Formation of contract in the English legal system

Formation of contract in the English legal system

By

Carlo Bruni

Attorney at Law in Rome Bar

INTRODUCTION

The aim of this article is to briefly describe the processes involved in the formation of contracts in the English legal system.

Business is the trading of services or things, thus Business law is the law regarding trade.

The basis of business law is the law dealing with contracts.

Each political society has its own law and quite often several law systems co-exist within the same state as is the case in the Australia and the US where, in addition to a federal law, there are different laws of states. Thus a multiplicity of law and therefore of legal systems exist throughout the world which all have their specificities.

The two main legal systems in Western society are based on English Common Law and Roman Civil Law. Though the civil law and the common law have much in common, in many important particulars they are the opposites of each other.

In the Common Law judges act as lawmakers, legislation is not the primary source; case law (precedent) is used to clarify issues. In the Civil Law System code and auxiliary statements cover all disputes (not precedent), legislature makes the law and judges interpret the code and apply law.

As far as the “mode of reasoning” is concerned, the Common Law is inductive (start with particular examples to find principle, bottom up reasoning) and the Civil Law System is deductive (find written principle and apply to case, top down reasoning).

The principles of the English law of contract are almost entirely the creation of the English Courts.

Common law countries are those that follow the English tradition of building up a body of law through the courts (such as USA, Australia, Canada and most Commonwealth States) rather than laying it down at the outset in a code (as in France, Italy and many other European countries).

1.COMMON LAW LEGAL SYSTEM

Common Law is derived from the broad principles encompassed within the unwritten laws of England. These principles are created and modified by judicial decisions; and are passed on through customs, traditional usage, and precedent.

The body of precedent or “doctrine of precedent” applies to and binds future decisions.

In future cases, when parties disagree on what the law is, an idealized common law court looks to past precedential decisions of relevant courts.

If a similar dispute has been resolved in the past, the court is bound to follow the reasoning used in the prior decision (this principle is known as stare decisis - Latin for “to stand by things decided”).

Common Laws are not generally codified, thus they are adaptable when presented with new facts or changing circumstances.

A decision in a currently pending legal case depends on decisions from previous cases, the outcome of this case may then affect the law that is applied in future cases. A judge is bound by decisions of courts of superior jurisdiction but not necessarily by those of inferior courts.

2.THE NATURE OF CONTRACT

The general concept of law held by most people revolves around the idea that “law” is a set of rules that constrain and control individual activity for the best interest of society as a whole. This concept sees legal obligations as involuntary.

Law has another important role: it allows people to enter voluntarily into obligations by following rules established for that purpose. Contract Law is an example of this voluntary legal process.

As well as allowing individuals to decide upon and bargain for their own legal obligations, contract law forms the basis for many specialised legal relationships, for example, laws of agency, partnerships, companies, and consumer protection law.

Contract has been defined in many different ways but most definitions emphasise that a contract is an agreement that gives rise to legal rights and obligations between the parties to it, and to rights which will be protected and obligations which can be enforced in court.

Contracts can be either unilateral or bilateral.

In Unilateral Contracts an offer may invite acceptance simply by the performance of its conditions and without the need for separate communication of that acceptance[1].

Bilateral Contracts require the giving of a promise, rather than the performance of an act, as a means of acceptance. The contract consists of the two promises and both parties are bound to perform[2].

What is one-sided in an unilateral contract is the obligation; whereas in a bilateral contract both parties assume obligations and make promises to perform.

A promise is a declaration of intent to be obligated, a commitment to act or perform, or a commitment to refrain from acting or performing.

All contracts begin with a promise, but not all promises become contracts. The law of contract is concerned with legally binding contracts.

The main purpose of understanding contract law is to be able to determine under what circumstances a person who has made a promise is actually legally bound by his promise.

3.CLASSES OF CONTRACTS

Contracts can be classified in the following way:

3.1 Contract under seal.

A contract under seal derives its validity neither from the fact of agreement, nor from the consideration[3] which may exist for the promise of either party, but solely from the form in which is expressed.

3.2.Simple contracts.

Contracts required by law to be reduced to writing or at least to be evidenced in writing.

These may be made orally or in writing, or may even arise by implication from the conduct of the parties involved.

