Basic Elements Form a Valid Contract

In the chapter of law of contract, we learned about the basic elements that form a valid contract which are offer, acceptance, consideration and capacity. Besides, it is necessary to consider exactly what the terms in the contract are. For the fairness of both parties, it is important to learn about the void and voidable contracts. In order to protect both parties’ interest and benefits, restraint of trade and discharged of contracts are the important issues that we have to know as well.

On 14th of February 2011, Lily went to a famous boutique ‘The Runaway’ to buy a dress for attending her romantic dinner. However, she did not successfully buy a dress as she had a conflict about the evening gown with the boutique’s manager. The manager confronted Lily saying that she cannot buy another dress as she herself has chosen the evening gown at the first place. The manager also argued that the moment Lily picks up that evening gown and walked to the cashier’s desk, she has already accepted the offer made by the boutique. So, on 18th of February, Lily received a letter of demand from ‘The Runaway’ asking her to pay for the evening gown.

In this situation, Lily is not liable to pay for it. There are two parts need to be explained. First, which party makes the offer and which accepts it. Second, when the contract of sale is made? So, the argument made by the manager was incorrect. The offer should be made by Lily instead of boutique. In the case of goods on display in the shop, the law has decided that it is the customer who makes the offer by taking the goods and placing them on the cashier’s counter and the cashier accept the offer by accepting the customer’s money. Since the boutique is a shop, the dresses in the shop is not an offer, it is only an invitation for customer to make an offer, which means it is only an invitation to a treat.

It can be supported by the case of Pharmaceutical Society of Great Britain v Boots Cash Chemist Ltd.1. In this case, the law requires that the sale of certain pharmaceuticals must be carried out under the supervision of a qualified pharmacist. The defendants, Boots who ran a chemist shop where the drugs were displayed on a self-service basis and the customers paid at cash desk for the goods they have selected. A pharmacist was present at the cash desk but not at the shelves where the goods were displayed with a price tag. The Pharmaceutical Society claimed that the law was contravened. It argued that the sale was complete when the customer took an article from the shelves and put it into his basket. The Court of Appeal disagreed, and held that the sale was made at the cash desk, where the customer made an offer to buy, which could be accepted or rejected by the cashier. The reason for this decision was that it is clear unacceptable to say that the contract is complete as soon as the goods are put into the basket, because the customer may want to change his or her mind, and it is undoubtedly the intention of all concerned that this should be possible. The display of goods in the store is therefore an invitation to treat, and not an offer.

Next, the contract of sale would only be made at the cashier’s desk based on the case of Pharmaceutical Society of Great Britain v Boots Cash Chemist Ltd. Therefore, in this circumstance, the contract of sale has not made in the boutique. Lily did pick up the gown and walk to the cashier desk to make the payment. But, on the way to the cashier’s desk, she changed her mind to another beautiful cocktail dress. The evening gown has not been put in the cashier’s desk, and thereby, the contract of sale is not formed. Hence, she has the right to change her decision to buy another dress.

Upon hearing the news, Marshall wanted to buy a bouquet of Lilies in a florist to cheers Lily up, however, when Marshall paid for the flowers, the florist, Ted did not have exact change for Marshall. Thus, Ted told Marshall that he does not have to pay for the flowers but he has to pray for Ted’s unhealthy wife, Zoey for a month.

1 [1953] 1 QB401.

A valid contract is formed when there is an offer, acceptance and consideration. In the situation above, there is an invitation to a treat when Marshall took the bouquet of Lilies to the cashier. The law has decided that it is the customer who makes an offer by taking the goods and placing them on the shopkeeper’s or cashier’s counter. And also, there is an acceptance when the florist accepts the Marshall’s offer. However, since Marshall did not pay the money to Ted but promised to pray for Ted’s unhealthy wife, Zoey for a month, we have to consider whether the Marshall’s praying services is a good consideration.

Section 26 of the Contracts Act 1950 provides that, as a general rule, an agreement without consideration is void. Section 2(d)2 defines the word ‘consideration’ as:

When, at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, such act or abstinence or promise is called a consideration for the promise.

