Formation of Contracts and Its Legal Effectiveness - Essay Example

?Law for Accounting The question pertains to the basic formation of contract issue in this question requires an analysis in respect of offer, invitation to treat, acceptance, revocation and consideration. Each of the issues will be discussed by stating the law first, with an analysis on the facts and then a conclusion in that respect would be made. The formation of contracts and its legal effectiveness is a subject which has been critically reviewed in case law and statutes. A contract can exist even if it is oral or informal but in strict legal terms for it to be legally effective, certain criterion must be met. Formation of Contract is based on firstly, an ‘offer’, which must be followed by an acceptance. Secondly, there must be consideration, intention to create legal relations and sufficient certainty. The main starting point for the conclusion of a contract can be found in Smith v Hughes1, where both a subjective as well as objective test was laid down in order to determine the existence of a contract. The subjective test determines the actual intention of the contracting parties, whereas the objective test ascertains what had been said by the parties, what they did and not and what their actual intention of saying or doing was. As per Professor Atiyah, the issue of offer and acceptance has been determined by courts in two ways, that is ‘reason forwards’ and ‘reason backwards’, the former is where existence of offer and acceptance are determined first and then the conclusion on the dispute is made; the latter is where the courts can reason from the appropriate solution back to the legal concepts of offer and acceptance. An offer has been defined as an expression of willingness by one party known as the offeror, to contract or be bound on stated terms, provided that such terms are accepted by the party to whom the offer is made that is the offeree. The courts have drawn a distinction between an offer and an invitation to treat, as the latter is merely an expression of willingness by one party to enter into negotiations and is not unconditional and there is a lack of intention to create legal relations. The most important and land mark cases which distinguished between an offer and invitation to treat are of Gibson v Manchester City Council2 and Storer v Manchester City Council3. In Gibson, where treasurer had sent a letter to Mr. Gibson, stating that council may be prepared to sell the house, was held to be an invitation to treat, which was further confirmed by the fact that Mr. Gibson was asked to make a formal application to purchase the house. The courts therefore took into account the correspondence between the parties. However, in Storer the courts found that a contract had come into existence as negotiations had moved beyond what had happened in Gibson but an exchange of contracts had not taken place. These cases clearly point out that fact that judges can interpret and differ in the results and so the decision would be said to be based on its own facts. An offer should be differentiated from a mere statement of price that is an enquiry as to the price. (Harvey v. Facey)4 Invitation to treat has been defined as an expression of willingness of a party to enter into negotiations with another with the hope that a contract would be reached at the end of such negotiations. (Fisher v Bell)5. As for advertisements, it has been strictly said to be an invitation to treat (Partridge v Crittenden)6, however, the courts have interpreted advertisements in a manner which allows for certain exceptions to be created and the main reasons for that has been cited to be intention to be bound and certainty (Carlill v Carbolic Smoke Ball Co.)7. Further, the advertisement of an auction sale is generally only an invitation to treat (Harris v Nickerson)8. The opinions as to when an offer is made have differed. In respect of the advertisement that had been placed by Serena in the Sunday Times Style, the first and foremost question is whether such advertisement was an invitation to treat or an offer. The most important aspect is the fact that advertisements are generally considered to be an invitation to treat. The only exception that can be seen in respect of advertisements is that of unilateral offer. This was analysed in the case of Carlill whereby an advertisement was found to be a unilateral offer. The facts of the case were that the advertisement stated that if somebody would catch flu after use of the smokeballs he would be compensated/rewarded and such an event occurred. The distinguishing factor that was taken into account by courts was the fact that to ensure that people believed it to be an offer it had been expressly stated in the advertisement that a certain figure had been deposited in the bank account, thus the act of depositing the amount in the bank made it a unilateral offer. In respect of the current scenario it is very difficult to establish that such a unilateral offer is existent and this because of the fact that it is an advertisement and secondly that it required for bids which in itself would constitute to be offer and therefore the advertisement placed by Serena can be clearly said to be invitation to treat and not an offer. The next issue that needs to be considered is the message left by Eric on the mobile. The first and foremost thing that needs