contractual binding agreements made in business

1. Contract law

2. Definition
. A contract is an agreement between two or
more parties creating obligations that are
enforceable or otherwise recognizable at law.
(Black's Law Dictionary: contract, n. (14c) 1)

3. The essentials of a Binding Contract
No contract can come into being without the
following features exist:
1. an offer;
2. an acceptance;
3. Consideration (each party will contribute
something of material value to the
agreement);
4. Intention to be legally bound.

4. Contractual agreement has traditionally been
analysed in terms of offer and acceptance.
One party, the offeror, makes an offer which
once accepted by another party, the offeree,
creates a binding contract.

5. The Offer
This may be defined as a clear statement of the
terms on which one party (the offeror) is
prepared to do business with another party (the
offeree).
• An offer is an expression of willingness to
contract on specified terms, made with the
intention that it is to be binding once accepted by
the person to whom it is addressed. There must
be an objective manifestation of intent by the
offeror to be bound by the offer if accepted by
the other party.

6. • Therefore, the offeror will be bound if his
words or conduct are such as to induce a
reasonable third party observer to believe
that he intends to be bound, even if in fact he
has no such intention. This was held to be the
case where a university made an offer of a
place to an intending student as a result of a
clerical error.

7. • An offer can be addressed to a single person,
to a specified group of persons, or to the
world at large. An example of the latter would
be a reward poster for the return of a lost pet.
An offer may be made expressly (by words) or
by conduct.

8. Types of offer
• Bilateral Offer:
Such an offer consists of a promise made in
return for a promise. In a sale of goods
contract for example, the offeror (Buyer)
promises to take and pay for goods and the
offeree (seller) promises to supply goods of an
appropriate description and standard.

9. • Unilateral Offer:
This is a promise made in return for the completion
of a specified act.
A legally binding offer will include:
1. Clearly stated terms
2. Intention to do business
3. Communication of that intention
These must all exists for a valid offer to have been
made.

10. Clearly stated terms
• A statement may held to be too vague to
comprise a valid offer.
In the case, Guthing V Lynn (1831), the buyer of
a horse promised to pay the seller an extra
Five Pounds ‘if the horse is luck for me’. The
Court held that this was to vague to be
enforceable.
In the case, Hillas V Arcos, A contract to supply

11. wood for one year contained an option
permitting the buyer to buy more wood the
next year, but it did not specify the terms on
which the supply would be made. Clarification
of this rather vague option could readily be
gleaned from the previous business dealings
of the parties, as well as from custom and
practice in the timber trade. It was therefore a
valid offer.

12. Intention to do business
An offer represents the parties ‘last words’ prior
to acceptance. A statement which does not
indicate commitment to be bound by its terms
(if accepted) will not be interpreted as a valid
offer.
Problems arise where a party, who believes an
offer has been made, communicates an
‘acceptance’. The party then believes a
contract exists. However, if the original

13. statement is not a valid offer, there will as yet be
no contract, since a valid offer requires both
an offer and acceptance.

14. Communication of the offer
The offer must be commuincated to the offeree.
The communication of an offer may be written
or spoken , but it may often be conduct, such
as taking goods to the supermarket checkout,
or putting money into a vending machine. An
offer is most commonly made to an individual,
but a unilateral offer may be made to the
world at large.

15. In such a case a contract will be made with all the
people who can and do fulfil the terms of the
offer.
The famous case of Carlill v Carbolic Smoke Ball
Company [1893] 2 QB 256 is relevant here. A
medical firm advertised that its new drug, a
carbolic smoke ball, would cure flu, and if it did
not, buyers would receive £100. When sued,
Carbolic argued the advert was not to be taken as
a legally binding offer; it was merely an invitation
to treat, a mere puff or gimmick.

16. However, the Court of Appeal held that the
advertisement was an offer. An intention to be
bound could be inferred from the statement
that the advertisers had deposited £1,000 in
their bank "shewing our sincerity".

17. An Invitation to treat
An offer must be distinguished from an
invitation to treat, by which a person does not
make an offer but invites another party to do
so. Whether a statement is an offer or an
invitation to treat depends primarily on the
intention with which it is made. An invitation
to treat is not made with the intention that it
is to be binding as soon as the person to
whom it is addressed communicates his
assent to its terms. Common examples of

18. invitations to treat include advertisements or
displays of goods on a shelf in a self-service store.
Statements advertising goods or land or services for
sale are not usually treated by the courts as
indicating the necessary intention to form an
offer. Such statements invite potential customers
to make an offer. It is then up to the business
proprieter to decide whether or not to accept.

19. Without acceptance no contract exists,
therefore , buyers have no rights to the goods,
they want to purchase.
In the case, Fisher V Bell, the Court of Appeal
held that goods in a shop window, even those
bearing a price tag, represents an invitation to
treat not an offer. Customers make offers by
saying that they are prepared to do business

20. at the price shown. Sellers then decide if they
want to accept, only if they do does any
contract result.
Pharmaceutical Society (GB) V Boots Cash
Chemists (Southern) Ltd. (1953, CA). Court
held, Goods displayed on the shelf in a self-
service shop represent an invitation to treat.
The customer makes an offer only when
presenting the goods at a checkout.

