BE2304 Law of Obligation

Project study- Valid contract

Acknowledgement
This report reflects the combined efforts of many professionals in the University of Moratuwa. Their observations, conclusions, recommendations, are a product of intensive investigation upon us. Those became as precious assets to achieve the task of our project. So many people deserve credit, which is impossible to identify all of them individually. Mr. Mahesh Abeynayake, senior lecturers of the department of building Economics contributed skills and their dedication was made our project success. A project like this, necessasarily required the assistance of many people. Miss Aparna Samaraweera has assigned us to reach the task in a flexible manner. The lecturers in charge of computer labs helped and guided us to obtain knowledge by providing the facilities to access internet to collect information for our project work. Also we make this acknowledgement as an opportunity to thank our senior brothers and sisters in the Department of Building Economics for their help to find and get resources from the library. Here this project work is acknowledged to the Department of building Economics in the University of Moratuwa as to show our gratitude to above professionals and future professionals. Your acceptation will be courage to our career in this field of Quantity Surveying and Facilities Management.

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BE2304 Law of Obligation

Project study- Valid contract

Table of Content
1.0 List of Case Studies _______________________________________________________________ iii 2.0 Introduction ______________________________________________________________________ 1 3.0 Definition of the contract ____________________________________________________________ 2 3.1 The agreement must have an offer ___________________________________________________ 3 3.2 The agreement must have an acceptance ______________________________________________ 5 3.3 The agreement must have a consideration _____________________________________________ 6 3.4 The intention behind a contract must be to create legal relations. ___________________________ 7 3.5 Capacity to contract ______________________________________________________________ 8 3.6 Legality of object _______________________________________________________________ 11 3.7 Certainty of terms of contract _____________________________________________________ 11 4.0 Conclusion ______________________________________________________________________ 12 5.0 References ______________________________________________________________________ 13

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1.0 List of Case Studies

Case study: Acceptance of the offer - Carlill Vs. Carbolic Smoke Ball Co. (1893) __________________ 3 Case study: Gunthing Vs. Lynn (1831) ____________________________________________________ 4 Case study: Harvey Vs. Facey (1893) ____________________________________________________ 4 Case study: Harris Vs. Nickerson (1873) __________________________________________________ 4 Case study: Fisher Vs. Bell (1961) _______________________________________________________ 5 Case study: Pharmaceuticals Society of Great Britain Vs. Boots Cash Chemicals Ltd (1953) _________ 5 Case study: Felthouse Vs. Bindley (1862) _________________________________________________ 5 Case study: Powell Vs. Lee (1908) _______________________________________________________ 6 Case study: Lampleigh Vs. Braithwaite (1615) _____________________________________________ 7 Case study: Re McArdle (1951) _________________________________________________________ 7 Case study: Balfour Vs, Balfour (1919) ___________________________________________________ 7 Case study: Nash Vs Inamn (1908) _______________________________________________________ 8 Case study: Doyle Vs. White city stadium (1935) ____________________________________________ 9 Case study: Mercantile Union Guarantee Corp Vs. Ball (1937) _________________________________ 9 Case study: Taylor Vs. Portington (1885) _________________________________________________ 11

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2.0 Introduction
Every one of us enters in to a number of contracts in our everyday life. If a person has more relationships with the business community, he could involve in thousand of contracts in his day to day activities. Therefore, it is very important to have a fair knowledge of the essential elements for a valid contract and its legal enforceability. But it is questionable to identify a valid contract. A contract has many definitions, but one of the simplest definitions for a contract is a promise enforceable by law. The promise may be to do something or to refrain from doing something. The making of a contract requires the mutual assent of two or more persons, some of the basic elements of a contract include, an offer and an acceptance, capacity, or being of legal age and sound competence, mutual assent, or agreement on the terms of a contract; and consideration, or compensation for goods or services rendered. The element that distinguishes a contract from an informal agreements is that it is legally binding the law provides a remedy in the event that the promise is not fulfilled. If one of the parties fails to keep his or her promise, the other is entitled to legal recourse against that person. Contracts can cover an extremely broad range of matters, including the sale of goods or real property, the terms of employment or of an independent contractor relationship, the settlement of a dispute, and ownership of intellectual property developed as part of a work for hire Bylaw, certain types of contracts must be in writing, but oral contracts are valid in many situations. An oral contract may be held to exist even in the absence of agreement as to all its terms.