to be discussed is that since the message has been listened to by Serena it has been communicated and therefore the problems of communication do not arise. The issue that requires addressing is the fact that Eric, contrary to what had been said in the advertisement has stated ?19,500 and so what is his position. The issue has clearly not been addressed upon by case law, however from an analysis of the cases at hand it can be seen that since Serena had made an invitation to treat and so required an offer but subject to her conditions. However, even though the restrictions had been clearly addressed in the advertisement that the bids should be more than ?20,000, there has been an offer made and which can either be rejected or accepted by Serena. As far as Chuck is concerned since it has been clearly established that Serena had been an invitation to treat by way of the advertisement which required bids to be made therefore an offer was required. The first point was that Chuck made an offer which inserted a term requiring a satisfactory inspection. However, it needs to be seen that Serena clearly informed Chuck that she was not accepting the offer and therefore the offer was rejected at that point in time only. However, a new offer might have been made to Chuck whereby his interest on Columbus was asked for. This is stated because even if offer and acceptance is found the problems of certainty would be present which would be looked into later. The next step is that of acceptance. The general rule for the acceptance of an offer is that the offer should be accepted unconditionally and must be communicated to the offeror. (Holwell Securities v. Hughes9). However there are certain exception to this general rule and one of them is the infamous postal rule. The postal rule states that when an acceptance is sent by means of a post, it takes place as soon as the letter is validly posted. (Adams v. Lindsell), furthermore Instantaneous modes of communication has lately been scrutinized by the courts (Lord Wilberforce in Brinkibon Ltd. v Stahag Stahl GmbH), however the problem of when acceptance is effective has clearly not been addressed and still lies in an area of uncertainty, however the problem of when acceptance is effective has clearly not been addressed and still lies in an area of uncertainty, however it is a settled law that a communication made through instant mode of communication is deemed effective if it is despatched and received during working hours i.e if a fax is sent on Sunday evening it will only deemed to be effectively communicated on Monday morning, when office working hours start. Another exception is that of a unilateral offer (Carlill v. Carbolic Smoke Ball Co.) Acceptance must be looked into carefully, as the fact that it must be unconditional is strict and so if new terms and conditions are introduced that would not be acceptance and would merely be a counter offer, which can then be accepted by the original offeror, who now becomes the offeree as in (Hyde v Wrench)10 in which the defendant offered to sell some land to the claimant for $1000 and the claimant replied with an offer of $950 for the land. On the refusal by the defendant, the claimant agreed to pay $1000 which was again rejected by the defendant. It was held by the courts that there was no contract between the parties because the claimants offer of $950 was a counter offer which killed off the original offer. Further Conduct will only amount to acceptance if it is clear that the offeree did the act with the intention to be contractually bound Day Morris Associates v. Voyce11. If the offeree does not accept all the terms and conditions proposed by the offeror and introduces new terms to the original offer is not an acceptance but a counter offer which kills the original offer The general rule for acceptance is that communication must actually be made to the offeror and must be heard. (per Lord Denning in Entores v. Miles Far East Corporation)12. If a prescribe mode of communication is specified it must be followed. Further, silence does not constitute as acceptance. (Felthouse v Bindley)13. Acceptance can therefore be quite simplistic on the face of it but an interpretation by the judges has clearly allowed for certain situations to be decided contrary to what a reasonable man would have construed on the facts. Clearly, this would constitute as a hurdle as a person without legal knowledge would be unaware of the point at which acceptance is made. It has been argued by commentators that the current law on offer and acceptance is uncertain and this could possibly be achieved by legislation. Further, the current law could give rise to injustice in certain cases. However, it can be said that the current has struck a balance between the need for certainty and the achieving of a just result in line with the intention of the parties. After establishing offer and acceptance, the element of certainty is looked into, which is vital as a binding contract can exist only if the parties express their agreement in a sufficiently certain form so that the courts can enforce it. This is because the court does not want to insert its own terms within a contract that has been agreed between the parties(Viscount Maugham in Scammell and Naphew Ltd. v. Ouston)14. As for the issue of Chuck telling Serena that he wanted to purchase the Columbus, there is a problem and that is