Fundamentals of Contract Law – Question and Answer

1. Contract Law is the fundamental business legal subject. Not only is it obviously relevant to sales and purchase contracts but it also underlies employment contracts. The contract law sections explain the basics of what makes up a contract. The first two sections, Agreement and offer, and Acceptance, deal with the formation – the making – of contracts.

Most people think that a contract must be a signed document. Although many business contracts take the form of a signed document, many do not. How many orders for goods and services are made by telephone or fax? When is the contract made? When the order is placed? When the goods arrive?

When ordering goods or services on your own standard form contract is the contract made on your terms? What if your supplier ‘accepts’ your order on their standard form contract? Now on whose terms is the contract made?

2. The certainty of terms? section deals with issues such as what is meant by ordering goods ?n the usual terms? From a regular supplier.
What have you agreed with your supplier?
Are there regular terms?
Are there different terms depending on what the goods are?

3. The sections on Consideration and Variation of contracts are important and related features of English contract law. In most business contracts there is no difficulty in identifying? B>consideration? However, what if you want to vary the terms of the original contract? This you can only do if you enter into a new contract which varies the terms of the original contract. In this case very often ?b>consideration? is missing from the new agreement. If this is the case you will be bound by the original contract.

E.g. If you order 400 kettles from a supplier and then discover that you only need 200 can you cancel? 200 kettles?

Even if your supplier agrees can he later change his mind and make you take the whole 400?

4. The Privity of contract section is an area of law that has very recently been altered.

This area of law deals with the type of situation where you buy a holiday from a travel company for you and your family. If the holiday does wrong? You can sue the travel company but can the members of your family sue the travel company?

Another example. Assume that your company (I’m assuming that your company is an incorporated company and therefore a legal person in its own right) enters into a contract with another company. Say that under one of the terms of that contract the other company agrees to pay some money to ?our?company and some money direct to you in your own personal capacity. What happens if the other company then refuses to pay you? Can you sue the other company?

5. This section deals with the terms of the contract in general.

What do we mean by terms? of the contract?

How important are they?

Are they all of equal importance?

Can you break some terms but not others?

Are the penalties for breaking some terms less onerous than others?

6. The sections on Exemption clauses – the common law, and the Unfair Contract Terms Act 1977, deal with the terms of the contract that limit or exclude liability for breach of contract.

If the other party breaks a term of the contract can he escape liability because the contract contains a term which excludes his liability for that particular breach?

7. If a person sells you a second hand car and tells you that he has owned it from new and it later turns out that its been owned by 10 people what are your remedies?

Has that person’s statement be made a part of the contract ie was it a term of the contract?

If it wasn’t a term have you a remedy?

8. Does every breach of contract entitle the innocent party to treat the contract as at an end if he so chooses?

What is the effect of penalty clauses?

Part two: Agreement and offer

Objective: When you have worked through this section you should be able to Appreciate the importance of the concept of agreement.

Appreciate the importance of the intention of the parties.

Distinguish between an invitation to treat and an offer.
Suggested study time 4 hours

Preliminary matters:

The law of contract is the most important law subject you will ever study. It underpins all commercial law subjects and is even important to subjects such as criminal law.

Definition of a Contract

A contract is an agreement (usually between two persons) giving rise to obligations on the part of both persons which are enforced or recognised by law. Warning!! Since, for the most part, the law of contract is a common law subject do not take any definition you are given as the only definition. Treat the definitions as working definitions to help you analyse contract cases etc.

NB The ‘persons’ mentioned above are usually referred to as ‘parties’ to the contract.

NB Generally speaking, an agreement is made when one person accepts an offer made by the other.

NB The offeror makes an offer to the offeree.

Time and time again you will be brought back to the fact that the fundamental basis of contract law is the agreement of the contracting parties.

The thing that distinguishes the law of contract from other branches of law is that it does not lay down a number of rights and duties which the law will enforce. In other words the law of contract does not lay down a list of things that are legal or illegal, or things that must or must not be included in a contract.

The law of contract consists of a number of limiting principles, subject to which the parties may create rights and duties for themselves which the law will uphold.

