Faculty of Economics & Administrative Sciences INTRODUCTION TO LAW
MAN 206 LECTURE 6
Gulay Suleymanoglu
L.L.B(Hons), L.L.M(International and European Law) Member of Cyprus Bar Assosiation
M: gulay.suleymanoglu@neu.edu.tr
Introduction to Contract Law
CONTENT OF THIS LECTURE
• What is a contract?
• How is it formed
• Offer v invitation to treat.
• Consideration.
WHAT IS A CONTRACT?
A contract is a legally binding agreement between two or more parties.
The law will enforce an agreement provided the following are satisfied:
• there has been an agreement (offer and acceptance);
• this agreement is backed by consideration;
• the parties intend to create legal relations;
• any formalities required to complete the contract have been complied with;
• the parties have the legal capacity to enter the contract; and
• the contract is not for an illegal or immoral purpose.
In this lecture we will concentrate on the first two requirements- agreement and consideration.
What is contract?
• A contract is an agreement between two parties by which both are bound in law and which can therefore be enforced in a court.
• A contract is an agreement based on the promises of two parties.
• Contract law is important as it is a way of regulating relationships, we can safely make arrangements with other people if we know those agreements have the force of law.
• To be enforceable a contractual agreement must be based on
mutuality of intent.
Formation of contracts
• The first stage in any contractual dispute is to establish if a contract actually exists. This depends on proper formation.
• There are three key ingredients to formation:
- agreement, based on mutuality over the terms, agreement exists when a valid acceptance follows a valid offer.
- Consideration, given both sides-the proof that bargain exists.
- Intention to create legal relations.
Offer
• Has there been an agreement?
For a contact to come into existence one person, the offeror must make an offer that is accepted by the other person, the offeree.
• What is an offer?
• An offer is a promise to be bound on particular terms – therefore it must be capable of being accepted.
• An offer may take the form of a statement (either oral or written), or it could be made by conduct that is capable of acceptance.
• An offer can be made to one particular person, a group of people,
or to the world at large.
Offer
• Offer is straightforward if made in the form of question: `Will you buy my law book for the price stated?`-offeree responds positively and accepts or rejects the offer.
• Not all contract begin as simply. Invitation to treat.
• Most offers tend to be bilateral( consisting of two promises-each made in exchange for the other).
Example: I promise to give you $20 and you promise to wash my car(two promises).
• However, offers can be unilateral(one party makes a promise in return for the performance of a particular act by another party).
Example: contained advertisements ( Carlill v Carbolic Smoke Ball
Co).
Carlill vs Carbolic Smoke Ball Co.(1893)
Facts:
• The Carbolic Smoke Ball Co. made a product called the "smoke ball". It claimed to be a cure for influenza and a number of other diseases.
• The Company published advertisements in the Pall Mall Gazette and other newspapers on November 13, 1891, claiming that it would pay £100 to anyone who got sick with influenza after using its product according to the instructions provided with it.
• £100 reward will be paid by the Carbolic Smoke Ball Company to any person who contracts the increasing epidemic influenza colds, or any disease caused by taking cold, after having used the ball three times daily for two weeks, according to the printed directions supplied with each ball.
• Mrs Louisa Elizabeth Carlill saw the advertisement, bought one of the balls and used it three times daily for nearly two months until she contracted the flu on 17 January 1892. She claimed £100 from the Carbolic Smoke Ball Company.
Carlill vs Carbolic Smoke Ball Co.(1893)
• They ignored two letters from her husband, a solicitor. On a third request for her reward, they replied with an anonymous letter that if it is used properly the company had complete confidence in the smoke ball's efficacy, but "to protect themselves against all fraudulent claims" they would need her to come to their office to use the ball each day and be checked by the secretary. Mrs Carlill brought a claim to court. The barristers representing her argued that the advertisement and her reliance on it was a contract between her and the company, and so they ought to pay. The company argued it was not a serious contract.
• Can one make a contract with the whole world?
• Does performance of the conditions advertised in the paper constitute acceptance of an offer?
• Was there consideration?
Carlill vs Carbolic Smoke Ball Co.(1893)
• When sued, Carbolic argued the ad was not to be taken as a serious, legally binding offer. It was merely an invitation to treat, and a gimmick.
