Elements of CONTRACT

Cases
By:
EMRAN SHAH

Harvey v Facey [1893] UKPC 1

Offer
In order to amount to an offer it must
be shown that the offeror had the
intention to be bound:

Harvey sent a Telegram to Facey which stated: "Will you sell us Bumper Hall Pen? Telegraph lowest cash price-answer paid;"
Facey replied by telegram:"Lowest price for Bumper Hall Pen 900."
Harvey then replied:"We agree to buy Bumper Hall Pen for the sum of nine hundred pounds asked by you. Please
send us your title deed in order that we may get early possession."
Held:
The Privy Council held that there was no contract concluded between the parties. Facey had not
directly answered the first question as to whether they would sell and the lowest price stated
was merely responding to a request for information not an offer. There was thus no evidence of
an intention that the telegram sent by Facey was to be an offer.

Carlill v Carbolic Smoke Ball co [1893] 1 QB 256

Offer
In order to amount to an offer it must be shown that the offeror had the
intention to be bound:
Advertisements
Advertisements are also generally invitations to treat:

A Newspaper advert placed by the defendant stated:100 reward will be paid by the Carbolic Smoke Ball Company to any person who contracts the
influenza after having used the ball three times daily for two weeks according to the printed
directions supplied with each ball...
1000 is deposited with the Alliance Bank, showing our sincerity in the matter."
Mrs Carlill purchased some smoke balls and used them according to the directions and caught
flu. She sought to claim the stated 100 reward.
The defendant raised the following arguments in defense:
1. The advert was a sales puff and lacked intent to be an offer.
2. It is not possible to make an offer to the world.
3. There was no notification of acceptance.
4. The wording was too vague to constitute an offer since there was no stated time limit as to
catching the flu.
5. There was no consideration provided since the 'offer' did not specify that the user of the balls
must have purchased them.

Held:
The Court of Appeal held that Mrs Carlill was entitled to the reward as the
advert constituted an offer of a unilateral contract which she had accepted
by performing the conditions stated in the offer. The court rejected all the
arguments put forward by the defendants for the following reasons:
1. The statement referring to the deposit of 1,000 demonstrated intent
and therefore it was not a mere sales puff.
2. It is quite possible to make an offer to the world.
3. In unilateral contracts there is no requirement that the offeree
communicates an intention to accept, since acceptance is through full
performance.
4. Whilst there may be some ambiguity in the wording this was capable of
being resolved by applying a reasonable time limit or confining it to only
those who caught flu whilst still using the balls.
5. The defendants would have value in people using the balls even if they

Pharmaceutical Society of Great Britain v Boots [1953] 1 QB

401
Goods on display in shops
Goods on display in shops are generally not offers but an
invitation to treat. The customer makes an offer to
purchase the goods. The trader will decide whether to
accept the offer:

Boots introduced the then new self service system into their shops whereby
customers would pick up goods from the shelf put them in their basket and
then take them to the cash till to pay. The Pharmaceutical Society of Great
Britain brought an action to determine the legality of the system with regard to
the sale of pharmaceutical products which were required by law to be sold in
the presence of a pharmacist. The court thus needed to determine where the
contract came into existence.
Held:
Goods on the shelf constitute an invitation to treat not an offer. A customer
takes the goods to the till and makes an offer to purchase. The shop assistant
then chooses whether to accept the offer. The contract is therefore concluded
at the till in the presence of a pharmacist.

Fisher v Bell [1961] 1 QB 394

Goods on display in shops
Goods on display in shops are generally not offers but
an invitation to treat. The customer makes an offer to
purchase the goods. The trader will decide whether to
accept the offer:

The defendant had a flick knife displayed in his shop

window with a price tag on it. Statute made it a criminal
offence to 'offer' such flick knives for sale. His conviction
was quashed as goods on display in shops are not 'offers'
in the technical sense but an invitation to treat. The court
applied the literal rule of statutory interpretation.

Partridge v Crittenden (1968) 2 All ER 421

Advertisements
Advertisements are also generally invitations to treat:

The defendant placed an advert in a classified section of

a magazine offering some bramble finches for sale. S.6
of the Protection of Birds Act 1954 made it an offence to
offer such birds for sale. He was charged and convicted
of the offence and appealed against his conviction.
Held:
The defendant's conviction was quashed. The advert was
an invitation to treat not an offer. The literal rule of
statutory interpretation was applied.

Spencer v Harding Law Rep. 5 C. P. 561

Contract by Tender
The request for tenders represents an invitation to
treat and each tender submitted amounts to an
offer unless the request specifies that it will accept
the lowest or highest tender or other condition. If
the request contains such a condition this will
amount to an offer of a unilateral contract where
acceptance takes place on performing the condition:

The defendants advertised a sale by tender of the stock in trade

belonging Eilbeck & co. The advertisement specified where the
goods could be viewed, the time of opening for tenders and that
the goods must be paid for in cash. No reserve was stated. The
claimant submitted the highest tender but the defendant refused
to sell to him.
Held:
Unless the advertisement specifies that the highest tender would
be accepted there was no obligation to sell to the person
submitting the highest tender. The advert amounted to an
invitation to treat, the tender was an offer, the defendant could
choose whether to accept the offer or not.

