The fundamentals of contract law

October 2020

Agreements form the basis of contracts – although not every
agreement is a binding contract, says Dr Jeremé Snook.

Contracts are usually legal binding agreements and form part of both business and personal commitments.

Contracts all contain terms and conditions which gives the parties’ own rights under that contract. For example the employment contract contains terms as salary, notice to terminate and job title.

Contracts also form part of consumer laws. For example, The Consumer Rights Act of 2015 provides rights which ensure that products, whether bought at shops or online must be of a satisfactory quality and fit for their advertised purposes.

Any claims regarding goods can be maintained against the retailer from whom the goods were bought. You have a legal right to return faulty goods within 30 days of purchase – but this does not apply to downloads such as games, music or apps. Otherwise, products can be returned or replaced – after the 30 days expires – you can even allow the retailer one opportunity to repair faulty goods or digital content which you regard as unsatisfactory quality. If the product cannot be repaired, or any replacement is itself defective, you have the further right to receive a full refund.

These are just some of the consumer rights. These are rights under Statute – you often read on products that “Your statutory rights are unaffected”, so your first thoughts should be to use these rights. Statute Law is enforced by the courts. But where did the contractual rights first emerge? The answer is from the common law and case law rules relating to contracts – so read on!

We often make agreements without forming a contract – for example, a promise to dig your own garden is unlikely to amount to a contract. The reason is that only one of a number of elements required for a contract to be legally enforceable is involved.

Those elements which make an agreement binding are:

• An offer.

• Its acceptance.

• Exchange of consideration.

• Along with an intention to create a legal obligation.

• By those with an interest in and a capacity to make the contract.

• Acting in the absence of mistake, misrepresentation or other vitiating factors. A contract need not be in writing to be a legally binding agreement, but must contain the above elements if it is to be upheld in the courts. The two most essential elements are the offer and acceptance.

An offer is made when a statement is made of the terms on which the person (or company) making the offer is willing to buy goods or services from or sell goods or services to a named person, group of people or to the public generally.

The offer must not be too vague. It must be clear what is being bought or sold, and at what price – otherwise the offer is automatically invalid; Scammel vs Ouston, 1941.

The offer can be to one person only (say an offer by X to sell Y a car for £1,000) but can be to a group of people.

In the Carbolic Smokeball Company case, Carlill v Carbolic Smokeball Company, 1893, the company had promoted its product by offering to pay £100 to any person who suffered from influenza after using its smokeball as directed. Mrs Carlill did use the smokeball, and was subsequently ill with influenza. She claimed the £100.

The court agreed that in placing its advertisement the company had made an offer to Mrs Carlill, and to everybody else who read it. Mrs Carlill had accepted the offer by buying the smokeball on those terms.

Supply of information alone by one person to another does not amount to an offer to enter into a binding contract (although there may well be a duty of care involved – such as in the supply of references).

In the case of Harvey v Facey, 1893, an inquiry about whether the owner would sell Bumper Hall Farm was met with the reply ‘Bumper Hall – £900’.

This, said the court, amounted to a valuation not an offer to sell, and expressed no desire to accept any intended offer.

Neither do negotiations that precede any offer and amount to an ‘invitation to treat’, amount to an offer. Invitations to treat include:

• Displays of goods in a shop window (in the famous Fisher v Bell, 1961, case. It was decided that a shopkeeper who displayed flick knives in the shop window had not broken the legislation forbidding the sale of such goods since the display amounted to an invitation to potential buyers to make an offer which could be refused or accepted).

• Displaying goods on shelves in a self-service shop (in the equally well known Pharmaceutical Society of Great Britain v Boots, 1952, case it was held that the policy of requiring shoppers to seek advice from a pharmacist before purchasing prescription drugs on display was not an offer to sell goods but an invitation to treat).

• Auctions – the auctioneer invites bids from the floor and thus the offer comes from the intending buyer of goods, not the auctioneer.

• Advertisement in the media – they amount to an invitation to make an offer on the terms stated (in Partridge v Crittenden, 1968, Partridge saw an advert for wild birds in breach of legislation, but the advert was an invitation to treat not an offer).

• Tenders – they are an invitation to negotiate terms prior to accepting any offer of work. Once terminated, offers may no longer be accepted to form a contract. They can be terminated in a number of ways.

They can be revoked prior to acceptance. Revocation should, if possible, be made in the same way that the offer was made. It must be received by the offeree before it is effective although may be communicated via a trusted third party (Dickinson v Dodds, 1876).

Any offer will lapse after a reasonable period of time. In Ramsgate Victoria Hotel v Montefiore, 1866, acceptance of an offer to purchase shares in the company was ruled ineffective since it had not been made within six months.

Industry norms on acceptance of contracts may well be influential of whether or not an offer has been deemed to have lapsed.

Offers may also be terminated by rejection – which may be in the form of a counter offer as in Hyde v Wrench, 1840. Here an offer to sell a farm at £1,000 was met by a counter-offer of £950.

A refusal to sell was made at this point, and an attempt to offer the original price was also rejected.

Acceptance of a contract may be made orally, in writing or by conduct – so long as this is communicated to the offeror. It is not possible to communicate acceptance by remaining silent. (Felthouse v Bindley, 1863).

There are two major exceptions to this general rule concerning rewards and delivery.

In the case of a reward posted for information or return of property, the offeree will not need to reply before he or she seeks out the information or property – conduct of the search is itself acceptance of the offer, although the claimant must have known of the reward before coming forward.

Special rules apply to acceptance made by the post. In Adams v Lindsell, 1818, it was held that a contract had been made as soon as a letter of acceptance had been placed in the post, and not at the point it was delivered to the offeror. Provided the letter is correctly addressed and stamped acceptance is effective even if it never reaches the offeree’s home or office. This rule does not apply to modes of instantaneous communications such as the telegram or fax. In these cases, the offeror must receive the communication.

As a practical point it is wise to specify at the outset any intention that the postal rules will apply since then there can be no doubt as to the terms of the contract.

Also be wary in dealing with the HMRC and other authorities since regardless of the law of contract they are generally able to uphold deadlines for receipt of returns and payment which specify a date by which they must have been delivered.

• Dr Jeremé Snook, Senior Lecturer in HRM, Sheffield Hallam University Business School.