the fact that Serena had merely enquired about Chuck’s interest which would be held to be an invitation to treat. As far as the acceptance is concerned there is uncertainty present even if the contract has been formed, the uncertainty being the fact that the important aspect of price has not been decided as yet and therefore a contract has not come into existence. Contrary to that Chuck merely made an offer and nothing else to Serena and therefore it was her decision taking into account the uncertainty on price. As for termination of an offer, there have been five different methods that have been illustrated. Only two of them would be discussed, as they are of relevance to the facts. The first one being that the offeror can withdraw the offer at any time before the offer has been accepted and the fact that such withdrawal must be brought to the notice of the offeree. Such a notice need not be provided by the offeror, that is someone else can also inform the offeree of revocation. (Dickinson v. Dodds)15. However, the fact that this rule requires the withdrawal to be brought to the attention of the offeree, this has had odd inferences on the offers that have been sent by the use of post. An illustration of such instances can be made by looking at the case of Byrne v. Van Tienhoven16 where an offer was sent by the defendants to the claimants on 1 October , which in turn was received by the claimant on 11 October and as soon as the offer was received an immediate acceptance was sent. On the other side the defendants changed their mind and sent a letter revoking the offer, on 8 October which reached the claimants on 20 October. The courts held that that the fact that the revocation was posted on 8 October was not relevant as the postal rule did not apply to revocation and so revocation only took place when it was brought to the attention of the claimant and by that time a valid contract had come into existence and so the offer could not be revoked. The next way of rejection of offer is that of a counter-offer whereby the offeree rejects the offer, because the counter-offer has a killing off effect on the original offer and a new offer comes into existence. As for Serena telling Eric that she accepts the offer, it is important to mention that Eric said that he wanted to gift to his girlfriend for her birthday, thus it can be said that this was not an unconditional offer. However, if it is construed by the court that an unequivocal offer was given, which is highly unlikely, then the acceptance has taken place. However, on the facts it is highly unlikely that an acceptance would be found. After establishing offer and acceptance, the element of certainty is looked into, which is vital as a binding contract can exist only if the parties express their agreement in a sufficiently certain form so that the courts can enforce it. This is because the court does not want to insert its own terms within a contract that has been agreed between the parties(Viscount Maugham in Scammell and Naphew Ltd. v. Ouston)17. Uncertainty can be due to the fact that the terms of the contract are vague. Alternatively, the contract may be incomplete , however there are a number of options available, which allow the court to avoid the issue of incompleteness and making the contract void, for example s.8(2) of Sale of Goods Act 1979 which provides for a reasonable price to be inserted where the price has not been determined. As for the situation of Chuck receiving the invoice in February it important to mention that since the price had not been agreed upon there was uncertainty and it can clearly be argued that the ?20,000 invoice was an offer rather than the consideration amount to be paid to Serena. Thus if on the basis of uncertainty and looking into the facts of Gibson and Storer it is possible to find that acceptance had not taken place. However, if uncertainty is not found then the courts would allow such acceptance and hold Chuck liable to pay the amount to Serena. Thus if Chuck is found to have merely been given an offer, he can reject an offer or merely ignore the invoice as clear and established principles have stipulated the fact that silence does not in any way constitute to be acceptance. The next element that has been looked into by courts is the fact that consideration for the contract has been made or not and this will now be discussed. The doctrine of consideration has been developed to so as to give a ‘badge of enforceability’ to contracts. The classic definition of consideration was given in Currie v. Misa18 as ‘a valuable consideration, in the sense of the law, may consist either in some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.’ However, this definition has been challenged by Professor Atiyah (1986c) who argues that the doctrine is not based upon reciprocity. Subsequently, Professor Treitel argues that such rules and a doctrine of consideration do exist. However, it is evident that there have been cases where the courts have invented consideration even though there was no evidence that the parties regarded it as consideration. Thus the difference in thoughts lies in the fact that one relies on benefit/detriment principles while the other states that there are other reasons which allow for the enforcement of a promise. The amount of consideration for a contract is left for the parties to decide and even the smallest of consideration has been held to suffice. ( Thomas v. Thomas)19. The rules which make up the doctrine of consideration will now be stated. The first one being, that consideration must be sufficient but it need not be adequate. Thus, something of value must be given in return, if a promise is to be enforced, thereby satisfying what is called ‘sufficient’. Further, adequate consideration is not a concern of the courts. The principle might at times be disadvantageous, as there might be other factors involved which led to such a bargain. (Chappell & Co. v. Nestle)20. When considering intangible returns, the courts have held a promise by a son, not to constitute as consideration (White v. Bluett)21. However the promise of not applying for an injunction was held to be consideration (Pitt v. PHH Asset Management Ltd.)22. If a promise not to enforce a claim which is known to be invalid is made, that would not be good consideration (Wade v. Simeon)23. However, if a genuine belief is held, then such a belief would constituted to be consideration (Cook v. Wright)24. Until recently it was an established principle that performance of an existing contractual duty owed to the promisor was no consideration (Stilk v. Myrick)25. This was recently changed, when the Court of Appeal in Williams v. Roffey Brothers26adopted a wider approach whereby it was found that the claimant had derived a practical benefit by promising to finish the work on time and it was sufficient to constitute as consideration. However, it has been argued that the defendant was under an existing duty to finish the work on time and secondly, the element of duress was present. Further, the courts have found past consideration not to be treated as good consideration (Roscorla v. Thomas)27 . Finally the doctrine of consideration must move from the promise, that is the promise can only be enforced by a promisee if there is a consideration for the promise; the benefit can move to a third party as well. The doctrine in the modern day had caused problems in the twentieth century, when looked at, along with the new doctrines, like duress. The issue in respect of Jenny is that fact that whether the instruction given by Serena would be held to be valid so as to constitute consideration of the amount promised by Serena. Jenny can argue that she did additional work in accordance with the principal of Williams v. Roffey and so she should be given the consideration which was promised by Serena. However a strong rebuttal so such an argument would be that this was not in any way related to Williams case as nothing like that was done whereby the conditions of the case would not be satisfied and the fact that since Jenny was just an employee she could not do much. However, when comparing the facts of the case of Williams and the current scenario it can be said that practical benefit was derived by Serena and it helped Serena to avoid going to someone else if the dress would not have been in a good condition. Thus the promise of Serena would be held enforceable even though it was for existing contractual obligation as the high standards have been met. Thus from the facts no binding contract is present with Eric and Chuck, however a valid contract is existent with Jenny whereby Serena has to pay the consideration that she had agreed with Jenny. The result that has been achieved in the current scenario is understandable to the extent that this situation can be clearly related to the battle of forms situation. However, as far as the intention of the parties is concerned, from the facts it can be seen that the law has not adequately taken into account the intention of the parties and such an area can clearly be reformed upon. The intention of the parties and the disparity in law is to a very great extent apparent in the facts of the case whereby even though the parties wished to be bound the law has not done so. Such has also been evident in the case law that has been specified within this question and therefore the law has at times clearly been rigid in focusing on other aspects rather than keeping its focus on the all important principle of achieving what had been intended between the parties and whether they wanted a contract to come into existence with each other. Balance can be said to have been achieved to the extent that Eric since he did not want to buy it was adequately protected and so was the case for Chuck who even though missed upon an important aspect of price was saved upon by the law of contract. Finally the result that can be seen from the question on the relationship between Jenny and Serena is the area which has been constantly criticized and requires adequate reforms so as to firmly embed principles which would cause greater harmony as well as enforcement of the intention of the parties along with the contractual principles which have been developed by the courts over a number of years. As far as the law on contract is concerned, it has been an area which is in dire need of legislation and clearly requires that because the principles have already been decided upon by courts and the formalizing can be carried out by the legislation so as to stop the discrepancies which have been seen to be existent in the area and have grown over a period of time. References MCKENDRICK, E. (2009). Contract law. Basingstoke, Palgrave Macmillan Read More

 

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