File - Colbourne College

Lecturer: Judith Robb-Walters
Lesson 1
• LO 1: Understand the essential
elements of a valid contract in a
business context
September – November 2014
The Basic Syllabus
- Understand the essential elements of a valid
contract in a business context.
- Be able to apply the elements of a contract in
business situations.
- Understand principles of liability in negligence in
business activities
Be able to apply principles of liability in negligence
in business situations.
• At the end of the class, students should be able to:
- Explain the importance of the essential elements
required for the formation of a valid contract.
“Contracts are agreements that are legally enforceable. A contract may
involve a duty to do or refrain from doing something, and the failure to
perform such duty is called a breach of contract. The law provides
remedies if a promise is breached- aiming to restore the person wronged
to the position they would occupy if the contract had not been
breached, rather than punish the breaching party.
The existence of a contract requires:
1. an offer;
2. an acceptance of that offer which results in a meeting of the minds,
3. a promise to perform,
4. a valuable consideration,
5. a time or event when performance must be made,
6. terms and conditions for performance,
7. performance, if the contract is "unilateral".”
• The first essential element in the formation of a
binding contract is agreement. This is usually
evidenced by offer and acceptance. An offer is a
definite promise to be bound on specific terms, and
must be distinguished from the mere supply of
information and from an invitation to treat.
• An offer is a definite promise to be bound on specific
terms and may be defined as follows. 'An express or
implied statement of the terms on which the maker is
prepared to be contractually bound if it is accepted
unconditionally. The offer may be made to one person,
to a class of persons or to the world at large, and only
the person or one of the persons to whom it is made may
accept it.' A definite offer does not have to be made to
a particular person. It may be made to a class of persons
or to the world at large. However, it must be
distinguished from a statement which supplies of
information, from a statement of intention and from an
invitation to treat
• Contracts may be bilateral or unilateral. The more common of
the two, a bilateral contract, is an agreement in which each
of the parties to the contract makes a promise or promises to
the other party. For example, in a contract for the sale of a
home, the buyer promises to pay the seller $5,000,000 in
exchange for the seller's promise to deliver title to the
• In a unilateral contract, only one party to the contract makes
a promise. A typical example is the reward contract: A
promises to pay a reward to B if B finds A's dog. B is not
obliged to find A's dog, but A is obliged to pay the reward to B
if B finds the dog. In this example, the finding of the dog is a
condition precedent to A's obligation to pay.
• The classic example of such a contract is where A promised to
pay B £100 if B will walk from London to York: see Rogers v
Snow [1573] Dalison 94.
Carlill v Carbolic
Smoke Ball Co 1893
The facts: The manufacturers of a patent medicine published an
advertisement by which they undertook to pay '£100 reward .... to any
person who contracts .... influenza .... after having used the smoke ball
three times daily for two weeks'. The advertisement added that £1,000
had been deposited at a bank 'showing
our sincerity in this matter'. The claimant read the advertisement,
purchased the smoke ball and used it as directed. She contracted
influenza and claimed her £100 reward. In their defence the
manufacturers argued against this.
(a) The offer was so vague that it could not form the basis of a contract,
as no time limit was specified.
(b) It was not an offer which could be accepted since it was offered to
the whole world.
Decision: The court disagreed.
(a) The smoke ball must protect the user during the period of use – the
offer was not vague.
(b) Such an offer was possible, as it could be compared to reward cases.
You should note that Carlill is an unusual case in that advertisements are
not usually regarded as
Gunthing v Lynn 1831
• The facts: The offeror offered to pay a further sum
for a horse if it was 'lucky'.
• Decision: The offer was too vague and no contract
could be formed
• In order to create a valid contract, the parties must
have intended to create a legal relationship
between them. This is usually obvious and in most
commercial cases the court will presume that there
was this intention. This criteria is only really seen in
cases involving domestic or social contexts where
the court presumes that there was no intention to
create legal relations unless proved otherwise. The
reasoning behind this is that as a matter of policy
the court wants to avoid intruding too much into
the private lives of families.
• The fact that the parties are husband and wife does not
mean that they cannot enter into a binding contract
with one another. Contrast the following two cases.
