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INTRODUCTION

Contracts are legally-binding agreements between two or more parties. Parties may
mean persons, companies, institutions, and other bodies allowed by law to enter into a
contract. The term legally-binding means that ones rights in a contract are recognized
and can be enforced by the law. The parties to a contract normally set out their rights
and obligations in an agreement. They make promises on what they are supposed to do
in that contract. In cases where those promises are not fulfilled, the aggrieved or the
wronged party may sue the other in court.

All contracts are agreements, but not all agreements are contracts. Agreements become
contracts only if they contain all the elements of a legally-binding agreement. If the
elements are not there, the agreement is merely a gratuitous promise; and the law
does not recognize such promises. The basic elements of a valid and binding contract
are:
1. offer

2. acceptance

3. consideration

4. intention to create legal relations

Some authors list down the basic elements as agreement (agreement includes offer,
acceptance, and meeting of the minds, i.e. consensus ad idem), consideration, and
intention to create legal relations. An in-depth study of the law of contract would reveal
that there are many more elements that are required and many other factors that will be
considered when determining whether a certain agreement is a valid contract or not. For
the purposes of this book, however, it is enough that the reader understands the
abovementioned basic elements.

HOW A CONTRACT IS FORMED & SOME BASIC TERMINOLOGIES

A contract is formed when there is an offer and an acceptance of that offer, and both are
supported by consideration. The parties making the offer and acceptance must also
have the intention to make their agreement legally-binding, i.e. they must have the
intention to create legal relations.

The person who makes an offer is known as the offeror, the proposer, or the
promisor. The person on whom an offer is being made is known as the offeree or the
promisee. An offeree or a promisee may not necessarily accept an offer.

For example, if Ahmad tells Aminah that he is willing to sell his house to her for the price
of RM120000, he is said to be making an offer to Aminah. Ahmad would be the offeror,
and Aminah would be the offeree.

If Aminah agrees to Ahmads offer, then a contract is formed. If one of them does not
fulfill their promise, then the person who did not fulfill his or her promise is known to have
breached the contract. So, if Aminah has paid the RM120000 to Ahmad, and Ahmad
refuses to hand over his house to her, he is the one who is in breach of the contract.

The aggrieved or wronged person in this case, which is Aminah, can now sue in court.

One of the distinguishing features of English contract law is that there must be an
identifiable offer and an identifiable acceptance in a valid agreement. Identifying the offer
and acceptance is vital because it helps to identify which terms are enforceable in a
contract because once an offer has been accepted, the agreement becomes binding
and no new terms may be introduced anymore. It means that if the parties have agreed
to certain terms when the offer and acceptance are made, only those terms will be
enforceable in a court of law.

TYPES OF CONTRACTS

Contracts may be classified based on (a) the number of parties that assume an
obligation in it (at the outset), or (b) based on the legal validity of the agreement itself.
On the first basis, a contract may either be a known as a unilateral or a bilateral contract.

A unilateral contract is a contract where only one party assumes an obligation at the
outset. In other words, only one party promises something in the beginning, and the
other party is not obliged to do anything despite the promise.

For example, Ahmad advertises in a newspaper that he will give a reward of RM100 to
anyone who can find his lost pet. Nobody has an obligation to find his pet, but if Ali finds
the pet and returns it, Ahmad is bound to pay the RM100 that he promised. Once Ali
finds and returns the pet, Ahmads promise becomes a unilateral contract. Alis act of
finding AND returning the pet constitutes as the acceptance of that offer.

A bilateral contract is a contract where both parties assume an obligation at the outset.
For example, Ali promises to Siti that he will sell his car to her for RM25000, and, at the
same time, Siti promises to buy Alis car for RM25000. In this situation, both parties
promise to do something from the beginning of the creation of their agreement.

Although the term bilateral contract gives the impression that there are two parties to
that contract, it actually includes all contracts that involve more than one party.

On the basis of validity, a contract may be classified as valid, void, and voidable.

A valid contract has all the attributes of a legally binding contract and it may be enforced
by the courts.

A void contract is one which will not be recognized by the courts. In other words, it has
no legal effect. An example of a void contract is a contract to do something illegal.

A voidable contract is one that can be set aside at the option of the wronged party. For
example, if a person has been forced or coerced to enter into a contract, he or she may
choose to avoid the contract. At the same time, he or she may choose to continue with
the contract, despite the defect, and sue for damages (in this situation, damages do not
mean injury but compensation, usually in monetary form).