Heathcote Ball v Barry [2000] EWCA Civ 235

Auctions
Where an auction takes place with reserve, each
bid is an offer which is then accepted by the
auctioneer. Where the auction takes place
without reserve, the auctioneer makes a
unilateral offer which is accepted by the placing
of the highest bid:

The claimant had submitted the highest (and only) bids at an auction
stated to be without reserve. The items were two Alan Smart engine
analysers which were worth 14,000. The claimant had submitted
bids of 200 each. The auctioneer refused to sell them at that price.
The claimant brought an action for breach of contract claiming
damages of 27,600.
Held:
The claimant was entitled to damages. Where an auction takes place
without reserve the auctioneer makes a unilateral offer which is
accepted by submitting the highest bid. There was thus a binding
contract and the claimant entitled to damages covering the loss of
bargain.

Thornton v Shoe Lane Parking [1971] 2 WLR 585 Court of Appeal

Machines
The machine represents the offer, the acceptance is inserting the
money:

The claimant was injured in a car park partly due to the defendant's negligence.
The claimant was given a ticket on entering the car park after putting money
into a machine. The ticket stated the contract of parking was subject to terms
and conditions which were displayed on the inside of the car park. One of the
terms excluded liability for personal injuries arising through negligence. The
question for the court was whether the term was incorporated into the contract
ie had the defendant brought it to the attention of the claimant before or at the
time the contract was made. This question depended upon where the offer and
acceptance took place in relation to the machine.
Held:
The machine itself constituted the offer. The acceptance was by putting the
money into the machine. The ticket was dispensed after the acceptance took
place and therefore the clause was not incorporated into the contract.

Ramsgate Victoria Hotel v Montefoire (1866) LR 1 Ex 109

Termination of offers
An offer may be terminated by:
1. Death of offeror or offeree
2. Lapse of time
An offer will terminate after a reasonable lapse of time. What amounts to a reasonable period will depend
on the circumstances.

The defendant offered to purchase shares in the claimant company

at a certain price. Six months later the claimant accepted this offer
by which time the value of the shares had fallen. The defendant had
not withdrawn the offer but refused to go through with the sale. The
claimant brought an action for specific performance of the contract.
Held:
The offer was no longer open as due to the nature of the subject
matter of the contract the offer lapsed after a reasonable period of
time. Therefore there was no contract and the claimant's action for
specific performance was unsuccessful.

Dickinson v Dodds (1876) 2 Ch D 463

3. Revocation
An offeror may revoke an offer at any time before
acceptance takes place:

The defendant offered to sell his house to the claimant and promised to keep
the offer open until Friday. On the Thursday the defendant accepted an offer
from a third party to purchase the house. The defendant then asked a friend to
tell the claimant that the offer was withdrawn. On hearing the news, the
claimant went round to the claimant's house first thing Friday morning
purporting to accept the offer. He then brought an action seeking specific
performance of the contract.
Held:
The offer had been effectively revoked. Therefore no contract existed between
the parties. There was no obligation to keep the offer open until Friday since
the claimant had provided no consideration in exchange for the promise.
The offeror is free to withdraw the offer at any time before acceptance takes
place unless a deposit has been paid.

Errington v Errington Woods [1952] 1 KB 290 Court of Appeal

Revocation
An offeror may revoke an offer at any time before acceptance
takes place:
This may not apply in unilateral offers where acceptance requires
full performance:

A father-in-law purchased a house for his son and daughter-in-law to live in. The house was put in
the father's name alone. He paid the deposit as a wedding gift and promised the couple that if they
paid the mortgage instalments, the father would transfer the house to them. The father then
became ill and died. The mother inherited the house. After the father's death the son went to live
with his mother but the wife refused to live with the mother and continued to pay the mortgage
instalments. The mother brought an action to remove the wife from the house.
Held:
The wife was entitled to remain in the house. The father had made the couple a unilateral offer. The
wife was in course of performing the acceptance of the offer by continuing to meet the mortgage
payments. Under normal contract principles an offer may be revoked at any time before acceptance
takes place, however, with unilateral contracts acceptance takes place only on full performance. Lord
Denning held that once performance had commenced the Mother was estopped from revoking the
offer since it would be unconscionable for her to do so. Furthermore there was an intention to
create legal relations despite it being a family agreement.

