Summary - Formation of Contract (LL104 - Contract Law)
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Course
Contract Law (LL104)
Institution
London School Of Economics (LSE)
Book
Contract Law
This set of notes helped me prepare for the formation of contract topic for my Contract Law exam and I achieved a 2.1 in my exam, graduating with a first class honours overall. This document sets out the key principles and cases to cite in your exams as well as points of evaluation and policy consi...
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Formation of contract
Voluntary nature of responsibility assumed by contracting parties distinguishes their liability
from liabilities arising in tort, property, unjust enrichment law
Contract = offer + acceptance
Contract
o “A set of promises for the breach of which the law gives a remedy” (Restatement
2d Contracts USA)
o Defining allows us to determine the requirements of offer and acceptance
Offer
o (i) Communication (ii) of the intention to be bound (iii) on sufficiently definite
terms
o Law needs to know (iii) because it must be capable of giving a remedy
Acceptance
o (i) Communication (ii) of the intention to be bound (iii) on the proposed terms
Objective v Subjective
There is an objective test adopted by the courts in ascertaining the existence of a
contract and its terms so the parties’ actual subjective intentions are not considered but
rather their intentions reflected through their acts and conducts are considered.
Blackburn LJ in Smith v Hughes [1871] – “If, whatever a man’s real intention may be, he
so conducts himself that a reasonable man would believe that he was assenting to the
terms proposed by the other party, and that other party upon that belief enters into the
contract with him, the man thus conducting himself would be equally bound as if he had
intended to agree to the other party’s term”
In the absence of express communication of acceptance, it must be shown that a party
acted in reliance on the fact that a contract had been concluded/abandoned.
o Hannah Bluementhal – Reliance on silence on the matter of arbitration for six
years meant court held arbitration would be abandoned.
Example of an objective test - Centrovincal Estates plc v Merchant Investors Assurance Co
Ltd [1983]
C lets premises to D at a yearly rent of £68,32 subject to review from 25 December 1982
C wrote to D inviting them to agree that the current market rental value should be
£65,000 which D accept.
At receiving the acceptance C immediately contacted D informing them they meant to
propose £126,000 and not £65,000 which D refused.
C failed to negative the existence of the apparent agreement of the parties to treat
£65,000 as the current market rental value for the Lease.
Subjective intention was not relevant and instead their conduct counted so offer and
acceptance as objectively observed concluded the contract.
Slade LJ – “it is contrary to the well-established principles of contract law to suggest that
the offeror under a bilateral contract can withdraw an unambiguous offer, after it has
been accepted in the manner contemplated by the offer, merely because he has made a
mistake which the offeree neither knew nor could reasonably have known when he
accepted it.”
, Smith v Hughes (1871)
Can we say they were not ad idem? That they missed each other?
o Not completely – we must ask on which terms the contract was concluded on an
objective basis
o The ad idem argument proceeds on the fallacy of confusing what was merely a
motive operating on the buyer to induce him to buy with one of the essential
conditions of the contract
o Both parties were agreed to the sale and purchase of the oats – all that can be
said is the two minds were not ad idem as to the age of the oats, but they
certainly were as to the sale and purchase of them
o Parties might not fully agree but found to agree on the sale
So, who bears the risk? Caveat emptor logic – buyer must be aware
o Defendant had opportunity to inspect a sample of the oats
o The buyer persuaded himself they were old oats when they were not so but the
seller did nothing to contribute to the deception. Buyer has himself to blame.
o The question is not what a man of scrupulous morality would have done in those
circumstances – mere silence as to anything which the other party with due
diligence might have discovered and which is open to examination is not
fraudulent unless a special relationship of trust or confidence exists between
the parties, or can be implied from the circumstances… Not the case here.
Subjectivity is still relevant, most of the times subjective intention coincides with the
objective intention. There are two instances where subjectivity appears to hold greater
importance.
Where there is a mistake as to the terms of the contract by the offeror which the
offeree is aware of, there is no contract.
o This seems to be a subjective approach.
o Hartog v Colin and Shields [1939] - Seller offered to sell 3000 Argentine hair
skins at a fixed price per pound when he really meant per piece, thus
mistakenly offering the skins at 1/3 intended asking price
o Buyer accepted the offer and sued for damages when seller refused to deliver
at lower price.
o Court found no contract because the buyer must have known the mistake
had occurred – in the context of the trade, the negotiations were always
discussed in terms of ‘per piece’.
o BUT McKendrick rejects this as a purely subjective approach and explains it
in objective terms. A reasonable person in the defendant would know the
mistaken offer made did not reflect the offeror’s true intentions.
o Similarly, Neyers (2009) interprets this differently: An honest and
reasonable buyer had reason to know that a seller’s words meant ‘per piece –
this makes ‘per piece’ the objective reference point & so seller makes no
relevant mistake at all because his meaning does not deviate from the
objective point of reference.
Where offeree is at fault for failing to note offeror’s mistake, so the offeree’s
version of the contract prevails.
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