Four Main Rules in Contract Law

Task 2 : Using Your Knowledge Of Formation Of Contract, Answer The Following Questions Using The Case Study Provided.

1. Explaining the relevant rules on formation of contracts, consider whether a contract for the purchase of the VX47 was made between Lisa and M.J. Electrical.

In order for a valid binding contract to be made there must be an agreement between parties, both on the subject matter and the contract terms.

In general an agreement specifies that an offer is made and an acceptance of the said offer is reached.

The four main rules in contract formation are an offer, an acceptance, consideration and the intention to create legal relations. Agreement involves the change of bargaining into a solid deal, the negotiations do not themselves make a contract and therefore it has to be clear when an agreement has been reached. This is where we determine the rules of offer and acceptance, when one party makes a clear offer and the other party accepts if offer then the agreement is formed.

Consideration is anything of value promised in exchange for something else of value, this could be anything from goods to services. Consideration usually means that both parties suffer a detriment and benefit by the giving and receiving of their consideration. Once these two elements have been fulfilled then a contract exists.

As the agreement had a commercial purpose then the intention to create legal relations is usually assumed. This can only be rebutted with very strong evidence to the contrary.

Taking these rules into account then a contract between Lisa and M.J. Electrical did exist but for the VX48. M.J. Electrical made an offer to Lisa for the VX48 and she accepted, the VX48 was M.J. Electricals consideration and Lisa’s was the cheque she sent for the VX48. Despite having been given two weeks to return the VX47 offered to Lisa as an alternative this did not constitute Lisa’s acceptance of the counter offer. Silence does not constitute acceptance.

In the case of Carlill v Carbolic Smoke Ball Co [1892], the Carbolic Smoke Ball Company placed a national advert claiming that their product could cure flu and if any person caught flu after using the product they would provide £100 in compensation. Mrs. Carlill used the product as prescribed but went on to contract flu in 1892 and went on to claim h

Carlill v Carbolic Smoke Ball Company [1892] EWCA Civ 1 is a English contract law decision by the Court of Appeal. It is notable for its curious subject matter and how the influential judges (particularly Lindley LJ and Bowen LJ) developed the law in inventive ways. Carlill is frequently discussed as an introductory contract case, and may often be the first legal case a law student studies.

The case concerned a flu remedy called the “carbolic smoke ball”. The manufacturer advertised that buyers who found it did not work would be rewarded £100, a considerable amount of money at the time. The company was found to have been bound by its advertisement, which it construed as creating a contract. The Court of Appeal held the essential elements of a contract were all present, including an offer, acceptance, consideration and an intention to create legal relations.

Felthouse V. Bindley 1862.

Felthouse v Bindley (1862) EWHC CP J 35, is the leading English contract law case on the rule that one cannot impose an obligation on another to reject one’s offer. This is sometimes misleadingly expressed as a rule that “silence cannot amount to acceptance”.

(http://en.wikipedia.org/wiki/Felthouse_v_Bindley)

Later the case has been rethought, because it appeared that on the facts, acceptance was communicated by conduct (see, Brogden v Metropolitan Railway). (http://en.wikipedia.org/wiki/Felthouse_v_Bindley)

Facts

Uncle Paul Felthouse was a builder who lived in London. He wanted to buy the horse of his nephew, John Felthouse. After a letter from the nephew about a previous discussion in buying the horse, the uncle replied saying,

“If I hear no more about him, I consider the horse mine at 30l. 15s.”

The nephew did not reply. He was busy at auctions on his farm in Tamworth. He told the man running the auctions, William Bindley, to not sell the horse. But by accident, Bindley did. Uncle Felthouse then sued Bindley in the tort of conversion – using someone else’s property inconsistently with their rights. But for the Uncle to show the horse was his property, he had to show there was a valid contract. Bindley argued there was not, since the nephew had never communicated his acceptance of the uncle’s offer.

Judgement

The court ruled that Felthouse did not have ownership of the horse as there was no acceptance of the contract. Acceptance must be communicated clearly and cannot be imposed due to silence of one of the parties. The uncle had no right to impose a sale through silence whereby the contract would only fail by repudiation. Though the nephew expressed interest in completing the sale there was no communication of that intention.

Willes J Delivered The Lead Judgment.

“ I am of opinion that the rule to enter a nonsuit should be made absolute. The horse in question had belonged to the plaintiff’s nephew, John Felthouse. In December, 1860, a conversation took place between the plaintiff and his nephew relative to the purchase of the horse by the former. The uncle seems to have thought that he had on that occasion bought the horse for 30l., the nephew that he had sold it for 30 guineas: but there was clearly no complete bargain at that time. On the 1st of January, 1861, the nephew writes,

“I saw my father on Saturday. He told me that you considered you had bought the horse for 30l. If so, you are labouring under a mistake, for 30 guineas was the price I put upon him, and you never heard me say less. When you said you would have him, I considered you were aware of the price.”

