Contract Formation

Part A Contracts are an integral part of business and everyday life, and are fundamental to construction as the industry relies on the formation of contracts for business agreements. “Contracts are based on the idea of a bargain, where each side must put something into the bargain. A contract may be defined as ‘an agreement which is binding on the parties’” (Galbraith, 1998, pg78). There are a number of key components which must be present in the formation of such contracts. Firstly, there needs to be an initial offer made by one party for the formation to begin. An offer exists when one party effectively declares his readiness to be bound by a set of terms without any further negotiation” (Galbraith, 1998, pg79). It is interesting to note also that there is generally no requirement that the offer be made in any particular form, it may be made orally, in writing or by conduct (McKendrick, 2007, pg33). The exception to this is with speciality contracts such as the sale of land or estates or when deeds are formed between parties giving them twelve years liability instead of the six on simple contracts, and are frequently used within construction (Owen, 1998, pg47).

However there is a fine line between what constitutes an offer, and an invitation to treat. “An invitation to treat is simply an expression of willingness to enter into negotiations which will lead to the conclusion of a contract at a later date” (McKendrick, 2007, pg33). There is much confusion between the two, as shown in the cases of Gibson v. Manchester City Council [1978] and Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953].

An example of an invitation to treat in construction is the tendering process, in which the employer will invite contractors to make an offer based on the project information, which the employer can then choose to accept to form a binding contract. In terms of the enforcement of contract law, when cases are examined McKendrick (2007, pg32) states “the courts adopt the ‘mirror image’ rule of contractual formation, that is to say they must find a clear offer which is matched by an equally clear acceptance”.

Acceptance is also defined as “an unqualified expression of assent to the terms proposed by the offeror” (McKendrick, 2007, pg43). Therefore a contract can only be legally binding if the offer includes clear terms and is declared to the offeree, with communication of a clear and firm acceptance to be bound by these terms given back to the offeror. These two factors combined culminate in the agreement of the contract. However contract formation is rarely simple, and often the offeree will wish to introduce their own terms to the agreement as part of the negotiations, communicating this back to the offeror.

This is known as a counter offer. Galbraith (1998, pg80) points out that “the offer – counter offer situation arises frequently in business where each side in the negotiations may be trying to make the contract on the basis of their own ‘pro forma’ standard documents. This gives rise to what us known as battle of the forms” The battle of the forms scenario succinctly defines the rules of offer and acceptance, in that any counter offer destroys the original offer making it irretrievable, with agreement of contract resulting when the last offer is accepted by the offeree.

An example of this is evident in the case of Butler Machine Tool Ltd v Ex-Cell-O Corp [1979]. It is also important that there is an element of certainty to the terms of the contract, with the parties expressing their agreement in a form sufficiently certain for the courts to enforce (McKendrick, 2007, pg57). If there is an element of vagueness in the terms of the contract, it could be judged there is no valid contract at all, an example being the vague use of the term ‘hire-purchase’ in the case Scammell v Ousten [1941].

However if the parties have contracted with each other previously, it could be deemed as stated by Owen ( 1998, pg55) “a previous course of dealings will control some of the matters not expressly agreed in the present case, e. g. the amount of pay which could be the same as that paid on a prior occasion”. One particular problem in construction is the ‘letter of intent’, widely used between employers and contractors as a form of pre-contract agreement. Following on from the tendering negotiations, Adriaanse (2010, pg55) writes “the purpose of a letter of intent is to express an intention to enter into a contract at a future date”.

These are the result of failing to negotiate on certain terms in time for the project start date, and are introduced to allow the commencement of work, keeping within the projects’ completion target. As these are often not legally binding contracts they cause disputes in the future if one of the parties does not carry out their duties, as in British Steel Corporation v. Cleveland Bridge & Engineering Co. Ltd (1981). Owen ( 1998, pg50) writes that “all simple contracts must have consideration given by each party to the other as the price of each other’s promises.

It may take the form of money, goods, services, promises not to sue etc. ” For example party A must receive something from party B, in return for party A providing something to party B. However McKendrick (2007, pg88) states that “consideration must be sufficient but does not need to be adequate”, meaning for example something must be offered to the other party in return to satisfy the rules of consideration, but does not need to be of an equal value as shown in the cases Chappell & Co Ltd v Nestle Co Ltd [1960] and Thomas v Thomas [1842].

Consideration given also cannot be past, stated by Owen ( ) in that “you cannot make a contract in which one person promises to do something for another in exchange for a consideration which has already been performed”. This is clear in the cases of Lampleigh v Brathwait [1615] and Roscorla v Thomas [1842].

