A doctrines of contract law? When two parties
A contract in its most basic definition is nothing more than a legally enforceable promise. Is promise alone enough to constitute a contract? How useful is the image of contracts as promises for understanding the specific doctrines of contract law? When two parties made a promise to show the willingness to do or not to do something, this is considered as agreements. Indeed, in general, the contracts begin as agreements. However, it becomes much more complicated when an agreement is brought to the level of a contract bound by law. Promises and commitments forming consideration for the parties to the same consent is known as an agreement. The agreement, which is legally enforceable is known as a contract. We will discuss the extent of a legally enforceable contract goes beyond a promise.
There are many competing theories which seek to explain the basis of the law of contract. The classical theory is the will theory which is closely associated with laissez-faire philosophy. The will theory has then been revived and subjected to elegant refinement by Professor Fried (1981)1. Fried maintains that the law of contract is based upon the ‘promise-principle’, by which ‘persons may impose on themselves obligations where none existed before’. The source of contractual obligation is the promise itself. But, at the same time Fried concedes that doctrines such as mistake and frustration cannot be explained on the basis of his promise-principle.2 The promise theory has been accepted for decades because it comports with some of our most basic intuitions about contractual obligations. Unfortunately, where it deviates from these intuitions, the promise theory has led to results and doctrines that have undermined the centrality of consent in contract law and theory.3
The agreement, which is legally enforceable is known as a contract. We will now discuss the extent of a legally enforceable contract goes beyond a promise. A contract is a specific type of agreement that meets certain requirements designed to create legally binding obligations between parties that are enforceable by a court of law. There are three basic essentials to the creation of a contract: (i) agreement; (ii) contractual intention; and (iii) consideration.
Agreement, Offer and Acceptance
When a person (promisor) offers something to someone else (promisee), and the concerned person accepts the proposal with equivalent consideration, this commitment is known as the agreement. The first requisite of a contract is that the parties should have reached agreement. Generally speaking, an agreement is reached when one party makes an offer, which is accepted by another party. In deciding whether the parties have reached agreement, the courts will apply an objective test illustrated in the judgment of Blackburn J in Smith v Hughes4. Then, we shall give consideration to the schematic approach to agreement by examining in greater detail the constituent elements of offer and acceptance.
An offer is an expression of willingness to contract on specified terms, made with the intention that it is to be binding once accepted by the person to whom it is addressed.5
An offer may be made to a definite person where it is called the bilateral contract, or to the whole world at large where it is called the unilateral contract. A bilateral contract is one where a promise by one party is exchanged for a promise by the other and an offer to a definite person can only be accepted by that person and by no one else. Whereas a unilateral contract is where an offer to the whole world at large that can be accepted by anyone.
An offer must be differentiated from an invitation to treat, by which a person does not make an offer but invites another party to do so. Whether a statement is an offer or an invitation to treat depends primarily on the intention with which it is made. Examples of invitation to treat are advertisements6, goods on display in shops7, contracts by tender8, and auction sales. The famous case of Carlill v Carbolic Smoke Ball Company9 is relevant here.
An acceptance has been defined as ‘final and unqualified expression of assent to the terms of an offer’10. An acceptance must coincide exactly with all the terms of the offer. A purported acceptance which attempts to vary the terms contained in an offer is not an acceptance at all. In fact, it will be interpreted by the court as rejection of the offer and as a counter offer and no contract will exist11.
In the general rule, for the acceptance to be valid, the offeror must receive the acceptance before it is effective. Acceptance that occurs via instantaneous medium such as telex message or email will only take effect at the time and place of receipt12. The exception to this general rule is the postal rule where a postal acceptance takes effect upon posting the letter of acceptance13, even if the letter may be damaged, delayed or lost14.
Also, the agreement must be certain. When the agreement is being viewed objectively, it must be possible to determine exactly what the party had agreed to.15 The final issue to be considered is whether or not an offer, once made, can be withdrawn or revoked. The general rule is that an offer may be withdrawn at any time before it has been accepted and for this purpose, the revocation must have been communicated to the offeree prior to his acceptance of that offer16. If the revocation is not communicated, it is ineffective.17
Intention to create legal relations
Once an offer is accepted, there will be an agreement. The agreement alone is however not sufficient to create legal obligation. Since casual promises do not generally serve as a basis for recognizing rights, there is the additional question whether the promisor had the necessary intent. In the language of the law, the question is whether the promisor manifested the intention to the legally bound.18 That being said, we should now look into another element of contract formation, which is the intention to create legal relation.
In order to determine which agreements are legally binding and have an intention to create legal relations, the law draws a distinction between social and domestic agreements and agreements made in a commercial context. In a social and domestic agreement, the law raises a presumption that the parties do not intend to create legal relations. In Balfour v Balfour19, a husband worked overseas and agreed to send maintenance payments to his wife. At the time of agreement, they were happily married. However, their marriage later soured and the husband stopped making payments. The wife then sought to enforce the agreement. It was held that the agreement was a purely social and domestic agreement and therefore it was presumed that the parties did not intend to be legally bound. Similarly, agreements between parents and children are presumed not to be legally binding.20 Here again we can see that a promise alone is not enough to constitute a legally enforceable contract. On the other hand, 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.21
A contract is based on an exchange of promises. Each party to a contract must be both a promisor and a promisee. A promise is not binding as a contract unless it is supported by consideration. 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 law22. 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.
