CONTACT LAW. Contract Law: Creating contract Lesson: Offer and acceptance

Transcription

1 CONTACT LAW Contract Law: Creating contract Lesson: Offer and acceptance 1

2 Introduction Every one of us enters into many contracts throughout our lives. If you buy a muffin, if you rent an apartment, if you take private health insurance or if you become an employee of a law firm - in all these situations you enter into a contract. The essence of a contract is that the parties are bound by it. That means that once you entered into the contract, you have to abide by it and you are no longer free to exit the contract (in most cases). Imagine you buy a new shirt in a shop. Coming home your partner tells you that it is the most disgusting thing they have ever seen. Therefore, you take the shirt back to the shop, and ask the shopkeeper to refund your money. As a contract has been entered into, you cannot claim your money back. There is no reason to set the contract aside. If the shopkeeper returns your money, then this is only due to him being kind; he is in no way obliged to do so. Once a contract has been entered into the parties are bound by it whether they still want to be bound or not (pactasunt servanda). If a party fails to do what he is bound to do under the contract, then the other party will have legal rights as a result of this breach of contract; the most common result being that the party who is in breach will have to pay damages. Every single rule in contract law has to be seen against the background of available remedies in case of breach. Although there are many different types of contracts (contracts for the sale of goods; employment contracts; service contracts; building contracts; factoring;...) there is a set of rules common to all kinds of contracts. In this course, the rules will be split up in four main categories: 1. Creating a contract 2. Content of a contract 3. Problems in the formation process 4. Problems in performing the contract Requirements of a contract If two parties want to enter into a contract they must meet certain requirements: There has to be offer and acceptance. There has to be consideration. There has to be intention to create legal relations. Any formal requirements have to be met. If any of these requirements are missing, there will not be a valid contract. 2

3 Type of Contract Mutual promises are the foundation of a contractual agreement. Most contracts that we will come across are bilateral in nature. This means that one party makes a promise on the understanding that another party will promise something in return. For example: you promise to supply your client with particular goods in return for their promise to pay an agreed price for them. There are other types of agreement known as unilateral contracts, where only one party makes a promise that they intend to be bound by subject to another party performing some act which they are not automatically duty bound to do. For example: My company advertises that I am offering a money back guarantee to any client who can find the same goods cheaper elsewhere. No one has to accept the offer, but if they do, I could be bound to honour the promise to pay. The law of contract provides that where a contractual agreement has been made, the parties are obliged to do certain things and a wronged party is able to seek redress via the court system if the wrongdoer has not performed his obligations under the contract. Consider that contract incurs what we call strict liability. This means that a remedy is not dictated by proving the fault of either party. We merely show that a binding contract has been agreed to and one party has broken or breached a part of that contract Contractual damages aim to put the injured party in the position he/she would have been in had the contract been performed. In other words, any benefit that would have been gained could be compensated for. This is different from other areas of compensation, such as for negligence, where compensation aims to put the wronged party in the position that they were in before the negligence took place. The concept of offer and acceptance The concept of offer and acceptance endeavours to ensure that there is an agreement of the two parties to enter into a contract with each other on specific terms. Thus, The offer must be an offer to enter into a contract with the offeror on specific terms. The acceptance must be the acceptance of this offer by the offeree. As an example, imagine that Bob wants to sell his bike to Sally. Bob says to her: 'I offer you my bike for 50.' Sally says: 'Nice, I agree.' While this example is very straightforward, and it is easy to see that Bob made an offer which Sally accepted, it is sometimes not as easy to decide whether or not agreement has been reached. 3

4 As an example, you should look at Smith v Hughes (1871) LR 6 QB 597 In this case, A received a sample of oats from B and thereafter A bought oats from B according to this sample for a given price. A believed that the oats were old oats; actually they were new oats. 4

5 Did A want to buy new oats? Did B want to sell old oats? What was on offer? Is there an agreement? If so, on which terms? The rationale of offer and acceptance While the example of the sold bike was very straightforward, the oats example is not that easy. There are several solutions which are theoretically possible: There could be a contract on the sale of old oats. There could be a contract on the sale of new oats. There could be no contract at all. The concept of offer and acceptance gives an answer. B has offered oats according to his sample; that is, new oats. A accepted to buy oats according to the sample; that is, new oats. So there is an agreement between A and B on the sale of new oats. This example shows that the concept of offer and acceptance is not only a technique to decide whether there is a contract or not but also includes an answer to the question of whether or not in unclear situations there SHOULD be a contract. Objective approach We have seen that in Smith v Hughes the buyer entered into a contract to buy new oats although he had intended to buy old oats. The reason why we come to this conclusion is the objective approach. This means that every declaration of a will is to be interpreted in an objective way. It's not up to the offeror to interpret his offer himself, nor is it up to the offeree to interpret his acceptance himself. Every declaration has to be interpreted by an 'officious bystander', i.e. someone outside the contract with the knowledge the other party has and is deemed to have. In Smith v Hughes, the buyer did not know that he was buying new oats but he is deemed to have known that he was doing this because an officious bystander would have seen that the oats in the sample were new oats. What is the rationale of the objective approach? Rationale of the objective approach The rationale of the objective approach is twofold. 5

6 One part of the rationale is a formal one: according to the development of contract law it is the words which bind the parties, not their will (or their will only insofar as it matches the words). 'Objective' in this aspect means that words are deemed to mean what they mean normally, not what they mean for the person who has spoken them. The second part of the rationale is a material one: the commercial convenience asks for an objective approach. If it was not the objective meaning of a declaration that was decisive but the personal opinion of he who declares his will, then the meaning of offers and acceptances would be more unclear than it is taking an objective approach. The objective approach protects the party who relies on the normal sense of what has been said. This makes things in the business world easier. 6

7 In which of the following situations does the concluded contract not meet the actual intention of the offeror? 1. Bob wants to sell his bike to Sally for 50. He says to her 'Hi Sally, do you want to buy my bike for ten fivers?' Sally says 'Yes, I do!" 2. Bob wants to sell his bike to Sally for 50. He says to her 'Hi Sally, do you want to buy my bike for a fiver?' Sally says 'Yes, I do!" 3. Bob wants to sell his bike to Sally for 50. He says to her 'Hi Sally, I would consider giving you my bike for a fiver, should you make an offer.' Sally says 'Great. I would like to buy your bike for 5'. 1. Bob wants to sell his bike to Sally for 50. He says to her 'Hi Sally, do you want to buy my bike for ten fivers?' Sally says 'Yes, I do!" - In this situation Bob offered to sell his bike for 50 and Sally agreed. The concluded contract does meet Bob's intention. 2. Bob wants to sell his bike to Sally for 50. He says to her 'Hi Sally, do you want to buy my bike for a fiver?' Sally says 'Yes, I do!" - In this example Bob offers to sell his bike for 5 which Sally accepts. The concluded contract does not meet Bob's intention. 3. Bob wants to sell his bike to Sally for 50. He says to her 'Hi Sally, I would consider giving you my bike for a fiver, should you make an offer.' Sally says 'Great. I would like to buy your bike for 5'. - In this example there is no contract at all. Bob did not make an offer but only an invitation to treat. Sally offered to buy the bike for 5; now it is up to Bob to accept or decline this offer. Invitation to treat An offer has to be distinguished from an invitation to treat. An offer is a declaration of the will to enter into a contract with a specific person on specific terms. An invitation to treat is less than that; it is not an offer, but an invitation to make offers. He who makes the invitation to treat does not want to be bound if somebody else 'accepts' his invitation. Instead, he wants to be free to accept or decline such an 'acceptance' of the invitation. Example: Bob says to Sally, 'Maybe I would sell my bike to you for 50 should you offer to buy it'. Sally says: 'Nice, I accept'. 7