An unenforceable contract is a contract that cannot be enforced by the courts for some
reason provided by the law. For example, if a minor buys non-necessaries (luxuries) on
credit, the court will not enforce the agreement against him minors are a protected
class of persons and do not have full contractual capacity.

OFFER

An offer may be defined as a willingness expressed by an offeror to enter into a contract


on the terms stated with the person to whom it is addressed.

It is also a promise to enter into a contract on a particular set of terms, with the intention
that it shall become binding as soon as it is accepted by the person to whom it is
addressed.

As mentioned earlier, another term for an offer is proposal.

The offeror must intend that the he should be bound by his promise as soon as it is
accepted by the offeree. It must be final, and there must be no need for further
negotiations.

For example, the statement I am selling to you my car is not yet an offer because no
price has been mentioned. In contrast, I am selling to you my car for RM15000 sounds
more like a valid offer.

TO WHOM CAN AN OFFER BE MADE

An offer can be made to an individual, a class of persons, or the public at large.

The case of Carlill v Carbolic Smoke Ball Company [1893] illustrates that an offer can
be made to the public at large, or to the whole world. In this case, there was an outbreak
of influenza. The Carbolic Smoke Ball Company advertised that their product can
prevent influenza, and that if anyone uses it for the specified time and manner, and still
catch flu, they will pay that person 100.

Mrs. Carlill bought a smoke ball, used it as described in the advertisement, and yet she
still caught the flu. She sued the company for their promise. In their defense, the
company said that it was a contract with the entire world, and that it was impossible to
make a contract with the whole world.

The court clarified that it was not a contract with the whole world. It was an offer to the
entire world, but it only became a contract once a person came forward and performed
the conditions that they stipulated. Thus, it became a contract only Mrs. Carlill bought
the smoke ball and used it.

FORMS OF AN OFFER
A proposal can be in writing, or orally, or by conduct/actions, or a combination of any of
these methods.

The case of Thornton v Shoe Lane Parking Ltd (1971) shows a different way of
making an offer.

The facts are as follows:

The plaintiff wished to park his car in the defendants automatic car park where a notice
at the entrance stated All cars parked at owners risk. The plaintiff took a ticket from an
automatic ticket-issuing machine at the entrance and drove into the car park. He then
looked at the ticket and saw the time printed on it and also saw other printed words
which he did not read. The words in fact stated that the ticket was issued subject to
conditions displayed at the premises. One condition displayed at a corner of the car park
purported to exempt the car park owner from liability not only for damage to the car, but
also for his personal injuries.

While returning to collect his car, the plaintiff sustained personal injury and sued the
defendant. The defendant pleaded in defence that they are not liable because of the
exemption clause, i.e. the notice in the car park that says that the owners are not liable
for any damage to the car or injuries suffered by the customers.

It was held that the offer was made when the machine is put up and ready to receive
money from the customers. The acceptance happens when the customer puts his
money into the slot. A contract is then formed. Once a contract is formed, no additional
conditions may be imposed after that.

In the above situation, when the ticket came out, the conditions printed in it were no
longer part of the terms of the contract as the acceptance had already happened.
Therefore, the defendants could not be exempted from liability.

COMMUNICATION OF THE OFFER

The proposal must be communicated to the promisee. The communication of a proposal


is only complete when it comes to the knowledge of the person to whom it is made.

Knowledge of the offer

A question arises as to whether an offer can be accepted if a person does not know of
the offer. This is relevant in unilateral contracts, especially in reward cases.

In the Australian case of R v Clarke (1927), Clarke gave information on certain


murderers but was unaware of the 1000 reward. Later, he tried to claim but the court
said that a person cannot be deemed to accept an offer which he is not aware of at the
relevant time.

Based on this case, it appears that a person cannot accept an offer that he does not
know.
STATEMENTS OR SITUATIONS THAT ARE NOT OFFERS (INVITATIONS TO TREAT)

There are times when certain statements (words, actions, conduct) seem to be offers,
but in law, they are not considered as offers. These are known as invitations to treat.

Invitations to treat are merely invitations to receive offers, or invitations to negotiate


further.