Dahlia v Four Millbank Nominees [1978] Ch 231 Court

of Appeal
Revocation
An offeror may revoke an offer at any time before
acceptance takes place:
This may not apply in unilateral offers where
acceptance requires full performance:

The claimant wished to purchase some property from the defendant. The terms had
been agreed but no written contract had been completed. The defendant promised
the claimant that if he arranged for a bankers draft for the deposit to be delivered to
the defendant before 10.00 am on the 22nd December he would complete the
written contract. The claimant duly complied with the request but the defendant
refused to complete. The claimant brought an action stating that unilateral contract
existed and the defendant was thus bound by that contract to complete the written
contract for the sale of the property.
Held: A unilateral contract did exist.
Goff LJ stated obiter on the issue of revocation of a unilateral offer:"Whilst I think the true view of a unilateral contract must in general be that the
offeror is entitled to require full performance of the condition which he has imposed
and short of that he is not bound, that must be subject to one important qualification,
which stems from the fact that there must be an implied obligation on the part of the
offeror not to prevent the condition becoming satisfied, which obligation it seems to
me must arise as soon as the offeree starts to perform. Until then the offeror can
revoke the whole thing, but once the offeree has embarked on performance it is too
late for the offeror to revoke his offer.

Hyde v Wrench (1840) 49 ER 132 Chancery Division (Decided

by Lord Langdale MR)
Counter offer
A counter offer is where an offeree responds to an offer by
making an offer on different terms. This has the affect of
destroying the original offer so that it is no longer open for
the offeree to accept.

The defendant offered to sell a farm to the claimant for

1,000. The claimant in reply offered 950 which the
defendant refused. The claimant then sought to accept
the original offer of 1,000. The defendant refused to
sell to the claimant and the claimant brought an action
for specific performance.
Held:
There was no contract. Where a counter offer is made
this destroys the original offer so that it is no longer
open to the offeree to accept.

Entorres v Miles Far East [1955] 2 QB 327 Court of Appeal

Acceptance
Once valid acceptance takes place a binding contract is formed. It is
therefore important to know what constitutes a valid acceptance in order
to establish if the parties are bound by the agreement. There are three
main rules relating to acceptance:
1. The acceptance must be communicated to the offeree.
2. The terms of the acceptance must exactly match the terms of the
offer.
3. The agreement must be certain.
1. Communication
The general rule is that the offeror must receive the acceptance before it

The claimant sent a telex message from England

offering to purchase 100 tons of Cathodes from
the defendants in Holland. The defendant sent
back a telex from Holland to the London office
accepting that offer. The question for the court
was at what point the contract came into
existence. If the acceptance was effective from
the time the telex was sent the contract was
made in Holland and Dutch law would apply. If the
acceptance took place when the telex was
received in London then the contract would be
governed by English law.
Held:

Felthouse v Bindley [1862] EWHC CP J35 Court of Common

Pleas
The general rule is that the offeror must receive the
acceptance before it is effective:
Silence will not amount to acceptance:

A nephew discussed buying a horse from his uncle. He

offered to purchase the horse and said if I don't hear from
you by the weekend I will consider him mine. The horse was
then sold by mistake at auction. The auctioneer had been
asked not to sell the horse but had forgotten. The uncle
commenced proceedings against the auctioneer for
conversion. The action depended upon whether a valid
contract existed between the nephew and the uncle.
Held:
There was no contract. You cannot have silence as
acceptance.

Brogden v Metropolitan Railway (1877) 2 App. Cas. 666

Acceptance can be through conduct:

The claimants were the suppliers of coal to the defendant railway

company. They had been dealing for some years on an informal
basis with no written contract. The parties agreed that it would be
wise to have a formal contract written. The defendant drew up a
draft contract and sent it to the claimant. The claimant made some
minor amendments and filled in some blanks and sent it back to the
defendant. The defendant then simply filed the document and never
communicated their acceptance to the contract. Throughout this
period the claimants continued to supply the coal. Subsequently a
dispute arose and it was questioned whether in fact the written
agreement was valid.
Held:
The written contract was valid despite no communication of the
acceptance. The acceptance took place by performing the contract
without any objection as to the terms.

Butler Machine Tool v Ex-Cell-O Corporation [1979] 1

WLR 401 Court of Appeal
Acceptance can be through conduct:

Ex-Cell-O wished to purchase a machine from Butler. Butler sent out a quotation of
75,535 along with a copy of their standard terms of sale. The terms included a price
variation clause and a term that the seller's terms would prevail over any terms
submitted by a purchaser. The machine would be delivered in 10 months. Ex-Cell-O
put in an order for the machine at the stated price and sent a set of their terms
which did not include the price variation clause. The order contained an
acknowledgement slip which required a signature by Butler and was to be returned
to Ex-Cell-O. This slip stated that the contract would be subject to the terms stated
overleaf. Butler duly signed the slip and returned it. The machines were then
delivered and Butler sought to enforce the price variation clause and demanded an
extra 2,893. Ex-Cell-O refused to pay.
Held:
The offer to sell the machine on terms provided by Butler was destroyed by the
counter offer made by Ex-Cell-O. Therefore the price variation clause was not part of
the contract. The contract was concluded on Ex-Cell-O's terms since Butler signed
the acknowledgement slip accepting those terms. Where there is a battle of the
forms whereby each party submits their own terms the last shot rule applies
whereby a contract is concluded on the terms submitted by the party who is the last
to communicate those terms before performance of the contract commences.

