Contract Formation

There are requirements for the formation of contracts

• Agreement
• Consideration
• Certainty
• Intention to create legal relations

The other two requirements are only relevant or lacking in certain contracts

• Formalities
• Capacity to make a contract

In order to have a contract, there must be an agreement (also referred to as “meeting of the minds”). And in order to have an agreement there must be offer and acceptance.

In Martin-Smith V Williams (1998, E.M.L.R. 334 (at.p.358) an action involving the entertainer Robbie Williams on the issue as to whether or not there had been an extension of his contract with his management, Ferris J. Commented, “In my view if, in relation to such a matter, parties reach accord by means of offer and acceptance then they should be treated as contractually bound to each other unless it is shown that either or both of the offer and acceptance which lead to such a accord are subject to a condition which prevents them being legally bound. Devlin J. In Ingram V. Little (1961, 1, Q.B.32) also made that point, stating that “the first thing for a judge to do is to satisfy himself that the alleged contract has been properly formed…there must be offer and acceptance. The offer must be addressed to the offere, either as an individual or as a member of a class of the public. The acceptance must come from the one who is so addressed and must be addressed to the offeror.

There are two types of contract

1. Bilateral Contracts
2. Unilateral contracts

The Bilateral Contract

An example of this type of contract is Thornton V. Shoe lane Parking [1971] 2.Q.B. 163 in which a professional musician, Francis Thornton, had a job for the day playing his trumpet for the BBC at Farringdon Hall in central London. The plaintiff decided to leave his car nearby in a recently opened multi-store car park in shoe Lane close to Fleet street. He drove up, pressed a button and received a ticket, at which point the barrier rose up and he and his car entered the car park. A lift took his car to an upper floor. Three hours later the plaintiff retuned from his appointment. The car was brought down again on the lift to the place where Thornton was waiting, but he was loading some items into the boot of his car, an accident occurred. Part of the blame for the accident lay with himself and part with the car park as a result of negligence by one of the attendants. Mr Thornton sued shoe Lane Parking LTD for his own personal injuries and damage to his car. The court of appeal eventually awarded him £3,637 for his injuries (he had been 50% contributory negligent), but nothing for his car. It was held that a contract had been formed as soon as he passed the ticket barrier, there being odder and acceptance, and therefore, in return for the defendants looking after his car. Because this was a bilateral contract, both parties were bound contemporaneously.

The central issue in Thronton V. Shoe lane parking was whether certain attempts by shoe lane parking to exclude liability for personal injuries and damage to the car had been incorporated into the contract. Altogether, there were three attempts to do so by the defendants: (i) The sign outside the car park as the driver approached the car park (ii) The ticket which came out of the machine and (iii) a notice inside the car itself excluding damage to the car. The rule is that the only terms brought to the contracting parties attention at the time of, or before the contract is formed can be incorporated into the contract. Anything said or written after the agreement is made, I.e. after the acceptance of the offer, is too late. Offer and acceptance determined the precise moment at which the parties were contractually bound. On this basis the court of appeal held, the contract having been formed at the barrier, that the notice outside was included, but the ticked and sign were not.

The court of Appeal were not unanimous on the moment of formation. Lord Denning thought the offer was made by Shoe Lane parking to customers who drove up to the barrier. Acceptance occurred when the plaintiff arrived at the barrier with an intention to park his car. Therefore, the ticket came after the contract was formed, I.e. too late to be incorporated. Lord Denning may have been wrong on this point and the answer is certainly debatable. Megaw L.J reserved judgement on this offer and acceptance point. The contract was made by the time plaintiff drove through the barrier. Normally the barrier would be regarded as merely an invitation to treat, and the drive would make an offer when he approached the ticket machine. The ticket which emerged containing conditions is not acceptance, but a counter offer which is accepted by the driver keeping the ticket and driving into the car park. Although the precise analysis into offer and acceptance is problematic in Thornton, the case illustrates the importance of determining how and when the agreement occurred. It also shows that finding an offer and acceptance is not always a neat process or free from difficulty.