8 There is no contract at this stage because Bob did not make an offer but only an invitation to treat. Sally, by saying 'I accept', makes an offer of her own to buy the bike. Now Bob can accept or decline Sally's offer. What people say and what they are doing from a legal point of view can be quite different. In the former example, Sally says 'I accept'. What she actually does is not to accept an offer, but to make an offer. Offer and invitation to treat in supermarkets One of the most famous cases on invitations to treat is: Pharmaceutical Society of GB v. Boots Cash Chemists (1953) 1 QB 401 ( Every law student has to know at least the most important cases of every subject. You need to read them or at least to look them up in a case book. In every assignment you are expected to know at least the most important (leading) cases for every subject. Make sure you know: The name of the case (the parties) What has been decided? What the main arguments are! Look up Pharmaceutical Society of GB v. Boots Cash Chemists (1953) 1 QB 401 ( arkup.cgi?doc=/ew/cases/ewca/civ/1953/6.html) What are the main arguments for saying that the products on the shelf do not amount to an offer? In Pharmaceutical Society of GB v Boots Cash Chemists, the question to be answered was whether it is an offer to display goods on a shelf for customers to take away and pay for at the till. The background was that the seller would have been subject to a fine if this was the case. If you enter a store, take something from a shelf, pay for it at the counter and leave, then surely a contract has been entered into. But at what stage? Where is the offer, where is the acceptance? 8

9 There are two possible constructions: the first is to say that it is an offer to display the goods and the customer accepts the offer either by taking the goods from the shelf or by showing them at the till. The other possible construction is that the customer makes an offer at the till and the person behind the till accepts the offer. In this case, displaying the product on the shelf would not be an offer but only an invitation to treat. There are a few differences between these constructions. In the first construction, the contract comes into existence at an early stage. The shopkeeper has no opportunity to prevent himself from entering into a contract once the customer has taken the product from the shelf. If the shop mistakenly displayed the product at a lower price, there would be a contract to sell the product at this lower price. If acceptance was held to be the act of taking the product from the shelf, then the customer would not be free to change his mind and put the product back on the shelf. In the second construction, the shopkeeper would be free to decline the purchase at the till. At the same time, the customer would be free not to buy the product up to this point. An error in the price description could be remedied at the till. Which construction is the right one? In Pharmaceutical Society of GB v Boots Cash Chemists, it was held that the purchase is concluded at the till. This seems to be right. The starting point in asking whether displaying the product on the shelf is an offer or an invitation to treat is the intention of the shopkeeper. He wants to be free to decline the purchase at the till and to correct errors in displaying the price up to this point. In which situation do you have an offer? 1. A supermarket publishes an advertisement for milk in a local newspaper, giving a detailed description of the product and stating the price. 2. An Italian restaurant provides every household in its area with a flyer, showing their products and prices and stating 'We deliver to your home for just 2'. 3. Bob cannot make out the difference between an offer and an invitation to treat; thus he decides to stop studying law and puts his textbook on ebay. 9

10 1. A supermarket publishes an advertisement for milk in a local newspaper, giving a detailed description of the product and stating the price. - This is an invitation to treat. The supermarket does not want to make an offer because if everyone accepted the offer it could easily run out of stock, being left with contracts it could not perform. 2. An Italian restaurant provides every household in its area with a flyer, showing their products and prices and stating 'We deliver to your home for just 2'. - This is also an invitation to treat. The person who runs the restaurant can accept an order only if there is enough capacity to do the job. Thus, he wants to keep the freedom to decline the order. 3. Bob can't make out the difference between an offer and an invitation to treat; thus he decides to stop studying law and puts his textbook on ebay. - This is an offer. Although the price is not specified until the end of the auction, Bob wants to enter into a contract with the person who is the highest bidder at that point. Advertisements In the same way, advertisements, catalogues, circulars are generally not offers but Invitations to Treat. The reasoning for this is because of the "limited stock" argument. Read the case of Carlill v Carbolic Smoke Ball Co (1892) and, consider; a) What arguments the Company raised. b) Why the advertisement was treated as an offer rather than as an invitation to treat. The company raised a number of arguments to support the position that this was an invitation to treat rather than an offer. These included; An offer cannot be made to the whole world Adverts were traditionally seen to be invitations to treat Mrs Carlill did not indicate her acceptance of any alleged 'offer' The court held that this was an offer as the Carbolic Smokeball Co had shown their commitment to be legally bound by the offer by placing sufficient funds to meet any potential claims in the bank account. Mrs Carlill had accepted the offer by her conduct. 10

11 Auctions An auctioneer's request for bids at an auction is not offer. The bidder makes an offer by placing a bid. An acceptance takes place at the fall of the auctioneer's hammer. This was seen in the cases of; Payne v Cave (1989) Harris v Nickerson (1873) Warlow v Harrison (1859) Barry v Davies Heathcote Ball & Co (2000) Tenders Normally a statement that the provision of goods or services is open to tender is an invitation to treat, not an offer. In the case of Spencer v Harding (1870) it was stated in obiter, that advertisements for tenders, which promise to sell to the highest bidder or buy from the lowest tender, are offers. Negotiations for the sale of land Statements made when selling land may be seen as merely giving information rather than as offers. This is because of the large sums of money involved. The courts will require cogent evidence of an intention to be legally bound. This was seen in the cases of; Harvey v Facey (1893) Clifton v Palumbo (1994) Gibson v Manchester City Council (1979) Bigg v Boyd Gibbins Ltd (1971) Acceptance Once an offer is made, the acceptance of the offer by the offeree will bring the agreement into existence. Acceptance is the declaration of the agreement with the offeror; that is, the willingness to enter into the contract with the offeror on the specified terms. The acceptance may be made orally, in writing, by conduct or in any other appropriate way (unless there is a formal requirement). Silence as acceptance? As a general rule, silence is no acceptance. In Felthouse v Bindley (1862) 11 C.B. (N.S.) 869, an uncle offered in a letter to buy a horse from his nephew, telling the nephew that his purchase would be concluded if the nephew did not decline the offer within two weeks. The nephew did not answer. 11

12 It was held that there was no contract as the nephew did not accept the offer. His silence did not amount to a declaration of acceptance. (Further reading: arkup.cgi?doc=/ew/cases/ewhc/cp/1862/j35.html). 12