Adams v Lindsell (1818) 106 ER 250

The postal rule
Where it is agreed that the parties will use the post as a means
of communication the postal rule will apply. The postal rule
states that where a letter is properly addressed and stamped
the acceptance takes place when the letter is placed in the
post box:

The defendant wrote to the claimant offering to sell them some wool and
asking for a reply 'in the course of post'. The letter was delayed in the
post. On receiving the letter the claimant posted a letter of acceptance
the same day. However, due to the delay the defendant's had assumed
the claimant was not interested in the wool and sold it on to a third
party. The claimant sued for breach of contract.
Held:
There was a valid contract which came in to existence the moment the
letter of acceptance was placed in the post box.
This case established the postal rule. This applies where post is the
agreed form of communication between the parties and the letter of
acceptance is correctly addressed and carries the right postage stamp.
The acceptance then becomes effective when the letter is posted.

Hyde v Wrench (1840) 49 ER 132 Chancery Division (Decided by

Lord Langdale MR)
The terms of the acceptance must exactly match the terms of the
offer.

If the terms differ this will amount to a counter offer and no

contract will exist:

The defendant offered to sell a farm to the claimant for

1,000. The claimant in reply offered 950 which the
defendant refused. The claimant then sought to accept the
original offer of 1,000. The defendant refused to sell to
the claimant and the claimant brought an action for
specific performance.
Held:
There was no contract. Where a counter offer is made this
destroys the original offer so that it is no longer open to the
offeree to accept.

Scammell and Nephew v Ouston [1941] AC 251 House of

Lords
The agreement must be certain
When viewed objectively it must be possible to determine
exactly what the parties have agreed to.

The parties entered an agreement whereby Scammell were

to supply a van for 286 on HP terms over 2 years and
Ouston was to trade in his old van for 100. There was then
some disagreement and Scammel refused to supply the van.
Held:
There was no certainty as to the terms of the agreement.
Whilst there was agreement on the price there was nothing in
relation to the HP terms stating whether it would be weekly
or monthly instalments or how much the instalments would
be.

Sudbrook Trading Estate v Eggleton [1983] AC AC 444 House

of Lords
The agreement must be certain
When viewed objectively it must be possible to determine
exactly what the parties have agreed to.

A lease gave the tenant an option to purchase the freehold of the property
at a price to be agreed by two surveyors one appointed by the tenant and
one appointed by the landlord. The tenant sought to exercise the option but
the landlord refused to appoint a surveyor. The landlord claimed that the
clause was too vague to be enforceable as it did not specify a price.
Held:
The clause was not too vague to be enforceable as it put in place a
mechanism to ascertain the price.

Jones v Padavatton [1969] 1 WLR 328 Court of Appeal

Intention to create legal relations in social and domestic agreements
In social and domestic agreements the law raises a presumption that
the parties do not intend to create legal relations:

A mother promised to pay her daughter $200 per month if she gave up her job in the
US and went to London to study for the bar. The daughter was reluctant to do so at
first as she had a well paid job with the Indian embassy in Washington and was quite
happy and settled, however, the mother persuaded her that it would be in her interest
to do so. The mother's idea was that the daughter could then join her in Trinidad as a
lawyer. This initial agreement wasn't working out as the daughter believed the $200
was US dollars whereas the mother meant Trinidad dollars which was about less than
half what she was expecting. This meant the daughter could only afford to rent one
room for her and her son to live in. The Mother then agreed to purchase a house for
the daughter to live in. She purchased a large house so that the daughter could rent
out other rooms and use the income as her maintenance. The daughter then married
and did not complete her studies. The mother sought possession of the house. The
question for the court was whether there existed a legally binding agreement between
the mother and daughter or whether the agreement was merely a family agreement
not intended to be binding.
Held:
The agreement was purely a domestic agreement which raises a presumption that the
parties do not intend to be legally bound by the agreement. There was no evidence to

Balfour v Balfour [1919] 2 KB 571

Intention to create legal relations in social and domestic agreements
In social and domestic agreements the law raises a presumption that the
parties do not intend to create legal relations:

A husband worked overseas and agreed to send maintenance

payments to his wife. At the time of the agreement the couple
were happily married. The relationship later soured and the
husband stopped making the payments. The wife sought to
enforce the agreement.
Held:
The agreement was a purely social and domestic agreement
and therefore it was presumed that the parties did not intend
to be legally bound.