The law attempts to protect minors, children under age eighteen, and people who lack the mental capacity, such as insane people, from being taken advantage of. They are, therefore, usually able to get out of their contracts. Contract law is a product of our modern commercial civilization. An in-depth study of that phase of law involves much complex legality. This is just a general explanation of contract law. For a detailed contract to be drafted or interpreted an attorney's help is advisable. The law of contract needs to change with the developments in economics, technology and social attitudes. It is usually a matter for Parliament to intervene and legislate for new situations and introduce law that will govern particular relationships and the contract that arise between them. It is impossible however to legislate for all potential eventualities as a situation may arise that was not foreseen, or the technology, issue or relationship that it was intended to regulate may have moved on. It is then for the Courts to interpret the law so as to find the solution to any dispute. Throughout the report is detailed about the essential elements of a valid contract and its related cases in English law system.

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BE2304 Law of Obligation

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3.0 Definition of the contract

A contract is a legally binding and legally enforceable agreement.

A contract consists of an actionable promise or set of promises. Every such promise involves two parties, a promisor and a promisee It involves a common intention of acceptance There must be a consideration as to act or forbearance promosed.

An agreement is which an offer is made by the offeror is accepted by the offeree, it becomes an agreement. It is important to note that, although all the contracts are agreements, not all agreements are contracts. This is because all agreements are not legally enforceable. Agreement Contract = = Offer + Acceptance Enforceable agreement + Consideration

Legal requirements for the creation of a contract There are three essential elements, which would be examined by a court as the evidence of any contract. These are; 1. Agreement made by offer 2. Acceptance 3. Consideration 4. Intention to create legal relations Besides the three essential conditions, there are some additional elements which decide the validity of a contract. These are; 5. Capacity to contract 6. Legality of object 7. Certainty of terms of contract

Department of Building Economics

BE2304 Law of Obligation

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3.1 The agreement must have an offer

A contract is a bilateral agreement between two or more parties. Every contract has to go through the stages of;

a) An offer being made b) Negotiations among the parties which lead to a settlement c) Acceptance of the offer for a consideration Offer Offer is a definite promise to be bound by particular terms and it must be capable of acceptance. When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtain the assent of the other person to such act or abstinence, he is said to make an offer. The person who makes the offer is the offeror and the person to whom the offer is made is the offeree. Offer can be made to one person, to a class of persons, also to the world at large. Case study: Acceptance of the offer - Carlill Vs. Carbolic Smoke Ball Co. (1893) The defendants were proprietors and vendors of Carbolic Small Ball Co. They advertised a reward of 100 to any person who contracted influenza after using the Smoke Ball for a certain period, according to the printed directions. In order to show their sincerity, they also deposited 1000 in a bank. The claimant used the Smoke Ball according to the printed directions yet she contracted influenza. She brought an action to claim the reward. Arguments by the defendant company 1. The offer was so vague that it could not form the basis of a contract, as no time limit was specified in the offer. 2. There was no contract between the parties because a notification of acceptance had not been communicated to the company by the offeree. 3. Cannot contract with the whole world 4. Mrs. Carlill had not provided any consideration for their promise 5. The advertisement did not constitute an offer but was simply sales talk. 6. There was no intention to create legal relations Courts decision; The court disagreed with the companys arguments, and awarded the claimant damages. It was pointed out by the court that; 1. In advertisement cases, an offer may be made to the world at large but it becomes a promise only when it is accepted by an ascertained person 2. The company must protect the user during the period of use the offer was not vague.
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Essentials of a valid offer; 1. An offer cannot be vague : offers with uncertain meaning are void. Case study: Gunthing Vs. Lynn (1831) The offeror offered to pay a further sum for a horse if it was lucky Courts decision; the offer was too vague and hence the contract is void. 2. An offer must be distinguish from; a) Supply of information: Information may be necessary for the parties who are negotiating the terms of a contract before a definite offer is made. However the merely supply of information cannot be a valid offer. Case ular study: Harvey Vs. Facey (1893)