13 In which situation(s) has a contract been concluded? 1. Bob says to Sally 'You can have my bike for 50'. Sally does not say anything but gives Bob Bob says to Sally 'You can have my bike for 50'. Sally answers 'I always wanted a bike like yours. I am so happy I got one in the end!' 3. Bob writes to Sally 'I offer you my bike for 50; the purchase is concluded if I don't hear from you within one week'. Sally does not do anything. 1. Bob says to Sally 'You can have my bike for 50'. Sally does not say anything but gives Bob There is a contract. Sally accepted Bob's offer by conduct. 2. Bob says to Sally 'You can have my bike for 50'. Sally answers 'I always wanted a bike like yours. I am so happy I got one in the end!' - There is a contract. Sally accepted Bob's offer by what she said. Her words need some interpretation because she doesn't say explicitly that she accepts the offer; but it's the sense of her words that she wants to do so. 3. Bob writes to Sally 'I offer you my bike for 50; the purchase is concluded if I don't hear from you within one week'. Sally does not do anything. - There is no contract. Sally did not accept Bob's offer. Her silence is no acceptance. Acceptance and counter-offer If the offeree does not accept the offer as it is but makes changes to the offer then his declaration of acceptance with these amendments may be an acceptance or a counter-offer. It is the latter if the changes are material; it is the former if the changes are immaterial or if they are not changes at all but only inquiries. A counter-offer is a rejection of the original offer plus a new offer. It is important to keep in mind that the counter-offer is not only an offer but also a rejection of the original offer. In Hyde v Wrench (1840) 3 Beav 334, Wrench offered to sell his farm to Hyde for 1,000; Hyde answered he would take it for 950. After Wrench declined this offer, Hyde accepted the original offer, i.e. to buy the farm for 1,000 but Wrench did not want to sell the farm anymore. It was held that Hyde could not accept the original offer because he already rejected it by making the counter-offer. (Further reading: arkup.cgi? doc=/ew/cases/ewhc/ch/1840/j90.html) In Stevenson v. McLean (1880) 5 QBD 346, McLean offered to sell a certain amount of iron at a price of 40s to Stevenson. Stevenson answered 'Please wire whether you would accept forty for delivery over two months'. McLean answered 'No'. 13

14 Thereafter, Stevenson told McLean that he accepted the offer but McLean refused delivery. It was held that in this case there was no counter-offer but only an inquiry. Thus, Stevenson had accepted the offer with his first answer. 14

15 Communication of offer and acceptance Offer and acceptance have to be communicated, i.e. they have to be brought to the attention of the other party. This is not to be taken too seriously: 'brought to the attention' means only that the other party must have the chance to take notice of it. Thus, it seems to be sufficient that an has been received; it is not relevant whether or not it has been read (assuming under normal circumstances it would have been read). Example: Bob offers Sally his bike for 50. Sally asks Bob to give her one day to think about it. Later that day Sally says to her friend Jessica that she accepts Bob's offer. There is no contract at this stage. Sally wants to accept Bob's offer but her acceptance has not been communicated to Bob. If Jessica were to tell Bob that Sally accepted his offer then there would still be no contract; the offeree has to communicate his acceptance to the offeror. If Sally authorised Jessica to deliver her acceptance to Bob then the contract will be concluded by Jessica telling Bob that Sally accepts the offer. The postal rule An important exception from the rule that acceptance must be brought to the attention of the offeror is the postal rule. According to this rule, a postal acceptance takes effect when posted (Adams v Lindsell 106 E.R EWHC/KB/1818/J59.html). This is important for two reasons: If the acceptance has been posted then the offer has been accepted even if the acceptance does not reach the offeror at all. If the question arises at which point in time the offeree accepted the offer, then the time of posting is decisive. The postal rule does not apply in favour of the offeree if it is his fault that the acceptance does not reach the offeror, e.g. if the offeree uses a wrong address (Korbetis v Transgrain Shipping BV [2005] EWHC 1345 (QB)). You should note that, in order for the postal rule to apply, there are certain conditions that must be satisfied. Let us now consider these conditions: (i) The proper postal methods must be used. In London & Northern Bank (1900) the court decided that the rule would only apply if the proper postal methods were used, i.e. the letter was correctly stamped and addressed. Therefore, handing a letter to a delivering postal worker was ineffective. (ii) The rule does not apply to instantaneous modes of communication. In these situations, the parties are treated as being more or less in each other's presence. The postal rule did not apply in: Entores v Miles Far East Corporation (1955) Brinkibon Ltd v Stahag Stahl Mbh (1983) Note, in particular, Lord Wilberforce's judgment in the latter case. 15

16 In these cases, you should note that both Entores and Brinkibon concerned telexes and in both cases it was held that the postal rule did not apply to instantaneous modes of communication such as telexes, faxes etc. However, Lord Wilberforce argued that there is no universal rule which could apply here. On the facts of both cases, the telexes were sent during office hours but his Lordship considered situations where the acceptance is sent outside office hours and the message is left on an answering machine which is not played back until several days later or is accidentally erased. (iii) The rule only applies to letters of acceptance. It does not apply to offers, revocation or rejection, which are only effective when received. In Byrne v Leon Van Tien Hoven (1880) the court found that the contract was formed on 11 th October when the letter of acceptance was posted because the revocation was not effective until it was received on 20 th October even though it had been posted on 8 th October. The revocation was only valid when it was received. (iv) It must be reasonable for the offeror to expect a postal acceptance. Contribute to the Case Wiki by making brief notes on the legal principle in the following case and focus on why the court decided that acceptance should be reasonable; Henthorn v Fraser (1892) (v) The rule does not apply if the offeror has specified a particular mode of communication of acceptance. This was seen in the case of Holwell Securities Ltd v Hughes (1974) The court found that the postal rule did not apply in Holwell Securities Ltd v Hughes (1974). The reason for this was that the offeror had clearly stated that he required notice in writing which implied that the acceptance had to be received by the offeror before it could be effective. The postal rule is an exception to the normal rule on communication of acceptance so it will apply only if it is consistent with the offer. Therefore, if the offeror makes it clear that the notice must be received, the rule will not apply. So, to avoid the postal rule, the offeror would specify in the offer that acceptance would be valid on receipt by the offeror. On January 1 st, Bob offers his bike to Sally and gives her three days to think about it. On January 2 nd, Sally posts a letter accepting the offer; the letter arrives on the 10 th of January. On January 5 th, Bob sells his bike to Michael. Advise the parties. What do you think is the rationale of the postal rule? Do you think the postal rule can be justified? 16

17 In the given example, a contract has been concluded between Bob and Sally. Bob made an offer which Sally accepted. The acceptance has been posted, which is enough to accept the offer according to the postal rule. So the contract has been concluded on January 5th. By selling the bike to someone else, Bob has made it impossible for himself to perform and so will be liable to pay damages to Sally (see - {Link 04_02_001 - Damages for Breach of Contract}). The rationale of the postal rule seems to be to protect the promisee. Once he has posted his acceptance, he can rely on the contract having been concluded. This is subject to much criticism: why should the promisee be protected and not the promisor? It was the promisor who has chosen the means of communication, so why should the other party bear the risk of something going wrong? Also it can be argued that it makes more sense for the promisee to ask whether or not his acceptance had arrived than for the promisor to ask whether or not the promisee posted an acceptance. Prescribed Methods of Acceptance The offeror can stipulate whatever method of communication of the acceptance he deems appropriate. In Manchester Diocesan Council for Education v Commercial & General Investments Ltd (1969) Buckley L.J. stated "Where...the offeror has prescribed a particular method of acceptance but in terms of insisting that only acceptance in that mode shall be binding, I am of the opinion that acceptance communicated by any other mode, which is no less advantageous to him shall conclude the contract...if the offeror intends that he shall be bound only if the offer is accepted in some particular manner, it must be for him to make this clear." An issue that may arise here is whether the offeree must use the method stipulated or whether an equally expeditious mode of communication will suffice. In Tinn v Hoffman & Co (1873), where the offer said 'reply by return post', it was held that a reply by an equally speedy method would be valid. The problem is that frequently an offer may mention a particular mode of acceptance without making it clear whether the offeree may use that mode or whether he must use that method only. Sometimes, on the facts of a case, the courts will regard the mention of a mode of acceptance as a time stipulation. In other words, the stipulated method may be used but so can an equally, or more, speedy method. In Quenerduaine v Cole (1883) it was decided that making an offer by telegram implied a stipulation that acceptance must be prompt. Therefore, a letter of acceptance by post was deemed ineffective. In Yates v Pulleyn (1976) the words 'exercisable by notice in writing...to be sent by registered or recorded post' were construed as not obligatory, and therefore, the use of ordinary post was just as advantageous to the defendant. Therefore, unless there is a clear statement to that effect, a court will not construe an offer as requiring that acceptance is to be made by one method exclusively. If the offeror wants the acceptance by one method only then he must say so very plainly. 17

