sold it.

It was the uncle that had brought the action against the auctioneer alleging that he had bought it from the nephew, and therefore the defendant had no right to sell it. To win he had to show that there had been a contract between himself and the nephew under which ownership had passed. He failed as there had been no acceptance communicated to the offeror. So, SILENCE DOES NOT CONSTITUTE ACCEPTANCE.

The DISTANCE SELLING REGULATIONS 2000 implemented the Distance Selling Regulations. Unsolicited goods become the recipient’s immediately, and are treated as an unconditional gift. It is also a criminal offence to demand money for goods that were not ordered.


A REWARD or UNILATERAL CONTRACTS: the offeror of a reward does not need or expect to be told, he does not need to be told in order to be bound. As discussed in Carlill v Carbolic Smokeball Co. [1893], a further argument of the defendant was that the claimant had not told them that she had bought and was using the ball, and so the acceptance had not been communicated. There is no need as this was a reward case. LJ Bowen said (paraphrased), “If I advertise to the world that my dog is lost and offering payment for its return I do not expect potential seekers to write an offer of acceptance first. They look for the dog and perform the condition, and there should be no need to notify acceptance to make a binding contract.”

THE POSTAL RULE: Where the post is an appropriate means of communication between the parties, then the following rules apply unless the parties agree otherwise:

1. The letter containing the offer is effective when received. You can hardly accept an offer that you don’t know about!


2. A letter of revocation is effective when it is received - the revocation must be communicated to the offeror before acceptance. This seems straightforward, but:

Byrne v Van Tienhoven [1880]

1 Oct: The defendant in Cardiff posts an offer to the claimant, who is in New York
8 Oct: The defendant changes his mind and posts a letter of revocation
11 Oct: The claimant sends a telegram of acceptance
20 Oct: The claimant sends a letter in confirmation of the telegram
25 Oct: The letter of revocation arrives

So one is convinced that the offer is revoked, the other that he has accepted the offer. As you will see from the next rule, the court held that the letter of acceptance was valid when posted and so the revocation was too late. The contract had probably been formed on 11 Oct and in any event had been formed on 20 Oct, and both dates were prior to the arrival of the letter of revocation.

1. A letter of acceptance is valid as soon as it is posted, or as soon as it is put into the hands of a Post Office employee for posting (e.g. recorded delivery).

What happens if the letter gets lost and the offeror isn’t told that he is bound by the contract?

Household Fire Insurance v Grant [1879] – Grant applies for shares in the claimant’s company and a letter of allotment was posted to him. It was never received. When the company went into liquidation Grant was asked for his contribution of the amount outstanding on his shares, to place into the company assets. The court held that Grant was a shareholder, the contract was made when the allotment letter was posted.

It really has to be that way, otherwise he could have avoided payment even if he had received the letter by claiming that he had not.

The postal rule can be avoided by the parties making an agreement contrary to it and this is the case in much contract law. Two people are free to make their own terms and conditions in any contract, with the law intervening only where one of the parties is in a less favourable position.

Holwell Securities v Hughes [1974] – the offeror said that he required notice ‘in writing’ of the acceptance. Thus the letter had to reach him before the contract could be formed.

As the law has evolved the postal rule has been extended to telegrams and telemessages. Acceptance is at the time of dictating the message over the telephone. If a private courier service is used then the acceptance is treated as valid upon delivery of the message to the courier. There is no authority for these assertions, the intention of the parties will ultimately be looked at by the court to ascertain just what was meant.

Telex machines were superseded by fax and e-mail. When do the offers and acceptances become effective? There is no clear authority for most of this, and when the situations do arise the courts will need to refer to the basic principles to interpret them.

An offer: must be communicated to the offeree. So whatever device is used the offer will not become effective until the person to whom it is addressed reads it.

An acceptance: the first attempt (involving a telex):

Entores v Miles Far East Corporation [1955] – the Judge decided that the telexed acceptance became effective when it was received, but as telexes are simply talking devices in print it is almost instantaneous and so the general rule applies – there is no binding contract until the acceptance is communicated to the offeror.