The claimant offered to purchase a plot of land, Bumper Hall Pen, belonging to the defendant. He telegraphed the defendant: Will you sell us the land known as Bumper Hall Pen? Telegraph lowest cost price. The defendant replied through telegraph quoting, lowest price for Bumper Hall Pen is 900. The claimant was ready to purchase the land at the quoted rice and telegraphed We agree to buy Bumper Hall Pen for 900. But defendant refused to sell it. On the denial of the defendant to sell the land, the claimant brought this suit. Courts decision; it was held that no contract was made. The defendant had not made an offer by stating the lowest price of the land. He had merely supplied information.

b) Statement of intention: A statement showing a present intention, which can be altered in the future as one wishes, is not an offer. Case study: Harris Vs. Nickerson (1873) The auctioneer had advertised that an auction sale would be held on a particular day. The claimant saw the advertisement and reached the place of the auction on the specified day. However, due to the auctioneers illness the proposed sale was postponed. Courts decision; It was held that the auctioneer was not liable for damages. An advertisement that an auction would be held at a particular time and place is not an offer to hold an auction. Any person who on faith of the advertisement had incurred expenses to attend the proposed sale has no right of action if it is cancelled. This advertisement was a statement of intention

c) Invitation to treat: This is an invitation to others to make offers. An offer comes into existence only when a person shows his willingness to enter into a contract. Where a person invites others to make an offer to him, the invitation made by him is not an offer, but only an invitation to treat.

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BE2304 Law of Obligation

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Case study: Fisher Vs. Bell (1961) A shopkeeper was prosecuted for offering offensive weapons for sale, by having flick knives on display in his window. Courts decision; It was held that the shopkeeper was not guilty as the display in the shop window is not an offer for sale but only an invitation to treat. Case study: Pharmaceuticals Society of Great Britain Vs. Boots Cash Chemicals Ltd (1953) The defendant was charged with breaking the law, which stated that certain drugs could only be sold under the supervision of a qualified pharmacist. They had placed the drugs in an open display in their self service store, although a qualified person was stationed at the cash desk. It was claimed by the claimant that once a customer picked up an article and put it into the basket, the contract of sale was complete, the shopkeeper could not then refused to sell. Courts decision; The defendant was not guilty. It was held that the mere fact that a customer picks up a bottle of medicine from the shelves does not amount to an acceptance of an offer to sell. It is an offer by the customer to buy, and there is no sale confirmed until buyers offer to buy is accepted by the acceptance of the price.