Promises which are legally enforceable are termed “parol” or “simple” contracts. Irrespective of whether they are written or oral contracts, simple contracts are valid and enforceable by law because they result from agreement between parties and are supported (not by formality of seal) by what is called “consideration”.

In common law systems there are five essential elements to a simple contract:

Agreement: Offer and acceptance of offer.

Intention: Both parties must intend to affect their legal relations.

Consideration: The exchange of something of value

Lawful object: Contract only relate to legal acts

Contractual capacity: Some people are excluded by law from forming contracts.

4.AGREEMENT

An offer is a tentative promise made by one party (the offeror), containing a request to the other party (the offeree) or subject to the offeree undertaking an obligation. When the offeree accepts the offer by agreeing to the request or obligation, an agreement is formed.

In other words, one party, the offeror, makes an offer which once accepted by another party, the offeree, creates a binding contract.

Key concepts that one needs to familiarise with in relation to offer and acceptance include the distinction between an offer and an invitation to treat[4].

Rules as to offer.

1. the offer must be communicated;

2. offers can be made to one specific person, to one or more of a particular class of person, or to the whole world;

3. if the offeror promises to keep the offer open for a specified time, that promise is not binding on the offeror unless the offeree gives some consideration for the promise to keep it open;

4. an offer must be distinguished from an option which is an irrevocable promise by one party to another who may call for performance of the promise at any time up to a specified date.

Rules as to acceptance of an offer.

1. the acceptance must be a complete and unqualified acceptance of the terms of an offer;

2. acceptance must be made in specific conformity with the requirements of the offeror[5];

3. acceptance must be made in reliance on the offer;

4. acceptance must be positive in nature (whether in words or conduct);

5. an offer cannot be accepted by the offeree until he has first learned of it;

6. the acceptance of the offer must be communicated to the offeror by either the offeree or by his duly authorised agent, unless the offeror has dispensed with the necessity of notification of acceptance.

Termination of an offer.

An offer may be terminated by:

1. death of offeror or offeree;

2. lapse of time[6];

3. revocation[7];

4. counter offer[8].

5. INTENTION TO CREATE LEGAL RELATIONS

The second important requirement in the formation of a contract is that the intention of parties is to assume the legal rights and duties related to the contract. From the word attention, intention is what a person seeks to accomplish through an act or course of action; a determination to perform a particular act or to act in a particular manner for a specific reason; an aim or design; a resolution to use a certain means to reach an end.

In determining whether intention exists, courts will apply an objective test. They ask whether a reasonable man, on the basis of the parties’ words and conduct, would conclude that the parties had agreed on the terms of the alleged contract and had intended to be bound by their agreement.

The requirement of intention to create legal relations in contract law is aimed at sifting out cases which are not really appropriate for court action. Not every agreement leads to a binding contract which can be enforced through the courts.

In order to determine which agreements are legally binding and have an intention to create legal relations, the law draws a distinction between social and domestic agreements and agreements made in a commercial context.

In social and domestic agreements the law raises a presumption that the parties do not intend to create legal relations (Jones v Padavatton [1969]; Balfour v Balfour [1919]). This presumption may be rebutted by evidence to the contrary: this evidence may consist of a written agreement (Errington v Errington Woods [1952]), where the parties have separated (Merritt v Merritt [1970]), or where there is a third party to the agreement (Simpkins v Pays [1955]).

Where an agreement is made in a commercial context, the law raises a presumption that the parties do intend to create legal relations by the agreement (Esso Petroleum v Commissioners of Customs & Excise [1976]; Edwards v Skyways Ltd [1964]). Again this presumption can be rebutted by evidence to the contrary (binding in honour only clauses Rose & Frank v Crompton Bros [1925]; Ferrera v Littlewoods pools [1998]).

It can be seen that intention to create legal relations therefore seeks to keep agreements between family and friends outside the courts jurisdiction.

6. CONSIDERATION

It has already been stated that consideration is a universal requisite of contracts not under seal. It will be well, therefore, to start with a definition of consideration; and we may take that which is given by Lush J. in the case of Currie v Misa (1875): “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”.

Consideration is known as ’the price of a promise’.

Consideration is necessary to the validity of every simple contract: gratuitous promises are thus unenforceable in English law; reciprocity is required by the presence of consideration.

