Contract Law: The Concepts of Formation of a Valid Contract - Case Study Example

 Business Law Abstract This document discusses the concepts of formation of a valid contract in a case study. The timing of offer, acceptance, revocation of offer, invitation to offer and counter offer are also discussed. Rights of a principal and duties of an agent are also discussed. Keywords: Offer, Acceptance, Revocation, Doctrine of Estoppel, Quantum Meruit, Contract, Consensus ad idem. For a contract to be legally binding, it must initiate from a valid offer. The offer is valid if it is communicated to the party to which it is intended to be made. The party that makes the offer is called an offeror while the party to whom the offer is called an offeree. Some offers are specific, some are general. General offers are valid if they are communicated to a number of parties which are intended to be made a contract with. The offer must also be legal, not immoral and the terms of the offer should be clear and vivid. In Guthing v Lynn [1831] 2 B & Ad 232, 9 LJOSKB 181, it was held that a vague promise is not enforceable by law. The ambiguity may also relate to the pricing or timing of the contract. For instance, a promise made for the provision of services for either £50 or £70 is not a valid offer as it is not clear whether the total amount £50 or £70. When a valid is offer is communicated to the offeree, it becomes a promise upon its acceptance. The acceptance should be made by the offeree himself so there is consensus ad idem i.e. both parties agree to the same thing in the same sense. The acceptance should be unconditional and qualified. A qualified acceptance is a counter offer that rejects the original offer. The acceptance must be communicated to the offeror. It must also be made within the stipulated time, if any, or made within a reasonable time. A lapse of reasonable time makes an offer inoperative. The offeror reserves a right to revoke his offer at any time before it is accepted as seen in Dickinson v. Dodds [1876], 2 Ch. D. 463 (C.A.). A subsequent revocation is ineffective. A valid acceptance makes an offer a promise. If a promise or every set of promises form consideration for each other, an agreement is created. Consideration is ‘something for something’. Consideration does not necessarily need to be adequate, but it must be there for both the parties involved. There are some exceptions in which agreements made without consideration are valid but they relate to specific circumstances e.g. agreements in which close relatives are involved. Other agreements that are made without consideration are suspected to be devoid of free consent of the parties. An agreement becomes a contract when it is enforceable by law. Its being enforceable by law depends highly on the fact that the parties involved had an intention to be legally bound. Agreements made without such intention are of a social or a domestic nature. In Buckpitt v Oates [1968] 1 All ER 1145, it was held that a friendly agreement to go on a trip lacked an intention to create legal relations. Therefore, it was not a contract and not enforceable by law. When the parties have such intention, they have a right to go to a court of law to enforce their promise if the other party has committed a breach. The consent obtained from the parties to a contract must be free. It means that it should not have been obtained by using duress, undue influence or misrepresentation. Otherwise, the agreement would be invalid. If there is a bilateral mistake as to the subject matter of the contract, the contract is void. However, unilateral mistakes as to the value of the subject matter would not render a contract null and void. Apart from the free consent, the parties involved must also be competent to enter into a contract i.e. none of them should be a minor or of an unsound mind. For some contracts, as in the given case, it is necessary to put them into writing. Therefore, such contracts are not enforceable by law unless they have been put into writing. In the given case, UCL Property Developers invited competitive tenders for the building of their new administrative offices. This is an invitation to offer and not an offer. The acceptance by any of the related parties would not lead to a formation of contract. According to facts, the lowest tenders received were from DC Builders and GB Construction for £5,250,000 and £5,410,000. Both companies undertook to keep their tenders open for acceptance for 60 days. According to Dickinson v Dodds, an offeror is not bound to keep the offer open for acceptance unless he has received some consideration for it. Therefore, if any of the companies decide to revoke their offer at any time before its acceptance, UCL Property Developers would not be able to sue them for damages as their promise to keep the offer open was made without any consideration. Both the companies also qualified their tenders. This is not a counter offer because there was no offer made originally by UCL Property Developers. A counter offer rejects the original offer and its acceptance leads to formation of a fresh contract made without any regard to the original offer. In this case, the qualified tenders are not counter offers. There are differences in these qualified tenders and NEC3 Option B: Priced Contract with Bill of Quantities but the acceptance of any of these offers by UCL Property Developers would amount to a valid contract because it would fulfill the requirements of competent parties, legal object, consideration and consensus ad idem. After 54 days of submission of tender, UCL Property Developers wrote a letter of acceptance to DC Builders. Assuming that UCL Property Developers received the tender in qualified form initially, their letter of acceptance should have been construed to be the acceptance of