21. The termination of Offers
An offer if not accepted , can be brought to an end
in a number of ways.
1. Refusal and counter offer
If an offer is rejected to ceases to exist. If offerees
then change their minds and try to accept, they
will in contract terms be making a new offer. The
same result is achieved by a counter offer. This is
an attempt to vary the existing offer to get more
favourable terms, like price reduction.

22. In the case Hyde V Wrench (1840) the defendant
offered to sell his farm a Thousand Pounds.
The claimants at first said he would pay the
full price. He heard nothing from the
defendant. It was held that there is no
contract between the parties: the defendant
had not accepted the offer from the claimant,
who had destroyed the defendant’s original
offer by his counter-offer of a reduced price.

23. The claimants consequent statement that he
would pay the asking price could not revive
the original offer. It was a new offer which the
defendant never accepted.
If the offeree, while not accepting an offer, asks
for further information, or tests out the
grounds to see if further negotiation is
possible, this is not treated as a counter offer,
it therefore does not destroy the offer.

24. In the case Stevenson V McLean (1880), An offer
to sell iron at a certain price was not destroyed
when the offeree enquired whether delivery
and payment might be made in instalments.
This was merely an enquiry as to whether the
term might be varied, not a counter-offer of
different terms, and therefore it did not
destroy the original offer.

25. 2. Lapse of Time
An offer will cease to exists if not accepted
within any specified time limit. Otherwise it
will lapse if not accepted within a reasonable
time.
In the case of Ramsgate Hotel Co. Ltd. V
Montefiore (1866), the defendant applied to
buy some shares in June but heard nothing

26. more until November when the company
informed him that the shares were his. It was
held that the company’s delay had made the
defendant’s offer lapse and the acceptance
came too late to result in a contract.
3. Revocation
Offeros are entitled to change their minds and
withdraw offers at any time right up to the
moment of acceptance.

27. • Notice of revocation is crucial, it is not
effective unless the offeree knows of it.
Usually, the offeror will personally notify the
offeree, but this is not essential as long as the
offeree knew or reasonably should have
known that the offer had been withdrawn. For
example, if you had offered to sell your grand
piano to your neighbour who did not
immediately accept , they would know of your

28. revocation, if someone was seen loading the piano
in a van, later that day. Even information from a
third party, who is not acting on the offeror’s
instructions, may be sufficient notice. In the case,
Dickinson V Dodd (1876, CA), the defendant made
an offer to sell property to the claimant, but sold
it to a third party before the claimant responded.
A mutual acquaintance of the buyer and the
claimant told the claimant of the sale. This was

29. held to be adequate notice.
A promise to keep an offer open for a certain time
or to give someone ‘first refusal’ will not be
legally binding unless the offeree give some
payment to the offeror in return for the favour.
Otherwise the offeror is making only a gratuitous
promise: giving something for nothing. Such a
promise is not legally binding as it lacks
consideration (to be discussed later in the course)

30. The offeror, while waiting for the offeree to
make up his mind, might have sold the goods
to someone for a better price. The offeree
could ultimately decide not to accept and the
offeror could be left with the goods on his
hands. The offeror is therefore free to
withdraw (revoke) the promise at any time
the offer is accepted.

31. In the case, Routledge V Grant (1828), the
defendant offered to buy the claimant’s house,
promising, that he would keep the offer open
for six weeks. It was held that he could
withdraw the promise at any time before the
promise was offered was accepted as his
promise was merely gratuitous.

32. If the offeree does pay for the offer to held
open, a legally binding option is created. This
means that the offeree has a contract that
allows time to choose whether or not to
accept the offer. This is different from putting
down a deposit on goods or land.

33. The Acceptance
The offeree, by acceptance, agrees to be bound
by all the terms of the offer. To be legally
binding such acceptance must fulfil three
rules:
1. It must be a ‘mirror image’ of the offer;
2. It must be firm;
3. It must be communicated to the offeror

34. Acceptance must be a ‘mirror image’
of the offer
The offeree must be agreeing to all the terms of
the offer and not trying to introduce new
terms. In the case Jones V Daniel (1894), the
offeree responded to an offer by submitting a
draft contract which included some new
terms. This response was held to be a counter-
offer.

35. Acceptance must be firm
Conditional acceptance is not binding. In sales of
land, it is normal practice for a seller to accept
an offer ‘subject to contract’. The parties wll
not be legally bound to each other until
exchange of contracts take place. This is
meant to assist buyers by giving them time to
carry out surveys and searches before
deciding to commit themselves. It can also
mean that the seller is free to seller to
another buyer who is prepared to offer more

36. money in the meantime.
Acceptance must be communicated
Acceptance has no legal effect until it is
communicated to the offeror (because it could
cause hardship to the offeror to be bound
without knowing that his offer had been
accepted). The general rule is that a postal
acceptance takes effect when the letter of
acceptance is posted (even if the letter may be
lost, delayed or destroyed.

37. However, the postal rule will not apply if it is
excluded by the express terms of the offer. An
offer which requires acceptance to be
communicated in a specified way can
generally be accepted only in that way. If
acceptance occurs via an instantaneous
medium such as email, it will take effect at the
time and place of receipt. Note that an offeror
cannot stipulate that the offeree's silence
amounts to acceptance.

38. Communication is effective only if made by an
authorized person.
In Powell V Lee (1908), the claimant was notified
that his job application had been successful by a
member of an appointment board which then
decided to give the job to someone else. It was
held that the person who had told the claimant of
his success had not been authorized to do so and
therefore acceptance had not been effectively
communicated.