18 Termination of an offer An offer does not last forever. If Bob writes to Sally 'I offer you my bike for 50' then Sally cannot accept this offer some 50 years later. If the offeror makes it part of the offer that the offer shall expire on a specific date then the offer expires on this date. If no time period for acceptance is mentioned then the offer expires after a reasonable period of time (Ramsgate Victoria Hotel Co Ltd v Montefiore (1866) L.R. 1 Ex. 109). What 'reasonable' means depends on the nature of the offer? The more complex the intended contract is, the longer this period will be. An offer can also be made subject to a condition. Example: Bob offers his bike to Sally on the condition that his nephew fails his contract law exam (otherwise he wants to give his bike to his nephew). If the nephew passes the exam then the offer expires. An offer can also be withdrawn (Routledge v. Grant (1828) 4 Bing 653). This is of importance only while the time given for acceptance has not yet elapsed. After the offer has been withdrawn it cannot be accepted anymore. The withdrawal takes effect only if communicated (Byrne v. van Tienhoven (1880) 5 CPD 344); the postal rule does not apply (Byrne v. van Tienhoven.pdf - f rther reading). Offer and acceptance in unilateral contracts A unilateral contract is a contract which creates a duty to perform for only one party (the offeror) whereas the offeree accepts the offer by performing the requested act. Example: Bob is very unhappy because his dog Lucky has disappeared. He puts notes on every signpost in the neighbourhood, describing Lucky and promising 100 to the person who brings Lucky back to him. If Sally brings Lucky back to Bob, then Sally accepts Bob's offer to pay 100 by bringing the dog back. Performance and acceptance fall together in one act. At the same time Sally provides consideration for Bob's promise to pay 100 by bringing the dog back (the requirement of consideration will be dealt with in the next lesson). The most famous case on unilateral contracts is Carlill v Carbolic Smoke Ball [1893] 1 Q.B Make sure you are familiar with this case by reading it now! A special problem with unilateral contracts is the question until what point in time the offer can be withdrawn. As we have seen (Termination of an Offer) the offeror is free to withdraw his offer as long as it has not been accepted. Imagine that Paul promises to pay 50,000 to anyone who swims from Dover to Calais; in regard of this Peter begins to swim. Shortly before Peter arrives at Calais, Paul revokes his offer (based on Rogers v Snow [1573] Dalison 94). 18

19 According to what we have seen so far, there was an offer. This offer could have been accepted by performance of the requested act; the act has not been (fully) performed yet and as there was no acceptance so far, the offeror was free to withdraw his offer. This conclusion, as coherent as it is, does not seem to be just. There are different ways to correct this harsh result. One is to say that in making the offer, Paul not only promises to pay the money for carrying out the act, but also not to revoke his offer once performance has begun. A downside of this solution is of course that it is artificial, as it hardly can be said that Paul intended to give such an additional promise. Another possible solution is to say that part performance is enough to accept the offer (see e.g. Treitel, The Law of Contract, 2-053). However, there is also a downside to this: if Peter accepts the offer by starting to swim then he is bound to go on under the contract. Thus, it might be submitted that a third solution is favourable; that is, to grant the party-to-be a part of the promised money, proportionate to the degree of performance. This solution rewards the effort of the party-to-be, taking into account that at the same time this party had the freedom not to perform fully. In which examples has a contract been concluded? 1. Bob offers his bike to Sally for 50. Sally says she accepts it for 45. Bob says 'Fine, but please add a smile'. 2. Bob writes a letter to Sally offering his bike to her for 50. Sally sends a letter to Bob accepting the offer. The letter never arrives. 3. Bob writes an to Sally offering his bike to her for 50 and stating that he keeps his offer open for acceptance until the 20 th of the month. On the 18 th Sally accepts the offer by which Bob receives instantly. On the 17 th Bob sends an SMS to Sally telling her that he withdraws his offer; Sally doesn't read the SMS before she sends her . 1) Bob offers his bike to Sally for 50. Sally says she accepts it for 45. Bob says 'Fine, but please add a smile'. - There is a contract. Bob made an offer to sell the bike for 50; Sally rejected this offer and offered to buy it for 45 (counter-offer). Bob accepted this offer. His wish to get additionally a smile from her is not a material change of her offer, so it does not amount to a counter-offer. 2) Bob writes a letter to Sally offering his bike to her for 50. Sally sends a letter to Bob accepting the offer. The letter never arrives. - There is a contract. Bob offered his bike to Sally and Sally accepted the offer. According to the postal rule, it is sufficient that the acceptance has been posted. It is not relevant that the acceptance never reached the offeror. 19

20 3) Bob writes an to Sally offering his bike to her for 50 and stating that he will keep his offer open for acceptance until the 20 th of the month. On the 18 th, Sally accepts the offer by which Bob receives instantly. On the 17 th Bob sends an SMS to Sally telling her that he withdraws his offer; Sally doesn't read the SMS before she sends her . - There is no contract here. Sally accepted the offer only after it had been withdrawn already. Bob was free to withdraw his offer at any time before acceptance. He did so on the 17 th. The withdrawal was communicated to Sally via SMS. It is immaterial whether or not Sally actually read the SMS. 20

21 Knowledge Checks 21

22 Knowledge Checks - Solutions 22

23 Contract Law: Creating a Contract Lesson: Formal requirements 23

24 Formal requirements Principle The general principle is that there is no formal requirement for entering into a contract. Thus, contracts can generally be entered into in any way: orally, i.e.a conversation; in writing; by , etc. Example: Winnetou and Old Shatterhand communicate by smoke signals, the meaning of which has been agreed between them. Winnetou 'smokes': 'do you want to buy my outworn boots for 50?' Old Shatterhand 'smokes' back: 'Sure'. A contract for the sale of boots can be entered into by any means; so it also can be entered into by means of smoke signals. Thus, the agreement between Winnetou and Old Shatterhand cannot be void for lacking formal requirements. The only question as to the validity of the agreement could be whether or not Old Shatterhands acceptance is to be taken seriously (which depends on the further details of the case which we know nothing about). What might be the purpose of formal requirements? Purpose of formal requirements The purpose of formal requirements is threefold: Firstly, it shall protect parties from entering into a contract without having considered this step thoroughly. A formal requirement is a hurdle to surmount and it is an intentional hurdle. Every party should be warned that what they are doing is of major importance and has to be thought through. Secondly, a formal requirement shall increase certainty. This is especially clear for the requirement of a written contract: here the parties shall have the opportunity to look up the terms of their contract in a document. Thirdly, a formal requirement should make it easier to prove the existence of a contract or its terms. 24