But the court of appeal held that it would appear to a reasonable man that Carbolic had made a serious offer. People had given good "consideration"
for it by going to the "distinct inconvenience" of using a faulty product.
• The Court of Appeal unanimously rejected the company's arguments and held that there was a fully binding contract for £100 with Mrs. Carlill
• Among the reasons given by the three judges were
(1) That the advertisement was a unilateral offer to the entire world
(2) The satisfying conditions for using the smoke ball constituted acceptance of the offer.
(3) That purchasing or merely using the smoke ball constituted good
consideration, because it was a distinct detriment incurred at the behest of the company and, furthermore, more people buying smoke balls by relying on the advert was a clear benefit to Carbolic
Invitation to treat
• Statements that are not offers
Offers should not be confused with statements that are simply made in order to supplyinformation in response to a query.
• Offers also need to be distinguished from statements/conduct that are incapable of being accepted, but which might induce another to make an offer.
• These are known as invitations to treat. The distinction
between an offer and invitation to treat is best understood
through the categories that the courts create. Invitations to
treat include the display of goods; the advertisement of a
price or an auction; and an invitation for tenders .
Invitation to treat
• These are statements made to others by way of an invitation to them to make an offer. Such statements are not offers and cannot be accepted as such.
a)Displays of goods in shop windows:
Fisher v Bell :
In this case a Shopkeeper had been convicted under the Restriction of Offensive Weapons Act 1959 for displaying flick knives in his shop window.
This Act prohibited ‘offering for sale’ various types of offensive weapons including flick knives. For this reason, he was convicted of the criminal offence by offering the flick knives. The defendant appealed. On appeal, Lord Parker CJ said that the display of any article with a price tag on it in a display window of a shop is not an offer but an invitation to treat and this overturned the conviction.
• Invitation to treat: inviting an offer.
Invitation to treat
b) Goods on shelves in self-service shop:
Pharmaceutical Society of Great Britain v Boots Cash Chemists:
• Boots Cash Chemists were self-serve chemists. They had their products on shelves.
Customers would select the item they wished to purchase and take it to the cash register where a pharmacist checked the purchases. An English law required prescribed drugs to be sold under the supervision of a qualified pharmacist. The
Pharmaceutical Society prosecuted Boots Cash for breaching this law arguing that the products were sold when they were selected by the customer from the shelf. At that point of time there had been no supervision by a pharmacist as required by the law.
• The court held that the goods on display on the shelf was an invitation to treat. When the customer took the goods off the shelf and handed them to the pharmacist at the cash register this was an offer by the customer to buy. At this point the pharmacist could query the choice and not proceed with the sale. The sale only took place when the pharmacist accepted the customer’s offer by accepting the customer’s money.
Therefore Boots Cash were not in breach of the law.
• Display of goods is the invitation to treat, a customer then selects goods and makes an offer to buy at the checkout, which is then accepted or not by the shopkeeper.
Invitation to treat
c) Advertisement in a newspaper or a magazine :
Usually, we can see huge amount of advertisement on daily paper or a weekly magazines. These Advertisements are called an invitation to
treat. In Partridge v Crittenden[1968, an advertisement was published in a newspaper offering the sale of birds by mentioning that, ‘Bramblefinch cocks and hens,25s each’. The seller was convicted under the Protection of Birds Act 1954. It was held by the court that the advertisement was at the preliminary stage of negotiation and the interested person will make an offer to the seller. That’s why, it was an invitation to treat not an offer.
+However, note the position regarding advertisements that amount to unilateral offers. (Carbolic).
Invitation to treat
d)Auctions:
Actually, the principle of invitation to treat was obtained from the traditional practice at auctions. According to the Sale of Goods Act 1979, an auctioneer has to request the others to make a bid, which is merely an invitation to treat. Each bid is an offer. Each bidder’s offer expires whenever a new higher bid is made. On a certain point, every bidder stopped bidding on a price and subsequently that offering price is accepted by the auctioneer on behalf of the seller. It is too significant to mention that, any bidder could withdraw his bid before the hammer falls and similarly, the auctioneer may also withdraw
the goods before the hammer falls.
British Car Auctions v Wright [1972], Where the auctioneers were prosecuted for offering to sell an unfit vehicle at an auction. However, the prosecution successfully failed on the ground that the was no offer but an invitation to treat.