From the term with constellation (worth an examination of the stars), consideration is generally the exchange of something of value for something of value. Consideration is a benefit or right for which the parties to a contract must bargain; the contract is founded on an exchange of one form of consideration for another. Consideration may be a promise to perform a certain act.

In contract law consideration is concerned with the bargain of the contract. A contract is based on an exchange of promises. Each party to a contract must be both a promisor and a promisee. They must each receive a benefit and each suffer a detriment. This benefit or detriment is referred to as consideration.

Consideration must be something of value in the eyes of the law (Thomas v Thomas, 1842). This excludes promises of love and affection, gaming and betting etc. A one sided promise which is not supported by consideration is a gift. The law does not enforce gifts unless they are made by deed.

There are various rules governing the law of consideration.

1. The consideration must not be past.

2. The consideration must be sufficient but need not be adequate.

3. The consideration must move from the promisee.

4. An existing public duty will not amount to valid consideration.

5. An existing contractual duty will not amount to valid consideration.

6. Part payment of a debt is not valid consideration for a promise to forego the balance.

Consideration must not be past (Re McArdle [1951]). A consideration may be executory[9], a promise given for a promise; or it may be executed, an act or forbearance given for a promise[10] (in the case of executed consideration, both the promise and the act which constitutes the consideration are integral and correlated parties of the same transaction).

Consideration must not be past, for in that case it is a mere sentiment of gratitude or honour prompting a return for benefit received; in other words, it is no consideration at all[11].

 2. Consideration must be sufficient but need not be adequate. There is no requirement that the consideration must be market value. The courts are not concerned with whether the parties have made a good or bad bargain (Chappell v Nestle [1960]). Each promise in a contract must be supported by sufficient (i.e valid) consideration but the value or amount of the consideration does not have to be equal to what is given in return.

3. Consideration must move from the promisee. If a person other than the promisee is to provide the consideration, the promisee cannot enforce the agreement (Tweddle v Atkinson [1861][12]).

4. An existing public duty will not amount to valid consideration. Where a party has a public duty to act, this cannot be used as consideration for a new promise (Collins v Godefrey[13] [1831]), unless the promisor goes beyond their duty (Glasbrook Bros v Glamorgan County Council [1925][14], Ward v Byham [1956]). The principle now applies to modern policing by virtue of s.25 of the Police Act 1996, as applied in Harris v Sheffield United Football Club Ltd (1988). Glasbrook and Harris were applied in Leeds United v Chief Constable West (2013) and in Ipswich Town Football Club Co Ltd v Chief Constable of Suffolk (2017)[15].

5. An existing contractual duty will not amount to valid consideration. If a party has an existing contractual duty to do an act, this act cannot be used as consideration for a new promise (Stilk v Myrrick [1809][16]); unless the party goes beyond their existing duty (Hartley v Ponsonby [1857][17]) or if they confer a practical advantage (Williams v Roffey Bros [1990]).

In summary, it seems to be established that consideration is unreal if it consists in a promise given to perform a public duty, or to perform a contract already made with the promisor. It is harder to answer the question whether performance of, or a promise to perform, an existing contract with a third party is a real consideration.

If the existing contractual duty is owed to a third party this may be used as valid consideration for a new promise (Shadwell v Shadwell [1860][18], New Zealand Shipping v Satterthwaite [1975]; Scotson v Pegg [1861])[19].

6. Part payment of a debt (discharge of an existing duty).

The principle that the performance of an existing duty owed to the promisor is unreal consideration has been applied not only to creation of a new obligation, but also to the discharge of the existing duty itself. It is clear that full and exact performance will act as a valid discharge, but if the performance is only partial and offered in return for a promise to accept it as full satisfaction of the duty, it will not be a sufficient consideration to support the promise and the promisor may be consequently insist that the contract be completely performed. Thus if A owes B a debt of Euros 200, and B agrees to accept Euros 100 in full satisfaction of the debt, B is not bound by his promise and may subsequently sue for the whole amount.

Therefore, part payment of a debt is not valid consideration for a promise to release the debt in full (Pinnel's case [1602]); unless at the promisor's request part payment is made before the due date or with a chattel.