The decision in Entores has been followed ever since, but should it apply to faxes and e-mail? If you send me a fax to my home it will be received practically instantaneously and I shall have a hard copy of it. If you send me an e-mail it can be held in the system for hours, and I might not receive it from my mail box until many hours later.

The Entores decision, however, was concerned with the PLACE of communication, not the TIME of it, and so provides no direct authority on the issue of the time when a telex acceptance takes effect.

Brinkibon v Stahag Stahl [1983] – the House of Lords were dealing with a situation almost identical to that in Entores. It approved that approach, but refused to say whether the same approach should be used in all circumstances, e.g. the message is sent out of office hours or at night, the recipient’s machine is faulty etc. Lord Wilberforce specifically stated that no universal rule can cover all such cases, it must be resolved by reference to the intention of the parties, by sound business practice and in some cases by a judgement where the risks should lie.

The ELECTRONIC COMMERCE (EC DIRECTIVE) REGULATIONS 2002 have been introduced to deal with contracts via the Internet. All e-tailers must provide a minimum amount of information on the web site. The important bits of information to be provided are:

1. The different steps to be taken to conclude the contract


2. Whether or not the contract will be concluded by the service provider


3. How to identify and correct input errors in placing an order


4. The terms and conditions of the contract

After the order has been placed the company must acknowledge receipt electronically without delay and make available a means of correcting an input error.

Acknowledgement of the order will be deemed to have been received when the recipient can access it, and it is at this point that the contract is concluded. A failure of the supplier to acknowledge will mean that the order is not enforceable against the consumer.
The Telephone is considered in law to be ‘face to face’. But what happens if the acceptance is left on an answering machine? The person leaving the message knows it has not been heard at the time that it was left – but this may not be true. He does not know whether it will ever be listened to.

Again, no case law. Some suggest that the caller should check again later, but that defeats the whole point of an answering machine.

The third element of a contract is the CONSIDERATION, the contribution made by each of the parties to the bargain.

A definition of consideration can be found in : Dunlop Pneumatic Tyre Co v Selfridge [1915] – consideration is an act or forbearance of one party or the promise thereof and is the price for which the promise of the other is bought and the promise thus given for value is enforceable. I know it is long-winded, and I don’t really expect you to remember it!

The whole purpose of a contract is this consideration, what each of the parties want to gain from it. If one of the parties does not receive their consideration it will usually be a breach. A number of so-called ‘rules’ have been developed by cases, meaning a piece-meal approach:

A promise for nothing is not binding, except if it is contained in a deed. The only reason that the law will enforce it is because of the extraordinary lengths that the promisor went to in order to make it. The signature is important.

There are three types of consideration:

EXECUTORY - A promise to do something which will bring about the act of the contract at a later date. Go and order a new bed from Beds R Us and agree to pay cash on delivery for it, then the later delivery and later payment are promises to the future that will support a contract.

EXECUTED - One or both of the parties have already performed their part of the contract. If you had paid for the bed in the shop, with delivery to follow one week later, then you have executed your part of the contract.

PAST - The promise to pay is made after the act has been completed. As a general rule, past consideration in no consideration at all. The examiner’s favourite.

As long as the consideration has a value, then in the absence of fraud, it is enough. If you offer to sell me your house for my briefcase as consideration the law will enforce it.

Thomas v Thomas [1842] - £1 each year for ground rent of a house was enough to bind a promise to allow a woman to live in her late husband’s house. It was not the market value, but it did have value. His love and affection for her was not enough, but £1 would do!

White v Bluett [1853] – father promised his son that he need not repay money owed, if he would stop boring him! There was no consideration as there was no economic value.

Can there possibly be any value in something which is simply thrown away?

Chappell and Co v Nestle Co Ltd [1960] – three chocolate wrappers, later to be thrown away by a record company, could be of value as consideration, as this was part of a deal whereby the wrappers and 1/6d formed the price of a copy of a record called “Rockin’ Shoes”.