Consideration is of huge importance in the construction industry, as Adriaanse writes this is due to “a number of factors such as the length of the contractual chain stretching beyond the parties to their subcontractors and suppliers, as well as the system of competitive bidding meaning one party may under-price the cost of the work, raising the possibility that one party may wish to renegotiate the agreement”. This can lead to the question of whether consideration was given when the contract was formed and whether the party is legally entitled to expect renegotiation to occur.

However even when consideration has been given by parties and agreement reached this does not mean there is an enforceable contract in place. For a contract to be valid there must also be present the intention of all parties to enter legal relations with one another. Galbraith (1998, pg91) explains there are two categories, “commercial arrangements where the parties are presumed to have intended to create a contract, and family, domestic and social arrangements where they are presumed to have not”.

In the field of construction only the former is relevant, where the courts would initially look at a case between the parties and presume an intention to enter a contract exists. Conflict can occur when one of the parties seeks to rebut the presumption, in which the party will need to show evidence no contract was intended. An example of such a rebuttal is the case of Rose and Frank Co. v. Compton Bros where it was indicated the written document drawn up was merely a ‘gentleman’s agreement’ and not a legally binding contract (Galbraith, 1998, pg92). The legal capacity of the parties to enter into a binding agreement also must be present.

Minors under the age of 18, and the mentally incapacitated are not able to enter into contracts to protect them from their own inability or inexperience (McKendrick, 2007, pg348). Companies are deemed to have full capacity to enter into legal contracts and are not restricted in any way. In conclusion, in order for the formation of a legally binding contract to occur there must be an offer from a party which is followed by acceptance from another party. Certainty must exist within the terms of the agreement, and due consideration must be given by both parties for the price of the promises received.

The intentions of all parties to enter into legal relations must be present, as well as the capacity to qualify as valid party to the agreement. Part B a. ) When determining if there is a legal contract agreed between two parties there needs to be examination of whether the key elements of contract formation have been satisfied. In the case of Caroline v. A. W Electrical, the question is if at any point an offer was accepted and therefore a contract agreed between the two parties on the terms given. When A. W Electrical placed the advertisement in the newspaper for the ZR250 Smart Television at ? 80 via mail order, this is a clear invitation to treat and should not be classed as an offer. As discussed in part A, an invitation to treat is where a party will indicate they wish to enter into negotiations which may lead to receiving an offer and an agreement if they choose to accept. Advertisements are a prime example of an invitation to treat as they are an indication of what goods or services that party may be willing to negotiate over, with the price of ? 480 an estimate to invite offers. Subsequently when Caroline saw the advertisement and sent in a cheque for the ? 80, this equates to an offer being made to A. W Electrical. As Galbraith (1998, pg79) states “an offer exists when one party effectively declares his/(her) readiness to be bound by a set of terms without any further negotiation”. Caroline has effectively done this by sending the cheque for the amount on the advertisement, the terms being if she gives ? 480, A. W Electrical will send the item without any further negotiation if they accept Caroline’s offer. Due to the nature of the terms, A. W Electrical will be judged to have accepted if they go ahead and send Caroline the ZR250 Smart Television.

As explained in part A above, there needs to be communication of a clear and firm acceptance to be bound by these terms given back to the offeror. This will be deemed to be communicating via accepting by conduct, in which their actions equates to acceptance of the terms. However instead of sending Caroline the ZR250 model, A. W Electrical sent a ZR200 and a letter the following day with a cheque for ? 80 explaining the ZR250 was not available and unless Caroline returned the item within two weeks they would assume she was satisfied with the deal. A.

W Electrical have not accepted Caroline’s offer, but introduced a counter offer which is binding to their terms and not Caroline’s. As explained by McKendrick (2007, pg43) “a purported acceptance which does not accept all the terms and conditions proposed by the offeror but which in fact introduces new terms is not acceptance but a counter-offer, which is then treated as a new offer which is capable of acceptance or rejection”. Due to not being able to reply as she was departing on a two week holiday, upon her return Caroline returned the item with a note explaining it was not what she ordered, however A.

W Electrical refused to accept the item or provide any further refund as she had not returned the item within two weeks. This raises the question whether Caroline did actually accept the offer by not returning the item within two weeks. For this to be enforceable, the law of contract needs to govern that acceptance by silence is a valid form of coming to agreement. Galbraith states (1998, pg82) “the rule that acceptance must be communicated means that silence cannot usually amount to acceptance” This may mean that in the context of this case, Caroline did not accept the offer made by A. W Electrical and therefore is not bound by the terms.