To This The Uncle Replies On The Following Day,

“Your price, I admit, was 30 guineas. I offered 30l.; never offered more: and you said the horse was mine. However, as there may be a mistake about him, I will split the difference. If I hear no more about him, I consider the horse mine at 30l. 15s.”

It is clear that there was no complete bargain on the 2nd of January: and it is also clear that the uncle had no right to impose upon the nephew a sale of his horse for 30l. 15s. unless he chose to comply with the condition of writing to repudiate the offer.

The nephew might, no doubt, have bound his uncle to the bargain by writing to him: the uncle might also have retracted his offer at any time before acceptance. It stood an open offer: and so things remained until the 25th of February, when the nephew was about to sell his farming stock by auction. The horse in question being catalogued with the rest of the stock, the auctioneer (the defendant) was told that it was already sold. It is clear, therefore, that the nephew in his own mind intended his uncle to have the horse at the price which he (the uncle) had named, 30l. 15s.: but he had not communicated such his intention to his uncle, or done anything to bind himself. Nothing, therefore, had been done to vest the property in the horse in the plaintiff down to the 25th of February, when the horse was sold by the defendant. It appears to me that, independently of the subsequent letters, there had been no bargain to pass the property in the horse to the plaintiff, and therefore that he had no right to complain of the sale.

Then, what is the effect of the subsequent correspondence? The letter of the auctioneer amounts to nothing. The more important letter is that of the nephew, of the 27th of February, which is relied on as shewing that he intended to accept and did accept the terms offered by his uncle’s letter of the 2nd of January. That letter, however, may be treated either as an acceptance then for the first time made by him, or as a memorandum of a bargain complete before the 25th of February, sufficient within the statute of frauds. It seems to me that the former is the more likely construction: and, if so, it is clear that the plaintiff cannot recover. But, assuming that there had been a complete parol bargain before the 25th of February, and that the letter of the 27th was a mere expression of the terms of that prior bargain, and not a bargain then for the first time concluded, it would be directly contrary to the decision of the court of Exchequer in Stockdale v. Dunlop[1] to hold that that acceptance had relation back to the previous offer so as to bind third persons in respect of a dealing with the property by them in the interim. In that case, Messrs. H. & Co., being the owners of two ships, called the ” Antelope” and the “Maria,” trading to the coast of Africa, and which were then expected to arrive in Liverpool with cargoes of palm-oil, agreed verbally to sell the plaintiffs two hundred tons of oil, one hundred tons to arrive by the “Antelope,” and one hundred tons by the “Maria.” The “Antelope” did afterwards arrive with one hundred -tons of oil on board, which were delivered by H. & Co. to the plaintiffs. The “Maria,” having fifty tons of oil on board, was lost by perils of the sea. The plaintiffs having insured the oil on board the “Maria,” together with their expected profits thereon, it was held that they had no insurable interest, as the contract they had entered into with H. & Co., being verbal only, was incapable of being enforced.

Byles J

I am of the same opinion, and have nothing to add to what has fallen from my Brother Willes.

Keating J

I am of the same opinion. Had the question arisen as between the uncle and the nephew, there would probably have been some difficulty. But, as between the uncle and the auctioneer, the only question we have to consider is whether the horse was the property of the plaintiff at the time of the sale on the 25th of February. It seems to me that nothing had been done at that time to pass the property out of the nephew and vest it in the plaintiff. A proposal had been made, but there had before that day been no acceptance binding the nephew.

Willes J.

Coats v. Chaplin[2] is an authority to shew that John Felthouse might have had a remedy against the auctioneer. There, the traveller of Morrisons, tradesmen in London, verbally ordered goods for Morrisons of the plaintiffs, manufacturers at Paisley. No order was given as to sending the goods. The plaintiffs gave them to the defendants, carriers, directed to Morrisons, to be taken to them, and also sent an invoice by post to Morrisons, who received it. The goods having been lost by the defendants’ negligence, and not delivered to Morrisons, it was held that the defendants were liable to the plaintiffs.

Carlill v Carbolic Smoke Ball Company [1892] EWCA Civ 1 is a English contract law decision by the Court of Appeal. It is notable for its curious subject matter and how the influential judges (particularly Lindley LJ and Bowen LJ) developed the law in inventive ways. Carlill is frequently discussed as an introductory contract case, and may often be the first legal case a law student studies.