The argument that the wrappers were thrown away is not relevant, it was a part of the consideration and the offeree is not concerned with what the offeror might do with the consideration. The wrappers formed a part of the consideration.

Consideration cannot exist where you are already bound by an existing contractual duty with the other party, although if you did more than what is contracted you could expect more pay.

Stilk v Myrick [1809] – a sailor couldn’t recover extra pay he was promised (the promise wasn’t binding) for working upon a voyage to cover for two deserters from a crew of eleven.

Hartley v Ponsonby [1857] – the circumstances are similar to the above, but the desertion was nineteen out of a crew of thirty-six, leaving only four or five able seamen. He had done more than his existing contractual duty and had ‘bought’ the promise of extra pay.

Consideration cannot exist in doing what the law already requires - an existing legal as opposed to contractual duty.

Glasbrook Bros v Glamorgan C. C. [1925] - there were industrial problems at a quarry and the police were called to protect the owner’s property. The police made a charge, but the bill was not paid. The argument was that the police were already under a legal duty to protect property, thus there was no consideration on the part of the police to bind the promise to pay. However, the police had attended in greater numbers than that needed to discharge their usual legal duty, and had done so at the request of the owner and in reliance of the promise of payment. Consideration had been given to bind the promise and they should be paid.

A more up-to-date version can be found in Harris v Sheffield United F. C. [1988] - the circumstances are the same, except that the police attended on a regular basis. There was the same argument as in the colliery case, with the same greater numbers reply. The court held it to have been a ‘special’ police service. A number of other clubs had helped finance the action in the hope of a different result.

It is hardly extra value to be paid less than what you are owed, but what if you can find a LITTLE EXTRA?, something that a person was not contractually bound to do?

Pinnel’s Case [1602] – Cole owed Pinnel £8/10/- to be paid by 11/11. At Pinnel’s request Cole paid £5/11/- on 1/10 in full settlement of the debt. As the debt had been paid early there was valuable consideration.

D and C Builders v Rees [1966] – the builders promise to accept £300 in full settlement of a debt of £482 was not binding, and so they could sue for the balance. A part payment of a debt has no value, and consideration must be valuable.

This would not be the case if it were not a ‘straight’ part payment. If there is any little extra then valuable consideration has been given. So:

1. Part payment made early
2. Payment was in bricks to the value of £300
3. Part payment + a wheelbarrow
4. Part payment through a third party – A owes B, B accepts cash from C with agreement of creditor

All contain this little something extra. If this little extra is missing then a part-payment has no value; and consideration must be valuable:

Re Selectmove Ltd [1995] – a case concerning the payment of income tax arrears by instalments. The Inland Revenue agreed to accept the instalments, but later changed their mind and threatened to wind up the company unless the sum was not paid in full. The company appealed against the decision, but a promise to pay a sum which a debtor is already bound to pay, is not good consideration.

In other cases the courts seem to have been willing to accept that consideration can exist in a variety of contracts by the parties. It is an idea based upon economic duress. It is usual to include penalty clauses in building and highway contracts:

Williams v Roffey Bros and Nichols [1990] – an agreement by a sub-contractor to perform existing duties under a contract was held to amount to good consideration for a promised increased payment. The gain to the main contractor was avoiding penalty clauses for late performance, and that was valuable consideration.

Past consideration is no consideration at all.

Roscorla v Thomas [1842] – A sells a horse to B. A price is agreed, A gets the cash and B gets the horse. Then B asks about the horse’s temperament and A says that it is ‘sound and free from vice’. In fact it is the opposite. B cannot sue A for a breach of contract as it was not part of the deal – when B made the enquiry the deal was already over and the consideration (the money for the horse) was already in the past.

Re McArdle [1951] – A dies, leaving the house to his widow for life, then to the children. Improvements were made at the house, with the children subsequently promising to make a contribution, but the promise came after the work was done and was not, therefore, binding.