The unilateral contract

The case of Carlill V Carbolic smoke Ball Co LTD (1.Q.B 256. On the contextual background, see Simpson, “Quackery and contract Law” in leading cases in the common law Clarendon, Oxford 1995). The Defendant, Fredrick Roe, The proprietor of a medical preparation called “The carbolic smoke ball”, placed an advertisement in “The Pall Mall Gazette” promising to pay £100 to anything who used the carbolic smoke Ball for two weeks and who, for a limited period thereafter, contracted influenza. Mrs Louise Carlill did both and sued to recover her £100, as promised. In the high court, the defences of the Smoke Ball company, indeed most of the arguments, appear to have been about the facts rather than the law. In commercial contract practice and litigation, or arbitration over disputes, the facts are indeed often more complicated and relevant to the final outcome than the law in question. In Carlill some of the factual arguments were that the advertisement was not accurately reported, the plaintiff had not relied on it in any case, had not used it properly, had never actually caught influenza, and if she did, never reported it to the defendant. The court found for the plaintiff. (Reported at first instance in [1892] 2. Q.B. 484, Hawkins J).

In the court of Appeal, the carbolic smoke ball Co as appellants raised a number of legal points relevant to contract law: (i) The advertisement was not an offer, but an invitation to treat (there was no intention of creating legal relations). (ii) The advertisement was too vague to be an offer (iii) An offer could not be made to the whole world. (iv) There was no consideration for the promise (this raised the question of whether the plaintiff herself had actually bought the smoke ball). (v) where was the acceptance of the offer? In a bilateral contract the acceptance is normally communicated, and that was not done here; (vi) the advertisement was a bet or wagering contract, in which case it would be void as contrary to public policy.

The court of appeal rejected most of these arguments and held that there was a contract. The advertisement was held to be a promise which was an offer to the whole world, ans was capable of amounting to an offer of a unilateral contract. Communication of acceptance is not necessary in the case of a unilateral contract. Consideration and acceptance could be found in Mrs Carlill taking and using the Smoke Ball for the full two weeks. In was only at the end of this time that the promise became legally binding. The Smoke Ball Company’s offer could be revoked at any time until she had completed performance. The court of Appeal also dealt with the consideration point. Catching influenza was not the consideration but a “condition” (sometimes called an “if” clause). (I will pay you if a certain event happens, which you do not promise to bring about or is outside of your control). Consideration was found in Mrs Carlill using the smoke ball. The court of Appeal also found that there was an intention by the parties to treat the arrangement as contractual. The deposit of money was an important indicator of contractual intention. Carlill was the first case to explicitly state a requirement of intention to create legal relations. The advertisement was more than an invitation to treat. It was intended to be taken seriously. On an objective test, a reasonable person in Mrs Carlill’s position would take the advertisement to be an offer. This was further strengthened by the statement that £1000 had been deposited in the Alliance Bank, to deal with any liabilities “showing our sincerity in the matter”. Lindly L.J. called this “a promise, as plain as words can make it”.

Cases for offer

• Carlill v Carbolic Smoke Ball [1893]
• Pharmaceutical Society of GB v Boots [1953]
• Fisher v Bell [1961]
• Thornton v Shoe Lane Parking [1971]
• Centrovincial Estates v Merchant Investors [1983]
• Upton RDC v Powell [1942]
• Partridge v Crittenden [1968]
• Spencer v Harding [1870]
• Blackpool and Fylde Aero Club v Blackpool [1990]
• Gibson v Manchester CC [1979]
• Clarke v Dunraven [1897]
• Dickinson v Dodds [1876]
• Shuey v USA [1875]
• Errington v Errington [1952]
• Byrne v Van Tienhoven [1880]
• Daulia v Four Millbank Nominees [1978]

Cases for Acceptance

• Brogden V Metropolitan Railway [1977]
• Felthouse V Bindley [1862]
• Adams V Lindsell [1818]
• Howell Securities V Hughes [1974]
• Brinkibon V Stahag Stahl [1983]
• Entores V Miles Far East Corp [1955]
• Scammel V Ouston [1941]
• May and Butcher V R [1934]
• Hyde V Wrench [1840]
• Butler Machine Tool V Ex-Cell-O Corp [1979]

Cases for Good Daith

• Waltford V Miles [1992]
• Pitt V PHH Asset Management [1994]
• Petromec V Petroleo Brasileiro [2005]

To form a valid contract there must be two or more clear parties to the contract. And the parties must be clear on the rules, and therefore in agreement. The contract must be consensual and specified with no ambiguity or confusion. In addition to parties must intend to create legal creations, meaning that the promises made by both parties are legally binding. And the promises of each party must clearly be supported by consideration. To constitute a contract there must be at the very least two parties, a promisor and a promisee. Therefore when an agreement has to be made with an individual and someone.