qualified tender. However, according to given facts, UCL Property Developers wrote that they accepted the tender on their own conditions. This is a qualified acceptance which is not valid. It is a counter offer which was rejected by DC Builders. Therefore, at this point, there is no agreement between the parties and no contract. In Hyde v Wrench [1840] EWHC Ch J90, It was held that when Hyde made a counter offer of £950 for Wrench’s farm, the original offer was rejected and became inoperative. As Wrench never accepted the counter offer, there was no agreement. When an offeror appends a condition with its acceptance, the offeree must fulfill that condition for a valid acceptance. This condition may specify a certain mode of acceptance or a certain time limit within which the offer must be accepted. If the offeree fails to comply with such condition, the acceptance is not valid and the offeror is not bound to perform the contract as a contract was never formed. The offeror, however, has the discretion of accepting such acceptance and if he accepts it, he is bound to perform the promise. In the given case, DC Builders wrote a letter in reply of UCL Property Developers’ letter of qualified acceptance. Their original offer was rejected and became inoperative when UCL Property Developers’ letter reached them. However, in their replying letter, they informed UCL Property Developers that they were willing to perform the job on their own conditions. This means that DC Builders made the offer again but with a stipulation that must be accepted within 5 working days. UCL Property Developers posted the letter of acceptance on the fifth day. In Adam v Lindsell [1818] EWHC KB J59, it was established that when an acceptance is made by a letter to be sent by post and it is in the knowledge of both the parties that the acceptance would be made in this manner, the acceptance is complete when the letter is posted and is out of the offeree’s control. Therefore, the acceptance made by UCL Property Developers is valid. Revocation of an offer is effective when it is made at any time before acceptance. DC Builder’s revocation of offer was communicated to UCL Property Developers after the letter of acceptance was posted. The Project manager did not see the fax until the next day. Postal Rule established in Adams v Lindsell is not applicable to other letters. It was held in Stevenson v McLean [1880] 5 QBD 346, that a revocation is not effective until it is communicated. Therefore, as the revocation of offer was not communicated before acceptance, it would not be effective. A valid contract had formed between the two parties and both parties were legally bound to perform their promises. The Project Manager of UCL Property Developers was probably not aware that the revocation was ineffective so he called DC Builders to withdraw their revocation. DC Builders intimated the Project Manager that they had made a few errors in estimation of prices and their revised price was £5,400,000 and they were willing to withdraw their qualifications if UCL Property Developers accepted this new price. The Project Manager responded by saying that he would require a formal UCL Board approval which would take some time to obtain but he ‘thought that it would be alright’. A contract can be discharged if both parties agree on non-performance. From the conduct of the parties, it can be construed that the contract which had formed earlier came to an end by agreement. According to the facts, the Project Manager of UCL Property Developers never informed the UCL Board about the revised offer of DC Builders. A question arises whether the DC Builder’s offer is deemed to be communicated or not. The given facts state that when UCL Property Developers decided to accept DC Builder’s previous offer, they instructed the Project Manager to send a letter of acceptance accordingly and ‘signed’ it before posting. Their signature means that their approval was necessary and it was not in Project Manager’s power to accept offers on their behalf. From the point of view of DC Builders, the law is clear that an acceptance is deemed to be communicated when it is communicated to an agent as seen in Dickinson v Dodds. However, if an offer never reaches the party to which it was intended to be made, all the possibilities of consensus ad idem are eliminated. Therefore, no contract can be formed. Therefore, as DC Builder’s offer was never communicated to UCL Board, no contract was made. On the day when the Project Manager and DC Builders talked over the phone about the revised offer, the Project Manager received a fax from GB Construction in which they withdrew their qualified tender and offered to perform the contract on UCL’s terms and complete the job within 18 month provided that they a Letter of Intent within 24 hours authorizing them to start work. The Project Manager told them that he could do this only if GB Construction would reduce their price to £5,250,000. The Director with whom he spoke said that he was ready to present it to the Board of Directors if he received an immediate Letter of Intent. The Project Manager then issued a Letter of Intent authorizing GB Construction to start work on UCL’s terms of contract while the preparation of a formal contract was pending. After receiving the fresh offer of GB Construction, when the Project Manager told them to reduce their price, he made a qualified acceptance which is tantamount to a counter offer. Therefore, GB Construction’s fresh offer was rejected right there. However, the Director of GB construction made a qualified acceptance of this counter offer that he was prepared to present the offer to the Board of Directors if he received a Letter of Intent. The Project Manager agreed. Therefore, an agreement was formed between UCL and GB Construction. UCL’s consideration was