If A promises B £50 to find his lost dog B can only enforce the promise once he has found the dog, when he has executed the consideration, but the consideration is clearly given in return for the promise since it is performed after the promise. Hence whilst it is past (executed) in relation to the time of enforcement, it is not past in relation to the giving of the promise and is good consideration.

Conversely if B knows that A has lost his dog and searches for it, finds it and returns it to A, than A being grateful promises B £50, the promise is not enforceable since finding the dog could not have been done in return for the promise as it was done before the promise was made. It was past in relation to the promise.

Having told you all of this, the rule is not complied with strictly as the courts have to be sympathetic to commercial reality. It is a well established exception that professional people don’t respond to requests for their services except on the basis that they are to be paid for them. Call out the emergency plumber after you have hammered a nail through a pipe and he will come to fix it. A promise is then made to pay for the work (past consideration) and it is legally enforceable. This is known as the DOCTRINE OF IMPLIED ASSUMPSIT.

Re Caseys Patents [1892] – Casey agreed to promote certain patents held by S. Two years later S wrote to Casey promising him a one third share in the patents for his efforts in promoting the products. The court held that Casey could enforce the payment as the original agreement created an implication of payment and all that was left to be determined was how much, and this was set out in S’s letter.

Consideration Must Move From The Promisee. This is all about ‘privity of contract’; i.e. the claimant must show that he provided consideration. If A and B enter into a contract and B does not fulfil his part, neither X, Y or Z can sue B as they have no privity. Only A and B have rights, and only they have obligations.

This may seem fair enough, but as we shall see, it does present problems. The common law rules still exist, but we will first look at how statute law assists.

CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999
This supplements the common law.

Section 1 – someone who is not a party to a contract may still enforce a term of it if:

• the contract says that he may, or


• the contract purports to confer a benefit on him

the third party must be named in the contract or identified as a member of a class answering a particular contract description. They need not exist at the time the contract is entered into (unborn child, future spouse?).

Section 2 – the original parties cannot later cancel or vary the right of the third party to sue.

Section 3 – the defendant has the same defences available as he would have against a contracting party.

Section 4 – the rights of the original contracting parties to sue is not affected.

Section 5 – the party in breach cannot be forced to pay twice for the breach.

Section 6 – certain contracts are excluded – not important here.

Section 7 – third party cannot contest validity of a term under UCTA 1977.

Section 7(4) – the third party is not a ‘party to the contract’ for the purposes of other legislation, e.g. UCTA 1977.

The common law rules are explained in:

Tweddle v Atkinson [1861] – a couple got engaged, and each set of parents promised to pay a sum of money to the couple upon marriage. One paid, the other didn’t. In fact, the father died before he could pay. The couple sued the estate for the cash and failed. The only possible claimant could have been the other set of parents, the couple had provided no consideration to the contract and could not, therefore, sue under it.

Dunlop Pneumatic Tyre Co v Selfridge [1915] – this is the case we used for our definition of consideration. Dunlop sold tyres to Dew and Co, subject to two conditions:

1. The firm would not resell the tyres below a certain price
2. If any tyres were sold to a trade customer, they would be required to agree to point one.

Dew sold to Selfridges under a contract that provided for the price restriction, with a clause awarding £5 per tyre payable to Dunlop for each breach. Selfridge sold to customers below the price and Dunlop sued to obtain the requisite number of fivers, and sought an injunction to prevent further breaches. The defendants were not liable to Dunlop as Dunlop had provided no consideration for the defendant’s promise. No privity of contract existed between Dunlop and Selfridge.

Because of decisions such as these the courts had to find ways around the harsh privity rule, and came up with the following exceptions:

COLLATERAL CONTRACTS. The favoured approach. Find a collateral contract to exist between the third party and one of the parties, the third party will then be able to sue to enforce it.

A contracts with B, X is the third party. The court finds a collateral contract between A and X where, because of X’s statement, A is induced to enter into the contract with B. The consideration for X’s promise is A entering into the contract with B (to the detriment of A).