Section 26 also provides that an agreement is not void merely because the consideration is inadequate. In order for consideration to be valid, it must be measurable in terms of some economic gain or loss. It is a valid consideration no matter how small its economic value may be. Thus, the consideration need not be adequate but must be sufficient.

In this circumstance, if Marshall’s praying service is a valid consideration, it can be supported by the oft-cited case, Chappell & Co Ltd v Nestlé Co. 3. In this case, Nestlé offered a record for one shilling and sixpence plus three wrappers from sixpenny bars of chocolate to promote the sales of their chocolate bars. Chappell & Co. brought proceedings for infringement of copyright and Nestlé offered to pay a statutory royalty based on the one shilling and sixpence. They did not include the value of wrappers. The Court held that the wrappers formed part of the consideration because the one shilling and sixpence alone was not enough to obtain a record. Thus, Nestlé had to pay a royalty on three shillings.

2 Contracts Act 1950.

3 [1960] AC 87.

4 [1842] 2 Q.B. 851.

5 [1853] 23 L.J. Ex. 36.

On the other hand, there also exist another two cases to support that Marshall praying service is not a valid consideration which are Thomas v Thomas4, and White v Bluett5. From the case Thomas v Thomas [1842], the testator, Mr. Thomas, before his death, expressed a wish that his wife should have for the rest of her life the house in which they had lived. After his death, his executors made an agreement with Mrs. Thomas to this effect, expressed to be ‘in consideration of’ the testator’s wishes. There was also an obligation on Mrs. Thomas to pay one pound per year, and to keep the house in repair. It was argued that there was no contract here, because Mrs. Thomas had provided no sufficient consideration. The Court held that consideration must be something which is of some value in the eye of the law. Thus, the moral obligation which the executors might have felt, or been under, to comply with the testator’s wishes would not have been sufficient.

Another case of White v Bluett [1853] stated that a father promised not to enforce a promissory note (which was the document acknowledging a debt) against his son, provided that the son stopped complaining about the distribution of his father’s property. It was held that this was not an enforceable agreement because the son had not provided any consideration.

From our point of view, we agree that the praying service provided by Marshall is a valid consideration. The reason is because there is an exchange of product and service, the praying service for a month may represent the value of the bouquet of Lilies. If Marshall did not promise to pray for Ted’s wife, he maybe cannot take the bouquet of Lilies. Thus, the praying service provided by Marshall is a valid consideration and the contract between Marshall and Ted is valid.

On the 15th February 2011, Marshall was required by his friend, Barney, to loan him money to secure the down payment of a Volkswagen after having a drink together. Marshall refused Barney at first, but he finally agreed to loan him the amount as Barney threatened to beat his fiancée, Lily.

Based on the situation above, a valid contract is formed although Marshall was forced by Barney to enter into the contract. There is an offer made by Barney and Marshall is the one who accept the offer as well as the amount that to be loan out for Barney is the consideration. Three essential elements of a valid contract, offer, acceptance and consideration, are existed, and hence the contract is made at that point of time.

6 Contract Acts 1950.

However, Marshall realized that he don’t have enough money to loan to Barney and hopes to cancel the deal he had with Barney. He is able to do so through some of the reasons. Firstly, it is regarding of the capacity problem. Section 11 of the Contracts Act 1950 states that every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject. According to this section, two parties must competent to the contract which means they must fully understand the terms and obligations of the contract. Section 126 also states what a “sound mind” is for the purposes of contracting. The third condition under this section stipulates that a person, who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind. So, Barney was drunk at that moment. In the case of Molton v Camroux7, it has been said that drunkenness is in this respect on the same footing as unsoundness of mind. Hence, Barney was of unsound mind at that point of time and thereby Barney and those who as a result of drunkenness, whether voluntary or involuntary, are incompetent to contract.

It can be supported by the cited case, Gore v Gibson8. The case Gore v Gibson [1845], it was an action taken by indorsee against indorser of a bill of exchange. The defendant pleaded that, he was so intoxicated when he had indorsed the bill, and thereby so entirely deprived of sense, understanding and the use of his reason, as to be unable to comprehend the meaning, nature, or effect of the indorsement, or to contract thereby, of which plaintiff, at the time of the indorsement, had notice. In brief, it was held that a contract made by a person so intoxicated as not to know the consequences of his act is not binding on him if his condition is known to the other party. So, when he enters into the contract, is in such a state of drunkenness as not to know what he is doing, and particularly when it appears that this was known to the other party, the contract is void and he can’t be compelled to perform it.