The parties to a contract, in a sense, make the law for themselves: so long as they do not infringe some legal prohibition, they can make what rules they like in respect of the subject-matter of their agreement, and the law will give effect to their decisions.
Eg If June says to Fred that he can buy her pen for 200 and he agrees there will be a legally enforceable contract between June and Fred. The fact that Fred may have been foolish in agreeing to buy a pen that is only worth? Is irrelevant – the parties to the contract have agreed to the price of 200.

Whereas it is generally true that agreement is reached when one person accepts the offer of the other person – in other words there is an actual agreement between the two persons – this is subject to what’s known as the rule in Smith v Hughes.

The rules in Smith v.Highes:

The law is also concerned with the objective appearance of the agreement, as well as the actual fact, of agreement.

Eg If Freda makes an offer to John and John says that he accepts the offer, but secretly he doesn’t intend to accept the offer, there is in fact not an agreement. However, to an outside person there would appear to be an agreement. In other words objectively there appears to be an agreement between Freda and John. In such a case the court would say that there was an agreement between Freda and John.

Apply the principle in the quote below, sometimes known as ‘The Rule in Smith v Hughes’, to the problem we’ve just looked at in the example above.

Smith v Hughes (1871)

Blackburn J: ?.. If, whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms…? /p>


Definition of an offer

An offer is a proposition put by one person to another person made with the intention that it shall become legally binding as soon as the other person accepts it.
An offer may be made to an individual, or a group of persons, or to the world at large: see Carlill v Carbolic Smoke Ball Co(1893).

The Carbolic Smoke Ball Company published an advertisement which read ‘£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.’ £1,000 is deposited with the Alliance Bank, showing our sincerity in the matter.’ Mrs Carlill used the smoke ball as directed but still caught the flu. She sued for the £100.

Bowen LJ: It was also said that the contract is made with all the world— that is, with everybody; and that you cannot contract with everybody. It is not a contract made with all the world. There is the fallacy of the argument. It is an offer made to all the world; and why should not an offer be made to all the world which is to ripen into a contract with anybody who comes forward and performs the condition? It is an offer to become liable to any one who, before it is retracted, performs the condition, and, although the offer is made to the world, the contract is made with that limited portion of the public who come forward and perform the condition on the faith of the advertisement.

Offer or Invitation to treat:

It can be very difficult to distinguish between an offer and an invitation to treat. Basically it depends primarily on the intention with which a statement is made.

Definition of an invitation to treat

An invitation to treat is said to be a statement made by one person asking the other to make the first person an offer.

An invitation to treat is sometimes described as ‘an offer to make an offer’. This is not a very helpful way of describing an invitation to treat.

If a proposition is made by one person with the intention that if the other party accepts that proposition there will then be a contract between them, then that proposition is an offer.

If a proposition is made by one person with the intention that if the other party accepts that proposition there will not be a contract between them at that stage, then that proposition is an invitation to treat.

Examples of invitation to treat:

In the examples of invitations to treat that follow, consider carefully what proposition or factual situation made the court decide that it was an invitation to treat and not an offer.

Carefully identify the particular elements of the facts of the cases that persuaded the courts that what was intended by one of the parties was an invitation to treat and not an offer.

Goods on display in supermarket

Pharmaceutical Society of Great Britain v Boots Cash Chemists Ltd (1953)

Certain brand name medicines were displayed for sale in a self service store. The issue arose as to when and where the sale of the medicines took place. Was it when a customer put the medicines in her shopping basket or was it when she presented the goods to the cashier? The reason this was an important issue was because the Pharmacy and Poisons Act 1933 s.18(1) provided that it was unlawful to sell such medicines unless the sale is effected by, or under the supervision of, a registered pharmacist.? If the sale took place when the customer put the medicines in her shopping basket the sale would not take place under the supervision of, a registered pharmacist?because no pharmacist was present at that time. If, on the other hand, the sale took place when the customer presented the goods to the cashier the sale would take place under the supervision of, a registered pharmacist?because a pharmacist was present at the checkout desk.