25 Types of formal requirements Mankind came up with great a variety of formal requirements; for example, the necessity to use a scale (per aes et libram) or special words. Nowadays, there are only three types of formal requirements in use: Deeds Deeds Writing Evidence in writing A deed is a document, which is not only in writing, but is qualified further in that it meets other requirements also (which are today different from older law; the need for a deed to be sealed has been abolished by virtue of s. 1(1) Law of Property (Miscellaneous Provisions) Act 1989). The general effect of a document being a deed is that the promises and terms therein are being given stronger effect than in a usual contract not meeting any formal requirement. For example, as we have seen already in Lesson 2 of Unit 1, a promise made under deed does not need to be accompanied by any consideration to be valid. s. 1 Law of Property (Miscellaneous Provisions) Act 1989 gives some rules on how to create a deed: A deed must say somehow that it is a deed (s. 1(2) (a)) It must be signed in the presence of at least one witness (s. 1(3) (a)) It must be delivered as a deed (s. 1(3) (b)) Writing The meaning of writing is quite straightforward; it means that both offer and acceptance need to be written down. There are mainly two provisions which make it a formal requirement for a contract to be in writing: 1. s. 2(1) Law of Property (Miscellaneous Provisions) Act 1989 Under this provision, 'a contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each.' 1. s. 3(1) Bills of Exchange Act 1882 Under this provision, 'a bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to bearer.' 25

26 Example: Bob sells his bike to Sally for 50. As Sally does not have any money with her at the time, she gives Bob a bill of exchange, advising her bank to pay Bob

27 The purpose of a bill of exchange is to substitute money. It is often used in commercial business transactions; it allows companies to keep their liquidity and gives the other party quite a strong position at the same time. What does 'writing' mean? Read Firstpost Homes Ltd. v Johnson [1995] 1 W.L.R Evidence in writing The formal requirement of evidence in writing is a fragment of history, still attached to the law of guarantees. The rationale seems to be that in earlier times many people were illiterate, thus incapable of providing their offer or acceptance in writing. Nowadays it still applies to guarantees, according to s. 3 Statute of Frauds 1677: 'Noe Action shall be brought... whereby to charge the Defendant upon any special promise to answere for the debt default or miscarriages of another person... unless the Agreement upon which such Action shall be brought or some Memorandum or Note thereof shall be in Writing and signed by the partie to be charged therewith or some other person thereunto by him lawfully authorized.' Effects of failure to comply with a formal requirement In the case of failure to comply with a formal requirement the agreement is void or unenforceable. This can cause hardship in some cases, especially if one party relied on the other party's statement that performance will take place irrespective of the formal requirement not being met. That is why it is sometimes felt that a formal requirement should be set aside in some way. In which of these situations has a formal requirement to be met? 5. James gets a loan from his bank. To secure that James will pay the money back, the parties make James's house a loan security. 6. Bob, a collector of art, sells his original Picasso painting to Sally for 30,000, Tony starts studying law. To pay the university fees she takes a loan from Shark Bank. Her father guarantees the loan. 8. Sally owes some money to Bob. Sally's father, Frank, promises Sally he will pay the money back. 27

28 4. James gets a loan from his bank. To secure that James will pay the money back, the parties make James's house a loan security. - There is a formal requirement here as the contract is about an interest in land; so the contract must be in writing, s. 2(1) Law of Property (Miscellaneous Provisions) Act Bob, a collector of art, sells his original Picasso painting to Sally for 30,000, There is no formal requirement here. The contract is a normal sales contract. The price being that high does not create the necessity of meeting a formal requirement. 6. Tony starts studying law. To pay the university fees she takes a loan from Shark Bank. Her father guarantees the loan. - The contract has to be evidenced in writing under s. 3 Statute of Frauds Sally owes some money to Bob. Sally's father, Frank, promises Sally he will pay the money back. - No formal requirement. This is not a guarantee within the meaning of the Statute of Frauds 1677 because the promise was not made to Bob. Of course, this only means that the contract is not unenforceable for that reason. In fact, the contract is unenforceable for two other reasons: firstly, there is no consideration for the promise (see Lesson 2 of Unit 1); secondly, this is a domestic agreement which lacks intention to create legal relations (see Lesson 3 of Unit 1). Steven enters into negotiations with Barbara on the sale of a piece of land. Barbara wants to build a new hotel on the land; thus, she only wants to buy the property should planning permission be granted by the local authorities. Orally, Steven and Barbara agree in principle that Barbara will buy the property for 500,000 should planning permission be granted and that Barbara shall apply for the planning permission at her own expense. Barbara invests 20,000 in getting the planning permission, which eventually is granted. After that, Steven tells Barbara that he wants 700,000 for his land. Advise Barbara. 28

29 This question is based on Yeoman's Row Management Ltd v Cobbe [2008] UKHL 55, [2008] All ER (D) 419. The answer as to the validity of a potential sales contract is straightforward: a contract for the sale of land needs to be in writing. Thus, we do not have a valid sales contract here. Firstly, it is unclear whether the parties wanted to be bound by their 'agreement in principle'. If parties decide to say that they agree in principle rather than that they enter into a contract, it is likely that they did not have intention to create legal relations at this stage. Even if their agreement in principle could be considered to be a contract, this contract would be void as a result of failure to meet the formal requirement: contracts for the sale of land need to be in writing. Therefore, it is clear that Barbara has no legal right as to the property. The only remaining question is whether or not Barbara can get back her expenses for obtaining the planning permission from Bob and, if so, on which legal basis. Though the case is instructive on these issues, we have to leave that to a later stage (see {Link 03_02_002 - Misrepresentation}). 29

30 Contract Law; Creating a Contract 30

31 Consideration A promise may be made in a deed. In this case it is legally binding, even if it is not accompanied by consideration. Every promise not made within a deed needs consideration; a promise that is not accompanied by any consideration is not legally binding. The basic idea of consideration is that 'he who makes the promise must get something in return'; otherwise his promise is not to be taken seriously. From another perspective, one could say that the rationale behind the concept of consideration is to make gratuitous promises void. Example: Bob offers his bike to Sally for 50; Sally accepts the offer. As we have seen in Lesson 1, there is a contract in this example. Every mutual contract consists of two promises; the offeror promises something and so does the offeree. Bob, the offeror in our example, promises to give his bike to Sally. Sally promises to pay 50. To be legally binding, both of these promises need consideration. The consideration for Bob's promise is that Sally promises to pay 50. The consideration for Sally's promise is that Bob promises to give his bike to her. In this example both considerations are executory, which means they are to be executed in the future. This is because Bob does not get 50, nor does Sally get a bike; both of them only get the promise that they will get the money / the bike in future. Consideration can be either a benefit for the promisor or a detriment to the promise, as illustrated by the famous definition in Currie v Misa (1875) LR 10 Ex 153: '... a valuable consideration, in the sense of the law, may consist either in some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other'. In most situations, the consideration will be both a benefit to one party and a detriment to the other at the same time: if Sally promises to pay 50 in return for Bob's bike, then getting 50 is a benefit for Bob and losing it is a detriment to Sally. However, sometimes it happens that there would only be a benefit or only a detriment. The former situation can occur if a pupil is employed: the pupil's promise to work is not a detriment to him as he wants to benefit from the pupillage; but it can be a benefit for the pupilmaster (Edmonds v Lawson [2000] Q.B. 501; further reading :). The latter situation can occur if a third party, not the promisor, would receive something in return. 31