This rule from Pinnel's case was affirmed by the House of Lords in Foakes v Beer (1883-84) An exception to the rule in Pinnel's case can be invoked where part payment is made by a third party (Hirachand Punamchand v Temple [1911]). A creditor who accepts, in full satisfaction, part payment of a debt by a third party cannot later recover the balance from the debtor.

7. PROMISSORY ESTOPPEL AND CONSIDERATION.

Promissory estoppel is an equitable doctrine which in some instances can stop a person going back on a promise which is not supported by consideration. Promissory estoppel was developed by an obiter statement by Denning J (as he then was) in Central London Property Trust Ltd v High Trees Ltd [1947][20].

In this case High Trees leased a block of flats from Central London Property at a ground rent of ￡2,500. It was a new block of flats at the time the lease was taken out in 1937. The defendant had difficulty in getting tenants for all the flats and the ground rent left High Trees with no profit. In 1940 many of the flats were still unoccupied and with the conditions of the war prevailing, it did not look as if there was to be any change to this situation in the near future. Central London Property agreed to reduce the rent to ￡1,250 during the war years. The agreement was put in writing and High Trees paid the reduced rent from 1941. When the war was over the flats became fully occupied and the claimant sought to return to the originally agreed rent. The High Court held that the rent would be returned to the originally agreed price for the future only. Central London Property could not claim back the arrears accrued during the war years. This case is important as Denning J established the doctrine of promissory estoppel. Promissory estoppel prevented Central London Property going back on their promise to accept a lower rent despite the fact that the promise was unsupported by consideration. Denning J said as follows: "In my opinion, the time has now come for the validity of such a promise to be recognised. The logical consequence, no doubt is that a promise to accept a smaller sum in discharge of a larger sum, if acted upon, is binding notwithstanding the absence of consideration".

The principle of promissory estoppel has been employed to obviate the necessity for consideration in cases where parties are already bound contractually one to the other and one of them promises to waive, modify or suspend his strict legal rights.

The question therefore arises whether the principle might similarly be employed to by-pass consideration as a necessary element in the formation of contracts, so that a person who made to another a promise, intended to affect legal relations and intended to be acted upon by the promise, could be compelled by the promise – at least if he had altered his position in reliance on the promise – to fulfil the promise notwithstanding that the promise had incurred no detriment and conferred no benefit in the return for the promise.

Lord Denning has also stated that promissory estoppel does not “create new causes of action where none existed before”. In Combe v Combe [1951] a husband promised to make maintenance payments to his estranged wife but failed to do so. The wife brought an action to enforce the promise invoking promissory estoppel. Her action failed since the Court of Appeal held that there was no pre-existing agreement which was later modified by a promise; there was no consideration for the promise as the wife’s forbearance was not in return for the promise made to her; nor could the wife rely on promissory estoppel which does not create new contractual rights, nor will any action for damages lie for breach of the promise; it is , as it was said, “a shield and not a sword”.

8. LAWFUL OBJECT

Legality of object is an important requirement for a contract to be enforceable. Any contract to do an illegal act is unenforceable even if the consideration has been paid. Technically, that is a breach of contract, but since the object of the contract (commission of a crime) is illegal, the contract is unenforceable in the courts.

9. CAPACITY TO CONTRACT

Both parties in a contract must have the necessary mental capacity to understand what they are doing. Under common law anyone has the right to enter into a contract but some groups of people are considered likely to lack the necessary capacity to a certain extent, depending on the jurisdiction these may include: minors; people who have a mental impairment (including an intellectual disability); people under the influence of drugs or alcohol; bankrupts; and alien enemies and/or terrorists.

10. DISCHARGE AND CONCLUSION OF CONTRACT (brief overview).

Discharge of a valid and enforceable contract may occur through several processes.

Performance: the primary obligations are fulfilled.

Agreement: a contract may be discharged by agreement when both parties agree to bring the contract to an end and release each other from their contractual obligations.

Breach: a contract may, in some circumstances, be discharged by a breach of contract. Where there exists a breach of condition this will enable the innocent party the right to repudiate the contract (bring the contract to an end) in addition to claiming damages.

Frustration: a contract may be frustrated where there exists a change in circumstances, after the contract was made, which is not the fault of either of the parties, which renders the contract either impossible to perform or deprives the contract of its commercial purpose. Where a contract is found to be frustrated, each party is discharged from future obligations under the contract and neither party may sue for breach. The allocation of loss is decided by the Law Reform (Frustrated Contracts) Act 1943.