One of the landmark cases that explain invitations to treat is Gibson v Manchester City
Council (1979), where a council tenant was interested in buying his house. He
completed an application form and received a letter from the Council stating that it may
be prepared to sell the house to you for 2180. Mr. Gibson initially queried the price,
pointing out that the path to the house was in bad condition. The Council refused to
change the price, saying that the price had been fixed taking into account the condition
of the property.

Mr. Gibson then wrote on 18 March 1971 asking the Council to carry on with the
purchase as per my application. Following a change in political control of the Council in
May 1971, it decided to stop selling Council houses to tenants, and Mr. Gibson was
informed that the Council would not proceed with the sale of the house.

Mr. Gibson bought legal proceedings claiming that the letter he had received stating the
purchase price was an offer which he had accepted on 18 March 1971. The House of
Lords, however, ruled that the Council had not made an offer; the letter giving the
purchase price was merely one step in the negotiations for a contract and amounted
only to an invitation to treat. Its purpose was simply to invite the making of a formal
application. This application from the tenant would be the offer and can still be rejected.

There are many types of invitations to treat. They may not be easily identifiable and
there are no real clear-cut classifications.

There will be three areas that will be discussed, namely: advertisements, display of
goods in shop windows or shelves, and supply of information.

Advertisements

Advertisements are generally invitations to treat. However, advertisements for unilateral


contracts are usually treated as offers, on the basis that they can be accepted without
further negotiations. Examples are advertisements for rewards, or advertisements such
as the one in Carlill v Carbolic Smoke Ball Co.

Advertisements for bilateral contracts are those that advertise specified goods at a
certain price. They are usually considered as invitations to treat because they may lead
to further bargaining.

In Partridge v Crittenden (1968), an advertisement in a magazine stated Bramblefinch


cocks and hens, 25s each. As the Bramblefinch was a protected species, the person
who placed the advertisement was charged with unlawfully offering for a sale a wild bird
contrary to the Protection of Birds Act 1954, but his conviction was quashed on the
grounds that the advertisement was not an offer but an invitation to treat.

According to certain authors, an advertisement would also be considered as an offer if it


came from the manufacturers (as what happened in Carlills case).

Display of goods in shop windows or shelves

Goods displayed in shop windows are generally invitations to treat.

In Fisher v Bell (1960), the defendant had displayed flick-knives in his shop window,
and was convicted of the criminal offence of offering such knives for sale. On appeal, it
was stated that the display of an article with a price on it in a shop window was only an
invitation to treat and not an offer. The conviction was overturned.

In Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd


(1953), Boots were charged with an offence concerning the sale of certain medicines
which could only be sold by or under the supervision of a qualified pharmacist. Two
customers in a self-service shop selected the medicines, which were price-marked, from
the open shelves, and placed them in the shops wire basket. The shelves were not
supervised by a pharmacist, but a pharmacist had been instructed to supervise the
transaction at a cash desk. The issue was, therefore, whether the sale had taken place
at the shelves or at the cash desk.

The Court of Appeal decided that the shelf display was like an advertisement for a
bilateral contract, and was, therefore, merely an invitation to treat. The offer was made
by the customer when medicines were placed in the basket, and was only accepted
when the goods were presented at the cash desk. Since a pharmacist was supervising
at that point, no offence had been committed.

There are two main practical consequences of this principle. First, shops do not have to
sell goods at the marked price, although they may be committing a statutory offence.
Secondly, a customer cannot insist on buying a particular item on display. Displaying the
goods is not an offer, so a customer cannot accept to buy it. On the other hand, it is the
customer who makes an offer to buy the goods on display.

Supply of information

Prospective sellers provide details of what they may sell without having any intention
of making a proposal to be legally bound by what they have provided. Thus, supplying
information on certain goods does not always amount to an offer.

In Harvey v Facey (1893), the plaintiffs sent the defendants a telegram asking: Will you
sell us Bumper Hall Pen? Telegraph lowest cash price. The reply stated: Lowest price
for Bumper Hall Pen, 900. The plaintiffs then sent a telegram back saying: We agree
to buy Bumper Hall Pen for 900 asked by you. Please send us your title deeds.

It was held that there was no contract. The telegram by the defendants stating the lowest
cash price was not an offer. It merely supplied the information as to the price of Bumper
Hall Pen (a plot of land), but it did not state that the defendants were willing to sell it to
the plaintiffs.

Termination of offer

An offer does not last forever. There are situations that cause an offer to be terminated.