3.2 The agreement must have an acceptance When a person to whom an offer is made signifies his assent to the same, the offer is said to be accepted. Acceptance of an offer is a necessary and vital ingredient towards the creation of a contract. Conditions for valid acceptance; 1. Acceptance must be communicated: Even if the offeree has made up his mind to accept the offer, the agreement is not yet complete. There must be an external expression of assent. The acceptance of an offer must be communicated to the offeror. It should be clear and unambiguous. 2. Mode of communication: Acceptance can be communicated in any of the following three ways; Acceptance by express words, Acceptance by action, Acceptance inferred from conduct Case study: Felthouse Vs. Bindley (1862) The claimant wrote a letter to his nephew offering to buy his nephews horse for 30.15s. He also wrote in his letter If I hear no more about him I shall consider the horse to be mine at 30.15s. The nephew did not reply to this letter. However, he told the defendant, an auctioneer, not to sell the horse. Hence he intended to reserve the horse for his uncle. But the auctioneer sold the horse to someone else. The claimant thereupon sued the defendant, the auctioneer. Courts decision; Dismissing the action, the court held that since the nephew did not communicate his accepatance, no contract took place between the claimant and his nephew, hence he had no right to make a complaint regarding this sale.
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3. The offer cannot impose upon the offeree an obligation to refuse: In the above case it was held that the offeror cannot impose upon the offeree the obligation of refusal. 4. Communication of acceptance must be by a person who has authority to accept: Communication of acceptance to be valid either by the offeree himself or by his authorized agent. A communication of acceptance by any other person will not be valid. Case study: Powell Vs. Lee (1908) The board of managers of a school passed a resolution selecting the claimant for the post of headmastership but the decision about his selection was not communicated to him. One of the managers, in his individual capacity, informed him about the resolution. Subsequently, the board of managers rescinded their decision and so the claimant was not appointed as the headmaster. The claimant thereupon brought an action for breach of contract Courts decision; The court held that no contract was concluded because for a communication of acceptance to be valid it must be made by the offeree himself o his authorized agent There are exception to the general rule that acceptance must be communicated; a) Communication may be waived by the offeror. b) Where acceptance is through postal services. 3.3 The agreement must have a consideration Another essential element of a contract is the consideration. In simple terms it is a reasonable equivalent or other valuable benefit passed on by the contractor to the contractee. A valuable consideration in the eye of law may consist either in some right, interest, profit, or benefit accruing to one party, or some forbearance and detriment, loss or responsibility given, suffered or undertaken by the other. There are three types of consideration; a) Executory consideration: this is a promise to perform an action in return of a promise at some future time. b) Executed consideration: this is an act in return for a promise. The promise only becomes enforceable when the offeree has actually performed the required act. c) Past consideration: Such consideration actually is not regarded as a valid contract. Usually consideration is provided either at the time of the creation of a contract or at a later date. Exception to the rule of past consideration; a) Under s.27 of the Bills of Exchange act 1882, past consideration can create a liability on a bill of exchange. b) Under s.29 of the Limitation act 1980, a time barred debt becomes enforceable again if it is acknowledged in writing. c) Where a claimant performed the action at the request of the defendant and payment was expected, and then any subsequent promise to pay will be enforceable.
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Case study: Re McArdle (1951) In this case according to the will of the father certain number of children was entitled to a house after the death of their mother. In mothers lifetime one of the children and his wife lived in the house with mother. The wife made some improvements in the house during this period. All the children subsequently undertook in writing to pay a sum of 488 to the said wife in consideration of her carrying out the improvement. But at the mothers death they refused to pay anything. Courts decision; It was held that said promise was without a consideration for the obvious reason that improvement to the house had been completed before the document containing the promise were signed, thus it was a past consideration which is no consideration at all. Case study: Lampleigh Vs. Braithwaite (1615) In this case, the defendant had killed a man and asked the claimant to obtain royal pardon for him. The claimant did so at his own expense. The defendant then promised to pay him 100. He failed to pay and was sued. Courts decision; It was held that there was an implied promise to pay and subsequent promise merely fixed the amount. Hence the consideration was valid.

3.4 The intention behind a contract must be to create legal relations. A contract, which is governed by the law of contract, must be with a view to creating legal relations. Case study: Balfour Vs, Balfour (1919) In this case the defendant, who was working in Sri Lanka, went on a holiday to England with his wife. At the end of the holiday, his wife fell ill and was advised to remain in England for medical treatment. Before he retuning to Sri Lanka, promised to pay 30 a month to his wife for her maintenance. Initially he sent the amount regularly; however he stopped paying as certain differences between them led to their separation. By the time of separation, the allowance had fallen to arrear, so he wife brought an action to recover the arrears. Courts decision; her action was dismissed. It was held there was no indication that the arrangement was intended to be a contract.