Shanklin Pier Ltd v Detel Products Ltd [1951] – the claimant employed contractors to repair their pier, specifying the type of paint to be used, that of the defendants. The stipulation was made after the defendant had told the claimant that the paint would last for seven years. In fact it lasted only three months, and £4,000 was spent remedying the defects. The defendant argued that as there was no contract they couldn’t be held liable. However, a collateral contract existed between the claimant and the defendant and the latter was liable to pay damages for its breach. They had provided consideration for the promise of the defendant by entering into an agreement with the contractor which resulted in the purchase of the defendants’ paint.

THE EQUITABLE POSITION. A contracts with B for the benefit of C. C cannot enforce under the contract, even though both A and B both know that C is the object of the contract. Equity has been prepared to regard the contract as creating a trust in favour of C, enabling C to sue as a beneficiary under a trust. This is similar to the statute above, but remember that equitable remedies are discretionary.

The law of agency is particularly important in insurance law, and needs only a few words here. If A contracts with B to supply goods to C, A is judged to have acted as C’s agent, so C can sue B under the contract. The normal rules of agency provide that “he who does an act through another does it himself.”

Equitable Estoppel. One of Lord Denning’s most famous cases:

Central London Property Trust Ltd v High Trees House Ltd [1947] –concerns the argument of consideration.

In 1940 a landlord gratuitously promised to halve the rent that he could have demanded from a company who rented the whole block. It was World. In 1945 the landlord wanted to return to his former position of War II and difficult times for the company to let flats and pay the full rent full rent, the company thought otherwise. The landlord was entitled to recover the rent arrears from the end of the war. There was no right to sue for the ‘arrears’ from 1940 - 1945 as the 1940 agreement would defeat the claim. Equity requires the claimant to honour his gratuitous promise made in the 1940 agreement.

This is known as equitable estoppel and simply means that a person who promises that he will not insist on his strict legal rights and that subsequently the promise is acted upon, the principle requires the promise to be honoured even if there is no consideration. It is applied only subject to the following points:

• It is a DEFENCE ONLY, not a cause of action - Combe v Combe [1951]


• The individual to whom the promise is made must be able to show that he RELIED on the promise.


• Those seeking help must show that they acted with FAIRNESS (clean hands).


• Equitable estoppel SUSPENDS rights, it does not EXTINGUISH them. Thus in High Trees it was suspended in time of war and then re-instated.

Our fourth element is AN INTENTION TO BE LEGALLY BOUND. In law there are rebuttable and irrebuttable presumptions, and there are two rebuttable presumptions here:

SOCIAL AND DOMESTIC AGREEMENT: No intention to be legally bound

COMMERCIAL AGREEMENT: Intention to be legally bound

Social and Domestic

Balfour v Balfour [1919] – the defendant was a civil servant in Ceylon (Sri Lanka). The defendant and his wife came to England on leave. When it was time to return the wife remained in England for health reasons. They agreed that he would pay her £30 per month whilst they were apart. The wife later divorced him and so he stopped paying. She sued and lost. Couples make such arrangements all the while, and whilst they are agreements they are not contracts because the parties did not intend that they should be legally bound.

compare

Simpkins v Pays [1955] – an old lady, her grand-daughter and the lodger jointly entered a competition. The old lady’s name appeared on the form. The grand-daughter won £750 and the lodger had to sue for his share. Despite the social agreement this was held to be a contract.

Commercial Agreements

Edwards v Skyways [1964] – a promise of ex gratia payments to surplus pilots was held to be binding as it was a commercial agreement.

compare

Rose and Frank v Crompton [1925] – an agreement for the sale of paper tissues contained a clause - “This arrangement is not entered into, nor is this memorandum written, as a formal or legal agreement and shall not be subject to legal jurisdiction in the courts.” The parties were not bound by the agreement, that is what they wanted.

We will begin with capacity in two weeks’ time. Next week is half-term.