Welcome to the World of Contract Law!
Ever wondered why some promises are just friendly agreements while others can land you in court? That is exactly what we are going to explore in this chapter on Formation. To make a legally binding contract—one that the law will actually enforce—you need four specific "ingredients." Think of it like baking a cake; if you miss an ingredient, the contract won't "set."
In this guide, we will break down the four pillars of forming a contract: Offer and Acceptance, Intention to Create Legal Relations, Consideration, and Privity. Don't worry if it feels like a lot of information right now; we’ll take it one step at a time!
1. Offer and Acceptance
The first step to any contract is a "meeting of the minds." One person makes a proposal, and the other person agrees to it exactly as it is.
What is an Offer?
An offer is a statement of terms upon which the offeror (the person making the offer) is prepared to be bound. It must be clear, certain, and communicated to the offeree (the person receiving it).
Important Distinction: Invitation to Treat (ITT)
Not everything that looks like an offer is one. An Invitation to Treat is just an invitation for others to make an offer. It’s like saying, "I’m thinking of selling, what would you give me?"
• Shop windows and shelves: Usually an ITT. In Fisher v Bell, a flick-knife in a window was an ITT, not an offer to sell.
• Advertisements: Usually an ITT (Partridge v Crittenden), unless they are very specific and promise something in return for an action.
Bilateral vs. Unilateral Offers
• Bilateral Offer: A promise for a promise. "I promise to pay you £10 if you promise to wash my car."
• Unilateral Offer: A promise for an act. "I will pay £100 to anyone who finds my lost dog." You don't have to promise to look for the dog; you accept the offer by actually finding it. (Think of the famous Carlill v Carbolic Smoke Ball Co case!)
Acceptance
Acceptance must be a "mirror image" of the offer. If you change a single detail, you haven't accepted; you've made a counter-offer. In Hyde v Wrench, when a buyer offered £950 for a £1,000 farm, the original offer of £1,000 was "killed off" and could no longer be accepted.
Rules of Communication:
1. Acceptance must be communicated to the offeror.
2. Silence is never acceptance (Felthouse v Bindley).
3. The Postal Rule: If it’s reasonable to use the post, acceptance happens the moment the letter is posted, not when it arrives (Adams v Lindsell).
Quick Review: An offer can be ended by revocation (withdrawing it before acceptance), rejection, lapse of time, or a counter-offer.
Key Takeaway: A contract starts with a clear offer followed by an identical acceptance that is communicated properly.
2. Intention to Create Legal Relations (ITCLR)
Even if you have an offer and acceptance, the law won't step in unless both parties meant for the agreement to be legally binding. The courts use two "presumptions" to decide this.
Presumption 1: Social and Domestic Agreements
When you make a deal with family or friends (like promising to do the dishes if your sister cooks), the law presumes you did not intend to go to court if things went wrong (Balfour v Balfour).
Can this be rebutted (proven wrong)? Yes! If a couple is separating (Merritt v Merritt) or if there is a lot of money involved between friends, the court might decide there was legal intent.
Presumption 2: Commercial and Business Agreements
In a business setting, the law presumes you did intend for the contract to be legally binding. It’s very hard to argue otherwise!
Can this be rebutted? Yes, but only with very clear evidence, like a "Honour Clause" stating the agreement is "binding in honour only."
Memory Aid:
• Home = Heart (No legal intent usually).
• Business = Briefcase (Legal intent is expected).
Key Takeaway: The courts look at the context. Families are usually left to their own devices, while businesses are expected to stand by their word legally.
3. Consideration
Consideration is the "price" paid for the promise. In English law, you can't get something for nothing. There must be a "quid pro quo" (this for that).
The Rules of Consideration
1. Consideration must be "sufficient" but need not be "adequate"
This sounds confusing, but it just means the item traded must have some value, but it doesn't have to be a fair market price. In Chappell v Nestle Co, used chocolate wrappers were considered "sufficient" consideration for a record! The law doesn't care if you make a bad deal, as long as there is something of value being traded.
2. Past Consideration is no consideration
You cannot use something you did in the past as consideration for a new promise. If you wash someone's car for free, and afterwards they promise to pay you £5, you cannot sue them if they don't pay. The work was already done before the promise (Re McArdle).
3. Pre-existing Duties
Generally, doing something you are already legally required to do is not new consideration.
• Public duty: A policeman can’t claim a reward for catching a thief if it’s his job anyway.
• Contractual duty: If you are already paid to sail a ship, promising to finish the journey isn't extra consideration (Stilk v Myrick).
Exception: If you do something "extra" or provide a "practical benefit" (Williams v Roffey Bros), the court might find new consideration exists.
Did you know? Even a peppercorn can be consideration. This is why you sometimes hear about "Peppercorn Rents" where a building is leased for almost nothing!
Key Takeaway: A contract requires an exchange of value. It doesn't have to be a fair trade, but it must be a current trade, not a past one.
4. Privity of Contract
Privity is a fancy way of saying "privacy." The general rule is that only the people who are actually parties to the contract can sue or be sued under it. If I make a contract with your friend to buy you a gift, and the friend doesn't deliver, usually you cannot sue because you weren't a party to the contract (Tweddle v Atkinson).
The Big Exception: Contract (Rights of Third Parties) Act 1999
This Act was created to fix the unfairness of the privity rule. A "third party" (someone not in the contract) can now enforce the contract if:
1. The contract expressly says they can, OR
2. The contract was clearly made to benefit them.
Other Exceptions
There are a few other ways around privity, such as:
• Agency: When an agent makes a deal on behalf of a principal.
• Collateral Contracts: A second, smaller contract that sits alongside the main one.
Key Takeaway: Traditionally, only the "A and B" in a contract matter. However, modern law (the 1999 Act) allows "C" to get involved if the contract was meant for them.
Summary Checklist for Formation
Before you decide if a contract exists in an exam scenario, ask yourself:
• Was there a clear Offer? (Check it wasn't just an ITT!)
• Was there a "mirror image" Acceptance?
• Did they Intend to be legally bound? (Check if it's social or commercial).
• Was there Consideration? (Is there an exchange of value?)
• Does Privity apply? (Is the person suing actually part of the deal?)
Don't worry if this seems tricky at first! Contract law is very logical once you start applying it to real-life situations. Just remember: Offer + Acceptance + Intent + Consideration = A Binding Contract!