Carlo Bruni

Via Aureliana 53

00187 Roma

BIBLIOGRAPHY

Richard Taylor & Damian Taylor, Contract Law, 7th Edition (Oxford University Press 2019).

Chen-Wishart, M. Contract Law, 6th edn (Oxford University Press 2018).

McKendrick, E, Contract Law: Text, Cases and Materials, 8th edn (Oxford University Press 2018).

O’Sullivan, J and Hiliard J The Law of Contract, 8th edn (Oxford University Press 2018).

Contract Law, An Introduction to the English Law of Contract for the Civil Lawyer, Tird Edition, John Cartwrite, Oxford and Portland, Oregon 2016.

Anson's Law of Contract OUP Oxford; 29 edition, 2010.

[1] Example 1: A allows B to work for him. A will be liable to pay for the work. The doing of the work is the offer; the permission to do it constitutes the acceptance. Example 2: C, who has lost his dog, offers by advertisement a reward of 50 Euros to anyone who will bring the dog safely home: he offers a promise in return for an act; and when D, knowing of the reward, brings the dog safely home, the act is done and C is bound to pay the reward.

[2] Example: E offers F to pay him a certain sum of money if F will promise to dig his garden for him within a certain time. When F makes the promise asked for, he accepts the promise offered, and both parties are bound, the one to do the work, the other to allow him to do it and to pay for it.

[3] Consideration – as will be seen below - can be anything of value (such as an goods, money, services, or promises of any of these), which each party gives as a quid pro quo to support their side of the bargain.

[4] In order to amount to an offer it must be shown that the offeror had the intention to be bound (see Harvey v Facey [1893] and Carlill v Carbolic Smoke Ball co [1893]). Whereas an offer will lead to a binding contract on acceptance, an invitation to treat cannot be accepted it is merely an invitation for offers. Goods on display in shops are generally not offers but an invitation to treat. The customer makes an offer to purchase the goods. The trader will decide whether to accept the offer (Pharmaceutical Society of Great Britain v Boots [1953]; Fisher v Bell [1961]). Advertisements are also generally invitations to treat (Partridge v Critenden [1968]). However, in some instances an advert can amount to an offer (Carlill v Carbolic Smoke Ball co [1893]). The request for tenders represents an invitation to treat and each tender submitted amounts to an offer unless the request specifies that it will accept the lowest or highest tender or specifies any other condition. If the request contains such a condition this will amount to an offer of a unilateral contract where acceptance takes place on performance of the condition (Spencer v. Harding [1870]). Where an auction takes place with reserve, each bid is an offer which is then accepted by the auctioneer. Where the auction takes place without reserve, the auctioneer makes a unilateral offer which is accepted by the placing of the highest bid (Heathcote Ball v Barry [2000]). The machine represents the offer, the acceptance is inserting the money (Thornton v Shoe Lane Parking [1971]).

[5] For example, if the offeror should prescribe a certain mode of acceptance as the only method of accepting the offer, than no acceptance can be legally effective unless it complies with this condition.

[6] An offer will terminate after a reasonable lapse of time. What amounts to a reasonable period will depend on the circumstances (Ramsgate Victoria Hotel v Montefiore [1866]).

[7] The offeror may revoke an offer at any time before acceptance takes place (Dickinson v Dodds [1876]) This may not apply in unilateral offers where acceptance requires full performance (Errington v Errington Wood [1952]; Dahlia v Four Millbank  [1978]).

[8] A counter offer is where an offeree responds to an offer by making an offer on different terms. This has the effect of destroying the original offer so that it is no longer open for the offeree to accept (Hyde v Wrench [1840]).

[9] A promise to do work in return for a promise of payment, are illustrations of executory consideration.

[10] If A makes a general offer of reward for information and B supplies the information, A’s offer is turned into a binding promise by the act of B, and B simultaneously concludes the contract and furnishes consideration by performance (Carlill v Carbolic Smoke Ball Co [1893]).

[11] If A saves B from drowning and B later promises A a reward, A cannot rely on his action as consideration for B’s promise for it is past in point of time.