32 The doctrine of consideration There are some rules about consideration you need to know: 9. Consideration does not need to be adequate, but needs to be sufficient. 10. Consideration must move from the promisee. 11. Consideration does not need to move to the promisor. 12. Past consideration is not good consideration. Consideration need not be adequate but needs to be sufficient In ancient times, there was the idea of iustum pretium which means that a contract was binding only if it was a fair bargaining; the worth of the subjects exchanged needed to be equal. This idea has no validity and cannot have any validity in a market system that is based on the idea of a free market. Thus, the law does not require exchanges to be well balanced. As a result, the requirement of some consideration does not mean that he who promises something must get something of the same value in return. It only means that he must get something in return, whatever the value of this something may be. On the other hand, if giving nothing would be sufficient, then consideration would no longer be required. That's why the consideration must be of some value in the eye of the law. In practice, the promisee often promises to give something of some value in return, e.g. 1. Read this article: zine/ stm Why do the law firms advise their clients to pay 1 for a firm? Do you think that to get all the assets of a firm, worth some million pounds, for only 1 can be justified? The purpose of the promise to pay 1 is to overcome the hurdle of consideration. Otherwise, both parties would bear the risk of the contract being void for lack of consideration. It might be that the assets of a firm are worth some million pounds; however, if the buyer takes over liability for the debts of the company then this also has to be taken into account. In many cases the debts are much higher than the value of all the assets. 32

33 Performance of an existing duty Sometimes parties enter into a contract and later they agree that the remuneration for performance of the duty owed under the contract shall be increased. Example: Captain Cook hires sailors to ship his vessel from Bristol to Madagascar. Every sailor shall get 500 for the job. During the journey some sailors desert. Cook, who is afraid that it might not be possible to bring the vessel to its destination with the remaining sailors, offers to pay an additional 50 to each of them. Having luckily reached Madagascar, each sailor claims 550. The original contract was to do the job for 500. Captain Cook promises to pay an additional 50; but did he get anything in return? It was held that he did not: the sailors were already under an obligation to do their job. They did not provide any further consideration. Thus, the promise was void and Captain Cook only had to pay 500 (Stilk v Myrick (1809) 2 Camp (Further reading: arkup.cgi?doc=/ew/cases/ewhc/kb/1809/j58.html). Read Stilk v Myrick (1809) 2 Camp. 317 ( arkup.cgi? doc=/ew/cases/ewhc/kb/1809/j58.html). In later decisions it has been pointed out that there was a policy reason for the decision in Stilk v Myrick. What does that mean? 'Policy reasons' are often referred to in order to justify a decision. It means that the law has to take into account what general effects it has on society. Stilk v Myrick took place during a time when every sea journey was a risky entertainment. The captain had to rely on his crew much more than nowadays. The borderline between duress and variation of a contract was very narrow. Thus, it can be argued that policy considerations made it necessary to protect the captain against an intractable crew. However, although Lord Ellenborough in Stilk v Myrick did not base the decision on policy reasons, Glidewell L.J. in Williams v Roffey [1991] 1 Q.B. 1 at 13 f. stated: "Thus this concept may provide another answer in law to the question of policy which has troubled the courts since before Stilk v. Myrick, 2 Camp. 317, and no doubt led at the date of that decision to a rigid adherence to the doctrine of consideration." 33

34 Later this approach has been refined by the concept of 'practical benefit': A, who is a builder, has entered into a contract under which he has to finish his work by 31 st October, otherwise he will have to pay penalties. A hires B as a subcontractor. Under the contract between A and B, B is bound to finish his work by 31 st October. Later, it becomes obvious to A that B is undergoing financial difficulties, as a result of which he might not be able to complete his share of the work on time. Thus, A promises B he will pay 10% more if B will finish his work on time (Williams v Roffey Bros. [1991] 1 Q.B. 1. (Further reading: arkup.cgi?doc=/ew/cases/ewca/civ/1989/5.html). At first glance, the facts seem to be similar to those in Stilk v Myrick. In either case the promisee was already under an obligation to perform; the sailors had to ship the vessel, B had to complete his share of the building work. In either case the promisor offered to pay more money for the same amount of work. In Stilk v Myrick this promise was held to be void for lack of consideration; in Williams v Roffey it was not. The reason given for the view that B provided consideration for the promise given by A, is the fact that A would have had to pay a penalty as a result of B not completing the work on time. By offering the additional money, A hopes to avoid this. Furthermore, he avoids the problem that B stops working and also the trouble of engaging other people to finish the work. Thus, there was a practical benefit for A in B's promise to finish the work on time, as a result of which the promise was not void for lack of consideration. There is a close connection between consideration in the form of a practical benefit and economic duress. The Williams v Roffey situation arises typically when the debtor tells the creditor that he cannot perform unless paid a higher amount. This behaviour can amount to economic duress, leaving the variation agreement voidable (see {Link 03_03_003 - Unit 3 Lesson 3}). Only if there is no duress can the variation be valid, given that there is consideration. Master Ships Ltd produces ships. Master Ships enters into a contract with Mini Supply Ltd, a small company, under which Mini Supply Ltd has to deliver some parts for the ships. As energy prices become much higher than they were when the contract was agreed, Mini Supply Ltd tells Master Ships Ltd that they cannot afford to produce the parts unless a higher price is paid by Master Ships. Master Ships, being afraid of losing customers if the necessary parts are not being provided by Mini Supply, agrees to pay the higher price. Advise Master Ships. The important points in this case are: 34

35 The increase of energy prices is not a good reason for asking for a higher price. Mini Supply has to bear the risk of rising prices (as Mini Supply would have benefited from falling prices). There might be consideration for Master Ships' promise to pay the higher price in that Master Ship has a practical benefit in not losing customers (Willams v Roffey). The remaining question is whether or not Mini Supply's behaviour amounts to economic duress (which will be discussed in {Link 03_03_003 - Unit 3 Lesson 3}). Another instance of cases where performance of an existing duty can be good consideration, is where the duty stems from a contract with a third party. This is illustrated by Scotson v Pegg (1861) 6 H & N 295: the plaintiffs sold coal to a third party. Under the contract with this third party, the plaintiffs were obliged to deliver the coal to the defendants. The defendants and the plaintiffs entered into an agreement under which the defendants promised to unload the coal at a fixed rate in consideration of delivery. This was held to be good consideration although the plaintiffs were already obligated to make the delivery. 35