Department of Building Economics

BE2304 Law of Obligation

Project study- Valid contract

3.5 Capacity to contract One of the essential requirements of a valid contract is that the parties must be competent to contract. Capacity refers to a persons ability to enter into a contract. In general, all adults of sound mind have full capacity to contract. However the capacity of certain individuals is limited. Normally, the following persons are considered to be incompetent to contract; i. ii. iii. iv. v. Minor Incorporated body: If the contract is against the clauses of or outside the scope of its Memorandum association. Mental incapacity and intoxication Disqualification by law Free consent

Minor: A minor is person below the age of 18years. Their contractual capacity is restricted by the law prevent them from entering into disadvantageous agreements, However, not all contracts entered into by a minor are void. Agreements entered into by minors may be classified within three possible categories. They are valid contracts, voidable contracts, and void contracts. Valid contract: A valid contract is one which has all the essential elements of contract. There are two types of valid contracts which can be enforced against a minor: a) Contract for necessaries b) Beneficial contracts of service a) Contract for necessaries: When a contract is relating to a payment for a supply of necessaries to a minor, then such a contract is binding on the minor. Necessary refers to things that are necessary to maintain a minor. However, whether any particular goods supplied are necessary or not will depend upon the facts and circumstances of each case. Generally it means goods and services which are most important for the survival of human life. It includes food, clothing, shelter, education, medical and legal aid etc. The necessaries must be things which the minor actually needs. It is not enough that they be of a kind which a person of his condition may reasonably want for ordinary use. Items which are generally necessary become unnecessary if the minor is already supplied with items of that kind. Case study: Nash Vs Inamn (1908) In this case, a tailor supplied an undergraduate minor with some clothing. The minor was studying at Cambridge University. The clothing consisted of 11 fancy waistcoats at the price of two guineas each. It was proved that the Cambridge undergraduate already had a sufficient supply of clothing for his position in life. Courts decision; It was held by the Appellate court that the tailor was not entitled to be reimbursed for the supply of clothing as he failed to prove that the clothing was suitable to the minors actual requirements at the time of sale and delivery.
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b) Beneficial contracts of service: A minor is bound by a contract of apprenticeship or employment, as long as it is on the whole, for his/her benefit. Case study: Doyle Vs. White city stadium (1935) Doyle, a minor, was granted a professional boxers licence, which was treated as a contract of apprenticeship. The licence provided that he would be bound by the rules of the Boxing Board of control. According to one of the rules, the Board had the power to retain any prize money if he aws ever disqualified in a fight. Doyle claimed that the licence was void, as it was not for his benefit. Courts decision; It was held that, in spite of the penal clause, the licence, taken as whole, was beneficial to him. Hence the conditions of the licence were held enforceable. Voidable contract: Voidable contracts are those contracts which may be avoided, that is, set aside, by one of his parties, if however, no steps are taken to avoid the contract, then the contract is considered to be a valid contract. Void contact: A void contract is one which is not legally enforceable and the parties are not legally obliged to each other. Generally contracts are void because the subject matter is not legal or one of the contracting parties does not have the competency to the contract. The following contracts entered into by a minor are always void; a) Contract entered into by a minor for repayment of money lent or to be lent. b) Contracts of goods supplied or to be supplied other than necessaries. c) Contracts of resale of rights in property. Case study: Mercantile Union Guarantee Corp Vs. Ball (1937) A minor was engaged in a haulage business. He had entered into a hire purchase contract which was related o a business. Courts decision; It was held by the court that a minor was not liable for the higher purchase entered into by him with regards to the haulage business. Contract with the minor for goods supplied are void. Incorporated body: Every incorporated body is a legal body created by the law. It can contract only through its agents such as a board of directors or chief officers in accordance with its internal management. A company cannot make any contract, which is inconsistence with the objectives set out in the memorandum of association. If the company enters into such a contract, it is ultra vires. A third party acting in good faith will be able to enforce the transaction against the company.