However, full clarity on the matter can be taken from a case law example of Felthouse v. Bindley [1862], where it was judged accepting by silence cannot equal a clear communication of acceptance, unless it is totally clear the offeree intended to do so. In Caroline’s case, it is most definitely not clear she wished to accept, due to A. W Electrical not providing the item she requested on the terms given in her original offer. Therefore, there was no contract formed between the two parties as at no point an offer was accepted, rendering the contract void and no terms binding on either party. . ) If however we were to assume a contract was formed between Caroline and A. W Electrical at the point the two week period elapsed, there would be terms binding and these can be separated into two types, express terms and implied terms. McKendrick (2007, pg184) explains that “express terms are the terms agreed specifically by the contracting parties and implied terms are those not specifically agreed but which are implied into the contract by the courts or by Parliament”. The express terms of Caroline’s contract included the price being ? 00 for a ZR200 television given that she sent a cheque initially for ? 480 with an ? 80 cheque sent to Caroline with the item, and that A. W Electrical reserve the right to repair or replace the goods at its discretion if any dispute over the quality of goods were to arise. The implied terms of the contract will include elements of the Sale of Goods Act 1979, which will enforce A. W Electrical to adhere to certain conditions relating to the quality of goods and defects, and the description of the goods sold. S. 4(2) of the Act states there is an implied condition that goods supplied under the contract are of satisfactory quality. This is clearly contradicting the express term made by A. W Electrical regarding the right to repair or replace the goods, however in order to protect consumers rights the Unfair Contract Terms Act 1977 means that implied terms cannot be excluded in contracts with consumers (McKendrick, 2007, pg205). Therefore the express term is not valid in the contract, and A. W Electrical have broken this implied term by stating this.

Furthermore the Sale of Goods Act 1979 s. 13(1) states an implied condition that goods sold by description shall correspond with the description. The advertisement was for a ‘smart’ television however the item provided to Caroline did not possess any ‘smart’ features, therefore this term has been broken due to the item not matching the description advertised. In relation to the right to return the item, when Caroline sent this back to A. W Electrical they refused to accept stating the two week period has passed.

We are assuming the contract came in effect and was accepted by Caroline’s silence at the end of this period however the Consumer Protection (Distance Selling) Regulations 2000 s. 10 and s. 11(1-2) explains she has the right to a seven day cancellation period starting from the date the contract was concluded, expiring seven days later. This is another implied term of the contract A. W Electrical have broken in refusing to accept the returned goods. c. ) There are remedies available to Caroline in order to resolve the fact A. W Electrical have broken the terms of the contract.

The main issue to her is she is not able to return the television either in exchange for the model she asked for, or for a full refund. This breach of contract is likely to be classed as a breach of warranty, where a warranty is a term in the agreement not fundamental to its existence and therefore the contract cannot simply be terminated due to the breach. However Caroline could recruit the services of a lawyer or solicitor to take legal action against A. W Electrical in the form of a specific performance order, which will require A.

W Electrical to perform their primary obligations under the contract (McKendrick, 2007, pg451). This would enforce the implied term from the Consumer Protection (Distance Selling) Regulations 2000. Caroline could also contact the Office of Fair Trading to make a complaint, which could lead to an application to the courts for an injunction against A. W Electrical, ultimately resulting in the same effect of enforcing the contract (Office of Fair Trading, 2012). Bibliography Reference list Adriaanse, J. (2010). Construction Contract Law (3rd ed. Basingstoke: Palgrave Macmillan. Davenport, A. , Galbraith, A,. Stockdale, M. , Wilson, S. (1998). Galbraith’s Building & Land Management Law For Students (4th ed. ) Oxford : Butterworth-Heinemann 1998. McKendrick, E. (2007). Contract Law (7th ed. ) Basingstoke : Palgrave Macmillan 2007. Office of Fair Trading. (2012). Relevant Legislation – The Office of Fair Trading. Retrieved 28 November 2012, from http://www. oft. gov. uk/about-the-oft/legal-powers/legal/#. ULY4v8UTDwM. Owen, S. (1998). Law For The Construction Industry (2nd ed. ) Harlow : Longman 1998. Cases Gibson v.

Manchester City Council [1978]. Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953]. Butler Machine Tool Ltd v Ex-Cell-O Corp [1979]. Scammell v Ousten [1941]. British Steel Corporation v. Cleveland Bridge & Engineering Co. Ltd (1981). Chappell & Co Ltd v Nestle Co Ltd [1960]. Thomas v Thomas [1842]. Lampleigh v Brathwait [1615]. Roscorla v Thomas [1842]. Rose and Frank Co. v. Compton Bros [1925]. Felthouse v. Bindley [1862]. Statutes Sale of Goods Act 1979 Unfair Contract Terms Act 1977 Consumer Protection (Distance Selling) Regulations 2000