that GB Construction’s Board of Directors would consider their offer. GB Construction’s offer was that UCL would provide them with a Letter of Intent. A Letter of Intent is a document that outlines the key factors of a complex agreement between two parties that takes a long time in completion. It is generally not legally binding on the parties unless otherwise is stated in it. In the given case, the Letter of Intent is not legally binding on the parties involved. However, it did state that GB Construction was authorized to start the work on UCL’s conditions. UCL’s conditions were according to NEC 3 Standard Conditions of Contract, Option B. Option B is a priced contract with a bill of quantities where the risk of carrying out the work at the agreed prices is being borne by the contractor. According to this option, the contractor is to be paid for quantity of work completed. GB Construction started working. The Project Manager instructed UCL’s solicitors to prepare a formal contract with GB Construction. The solicitors took 3 months in doing so. By that time, GB Construction had placed their sub-contract and major material orders and they were constructing the foundations. When they received the contract, they refused to sign it claiming that the price should have been the original figure of £5,410,000 and truly stating that there was never an agreement to reduce the price. They only undertook to consider the suggestion. The Project Manager never waited for a definite answer and GB Construction also never replied. This means that everything contained in the Letter of Intent was in effect and the formal contract should have been drafted according to the same. GB Construction claims that they should be awarded the contract at the price of £5,410,000 or should be compensated for the amount of work done. UCL Property Developers are not legally bound to award them a contract. They can choose to or not to award the contract to them. If they refuse to award the contract to them, they would have to compensate them for the amount of work done. As held in ERDC Group Ltd v Brunel University [2006] All ER (D) 468 (Mar), the valuation of the compensation should be based on the terms on which the work was performed. According to the Letter of Intent, work was done on ULC’s terms of contract. Therefore, ULC must pay 95% of value of work done in three months to GB Construction. The remaining 5% is not payable as the corresponding work has not been performed. The compensation would be awarded on Quantum Meruit basis. When DC Builders learnt about the facts that GB Construction had started the construction work and that their offer was never referred to the Board of Directors of ULC, they claimed that a contract should be awarded to them according to their revised offer. It has been discussed above that since the offer was never communicated to the party intended, there was no consensus ad idem and no contract. Therefore, ULC is not legally bound to award the contract to DC Builders. However, upon learning of DC Builder’s offer, they may opt to award a contract to them after accepting their offer. Finally, ULC states that they may have a claim on their Project Manager for any amounts that they had to pay to DC Builders or GB Construction for any additional costs of construction. The Project Manager acted on behalf on ULC as its agent. He may not have been given the authority to accept offers on ULC’s behalf which can be construed from the fact the letter of acceptance had to be signed by the Board of Directors. However, he did have an apparent authority as he was the continual medium of communication. ULC would be unable to assert the fact that the Project Manager had no authority to do the acts which lead to the ultimate confusion. The doctrine of estoppel would be applicable and they would be bound to compensate GB Construction. In Freeman and Lockyer v Buckhurst Park Properties [1964] 2 QB 480, it was held that as the principal was aware of the agent’s actions, he was bound to compensate the plaintiff. The same would be applicable here. DC Builders, on the other hand, have no claim against ULC. They had reasons to believe that there offer was communicated but it never happened due to the omission by the Project Manager. However, this situation does not arise any claims by DC Builders against ULC. The Project Manager acted somewhat outside of his authority. It was truly a matter of chance whether GB Construction would have reduced their price or not but it was the Project Manager’s duty to state all the facts clearly to the Board of Directors. In Murray vs. Beard, 102 N. Y., 505, it was established that a principal has a right to be indemnified by an agent when an agent omits to give such information which is likely to influence the principal’s conduct. At the end, ULC had to compensate GB Construction according to the terms in which total price was £5,410,000. If DC Builder’s offer was communicated to them, they would have to execute the contract according the terms in which the total price was £5,400,000. Therefore, ULC had to compensate GB Construction in a manner in which the extra £10,000 also had to be taken into account. This additional cost was borne by ULC due to negligence by the Project Manager. Therefore, they have a valid claim to be indemnified by the Project Manager for the additional cost. References 1. Adams v Lindsell [1818] EWHC KB J59. 2. Buckpitt v Oates [1968] 1 All ER 1145. 3. Dickinson v. Dodds (1876), 2 Ch. D. 463 (C.A.). 4. ERDC Group Ltd v Brunel University [2006] All ER (D) 468 (Mar). 5. Freeman and Lockyer v Buckhurst Park Properties [1964] 2 QB 480. 6. Guthing v Lynn [1831] 2 B & Ad 232, 9 LJOSKB 181. 7. Hyde v Wrench [1840] EWHC Ch J90. 8. Murray vs. Beard, 102 N. Y., 505 9. Stevenson, Jacques & Co v. McLean (1880) 5 QBD 346. Read More