Errington v Errington Woods [1952] 1 KB 290 Court of Appeal

In social and domestic agreements the law raises a presumption
that the parties do not intend to create legal relations:
This presumption may be rebutted by evidence to the contrary.
This evidence may consist of:
A written agreement:

A father-in-law purchased a house for his son and daughter-in-law to live in. The
house was put in the father's name alone. He paid the deposit as a wedding gift
and promised the couple that if they paid the mortgage instalments, the father
would transfer the house to them. The father then became ill and died. The mother
inherited the house. After the father's death the son went to live with his mother
but the wife refused to live with the mother and continued to pay the mortgage
instalments. The mother brought an action to remove the wife from the house.
Held:
The wife was entitled to remain in the house. The father had made the couple a
unilateral offer. The wife was in course of performing the acceptance of the offer by
continuing to meet the mortgage payments. Under normal contract principles an
offer may be revoked at any time before acceptance takes place, however, with
unilateral contracts acceptance takes place only on full performance. Lord Denning
held that once performance had commenced the Mother was estopped from
revoking the offer since it would be unconscionable for her to do so. Furthermore
there was an intention to create legal relations despite it being a family agreement.

Merritt v Merritt [1970] 1 WLR 1211 Court of Appeal

In social and domestic agreements the law raises a
presumption that the parties do not intend to create legal
relations:
This presumption may be rebutted by evidence to the
contrary. This evidence may consist of:
Where the parties have separated:

A husband left his wife and went to live with another woman. There was
180 left owing on the house which was jointly owned by the couple. The
husband signed an agreement whereby he would pay the wife 40 per
month to enable her to meet the mortgage payments and if she paid all
the charges in connection with the mortgage until it was paid off he
would transfer his share of the house to her. When the mortgage was fully
paid she brought an action for a declaration that the house belonged to
her.
Held:
The agreement was binding. The Court of Appeal distinguished the case
of Balfour v Balfour on the grounds that the parties were separated.
Where spouses have separated it is generally considered that they do
intend to be bound by their agreements. The written agreement signed
was further evidence of an intention to be bound.

Simpkins v Pays [1955] 1 WLR 975 Queen's Bench Division

In social and domestic agreements the law raises a presumption that
the parties do not intend to create legal relations:
This presumption may be rebutted by evidence to the contrary. This
evidence may consist of:or where there is a 3rd party to the agreement:

A Grandmother, granddaughter and a lodger entered into a weekly

competition run by the Sunday Empire News. The coupon was sent in
the Grandmothers name each week and all three made forecasts and
they took it in turns to pay. They had agreed that if any of them won
they would share the winnings between them. The grandmother
received 250 in prize money and refused to share it with the other two.
The lodger brought the action to claim one third of the prize money.
Held:
There was a binding contract despite the family connection as the
lodger was also party to the contract. This rebutted the presumption of
no intention to create legal relations.

Esso Petroleum v Customs & Excise [1976] 1 WLR 1 House

of Lords
Intention to create legal relations in commercial
agreements

Where an agreement is made in a commercial context, the

law raises a presumption that the parties do intend to
create legal relations by the agreement:

Esso ran a promotion whereby any person purchasing four gallons of

petrol would get a free coin from their World Cup Coins Collection.
The question for the court was whether these coins were 'produced in
quantity for general resale' if so they would be subject to tax and
Esso would be liable to pay 200,000. Esso argued that the coins
were simply a free gift and the promotion was not intended to have
legal effect and also that there was no resale.
Held: 3:2 There was an intention to create legal relations. The coins
were offered in a commercial context which raised a presumption
that they did intend to be bound. However, the coins were not
exchanged for a money consideration and therefore the coins were
not for resale.

Edwards v Skyways [1964] 1 WLR 349 Court of Appeal

Intention to create legal relations in commercial agreements

Where an agreement is made in a commercial context, the law raises

a presumption that the parties do intend to create legal relations by
the agreement:

The claimant was an airline pilot working for the defendant. He was to
be made redundant. The defendants said that if he withdrew his
contributions to the company pension fund, they would pay him the
equivalent of company contributions in an ex gratia payment. The
claimant agreed to this and withdrew his contributions. The company
then ran into further financial difficulty and went back on their promise
relating to the ex gratia payment.
Held:
The agreement had been made in a business context which raised a
strong presumption that the agreement is legally binding. The
claimant could therefore enforce the agreement and was entitled to
the money.