The rules that make up the doctrine of consideration can be set out in the form of three principal rules. The first is that the consideration must be sufficient but need not be adequate. This rule can be further broken down into a number of sub-rules and has proved to be particularly problematic in the case where the consideration Is alleged to take the form of a promise to perform or the performance of a pre-existing duty. The second rule is that past consideration is not good consideration and the third is that consideration must move from the promisee.23
The rule that consideration must be sufficient but it need not be adequate requires that something of value must be given in return for a promise but that something need not be an adequate return (in the sense of there being any economic equivalence between the value of the consideration given and the value of any goods or services received). This can be seen in Chappell & Co Ltd v The Nestlé Co Ltd24.
Also, where a party has an existing legal obligation to act, promising to do the act will not constitute sufficient consideration25, unless the act goes beyond the existing duty26. In relation to pre-existing duty, in Stilk v Myrick27, the ship captain promised to divide deserters’ wages among remaining crew if sailed ship home and it was held that it is enforceable as the crew are already obliged to do this. However, a new approach was taken in Williams v Roffey Bros28 where it was held that if new promise to perform existing duty confers ‘practical benefit’, it can constitute good consideration.
The second rule regarding past consideration is that past consideration is not good consideration. In Re McArdle29, the work was done on house before there was a promise to reimburse. It was held that the promise to make payment came after the consideration had been performed therefore the promise to make payment was not binding. Consequently, we can see that it is not enough to only have a promise since there are a lot of other factors to look at when deciding whether it is a legally bound contract.
Finally, consideration must move from the promisee and not from the third party. The rule does not require the consideration move to the promisor. It suffices that it moves from the promisee. Nevertheless, where the conditions of the Contracts (Rights of Third Parties) Act 1999 are met, a third party may be able to enforce rights created in his favour by a contract which he was not a party to, and the courts are also adopting a more flexible position under the common law here.
When making a contract, the parties would obviously come up with a number of terms. However, not everything said or written during the course of negotiations constitutes a term of the contract. These statements could amount to a contractual term or representation. The distinction between a term and a mere representation is important because, if a statement is held to be a term of the contract, a failure to comply with it will be a breach of contract, entitling the innocent party to a remedy for breach of contract. If it is a mere representation, the innocent party cannot claim that there has been a breach of contract. However, they may bring an action for misrepresentation.
In deciding whether a statement is a contractual term or a representation, the court looks at a few factors. The first one is the intention of the parties. A statement is likely to be a term of the contract where it is of such importance to the person to whom it is made that, had it not been made, he would not have entered into the contract.30
The second factor is the relative means of knowledge. If seller asserts a fact of which the buyer is ignorant or states an opinion on a matter of which the other party has no special knowledge, then this assertion becomes a term of the contract. This is illustrated in Dick Bentley Production v Harold Smith Motors31.
The next factor is the reliance at the time of contracting. If the seller makes a statement to the buyer, knowing or having to know that the buyer relies on that statement, then this becomes part of the contract. However, the time-lag between the seller’s statement and the actual time of contracting must be short enough to believe that the seller’s statement was a condition for the buyer’s contractual decision.
Finally, the last factor will be the parol evidence rule. It is stated in this rule that if parties have agreed to put their contractual bargain into words, any verbal statements will be representations. At present, the parol evidence rule is nothing more than a simple presumption.
There are two principal sources of contractual terms – expressed terms and implied terms. Express terms are the terms which are agreed specifically by the contracting parties, and implied terms are those terms which are not specifically agreed by the contracting parties but which are implied by the courts.
As we can see, contract law goes beyond promises. Without these basic essentials, it would not be a legally bound contract. Therefore, I would conclude that although promise is the basis of a contract, the image of contracts as promises is not enough for understanding the doctrines of contract law.
1 Charles Fried, Contract as Promise (1981).
2 E McKendrick, Contract Law (11th edn, Palgrave 2015) 3.
3 Randy E. Barnett, Some Problems with Contract as Promise, 77 Cornell L. Rev. 1022 (1992).
4 Smith v Hughes (1871) LR 6 QB 597.
5 Stover v Manchester City Council 1974 1 WLR 1403.
6 Partridge v Crittenden 1968 1 WLR 1204.
7 Pharmaceutical Society of Great Britain v Boots 1953 1 QB 401.
8 Spencer v Harding (1870) LR 5 CP 561.
9 Carlill v Carbolic Smoke Ball Company 1893 1 QB 256, Court of Appeal.
10 H Beale (ed), Chitty on Contracts (32nd edn, Sweet & Maxwell, 2015), para 2-026.
11 Hyde v Wrench (1840) 3 Beav 334.
12 Entorres v Miles Far East 1955 2 QB 327 Court of Appeal.
13 Holwell Securities v Hughes 1974 1 WLR 155.
14 Adams v Lindsell (1818) 106 ER 250.
15 Scammell and Nephew Ltd v Ouston 1941 AC 251, HOL.
16 E McKendrick, Contract Law: Text, Cases, and Materials (7th edn, OUP 2016).
17 Bryne & Co v Van Tienhoven & Co (1880) 5 CPD 344.
18 For creating a legally enforceable contract, there should be an agreement upon the same thing in the same sense, see section 13 of the Contract Act, 1872.
19 1919 2 KB 571.
20 Jones v Padavatton 1969 1 WLR 328.
21 Esso Petroleum Ltd v Comrs of Customs and Excise 1976 1 WLR 1.
22 Thomas v Thomas (1842) 2 QB 851.
23 E McKendrick, Contract Law: Text, Cases, and Materials (7th edn, OUP 2016).
24 1960 AC 87, HOL.
25 Collins v Godefrey (1831) 1 B & AD 950.
26 Glasbrook Bros v Glamorgan County Council 1925 AC 270.
27 (1809) 2 Camp 817.
28 1990 1 All ER 512.
29 (1951) Ch 699.
30 Bannerman v White (1861) 10 CBNS 844.
31 1965 1 WLR 623.