Formation Contract Law

8/10/2019 Formation Contract Law

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Formation of Contract


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Formation of a Valid and

Enforceable ContractAgreement (Offer + Acceptance)

Intention to Create Legal Relations

Consideration Must not be illegal or contrary to public policy

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Business Law-NG-07/10 - Week 6


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(A) Offer & Invitations to Treat An offer is an expression of willingness to contract made with

the intention that it shall become binding on the offeror as soonas it is accepted by the offeree.

A genuine offer is different from what is known as an "invitation

to treat", i.e. where a party is merely inviting offers, which he isthen free to accept or reject. It is not an offer because there is nointention to be legally bound. The following are examples ofinvitations to treat:

There are 4 categories of invitations to treat

- advertisements in a newspaper- display of goods on a shelf- auction sales- invitations to tender

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Invitations to Treat AdvertisementsAs a general rule, an advertisement in a newspaper is not an

offer. It is an attempt to induce offers. This general rule is

displaced where the advertiser by his word or conduct showsa clear intention to be bound, as is often the case in the

unilateral contract.

Display of Goods on a Shelf

A store owner who displays goods on a shelf with the priceattached does not make an offer. He is merely inviting the

public to make an offer to buy the goods at the price stated.

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Invitations to TreatAuction SaleThe general rule is that in an auction sale, when theauctioneer invites bids, this is not an offer but an invitation

to treat. When the bidder responds with a bid, he is in factmaking an offer and the auctioneer is then free to accept orreject this.

Invitation to Tender

Generally a request to tender will be considered as aninvitation to treat. Any tender document which is submittedin response to this request is an offer and the invitee of thetender is then free to accept whichever offer he chooses.

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Termination of an offer

The various ways in which an offer may terminate:

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Termination of an Offer(i) Revocation or withdrawal of an offer by the offeror

(ii) Counter offer

(iii) Lapse of time(iv) Death

(v) Non-fulfilment of a condition precedent

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Termination of an Offer(i) Revocation

A revocation is a withdrawal of an offer.

An offer can be revoked at any time before it isaccepted because there is no binding contract before

acceptance.

An offer cannot be revoked after it has been accepted.

A revocation must be communicated to the offeree to

be effective (by himself or by any other source). If it is

not, and the offeree accepts, there will be a contract.

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Termination of an OfferConsider the following:

- By letter dated 1st October, A offered to sell goods to B.

- B received the offer on 11th October and immediately

accepted by fax. - Prior to that, on 8th October A wrote a letter revoking the

offer.

He mailed this and B received it on 20th October.

- Is there a contract? - Yes. The court would hold that the revocation came too

late and was not effective until it had reached B. A contractwas made when B faxed his acceptance.

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Termination of an Offer(ii) Counter OfferSometimes a reply from an offeree comes in the form of a newproposal, or counter-offer. It is really a new offer, which is thenopen to acceptance or termination in some other way

(iii) Lapse of TimeWhere an offer is stated to be open for a specified time only, oncethat time expires and the other party has not responded, thenthe offer automatically ends. If no time is stipulated, the offermay lapse after a reasonable time.

(iv) DeathWhere the offeror dies before the offer is accepted by the offeree,the offer is terminated. If the offer is accepted before the offerordies, it may be enforceable against the estate if it is not of apersonal nature.

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Elements of a Valid AcceptanceAcceptance An offeror can prescribe that the acceptance must occur in

a particular manner, eg by post or hand delivered or bytelephone.

An acceptance to an offer is only effective if it iscommunicated to and received by the offeror. If somethingimpacts upon the ability of the offeror to receive word ofthe acceptance, for example, because of interference on thephone line or because the offeree is unable to speak clearly,then there is no contract.

Silence does not amount to acceptance. An acceptance of an offer must be absolute and

unqualified.

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AcceptanceWhen a counter offer is accepted then its terms and

not the terms of the original offer become the terms ofthe contract.

Subject to Contract means that the parties do notintend to bind themselves until a formal documenthas been drafted and signed.

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Acceptance The Postal Rule

A distinction is drawn between an acceptance through

instantaneous means and one in a contract by post.The post office rule constitutes the post office as anagent of the offeror.

It states that when an acceptance is placed under the

lawful control of the post office, it is effective evenwithout actual physical delivery to the offeror.

The postal rule applies to acceptance only and not tooffers.

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Acceptance Consider the following example:- A posted an offer to B on 2nd September. That letter contained a

clause which stated that A expected a response by the post.- The letter was incorrectly addressed and reached B on the 5th

September.- B sent off a letter at once agreeing to all the terms contained in

the offer.- On the 8th September, A not having heard from B, sold the item

to a third party.

- Was there a breach of contract?- Yes, because a contract had been completed on the 5thSeptember

when B posted the letter of acceptance. The post office was theagent of A, the offeror and had received the acceptance on hisbehalf.

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(B) An intention to create legal

relations The parties must intend the agreement to be legally

binding. The law divides agreements into two groups,

(i) Social and Domestic group covers agreements betweenfamily members, friends and workmates. The lawpresumes that social agreements are not planned to belegally binding.

(ii) In business agreements the presumption is that theparties intend to create legal relations and make a contract.

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(C) Consideration Consideration is often defined as some right, interest,

profit or benefit accruing to one party or the loss,detriment or responsibility assumed by another party to

the contract. Consideration is also a requirement of a legally valid

contract.

The basic reason for a contract; a person gives upsomething of value in exchange for receiving something of

value through the contract. Consideration must be lawful

Consideration must be sufficient but need not be adequate.

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Types of Consideration Executory Consideration

Executed Consideration

Past Consideration

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Executory Consideration This is where parties exchange promises to do

something in the future

A farmer promises to deliver vegetables to a restaurant,and the restaurant promises to pay for the vegetables

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Executed Consideration This is where the offeror promises something once the

offeree does something

The promise only becomes enforceable once theofferee has done the action

If Jane loses her dog and offers to pay a reward to theperson who finds it, she does not have to pay until

someone finds her dog and returns it to her

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Executory v. Executed Executory consideration consists of two promises

Executed consideration consists of one promisefollowed by some action

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Past Consideration Past consideration does notform a valid contract

Normally, consideration is given at the time the contract ismade or at a later time

Past consideration is where the action is performed beforethe promise is made

This is not good consideration because the considerationmust be given in return for a promise

This cannot be the case if the action was performed beforethe promise was made

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Formation Contract Law

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