Rose & Frank Co v Crompton Bros [1925] AC 445 House of Lords

Intention to create legal relations in commercial agreements
Where an agreement is made in a commercial context, the law
raises a presumption that the parties do intend to create legal
relations by the agreement:Again this presumption can be
rebutted by evidence to the contrary:
Binding in honour only clauses:

The claimants and defendants entered an agreement for the

supply of some carbonised tissue paper. Under the agreement
the claimants were to be the defendant's sole agents in the US
until March 1920. The contract contained an honourable pledge
clause which stated the agreement was not a formal or legal
agreement and shall not be subject to the jurisdiction of the
courts in neither England nor the US. The defendants terminated
the agreement early and the claimants brought an action for
breach.
Held:
The honourable pledge clause rebutted the presumption which
normally exists in commercial agreements that the parties intend
to be legally bound by their agreements. The agreement
therefore had no legal affect and was not enforceable by the

Ferrera v Littlewoods Pools [1998] EWCA

Civ 618 Court of Appeal
Intention to create legal relations in
commercial agreements
Where an agreement is made in a
commercial context, the law raises a
presumption that the parties do intend
to create legal relations by the
agreement:Again this presumption can
be rebutted by evidence to the contrary:
Binding in honour only clauses:

The facts were almost identical to those of Jones v Vernon Pools

whereby the claimant filled in a winning entry and sent it off to
Littlewoods Pools. Littlewoods disputed ever receiving the entry and
denied the fact that they would be legally obliged to pay out even if
they had received the entry due to the binding in honour only clause
and based on the Court of Appeal precedent set in Jones v Vernon
Pools. The claimant, a litigant in person, argued that the decision in
Jones v Vernons was outdated and should be overruled.
Held:
Littlewoods were not bound to pay out. The court was bound by the
decision in Jones v Vernon Pools the existence of the binding in
honour only clause demonstrated an intention that the parties did not
intend to be legally bound.

Kleinwort Benson (KB) v Malaysia Mining Corporation BHD (MMC

BHD) [1989] 1 WLR 379 Court of Appeal
Intention to create legal relations in commercial agreements
Where an agreement is made in a commercial context, the law raises
a presumption that the parties do intend to create legal relations by
the agreement:
Although note the difference with comfort letters:

Malaysia Mining Corporation Metals Ltd (MMC Metals) was a wholly

owned subsidiary of the defendant, MMC BHD. MMC Metals approached
the claimant KB Bank for a loan. MMC Metals was a relatively newly
formed company lacking in the size and resources of MMC BHD. The
bank approached MMC BHD asking if they would act as guarantor for the
loan. MMC refused to act as guarantor but stated they it was their
company policy to ensure that their subsidiaries are always in a position
to meet their debts. In reliance of this letter of comfort the bank
advanced money to MMC Metals. MMC Metals subsequently went into
administration having not paid the loan. KB brought an action against
MMC BHD to recover their loss based on the assurance given in the
comfort letter.
Held:
The comfort letter had no legal effect. The fact that MMC BHD had
refused to act as guarantor demonstrated they did not intend to be
legally bound. The comfort letter referred to company policy at that time.
There was nothing to stop the company changing its policy.

Coward v MIB [1963] 1 QB 359 Court of Appeal

The distinction between social and domestic agreements and
commercial agreements can be fine.
Compare the case:
It can be seen that intention to create legal relations therefore seeks
to keep agreements between family and friends outside the courts
jurisdiction.

Coward was killed whilst riding pillion on a motorcycle driven by a friend and work
colleague on the way to work. The collision was due to the negligence of the friend.
Coward's widow sought to claim damages from the Motor Insurance Bureau since
the rider's insurance did not cover pillion passengers. The Motor Insurance Bureau
would only be obliged to pay if insurance for the pillion was compulsory. Insurance
was only compulsory for pillions if they were carried for hire or reward. Coward paid
the friend a small weekly sum to take him to and from work each day. The widow
therefore argued that this was a contract for hire or reward. However, the MIB
argued that to amount to a contract for hire or reward there had to be an intention
to create legal relations which was absent in agreements of this nature between
friends.
Held:
There was no contract of hire or reward as it was a social and domestic agreement
and therefore no intention to create legal relations. The widow was therefore not
entitled to compensation.

Albert v MIB [1971] 3WLR 291 House of Lords

The distinction between social and domestic agreements and
commercial agreements can be fine.
Compare the case:
It can be seen that intention to create legal relations therefore seeks
to keep agreements between family and friends outside the courts
jurisdiction.

A docker was killed in a road collision on his way to work.

He was a passenger in a car owned and driven by a work
colleague. The driver gave lifts to the deceased and other
dockers in return for payment. He had given lifts to
different dockers over a period of eight years. A claim
was made against the Motor Insurance Bureau (MIB) as
the driver had no insurance cover for passengers. The
MIB was only obliged to pay if there existed a contract
between the docker and the driver.
Held:
The lifts were offered in a commercial context as he had
given lifts to different people over a period of time.
Therefore there was an intention to create a binding
contract.

In contract law consideration is concerned with the bargain

of the contract. A contract is based on an exchange of
promises. Each party to a contract must be both a
promisor and a promisee. They must each receive a benefit
and each suffer a detriment. This benefit or detriment is
referred to as consideration.