Lapse of time

An offer may be terminated if there is a lapse of time. This can happen in two situations:
the offeror might state the exact time on which the offer will expire, and if there is a
reasonable length of time between the offer and acceptance.

Specific length of time

There are offers that are good for a certain time only. The offeror will expressly state
when the offer will expire. For example, X informs W that he is offering to sell some
goods but the offer will end on 1 January 2008. On 2 January 2008, W will no longer be
able to accept the offer.

Reasonable length of time

Where the offeror does not expressly state when the offer will be terminated, the offer
will automatically lapse after a certain period of time, depending on what is reasonable
under the circumstances for example, offers to buy perishable goods, or a commodity
whose price fluctuates daily, will lapse quite quickly.

In Ramsgate Victoria Hotel v Montefiore (1866), the defendant applied for shares in the
plaintiff company, paying a deposit into their bank. After hearing nothing from them for
five months, he was then informed that the shares had been allotted to him, and he was
asked to pay the balance due on them. He refused to do so, and the court upheld his
argument that those five months was not a reasonable length of time for acceptance of
an offer to buy shares. Therefore, the offer had lapsed before the company tried to
accept it.

Failure of a pre-condition

In cases where offers are made subject to certain conditions, and those conditions are
not met, the offer may also be terminated. For example, X offers to sell his car to W if W
manages to get a loan from the bank. In this case, the pre-condition for Xs offer is Ws
ability to get a loan from the bank. If W fails to get that loan, it means that W has failed to
fulfill the pre-condition and, therefore, Xs offer to sell his car is no longer available.

In Financings Ltd v Stimson (1962) the defendant saw a car for sale at 350 by a
second-hand dealer on 16 March. He decided to buy it on hire-purchase terms. The way
that hire-purchase works in such cases is that the finance company buys the car outright
from the dealer, and then sells it to the buyer, who pays in installments. The defendant
would therefore be buying the car from the finance company (in this case, the plaintiffs),
rather than from the dealer.
The defendant signed the plaintiffs form, which stated that the agreement would be
binding on the finance company only when signed on their behalf. The car dealer did not
have the authority to do this, so it had to be sent to the plaintiffs for signing.

On 18 March, the defendant paid the first installment of 70. On 24 March, the car was
stolen from the dealers premises. It was later found, badly damaged and the defendant
no longer wanted to buy it. Not knowing this, on 25 March, the plaintiffs signed the
written agreement. They subsequently sued the defendant for failure to pay the
installments.

The Court of Appeal ruled in favour of the defendant, as the so-called agreement was
really an offer to make a contract with the plaintiffs, which was subject to the implied
condition that the car remained in much the same state as it was in when the offer was
made, until that offer was accepted. The plaintiffs were claiming that they had accepted
the offer by signing the document on 24 March. As the implied condition had been
broken by then, the offer was no longer open, so no contract was concluded.

Rejection

An offer is also terminated when the offeree rejects it. If X offers to sell his car to W on
Monday, and W says no, W cannot come back on Thursday and try to accept Xs offer.

Counter Offer

A counter offer terminates the original offer. In Hyde v Wrench (1840) the defendant
offered to sell his farm for 1000 and the plaintiff responded by offering to buy it at 950.
This is called making a counter offer. The farm owner refused to sell at that price, and
when the plaintiff later tried to accept the offer to buy at 1000, it was held that it was no
longer available; it had been terminated by the counter offer.

However, if the offeree merely requests for information regarding the offer, this would not
be considered as a counter offer. In other words, a request for information does not
terminate an offer. In the case of Stevenson v McLean (1880) the defendant made an
offer on a Saturday to sell iron to the plaintiffs for 40 shillings, cash on delivery, and
stated that the offer would remain available until the following Monday. The price and
quantity were accepted but the plaintiff wished to know whether delivery could be
staggered. They received no answer, and so on Monday afternoon, they contacted the
defendant to accept the offer, but the iron had already been sold to someone else.

When the plaintiffs sued for breach of contract, it was held that their reply to the offer
had been merely a request for information (or an enquiry), not a counter offer, so that
original offer still stood and there was a binding contract.

Death of offeror
Death of offeree
Withdrawal of offer

Acceptance
Finally, an offer comes to an end once it is accepted. A person may offer in a newspaper
advertisement to sell his property. Once his offer is accepted, it can no longer be
accepted by other people.

ACCEPTANCE

- the final and unqualified acceptance of the terms of an offer.