Q When did the sale take place?(b)
The sale took place when the customer put the medicines in her shopping basket.
The sale took place when the customer presented the goods to the cashier
Goods on display in window shop:
Fisher v Bell (1960)

A shopkeeper was convicted of offering for sale a flick knife contrary to the Restriction of Offensive Weapons Act 1959 s.1(1); he had displayed the knife in his shop window. The shopkeeper appealed.
Q What happened to him on appeal? (b)
The shopkeeper was convicted of offering a flick knife for sale
The shopkeeper was acquitted of offering a flick knife for sale.

An advertisement can be an offer:

An advertisement can sometimes be an offer BUT THIS IS VERY EXCEPTIONAL. Remember the thing that determines whether a statement is an offer or an invitation to treat is the intention of the party who makes the statement: our definition of an offer was an offer is a proposition put by one person to another person made with the intention that it shall become legally binding as soon as it is accepted by the other person.?So if a proposition, say an advertisement, is made with the intention that if acted upon the person making the advertisement will consider themself legally bound then the advertisement will be an offer and not an invitation to treat.

In Carlill v Carbolic Smoke Ball Co (above) the court held that in the particular unusual circumstances of the case that the Carbolic Smoke Ball Co had intended their advertisement to be an offer.

A tender is an offer in response to an invitation to tender put out by a company.

Generally a company who invites tenders is only making an invitation to treat and is not bound to accept any of the tenders.

Example of tenders:

Spencer v Harding (1870)

Harding sent out a circular which stated we are instructed to offer to the wholesale trade for sale by tender the stock in trade of Messrs. G. Eilbeck & Co. amounting as per stock-book to ?503 13s 1d, and which will be sold at a discount in one lot. Payment to be made in cash. The stock may be viewed on the premises, up to Thursday, the 20th instant, on which day, at 12 o?lock at noon precisely, the tenders will be received and opened at our offices.?Spencer claimed that the circular was an offer which he had accepted by submitting the highest tender.

Q Harding’s circular amounted to (b)

A) A valid offer which Spencer had correctly accepted

b) Nothing more than an invitation to treat and was, therefore, incapable of being accepted by Spencer.
Failure to consider a tender:

Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council (1990)

Blackpool Borough Council sent an invitation to tender to operate pleasure flights from Blackpool airport to the Blackpool and Fylde Aero Club Ltd (the club) and six other parties. The invitation to tender said that the Council do not bind themselves to accept all or any part of any tender. No tender which is received after the last date and time specified shall be admitted for consideration.?The club posted its tender in the town hall letterbox at about 1100 hrs on Thursday 17 March; this was an hour before the advertised deadline expired. The council’s staff failed to empty the letterbox at 1200 hrs and as a result the tender was marked late and not considered by the council. The council then accepted the highest tender which was from Red Rose Helicopters. Later the council established that the club’s tender had been received in time and so they decided to declare the successful tender invalid and to reissue the invitation to tender. However, Red Rose Helicopters contended that its tender had been accepted and that the council was contractually bound to proceed on that basis. The council decided to honour Red Rose Helicopters?tender. The club bought an action for damages against the council for breach of contract. The club argued that the council had warranted that if a tender was received in good time the council would consider it and that the council, having failed to consider its tender, was in breach of contract.

Q Click on the appropriate number (a)
Although Blackpool Borough Council’s invitation to tender amounted to no more that an invitation to treat they were contractually bound to consider Blackpool and Fylde Aero Club’s tender..

Following Spencer v Harding Blackpool Borough Council was not contractually bound to consider Blackpool and Fylde Aero Club’s tender.


You should now be able to
Appreciate the importance of the concept of agreement.

Appreciate the importance of the intention of the parties.

Distinguish between an invitation to treat and an offer.
If you have not mastered the above points you should review this section again.


Q. Which of the following is NOT an invitation to treat?

A. An advertisement which states 1000 will be paid to anyone who fails to loose 4kg after using our Slimaid for 4 weeks as per the instructions printed on the box.??0000 is lodged with our solicitors to show out confidence in the product.

A display of goods in a shop window marked special Offer?
Goods offered for sale in a newspaper.
An application form for hire purchase.