Consideration must be something of value in the eyes of the

law - (Thomas v Thomas) (1842) 2 QB 851. This excludes
promises of love and affection, gaming and betting etc. A one
sided promise which is not supported by consideration is a gift.
The law does not enforce gifts unless they are made by deed.
Whilst the common law strictly adheres to the requirement of
consideration (although in some instances the courts seem to
go to some lengths to invent consideration eg Ward v Byham
[1956] 1 WLR 496, Williams v Roffey Bros [1990] 2 WLR 1153)
equity will, in some instances, uphold promises which are not
supported by consideration through the doctrine of promissory
estoppel.

Rules of consideration

There are various rules governing the law of consideration:

1. The consideration must not be past.
2. The consideration must be sufficient but need not be
adequate.
3. The consideration must move from the promisee.
4. An existing public duty will not amount to valid
consideration.
5. An existing contractual duty will not amount to valid
consideration.
6. Part payment of a debt is not valid consideration for a
promise to forego the balance.

Re McArdle (1951) Ch 669 Court of

Appeal
Consideration must not be past:

Majorie McArdle carried out certain improvements and repairs

on a bungalow. The bungalow formed part of the estate of her
husband's father who had died living the property to his wife
for life and then on trust for Majorie's husband and his four
siblings. After the work had been carried out the brothers and
sisters signed a document stating in consideration of you
carrying out the repairs we agree that the executors pay you
480 from the proceeds of sale. However, the payment was
never made.
Held:
The promise to make payment came after the consideration
had been performed therefore the promise to make payment
was not binding. Past consideration is not valid.

Lampleigh v Braithwaite [1615] EWHC KB J17

Consideration must not be past:
Past consideration may be valid where it was proceeded
by a request:

The defendant had killed a man and was due to be hung for murder.
He asked the claimant to do everything in his power to obtain a
pardon from the King. The claimant went to great efforts and
managed to get the pardon requested. The defendant then promised
to pay him 100 for his efforts but never paid up.
Held:
Whilst the promise to make payment came after the performance

Chappel v Nestle [1960] AC 87 House of Lords

Consideration must be sufficient but need not be adequate:
There is no requirement that the consideration must be market value, providing
something of value is given eg 1 given in exchange for a house would be valid. The
courts are not concerned with whether the parties have made a good or bad bargain:

Nestle ran a sales promotion whereby if persons sent in 3 chocolate bar wrappers
and a postal order for 1 shilling 6d they would be sent a record. Chappel owned
the copyright in one of the records offered and disputed the right of Nestle to
offer the records and sought an injunction to prevent the sales of the records
which normally retailed at 6 shillings 8d. Under s.8 of the Copyright Act 1956
retailers were protected from breach of copyright if they gave notice to the
copyright holders of the ordinary retail selling price and paid them 6.25% of this.
Nestle gave notice stating the ordinary selling price was the 1 shilling 6d and
three chocolate bar wrappers. The question for the court was whether the
chocolate bar wrappers formed part of the consideration. If they did it was
impossible to ascertain the value they represented and therefore Nestle would
not have complied with their obligation to give notice of the ordinary retail selling
price. If the wrappers were a mere token or condition of sale rather than
constituting consideration, then the notice would be valid and Nestle could sell
the records.
Held:
The wrappers did form part of the consideration as the object was to increase
sales and therefore provided value. The fact that the wrappers were simply to be
thrown away did not detract from this. Therefore Chappel were granted the

Tweddle v Atkinson [1861] EWHC QB J57 Queen's Bench Division

Consideration must move from the promisee
If a person other than the promisee is to provide the
consideration, the promisee can not enforce the agreement:

A couple were getting married. The father of the bride entered

an agreement with the father of the groom that they would each
pay the couple a sum of money. The father of the bride died
without having paid. The father of the son also died so was
unable to sue on the agreement. The groom made a claim
against the executor of the will.
Held:
The claim failed: The groom was not party to the agreement and
the consideration did not move from him. Therefore he was not
entitled to enforce the contract.

Collins v Godefrey (1831) 1 B & Ad 950 King's Bench

Division
An existing public duty will not amount to valid
consideration
Where a party has a public duty to act, this can not
be used as consideration for a new promise:

The claimant, Collins, had been subpoenaed to attend court as a

witness in separate court case involving the defendant, Godefrey.
Godefrey had sued his attorney for malpractice and Collins was
required by the court to attend as an expert witness. In fact Collins
never gave evidence but was required to be on standby for six
days in case he was called. After the trial Collins gave Godefrey an
invoice to cover his time spent at court and demanded payment by
the next day. Without giving him the full day to pay, Collins
commenced an action to enforce payment.
Held:
Collins was under a public duty to attend court due to the
subpoena. Where there exists an existing public duty this can not
be used as consideration for a new promise. Godefrey was not
required to pay him.