36 Consideration must move from the promisee The consideration must move from the promisee, which means that consideration coming from somebody else is not good consideration (Tweddle v. Atkinson (1861) 1 B. & S. 393). Example: Bob offers his bike to Sally for 50. Sally accepts the offer, but says it will be her father, not her, who will pay the money; her father agrees and so does Bob. Bob, the promisor, made the promise to give his bike to Sally. This promise is legally binding only if accompanied by consideration. The consideration could be the promise of Sally's father to pay 50 to Bob. However, consideration must move from the promisee, that is Sally. Sally does not provide any consideration. The consideration moving from somebody else (her father) is not good consideration. As a result, Bob's promise to give his bike to Sally is not binding. In some instances, the courts based their decision that third parties cannot sue under a contract to which they were not parties on the principle that consideration must move from the promisee. (For the new law applying to third parties see {Link 02_04_007 - Unit 2 Lesson 4}). Is this view right? What other views are possible? A three party relationship can be illustrated as follows: Figure Three parties relationship If the rule is that consideration must move from the promisee, the question arises: who is the promisee? This principle hinders third parties rights only if you consider the third party to be the promisee, in which case, it is clear that consideration does not move from the promisee (the third party). However, if you consider the promisee to be the other party to the contract (party B), then consideration moves from the promisee and it is not for lack of consideration that third parties could not have any rights under a contract. 36

37 All of the questions surrounding third party rights now need to be considered in light of the new law. (Contracts (Rights of Third Parties) Act 1999; see Unit 2 Lesson 4.) Consideration does not need to move to the promisor In the basic example of a mutual exchange, every party will promise to give something and will get a promise in return. Every party will give and get something. Thus, consideration will move from the promisee to the promisor normally. However, it does not have to be like this. Consideration may move to somebody other than the promisor. Example: Bob offers his bike to Sally if she gives 50 to Bob's son. Sally accepts the offer. In this case the consideration for Bob's promise, that is the 50, does not move to him, but to his son. This is good consideration, Bob's promise is legally binding. Past consideration is not good consideration The consideration for a promise must not lie in the past. The rationale for this rule is that if somebody who already has something, which he can keep without paying for it, promises to give something in return, then this promise seems to be gratuitous. Example: when Bob was on holiday, Sally looked after his orchids. On his return Bob promises to pay Sally 50 for the wonderful job she has done. Bob already had the work done for nothing. He could keep things just as they are. If he now promises to pay Sally something, then the consideration (the work) lies in the past. Thus, his promise is not legally binding. The principle can be seen in Re McArdle [1951] Ch 669, where a mother had spent money to improve the house which should, according to the father's will, pass over to her children after her death. Later, her children promised that she should be paid a certain amount of money from the estate when distributed. The executors refused to pay these monies. It was held that the promise was void for lack of consideration; the improvements made by the mother did not come into account as this would have been past consideration. While in principle past consideration is not good consideration; attention has to be paid to the question whether or not the parties intended that a service should be paid for BEFORE the service was rendered. If the promise to pay follows under such circumstances it will not be void for lack of consideration; instead, the service, although rendered before the promise had been given, will be good consideration for the promise. The leading case for this is Lampleigh v Brathwait (1615) Hobart 105: Brathwait had killed a man and wanted to seek a pardon from the king. To this end, he asked Lampleigh to do this for him. Later, Brathwait promised to pay Lampleigh 100. As this promise could have been void for lack of consideration because the rendered service lay in the past, the court held it was valid on the ground that the parties, when Brathwait asked Lampleigh to go to the king, had implicitly agreed that Lampleigh should get something in return for this service. 37

38 The exception from the principle that past consideration is not good consideration laid down in Lampleigh v Brathwait has been affirmed in Pao On v Lau Yiu Long [1979] 3 All ER

39 Consider which statements about consideration are right and which are wrong] Consideration must move from the promise. Consideration must move from the promisor. Consideration must move to the promise. Consideration must move to the promisor. 1 can be good consideration for the promise of a very expensive item. Past consideration is not good consideration. The idea of consideration is to encourage gratuitous promises. 4. Consideration must move from the promise. - This is right. A consideration which moves from somebody other than the promisee is not good consideration. 5. Consideration must move from the promisor. - This is not right. The promisor gives the promise, thus it is the promisee who has to provide consideration. 6. Consideration must move to the promise. - This is not right for the same reason. 7. Consideration must move to the promisor. - Attention! Here you could be tempted to say 'yes' because this time the direction is not mixed up. However, while the consideration must move from the promise, it does not need to move to the promisor can be good consideration for the promise of a very expensive item. - That is right: consideration only needs to be of some value, it does not have to be adequate. 9. Past consideration is not good consideration. - That is right. 10. The idea of consideration is to encourage gratuitous promises. - Quite the opposite is true; the idea of consideration is to make gratuitous promises void. 39

40 Consideration and rescission Sometimes parties agree to rescind a contract. To rescind a contract means that the parties extinguish the rights arising out of the contract. This rescission can be regarded as a promise not to insist on one's legal rights under the contract. Thus, there needs to be consideration to make this promise legally binding. Two situations have to be distinguished. The first one is that, in a mutual contract, no performance has taken place so far. The second situation is that one party already performed, but the other did not. First situation: Neither of the parties has performed yet. If the parties decide to rescind the contract at this point, then there is consideration for both promises (rescission in this case consists of two promises because both of the parties promise not to insist on their legal rights under the contract): every party promises something (not to claim under the contract) and gets something in return at the same time (the other party's promise not to claim under the contract). So rescission in this case is valid. Second situation: One party has already performed, while the other has not. If the parties decide to rescind the contract at this stage, it has to be distinguished further: either the party who has performed already should get back what they have given or not. If the party shall get back what they have given, then this party promises not to claim under the contract and gets something in return, so there is consideration for their promise. If the party should not get back what they have given, but the other party keeps it, then the promise not to claim under the contract is a gratuitous promise, as the promisor does not get anything in return. In this case there is a lack of consideration, as a result of which, the agreement of rescission is void. Consideration and variation As we have just seen, rescission is valid only if both parties gain some advantage from it; otherwise it is void for lack of consideration. The same principle applies to an agreement to vary the contract. Variation is valid only if it lies in the interest of both parties. Example: Sally gets rid of her dogs and sells three leashes to Bob, an owner of three dogs. Soon after entering into the contract and before delivery, one of Bob's dogs passes away. At the same time Sally's cow eats one of her leashes. Sally and Bob agree to reduce the contract to two leashes. In this example, the variation is advantageous for both of the parties: Sally will not be liable under the contract, while Bob does not have to pay for three leashes if he only has need for two. Thus, there is consideration for both of the promises (the variation being regarded as promise not to claim under the original contract, but to accept the new terms). 40

41 If the variation is advantageous for one party only, there will be a lack of consideration, as a result of which, the variation will be void. Example: Bob owes Sally 20 for the two leashes that Sally delivered. He asks Sally if she would accept 15 instead. Sally agrees. In this example the variation is only advantageous for Bob, whereas Sally does not get anything in return for her promise not to claim 20, but only 15 instead. Thus, there is no consideration; Sally's promise is void. Read Coote, Consideration and variations: a different solution [2004] LQR 19. What is the rationale of the consideration requirement in variation agreements? Which different approach can be taken? The rationale of the consideration requirement in variation agreements seems to be the same as it is in the formation process: gratuitous promises shall not be given effect. From a theoretical point of view, it does not make much of a difference if a gift is promised when the contract is entered into or later as a result of a variation of the contract. The different approach that might be taken is the view that there might be good reason to have the requirement of consideration for entering into an agreement. However, once a contract has been entered into, parties should be given more freedom to make changes to this agreement even if there is no consideration. From this point of view, the requirement of consideration turns out to be an obstacle in amending contracts as is appropriate to meet changing circumstances. Promissory estoppel 'Estoppel' is a concept which is used to 'estop' a party from relying on a legal situation which is felt to be unsatisfactory. There are several kinds of estoppel: Promissory estoppel Proprietary estoppel Estoppel by representation Estoppel by convention 41