[12] In such a case, a couple were getting married. The father of the bride entered an agreement with the father of the groom that they would each pay the couple a sum of money. The father of the bride died without having paid. The father of the son also died so was unable to sue on the agreement. The groom made a claim against the executor of the will. The claim failed: the groom was not party to the agreement and the consideration did not move from him. Therefore he was not entitled to enforce the contract.

[13] In such a case, the promise to pay a witness who was already under a public duty to give evidence lacked consideration.

[14] The defendant owners of a colliery asked the police to provide protection during a miner's strike. The police provided the protection as requested and provided the man power as directed by the defendants although they disputed the level of protection required to keep the peace. At the end of the strike the police submitted an invoice to cover the extra costs of providing the protection. The defendants refused to pay arguing that the police were under an existing public duty to provide protection and keep the peace. It was held that in providing additional officers to that required, the police had gone beyond their existing duty. They were therefore entitled to payment.

[15] In this case the Court of Appeal held that the police could not charge a football club for services provided on public land next to a football stadium. The fact that the football club had a traffic control order (TCO) over the land was irrelevant.

[16] The claimant was a seaman on a voyage from London to the Baltic and back. He was to be paid ￡5 per month. During the voyage two of the 12 crew deserted. The captain promised the remaining crew members that if they worked the ship undermanned as it was back to London he would divide the wages due to the deserters between them. The claimant agreed. The captain never made the extra payment promised. The Court held that the claimant was under an existing duty to work the ship back to London and undertook to submit to all the emergencies that entailed. Therefore he had not provided any consideration for the promise for extra money. Consequently he was entitled to nothing.

[17] Half of a ship's crew deserted on a voyage. The captain promised the remaining crew members extra money if they worked the ship and completed the voyage. The captain then refused to pay up. The Court held that the crew were entitled to the extra payment promised on the grounds that either they had gone beyond their existing contractual duty or that the voyage had become too dangerous frustrating the original contract and leaving the crew free to negotiate a new contract since an uncontemplated risk had arisen.

[18] This is an English contract law case, which held that it would be a valid consideration for the court to enforce a contract if a pre-existing duty was performed, so long as it was for a third party. The defendant was the plaintiff’s uncle. The uncle promised to pay his nephew ￡150 a year until the nephew’s income reached 600 guineas provided the nephew married his fiancée. The uncle paid 12 instalments but then died, and the payments stopped. The nephew sued his uncle’s estate for the remaining payments. A marriage contract was legally enforceable at the time. However, the marriage contract was between the nephew and his fiancée, and was not made with the uncle. The defendants claimed that as a result the nephew had provided no consideration for the uncle’s promise to pay him. This was a voluntary gift and could not be enforced. The nephew argued that his going through with the marriage was consideration.

The Court held that performance of the marriage contract was consideration, even though the contract was made with a third party to the agreement, as the uncle’s promise was an inducement to the nephew to perform this contract. The plaintiff had, by getting married, made a material change in his position and had induced his wife to do the same. They may have incurred pecuniary liabilities that would be a loss to them if the promised income was withheld. It has been recognised that marriage could be a benefit to interested relatives, and so the uncle did derive a benefit from the marriage. Therefore, the marriage was good consideration.

[19] A contract for the carriage of a machine by ship to New Zealand provided that the owners of the goods could not sue the carriers or stevedores unless any claim was brought within one year of the action giving rise to the cause of action. The stevedores were independent contractors who were engaged to load and unload the ship by the ship owner. A stevedore damaged the machine whilst unloading it. The owner of the machine brought an action against the stevedore after the limitation period specified in the contract. The stevedore sought to rely upon the clause in order to escape liability. The owner of the machine argued that the stevedores could not rely on the clause as they were not privy to the contract and had not provided them with any consideration.

It was held that the stevedores had provided consideration in the form of services of unloading the machine. Relying on the case of Scotson v Pegg, there is nothing to prevent consideration owed to a third party being valid consideration for a new promise to another party. Therefore the stevedores had protection from the limitation clause. The claimant's action was unsuccessful.

[20] Denning J based the doctrine on the decision in Hughes v Metropolitan Railway (1876-77). The House of Lords affirmed the existence of promissory estoppel in contract law in Tool Metal Manufacturing v Tungsten [1955].