Glasbrook Bros v Glamorgan County Council [1925] AC 270

House of Lords
An existing public duty will not amount to valid consideration
Where a party has a public duty to act, this can not be used
as consideration for a new promise:Unless the promisor goes
beyond their duty:

The defendant owners of a colliery asked the police to provide

protection during a miner's strike. The police provided the protection
as requested and provided the man power as directed by the
defendants although they disputed the level of protection required
to keep the peace. At the end of the strike the police submitted an
invoice to cover the extra costs of providing the protection. The
defendants refused to pay arguing that the police were under an
existing public duty to provide protection and keep the peace.
Held 3:2 decision:
In providing additional officers to that required, the police had gone
beyond their existing duty. They were therefore entitled to payment.

Ward v Byham [1956] 1 WLR 496 Court of Appeal

An existing public duty will not amount to valid
consideration
Where a party has a public duty to act, this can not be
used as consideration for a new promise:Unless the
promisor goes beyond their duty:

An unmarried couple had a child together and lived together for five
years. The father then turned the mother out of the house and sent the
child to live with a neighbour and the father paid the neighbour 1 per
week. The mother then got a job as a live in house keeper and wished
to have the daughter live with her. The father agreed to allow the
daughter live with the mother and agreed to pay her 1 per week
provided she ensured the child was well looked after and happy. The
father made payments but then when the mother remarried he
stopped making payments. The mother brought an action to enforce
the agreement. The father argued that the Mother was under an
existing legal duty to look after and maintain the child and therefore
was not providing any consideration for the promise to make payment.
Held:
By promising to ensure the child was well looked after and happy she
had gone beyond her existing legal duty and therefore had provided
consideration. She was entitled to the payment.

Promissory estoppel

Promissory estoppel is an equitable doctrine which in

some instances can stop a person going back on a
promise which is not supported by consideration.
Promissory estoppel was developed by an obiter
statement by Denning J (as he then was) in Central
London Property Trust Ltd v High Trees Ltd [1947] KB 130
(Case summary). Denning J based the doctrine on the
decision in Hughes v Metropolitan Railway (1876-77) L.R.
2 App. Cas. 439 (Case summary). The House of Lords
affirmed the existence of promissory estoppel in contract
law in Tool Metal Manufacturing v Tungsten [1955] 1 WLR
761 (Case summary).

Central London Property Trust v High Trees House [1947] KB

130 High Court
Promissory estoppel was developed by an obiter statement
by Denning J

High Trees leased a block of flats from CLP at a ground rent of 2,500. It was a new
block of flats at the time the lease was taken out in 1937. The defendant had
difficulty in getting tenants for all the flats and the ground rent left High Trees with
no profit. In 1940 many of the flats were still unoccupied and with the conditions of
the war prevailing, it did not look as if there was to be any change to this situation
in the near future. CLP agreed to reduce the rent to 1,250 during the war years.
The agreement was put in writing and High Trees paid the reduced rent from 1941.
When the war was over the flats became fully occupied and the claimant sought to
return to the originally agreed rent.
Held:
The rent would be returned to the originally agreed price for the future only. CLP
could not claim back the arrears accrued during the war years. This case is
important as Denning J (as he then was) established the doctrine of promissory
estoppel. Promissory estoppel prevented CLP going back on their promise to accept
a lower rent despite the fact that the promise was unsupported by consideration.
Denning J "In my opinion, the time has now come for the validity of such a promise
to be recognised. The logical consequence, no doubt is that a promise to accept a
smaller sum in discharge of a larger sum, if acted upon, is binding notwithstanding
the absence of consideration"

Hughes v Metropolitan Railway (1876-77) LR 2 App Cas 439

House of Lords
Denning J based the doctrine of promissory estoppel on the
decision

A landlord gave a tenant 6 months notice to carry out repairs failure to do so would result in
forfeiture of the lease. The landlord and tenant then entered into negotiations for the tenant to
purchase the freehold of the property. It was thought by both parties that a conveyance of the
property would take place. The tenant had not carried out the repairs as they believed they
would be purchasing the freehold and the repairs required by the landlord were not essential to
his use of the property. At the last minute negotiations broke down and the Landlord gave the
tenant notice to quit for failure to carry out the repairs.
Held:
The time limit imposed for carrying out the repairs was suspended during the negotiations.
Lord Cairns CJ:"It is the first principle upon which all Courts of Equity proceed, that if parties who have
entered into definite and distinct terms involving certain legal results - certain penalties or
legal forfeiture - afterwards by their own act or with their own consent enter upon a course of
negotiation which has the effect of leading one of the parties to suppose that the strict rights
arising under the contract will not be enforced, or will be kept in suspense, or held in abeyance,
the person who otherwise might have enforced those rights will not be allowed to enforce them
where it would be inequitable having regard to the dealings which have thus taken place
between the parties."