- no acceptance, no contract.
- an unconditional agreement to all the terms of an offer. (Tinn v Hoffman offer
to sell 1200 tonnes of iron, an order of 800 tonnes was not an acceptance)
- Certainty is one of the distinguishing features of the English law of contract. The
law wants to be as clear as possible as to questions of offer and acceptance.
Therefore, an acceptance must be unqualified and unequivocal.

FORMS OF ACCEPTANCE

- acceptance will usually correspond with the manner of offer (eg. if offer made by
post, then it is accepted by post)
- but can be done:
orally
in writing
by conduct (especially in cases of unilateral contracts but there is no
acceptance until the act has been completely performed; no claim can be
done if the condition is partially performed. See also: Brogden v
Metropolitan Rail Co no formal agreement, but acceptance was
deemed when the company ordered coal after receiving an offer from
Brogden to supply them)
a combination of all or any of the above
or method of acceptance can be specified by the offeror (Tinn v Hoffman
offeree was asked to reply by return of post, any method is faster
would be sufficient) HOWEVER, if there is a speedier, more convenient,
and more reliable method than that of the offer, it will be acceptable.

COMMUNICATION OF ACCEPTANCE

General rule on communication of acceptance:


- no acceptance if it is not communicated to the offeror.
- communicated means that the acceptance must come to the knowledge of
the offeror. (Lord Dennings explanation in Entores Ltd v Miles Far East Corp
A shouts an offer to B across a river. B yells back an acceptance but a noisy
aircraft flies over and A could not hear Bs reply. No contract yet. A must hear Bs
acceptance before it can take effect.)

Exceptions: i.e. acceptance does not really come to the knowledge of the offeror but the
law will deem it as having been communicated.
1. unilateral contracts as soon as the offeree performs the condition stipulated by
the offeror, the acceptance is deemed complete/communicated. eg. Carlills
case.

2. conduct of offeror the offeror is estopped (prevented) from claiming that


acceptance was not communicated to them if they are at fault for not receiving
the acceptance completely eg. where an offer is accepted by telephone and the
offeror did not catch the words of acceptance, but at the same time, the offeror
did not ask those words to be repeated. (See also The Brimnes the
acceptance was sent by telex during business hours but was simply not read by
anyone in the offerors office)

3. postal rule Gen. rule: acceptances by post take effect as soon as they are
posted, rather than when they are communicated. Relevance today: it is easier to
prove that a letter has been posted than to prove that it has been received or
brought to the attention of the offeror. (See Adams v Lindsell)

- acceptance is deemed effective when put in hands of Post Office.


- Postal rule also applies to telegrams i.e. valid as soon as wording
communicated to a person authorised to transmit it to offeror.

Reasons for postal rule:

stops offeree accepting by post and then using faster method (e.g. telex) to
reject offer
without it offeree wouldnt be sure if theyd entered into a contract
law just providing certainty (related to no. 1)
if offeror, expressly or impliedly, indicates postal acceptance sufficient,
they should bear consequences

Exceptions to postal rule:

Offers requiring communication of acceptance offeror stipulates specific


modes of acceptance. (Holwell Securities v Hughes defendants stated
that acceptance had to be by notice in writing, acceptance was by post
but never reached defendants; court held notice meant communication
thus it was not appropriate to apply postal rule)
Instant methods of communication postal rule does not apply because it
is as if the parties are in each others presence when making the offer and
acceptance. (Entores v Miles Far East Corporation offer and
acceptance done by telex; plaintiffs in London, defendants in Amsterdam;
acceptance was received in London, so contract was deemed to be made
there)

STATEMENTS OR SITUATIONS THAT DO NOT AMOUNT TO ACCEPTANCE

1. Counter-offer in fact, a counter-offer terminates the offer (Hyde v Wrench,


offer of 1000, counter-offer of 950)
2. Cross-offer X offers to buy Ys house for 50000, and coincidentally, at the
same time, Y offers to sell his house to X for 50000.

3. Silence although acceptance can be by conduct, offeror cannot stipulate


silence as acceptance. (Felthouse v Bindley uncle offers to buy nephews
horse; nephew remained silent) However, the Court of Appeal in Re Selectmove
Ltd pointed out that if the offeree suggested that their silence is acceptance, then
their silence would be sufficient in Felthouses case, if the nephew said that his
silence would amount to acceptance, then it would be sufficient.