Last week we discussed the history of contracts and how they fit in to the capitalist free market society in which we live in. Today we are going to look at the formation of contracts – What are the key elements of a contract and why they are important.

As I mentioned previously, there are three primary components: Offer, consideration, and acceptance. There are also the concept known as “Invitation to treat” and these will be discussed too.

Key terms

Bilateral contract – a contract which involves a mutual promise
Unilateral contract – a one-sided agreement where one person promises to do or refrain to do something in return for performance by another person.

Offer

The traditional definition of an offer is “an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed”.

In the event of any ambiguity about what is on offer, the court will resolve all matters using an objective test. In the case of Smith v Hughes, Mr. Hughes, who was a racehorse trainer, was given a sample of new oats. He placed an order for more of the new oats, but when they arrived they were the wrong kind of oats (he wanted old oats).

However, the sample provided corresponded to what was received (he received new, but he wanted old).

Despite the fact that Mr. Hughes mistakenly believed that the offer was for oats, the offer (and subsequent acceptance) were considered effective. The court held that he would be bound because a reasonable person (the objective test) would have believed he was bargaining for the new oats as per the sample (as an aside, this is an example of a bilateral contract – money for oats).

This is the first lesson of accepting an offer: Caveat Emptor (buyer beware)

Invitation to treat

An invitation to treat is an expression of willingness to negotiate.

When an offer is accepted it is a contract. However, an invitation to treat is a special class of offer which can be accepted by another without the offeror (the person making the invitation to treat) being bound.

Invitations to treat are vitally important to advertisers. In one case, Partridge v Critendon a person ran an advertisement offering to sell wild birds. But it was considered in the case not to be an offer (which would bring about contractual liability), but rather an invitation to treat. The reasoning in this case was that if everyone in the world could, and did, accept then the advertiser would be in a situation where he had more goods than he actually stocked.

This would be an absurd situation.

In a similar case of Fisher v Bell, a flick-knife was in a shop window. It was illegal to offer flick knives for sale at the time. At court, it was held that the knife in the shop window was not an offer, but rather an invitation to treat (that is, an invitation for customers to offer to purchase the knife).

But in one case, Carlill v Carbolic Smoke Ball Company, an advert offered £100 to any person who caught influenza whilst using their product as described. A person caught influenza whilst using the product and that there was £1000 in a bank account in good faith to pay for any such person who might claim. It was held that this advert was sufficiently definitive, clear, and final that whoever performed the requested acts and caught influenza would be entitled to payment (again, as an aside, this is an example of a unilateral contract a promise to pay for performance).

The important distinction between offer and invitation to treat is that the offer must be definitive, clear, and final.

Consideration

Consideration is a very difficult and complicated legal concept.

For our purposes, consideration is legal value – it is anything of value promised to another party of a contract. It can include money, property, services, future actions, a promise not to act, and everything in between.

In the case of Smith v Hughes above, the legal value for the Hughes was the promise to provide oats and for Smith was the payment of money.

In the case of Calill v Carbolic Smoke Ball Company, the use of the smoke ball and subsequently catching influenza (performance) were the consideration in lieu of future performance (payment of £100).

In the case of Chappell & Co Ltd v Nestle Co Ltd, it was held that a contracting party can stipulate what consideration he chooses. A peppercorn does not cease to be good consideration even if it is established that he does not like the pepper and will throw away the corn.

This case is to be understood in the following way: consideration need not be adequate (that is, it need not meet the economic value of the trade), but is does need to be sufficient (that is, something of value, even of low value).

To illustrate this, in one case – Thomas v Thomas – the courts upheld a contract which allowed a woman to reside in a property for £1 per year.

If you agree to give your car away for a penny, you’ll be upset when you’re left with a penny.

Acceptance

In the case of bilateral contracts, it is important that acceptance is communicated. If a specific method of communication is stipulated, it must be accepted in the stipulated way. A condition of a specific method of acceptance must be made in completely unambiguous terms.

In the case of unilateral contracts, a person whom the offer applies to simply need to start performance on the terms and conditions of the offer. As discussed above, the case of Carlill demonstrated this perfectly: Any person who used the smoke ball and then caught influenza would be entitled to payment. There was no need to discuss this with the Carbolic Smoke Ball Company.

Acceptance is effective unless the offer has been revoked. According to the postal rule, another very complicated rule, an offer is accepted once it is posted, but revocation is only effective when it’s received.

Thus, if you post your acceptance letter the same time a person posts their revocation letter, the revocation is too late to be effective.

End notes

In the last piece, I asked you to consider the shopping scenario. The answer should be easier to consider now: You are likely to be offering to purchase the items, and the items on the shelves are an invitation to treat.

The point of no return is when they have accepted your offer to purchase the items.

Why is this the case?
If the items on the shelves were offers, rather than invitations to treat, then you would be accepting that offer the moment you put them in the basket and you would be legally bound to buy them.

Shopping would become a much more cautious venture! You should also now be aware of the horrible truth – if you see something drastically mispriced (for example, a £100 item mislabeled for £1.00), the shop is not legally obliged to accept your offer to purchase at that price. It’s just an invitation to treat.
Sorry to break that to you.

Points to take away

1. An offer is “an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed”
2. Contracts are always interpreted objectively – They will be settled based on what a reasonable person would believe was being bargained for
3. An invitation to treat is a willingness to negotiate – it is a type of offer that isn’t legally binding.
4. Most adverts are invitations to treat, as are the items which are on display in shops.
5. Consideration is, put simply, considered “legal value”
6. It need not be adequate (i.e. meet economic value), but it need be sufficient (i.e. of some value).
7. Acceptance is effective on communication, or the initiation of performance
8. The form of acceptance, where stipulated, must follow that form otherwise it will not be effective.
9. Acceptance is effective on sending; Revocation is effective only on receipt.

Craig

Craig Ineson is a law graduate of the University of Liverpool, current student of international business law at master’s level, a passionate restaurant reviewer, and experienced content writer.
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