Thus, persons who are so drunk that they cannot understand the terms of contract or form rational judgment as to its effects, the contract is said to be invalid. As a result, the contract made between Marshall and Barney is void at the time when Marshall agreed to loan Barney money.

7 [1849] 4 Ex. 17.

8 [1845] 14 LJ Ex 151.

9 1 LR [1913] 40 Cal 598.

Another reason for Marshall to cancel the deal with Barney is because he was forced to enter the contract through the threat made by Barney. It is an act of coercion or duress to the person where a person enters a contract as a result of threats of physical violence. Under Section 15 of the Contracts Act 1950, “coercion” is defined as committing, or threatening to commit any act forbidden by the Panel Code, or the unlawful detaining or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. In the case of Kanhaya Lal v National Bank of India Ltd9 , the Privacy Council explained that the definition of “coercion” in section 15 is limited to an unlawful act done “with the intention of causing the person to enter into an agreement”. Hence, the contract becomes voidable at the time that they report to the police.

As the case given, Barton v Armstrong10, Armstrong (A, the former chairman of a company) threatened Barton (B, the managing director) with death if he did not agree to purchase A’s shares in the company. There was some evidence that B thought the proposed agreement was a satisfactory business arrangement both from his own point of view and that of the company. B executed a deed on behalf of the company carrying out the agreement. He sought a declaration that the deed was executed under duress and was void. The Privy Council held that if A’s threats were “a” reason for B’s executing the deed he was entitled to relief even though he might well have entered into the contract if A had uttered no threats to induce him to do so.

In this situation, the threat made by Barney is the only reason for Marshall to enter into the agreement. Therefore, the contract can become voidable and Marshall is able cancel the deal at the time that he makes report to the police.

A week after that tragedy, Marshall and Lily decided to buy their first house. Robin, who worked with a developer, Teepoo Berhad, she was tricking them to buy the house with fully furnished house, ready with an automated gate and air conditioner units in every room in Broga Height. Marshall and Lily agreed to buy the house immediately. In fact, Robin knew that there was no way the house will be of everything she said to both of them, as there was not much sales for her on that day. After moving into their new house, Marshall and Lily realized that the house was not in fully furnished, not with automated gate and any air conditioners.

10 [1976] AC 104.

From the situation above, the contract is formed before Marshall and Lily discovered the house’s situation. However, the contract becomes voidable upon the discovery of the fact. They can take legal action against Robin as it is a fraudulent misrepresentation. A fraudulent misrepresentation is a false statement made by a person who, at the time of making it does not honestly believe it to be true. If a false representation is made knowingly, fraudulent misrepresentation exists. Also, a representation made recklessly, careless as to whether it is true or false is a fraudulent misrepresentation. At that time where Robin induced Marshall and Lily to buy the house, she already knew that the house will not be like what she had told them. This is her trick in order for her to hit her sales target. Therefore, fraudulent misrepresentation exists, the contract is voidable.

This can be supported by the cited case of Derry v Peek [1889]11. The defendants were directors of tramway Company who issued a prospectus inviting members of the public to subscribe to the company’s shares. The prospectus stated that instead of horses, the company was entitled to use steam and other mechanical power to run its trams. In reality, the special legislation which enabled the company to run the trams provided that steam could only be used with the consent of the Board of Trade. Although the company had applied for the necessary consents, these had not been obtained by the time the prospectus was issued. The directors honestly believed that getting the consents was a mere formality. On the faith of the representation, the plaintiff, Sir Henry peek, subscribed for shares, and when the company was subsequently wound up because the consents were never received, he sued Derry and the other directors claiming damages for fraudulent misrepresentation.

It was held by the House of Lords that in an action for deceit, it is not enough to establish misrepresentation alone; something more must be proved to hold the defendant liable. There is an essential difference between the case where the defendant honestly believes in the truth of a statement although he is careless, and where he is careless with no such honest belief. Fraud is established where it is proved that a false statement is made: (a) knowingly; or (b) without belief in its truth; or (c) recklessly, careless as to whether it be true or false. As the document had been issued negligently but not fraudulently, the plaintiff was unable to recover damages.