The case concerned a flu remedy called the “carbolic smoke ball”. The manufacturer advertised that buyers who found it did not work would be rewarded £100, a considerable amount of money at the time. The company was found to have been bound by its advertisement, which it construed as creating a contract. The Court of Appeal held the essential elements of a contract were all present, including an offer, acceptance, consideration and an intention to create legal relations

er £100 via the courts.

Contract terms come in many forms, the most commonly used are the ‘express terms’ which are terms clearly agreed by both parties when a contract is formed. There are also ‘implied terms’, these are not always known to either party but are included by law to ensure good business sense. Implied terms can either be statute or applied by the courts upon review of each individual case.

As M.J. Electrical failed to fulfil their side of the agreement they had broken the terms of the contract. The express terms of the contract stated that for an agreed price M.J. Electrical would provide Lisa with the VX48. Section 13 of the Sale of Goods Act 1979 states ‘if your selling goods by description, e.g. from a catalogue or newspaper advert, then the actual goods have to correspond to that description’. This is not an express term but a term implied by statue. If the goods are not as described in the advert then the buyer can retract the purchase or even sue the company for damages, even if the actual goods sent are otherwise satisfactory. There may be argument that under section 35 of the sales of goods act it states acceptance of goods takes place if the buyer does not contest the goods received within reasonable time, in this case the two weeks abated by M.J. Electrical. This condition however is rejected under subsection 5 which goes on to say whether a reasonable time had elapsed will depend also on whether the buyer had reasonable time to examine the goods to comply with subsection 2. As Lisa was going on holiday immediately after taking receipt of the goods she did not have reasonable time to make such an examination.

The concept of implied terms in contract law was established during the land mark case of ‘The Moorcroft (1889). The Moorcroft was a cargo ship that traded in the UK. The owners of the ship needed space at the jetty to unload their goods and therefore created a contract with the owners of the Wharf for this. Whilst unloading their cargo the tide dropped dramatically enough the front of the ship came into contact with the dock causing significant damage to the Moorcroft. It was the opinion of the ships owners that the Wharf owner had a duty of car to assure the safety of the ship whilst in dock. The Wharf owners argued that nowhere in the contract they created was there an arrangement that they would ensure the ships safety. The court had to decide if any implied liability could be enforced. The court decided that the Wharf owners must have assumed responsibility for the ship when in dock and they were in the best position to gauge the tides and have known there could be a risk of damage to the Ship whilst in dock. Therefore whilst it was never a written or for that matter spoken condition, it was considered implied by the very action of allowing the ship to dock during tidal changes.

The clauses referred to in the contract by M.J. Electrical are not valid as the contract made between the two parties was for the VX48 and not the VX47, therefore all clauses are void.

Remedies Lisa could possibly explore include rescission or reduction in price. Rescission is basically the unwinding of the contract, taking both Lisa and M.J. Electrical back to a position as far as possible before they entered into the contract. If M.J. Electrical agreed to this then the amount they have to pay back to Lisa may be reduced to take into account the inspection carried on the VX47.

Lisa should take her dispute with M.J Electrical to the civil courts, as her case involves a sum under £3000 it will be dealt with in the county court under the small claims procedure. Civil cases mostly include contracts disputes and torts or wrong doing. There are 250 county courts around the country. The small claims procedure normally involves a quick hearing with no need for legal representation to be present and is heard in front of a district judge. Lisa would need to obtain a claims form from the county court and pay a small fee to submit her claim against M.J. Electrical. Only if M.J. Electrical decides to defend the claim will both parties have to attend the hearing in front of the district judge. If the judge rules in favour of Lisa an order will be sent out to M.J. Electrical, this is sometimes referred to as a judgement. If M.J. Electrical ignores this order to pay then an enforcement of the judgement can be applied for in order to recover the money owed.

Definition of a contract; a contract is a bargain or agreement between persons giving them rights and duties in law. It does not usually have to be in writing but it must be the sort of agreement which would give rise to legal duties. (reference Law for the construction industry 2nd edition stephanie adam) pg 48.

It appears that although a contract was made between Lisa and MJ Electrical, Lisa would be able to refuse to recognize the contract as valid under Section 13 of the Sales of Goods Act, 1893.

“Section 13 implies a condition into such contracts that the goods shall correspond with the description. If they do not, the buyer can repudiate or sue for damages”. Pg 113 LFTCI 2ND EDITION STEPHANIE OWEN

In the case of Arcos v Ronaasen (1933), Staves were ordered with a specified thickness of half an inch by Arcos Limited, however on receipt of the knives from E.A. Ronaasen and Son it was discovered that the staves were in fact of varying thicknesses and not as described. Due to the staves not being as specified Arcos Limited were able to reject them.

Argument 1

Lisa payed for the goods via cheque in turn accepting the offer of the sale of goods by mj electrical, however payment was for VX47 not VX48.