In all cases the significance of the invitation to treat is that the person responding to it has not accepted an offer, so their action does not at that point create a binding contract.
OFFER
• Do offers have an expiry date?
An offer can be terminated, or brought to an end, in various ways.
• Rejecting an offer and making a counter offer An offer is terminated if it is rejected. It is also
terminated if the offeree tries to vary the terms
of the original offer e.g. by offering less money
of trying to change the subject matter of the
contract (this is known as a counter offer).
OFFER
• Expiry of specified time period
An offer is terminated if the offeror set a specified period during which the offer would remain open and it is not accepted within that period.
• Expiry of reasonable time period
Even if a particular time period is not stated, an offer will not remain open indefinitely; it will lapse after a reasonable time.
• Withdrawal of offer, provided it was communicated by offeror
An offeror may withdraw his offer provided he communicates notice of such revocation the offeree.
• Revocation must be received by the offeree prior to acceptance
In order for the revocation to be effective, notice of withdrawal must be received before the offeree has accepted the offer
• Withdrawal of unilateral offers
There are special rules regarding the withdrawal of unilateral offers. The offeror cannot withdraw his offer if a person has begun to do something on the strength of that offer.
Also, since the nature of a unilateral offer means that the offeror cannot guarantee that he’s communicated notice of the withdrawal to everyone who saw the offer, he must simply take reasonable steps to give such notice and should ensure that he communicates notice of the revocation in the same form as he communicated the original offer.
ACCEPTANCE
• An agreement occurs when a valid acceptance follows a valid offer, and the contract is formed immediately on acceptance.
• It is vital to establish that the response to the offer is in fact an acceptance and is properly communicated to the offeror.
• A valid acceptance is an intention to be bound by the terms of the offer, so it must be unconditional and correspond exactly with the terms of the offer-`minor image rule`.
• An acceptance must be the ‘mirror image’ of the offer (it must not be a counter-offer).
• The acceptance must also be firm (i.e. unconditional) and must be communicated to the offeror
• Acceptance may be communicated in writing, verbally, or by conduct.
Communication of the acceptance
• There is no contract unless acceptance is communicated.
• In one situation the acceptance takes place before the offeror receives notification of it-this is postal rule.
• Using the post to accept an offer (the postal rules)
When an acceptance is sent through the post, or via some other non-instantaneous form of communication (e.g. telegram), the courts treat the acceptance as being communicated to the
offeror when the acceptance was sent/posted by the offeree and not when it was received by the offeror (provided that it is
reasonable to use the post and the letter was properly stamped and addressed).
• Adams v Lindsell (1818)
Communication of the acceptance
• The postal rule can be avoided if the offeror specifies that acceptance must be drawn to his attention or that he won’t be bound until he actually receives the acceptance or he could specify some other means of communication of the acceptance.
• For instantaneous methods of communication, the
normal rule applies: acceptance is communicated on
receipt.
Consideration
• What is consideration?
• In Currie v Misa (1875), consideration was defined as
‘something that constitutes a benefit to one party or a detriment to another.’
• The House of Lords in Dunlop v Selfridge (1915) approved Sir Frederick Pollock’s definition of consideration.
• “An act of forbearance or the promise thereof is the
price for which the promise of the other is bought,
and the promise thus given for value is enforceable.”
Consideration
• Today two types of consideration are recognised in the law of contract
• Executory – a promise to perform an act at some future date.
• Executed – a promise which only becomes enforceable when the offeree actually performs the required act.
NB - The promisor is the person who makes the promise, the promisee is the person to whom the promise is made.
• A number of rules should help you remember how courts determine whether consideration is present in particular scenarios.
1. Past consideration is not good consideration
If valuable benefit has already been given, before the contract is entered into, then this is not valid consideration and there will be no contract.
2. Performance must be legal
A promise to pay for an illegal act is not enforceable.
Consideration
3. Performance must be possible
A promise to perform an impossible act is clearly unenforceable.
4.Consideration must be sufficient (but need not be adequate)
Courts will not intervene to ensure that the parties make a good bargain, but the consideration must have some value (sufficiency).
5. Performing an existing duty
Performance of an existing duty does not constitute valid consideration for a new contract.