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BE2304 Law of Obligation

Project study- Valid contract

Mental incapacity and intoxication: A contract entered into by a person who is of unsound mind or under the influence of drugs, or drunk is prime facie valid. Such contract can be held void if the person in contract proves; That time mind was so affected that they were incapable of understanding the nature of the actions That the other party either knew or ought to have known of their disability. In any case, however the person claiming such incapacity must pay a reasonable price for the goods supplied to them. Disqualification by law: A person may also be qualified from entering into a contract by any law to which he is a subject. Free consent: two or more persons are said to consent when they agree upon the same thing in the same sense. Consent is said to be free when it is not caused by; a) Duress (Coercion): This means committing or threatening to commit any act against a persons will. Duress is some element of force, either physical or economic, which is used to override one partys freedom to choose whether to enter into a contract or not. Such contracts are voidable at the instance of the innocent party In order to benefit from the doctrine of duress, claimant must prove two points; That the pressure, which has resulted in an absence of choice on their part, was brought on them against their will. That the pressure was of a nature considered to be illegal by the court.

b) Undue influence: A contract is said to be influenced by undue influence when all essential elements of undue influence are satisfied; The relationship between the parties is such that one of the parties is in a position to dominate the will of the offer. He uses that influence to obtain an unfair advantage over the other. Unfair advantage is in fact obtained.

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BE2304 Law of Obligation

Project study- Valid contract

3.6 Legality of object The legality of object is another essential element of a valid contract. A contract that breaks the law is illegal. The court has recognized that any contract that tends to prejudice any social or economic interest of the country must be forbidden. However, contracts that would be contrary to the public policy depend on the fact and circumstances of the case under consideration. Some examples of illegal contracts are as follows; Contracts prohibited by statute. Contracts to defraud the Inland Revenue. Contracts involving commission of crime Contracts against the interest of the UK or friendly state Contracts leading to corruption in public life. Contracts which interfere with the court of justice.

3.7 Certainty of terms of contract The contract terms should not be vague. They must be certain and definite the intention of the parties to contract must be clearly indicated by the terms of contract. Case study: Taylor Vs. Portington (1885) In this case the claimant promised to take the defendants house on lease for a period of three years provided, it is thoroughly repaired and the drawing rooms are decorated according to the latest style. Courts decision; It was held that the contract is not enforceable, since the terms were vague and uncertainty.

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BE2304 Law of Obligation

Project study- Valid contract

4.0 Conclusion
Our whole economy is based on the freedom of individuals to contract and a system of laws that enforces contracts freely entered into. But a lot of people may not be aware of what are the essential elements required to make an enforceable contract. Agreement is essential to any contract. Before there can be a contract, there must be a consensus ad idem. That is, there must be a meeting of the minds. The two sides to a contract, whether for the construction of the liner Queen Elizabeth or for having your lawn cut, must agree on the fundamental terms of the contract. There must be an intention to enter into a legally binding contract. Whether the parties have reached an agreement is determined by an objective standard. What each party believes the other to be agreeing to will not be the determining factor. To form a contract, there are no particular words that must be used by the parties. However, there must be an offer by one side and an acceptance of the offer by the person to whom the offer was made. Without both an offer and an acceptance, there can be no consensus ad idem or a meeting of the minds which is essential to form a contract. The contract constitutes a bargain. The acceptance of the offer is the bargain. An exchange of a promise for a promise or act has been made. It is this consideration that makes the contract binding. Consideration is some benefit or advantage to the person making the offer and a corresponding cost or prejudice to the person accepting the offer. It is left to the parties to determine whether or not the consideration is adequate, only the parties can judge whether or not it is a good bargain. The law only requires that there be sufficient consideration, something of value must be given. The consideration cannot be something given or promised in the past. To be valid, the consideration must be a new promise or some fresh benefit exchanged for the offer. This is subject to the courts refusing to enforce an alleged contract where the consideration is as inadequate as to raise suspicions of fraud or to make the contract unconscionable. In general, as long as the basic elements of an offer and acceptance with consideration are present, the parties have a valid and binding contract. There is no requirement that the contract be in writing except in certain special situations such as the sale of land. The problem is that if the verbal exchanges of the parties are to be relied upon, it may prove difficult and in some cases impossible to determine precisely the terms of the contract if there in fact is a contract.

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5.0 References
2008. Corporate and business law (Eng) study text.2nd ed. United Kingdom: Get through guides ltd. Contract law [online]. Available from: http://www.ukessays.com/essays/law/contract-law.php[Accessed 24 Friday 2010].

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