• Balfour v Balfour 1919
• The facts: The defendant was employed in Ceylon. He
and his wife returned to the UK on leave but it was
agreed that for health reasons she would not return to
Ceylon with him. He promised to pay her £30 a month as
maintenance. Later the marriage ended in divorce and
the wife sued for the monthly allowance which the
husband no longer paid.
• Decision: An informal agreement of indefinite duration
made between husband and wife whose marriage
• had not at the time broken up was not intended to be
legally binding.
What is Consideration
• Consideration is the benefit that each party gets or
expects to get from the contractual deal -- for
example, Victoria's Secret gets your money; you get
the cashmere robe.
• In order for consideration to provide a valid basis for
a contract -- and remember that every valid
contract must have consideration -- each party
must make a change in their "position."
Consideration is usually either the result of: a
promise to do something you're not legally
obligated to do, or a promise not to do something
you have the right to do (often, this means a
promise not to file a lawsuit).
• Capacity to contract means the legal competence of a
person to enter into a valid contract. Usually the
capacity to contract refers to the capacity to enter into
a legal agreement and the competence to perform
some act. The basic element to enter into a valid
contract is that s/he must have a sound mind.
• Certain class of people are exempted from the
category of people who are capable of entering into
• 1. infants/minors;
• 2. insane;
• 3. people under the influence of drug;
• 4. bankrupt;
• As a general common law rule, only parties to a
contract will have rights or obligations under that
• Examples
• A contract between A and B cannot impose obligations on C
• A contract between A and B can not be enforced by C, even if
the contract is intended to benefit C.
• Strict application of the doctrine can give rise to harsh
results, particularly where contracts are intended to
benefit a third party and a third party relies upon this. In
some cases exceptions or alternative remedies have
emerged to avoid or limit those harsh results.
• The doctrine of privity of contract was formally
recognised and entrenched in Tweedle v. Atkinson
(1861). In this case, the father of a bride promised the
father of the groom to pay the groom (plaintiff) a sum of
money upon the marriage. However, before making this
payment, the bride's father died and his estate refused
to honour his promise. The plaintiff sued for the money
but failed on the ground that, although the contract
had been made for his benefit, he was not a
contracting party.
• Facts
• John Tweddle (the Plaintiff's father) agreed with William
Guy (the Plaintiff's father in law) for the latter to pay
money to the Plaintiff upon marriage. Guy died before
making payment and the Plaintiff (William Tweddle) sued
the estate (Atkinson was the executor) for the promised
• Held
• No consideration moved from the plaintiff to Guy and
therefore the plaintiff had no right to sue on the
contract. Natural love and affection is not good
consideration (Crompton J)
Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd
[1915] AC 847
The plaintiff (Dunlop) sought to establish and enforce a resale
price maintenance (RPM) scheme. The plaintiff sold tyres to Dew
& Co (a tyre dealer) which then sold to Selfridge on condition
that Selfridge would not sell below the list price. Selfridge failed to
comply with the condition; the plaintiff sued for breach of
Although the promise made by Selfridge to Dew (not to sell below
list price) had been made for the benefit of Dunlop under its RPM
scheme, Dunlop was not entitled to enforce the contract against
Selfridge because it was not a party to the contract.
• 1. In relation to the law of contract explain the
meaning and effect of:
• (a) The doctrine of privity
• (b) The intention to create legal relations.
2.Explain in relation to the law of contract the rules
relating to acceptance of an offer.
3. Define the term consideration as it is understood in
contract law.
1. Which of one of the following cases illustrates an offer to the public
at large?
(a) Gibson v Manchester City Council (1979)
(b) Carlill v carbolic Smoke Ball Co. (1893)
© Thornton v Shoe Lane Parking Ltd. (1971)
2.All contracts are agreements, but not all agreements are contracts.
The primary reason is that:
(a) Certain agreements cannot be enforced by law.
(b) certain agreements cannot be licensed number law.
© agreements do not fall under any classification of contracts.
(d) a terms of an agreement usually are different from those of a
• 3. Apart from contracts for necessaries, which bind
the minor, the general rule at common law is that
minor’s contracts are:
• (a) obligatory
• (b) enforceable
• ©binding
• (d) voidable
Further readings
- The law of obligations 4: Formation of contracts I
- Judicial Studies Institute Journal [2010: 2 PRIVITY OF
- australiancontractlaw

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