Misleading statement may be in oral or written form, must be made by one to another, before or at the time the contract is made with regard to an existing fact or past event and must have induced or caused the contract. Out of the seven conditions for establishing the case of misrepresentation, there are five which fulfill the situation of Marshall and Lily: a representation of fact was made, the representation was false, it was addressed to the party misled (before or at the time the contract was made), it was intended to induce the contract and it did actually induce the contract.

11 [1889] 14 APP Cas 337, HL.

Thus, if the misrepresentation is made fraudulently, the party who misled into contracting in reliance on it can, at common law, rescind the contract and sue to recover damages. In the Explanation to Section 19 of Contracts Act 1950, it states that a fraud or misrepresentation which did not cause the consent to a contract of the party on whom the fraud was practised, or to whom the misrepresentation was made, does not render a contract voidable. Hence, Marshall and Lily also have to prove that the false representation is the reason for them to enter into the contract.

Marshall was painting the house of Mr. Bartowski. The contract stipulates that Marshall is to paint all the walls inside and outside of the house with the theme of his own. However, during the final stage of his work, a strong earthquake has demolished Mr. Bartowski’s entire house. Marshall insists on some sort of payment of his work, but Mr. Bartowski refused to do so as the contract had not been wholly performed when the earthquake took place.

From this situation, there is an issue about the discharge of contract. Discharge of contract means the termination of a contractual obligation or liability. When a contract is discharged, it comes to an end and imposes no further legal responsibilities on the parties. The original parties are therefore no longer bound by the contract. A contract may be discharged in four ways: performance, agreement, breach, and frustration.

In this event, there is a frustration. A contract is frustrated if an event occurs between the contract being agreed and it being performed, which is the fault of neither party, but which renders the contract legally or physically incapable of performance in its original intended form. This situation is about destruction of a thing necessary for performance. Once the frustration occurs, the contract becomes void at the date of frustration. Besides, the person who received advantage is bound to restore or compensate and both parties have to retreat their original position.

12 [1863] 122 ER 309.

13 [1956] AC 696.

There are some cited cases that are relevant to this situation which are Taylor v Caldwell12 and Davis Contractors Ltd v Fareham Urban District Council13. In the case of Taylor v Caldwell [1863], the defendant agreed to let the plaintiff to have the use of the Old Surrey music hall for a contract. However, before the day of performance, the hall was destroyed by fire. The court held that the contract was frustrated. The court reasoned that if the parties had contemplated the burning down of the Music Hall before the performance, they both would have considered themselves not bound. They likened the transaction to one where a painter who was commissioned to paint a work died before it was finished, thus releasing him from his obligation.

On the other hand, in the case of Davis Contractors Ltd v Fareham Urban District Council [1956], the plaintiff entered into a contract with the defendant to build 78 houses during an 8 month period. However, the project took 22 months to complete and ran over the agreed budget because of the shortage of labors and materials. The plaintiff therefore sued for the extra cost under the claim that the contract had been frustrated. The court held that there was no frustration because the events that had delayed the project have been foreseen and contemplated.

In our opinion, we consider that Mr. Bartowski has to pay Marshall for the work done although the contract was frustrated. This is because the earthquake is unpredictable and not contemplated. If Mr. Bartowski had already paid the entire amount before Marshall started working, Marshall has to pay back the portion of money which relates to the work that not yet done. However, the consequences should depend on the terms of contract or agreement they formed. If the contract stipulates that Marshall will not be recovered the payment if the natural disaster occurs, then Marshall will not be able to get back his money.

In conclusion, Lily is not liable to pay for the evening gown as the contract of sale is not yet formed. The contract between Marshall and Ted is valid because the praying service provided by Marshall is an adequate consideration. Marshall is able to cancel the deal he had with Barney as he is forced to enter into the contract which can make the contract becomes voidable. The fraudulent misrepresentation made by Robin can lead the contract to become voidable. So, Marshall and Lily can take legal action against Robin. Lastly, as the earthquake is unpredictable and unexpected, Mr. Bartowski has to pay Marshall for the work done although the contract was frustrated.