42 In contract law, we have to deal with promissory estoppel, which is constructed as a relief from the harsh consequences that can arise if an agreement is void due to lack of consideration. Bob lets his bike for two years to Sally, who has to maintain it. After one year, while maintenance is necessary, Bob and Sally start negotiations on a sale of the bike to Sally. During the negotiations, it is understood, Sally is not obligated to maintain the bike. As negotiations break down Bob claims back his bike on the ground that Sally failed to maintain it. Under the original contract, Sally had to maintain the bike and she failed to do so, which can give Bob the right to repudiate the contract. But the contract could have been subject to a (implied) variation insofar as the duty of maintenance could have been suspended. As we have seen, a variation is regarded as a promise not to claim under the original terms of the contract. As the variation is only advantageous for Sally, Bob's promise not to claim under the original contract is gratuitous, as he does not get anything in return. Thus, the promise is void due to lack of consideration. This means that the variation is void; hence, the duty to maintain the bike has not been suspended. As a result of this, Bob could repudiate the contract and claim his bike back. This example is based on Hughes v Metropolitan Ry (1877) 2 App.Cas. 439, the leading case for promissory estoppel. If Hughes was followed, it would be unfair if Bob could repudiate the contract. Sally relied on the duty to maintain the bike having been suspended and she omitted maintenance in the expectation that the bike would soon be hers. Bob agreed that she was not under a duty to maintain the bike during negotiations. Under these circumstances, it cannot be fair for Bob to claim on the ground that maintenance did not take place. This is where promissory estoppel comes in: promissory estoppel means that - under certain circumstances we shall discuss soon - the promissor is estopped from relying on his promise being void due to a lack of consideration. This does not mean that his promise is valid; it only means that the promisor himself cannot have any rights on the ground that his promise is void. Requirements and effects of promissory estoppel The requirements for promissory estoppel are as follows: There must be a clear promise not to insist on strict legal rights. The promisee must have relied on this promise. The promisor insisting on the strict legal rights would be inequitable. Effects of promissory estoppel Promissory estoppel is said to be a shield, not a sword. That means that promissory estoppel can only be used as a defence against a claim; but it is not possible to base a claim on promissory estoppel. 42

43 The effect of promissory estoppel has been the suspension of rights; it did not extinguish any rights (Hughes v Metropolitan Ry; Tungsten v Tool Metal Manufacturing [1955] 1 W.L.R. 761). However, this effect has been challenged recently by the Court of Appeal in Collier V P & MJ Wright (Holdings) Ltd [2007] BPIR 1452 where Arden L.J. stated (at para 42): "The facts of this case demonstrate that, if: (1) a debtor offers to pay part only of the amount he owes; (2) the creditor voluntarily accepts that offer, and (3) in reliance on the creditor's acceptance the debtor pays that part of the amount he owes in full, the creditor will, by virtue of the doctrine of promissory estoppel, be bound to accept that sum in full and final satisfaction of the whole debt. For him to resile will of itself be inequitable. In addition, in these circumstances, the promissory estoppel has the effect of extinguishing the creditor's right to the balance of the debt. This part of our law originated in the brilliant obiter dictum of Denning J, as he was, in Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130. To a significant degree it achieves in practical terms the recommendation of the Law Revision Committee chaired by Lord Wright MR in 1937." Promissory estoppel does not give any new rights (Combe v Combe [1951] 2 K.B. 215). This has to be understood in the right way. It is only the promissory estoppel itself that does not give any new rights. New rights may come into existence as a result of something else, especially a breach of contract, in consequence of promissory estoppel. Example: Bob sells his bike to Sally. Delivery will take place on 30 th June. In June, Sally agrees to Bob's enquiry as to whether the date of delivery could be extended to 15 th July. On 15 th July, Sally refuses to accept delivery on the grounds that it is delayed (Hartley v Hymans [1920] 3 K.B. 475). In this example, it is clear from what we have seen so far that Sally is estopped from making any claims on the ground that delivery did not take place before 15 th July. Thus, she is not allowed to refuse delivery. As a result of her refusal to accept delivery, Bob can claim damages or repudiate the contract. So, from Bob's perspective, new rights come into existence (damages, repudiation). However, they are not the result of promissory estoppel, or at least only indirect. These rights come from Sally refusing to accept delivery, i.e. Sally's breach of contract. Tackling Problem Questions Problem questions are a common means of assessment. They assess your knowledge and understanding of the law and your ability to identify relevant material and apply to a given situation. You have tackled a few problem style questions in your study of consideration in this topic. Alongside these skills, you will also be required to communicate your answer in a clear and coherent way alongside putting your practical skills of time management, research and planning to good use. 43

44 What is a problem question? A problem question is a hypothetical scenario upon which you will have to advise the parties as to their legal position. These are usually highly unfortunate tales of misery which focus on several topics of law linked by a common area e.g. a criminal law case study may involve, assault, battery and manslaughter alongside defences. Problem based assessment is really the true measure of a student's learning because it is the nature of the law and what lawyers and judges do day in day out - they problem-solve. Turner et al recommend that you actually look at the process that a judge engages in when problemsolving by reading an appeal case. The judge will identify the key facts of the case, examine the law which governs those issues, apply the law to the facts and will give a decision on who wins the case. The important thing to remember is that writing an answer to a problem question is very different to writing an essay; it requires a different approach and planning. Being a good problem-solver relies on skills which go beyond a mere understanding of the law. Problem-solving will stretch your higher level skills such as application and analysis. Developing A Good Approach to Problem Solving If you develop a sound approach to problem-solving at the outset, this is a transferable skill which will work effectively across all modules. Read the question A problem question is no place for skim reading. Read it thoroughly three or four times to ensure that you get the full picture. On each read through, new factors will become apparent. Do not make any assumptions on what will happen or what the outcome will be as this could tarnish your answer. Go back to your notes (this is where good preparation is vital) and begin to identify the areas of law in questions. This will be easier if you know your subject matter well. You may spot similarities with decided cases within the problem - do not assume that the outcome will be identical as sometimes there may be some distinguishing factors which may lead the judge to conclude that the cases are different and the decision should not be followed. Identify the key issues Begin to underline the key issues and facts. Everything which is in the problem question should be there for a reason and your examiner will leave clues for you as to what these issues are. 44

45 Introduce the law and cases that tie in with these issues. Don't make up or alter the facts to suit yourself. Develop a Strategy The first stage here is to read exactly what it is that you are required to do. Are you asked to advise one party or all parties? Are you asked if a crime has been committed or to consider the mensrea/ actusreus in isolation. Are you asked to discuss the rights of the parties or the remedies available to them also? An introduction is not as vital to problem question as to an essay and in any case you should avoid any general 'all I know about' introductions as it is a waste of your time and word limit. Never recite the facts of the question in your introduction. There is a key strategy to tackling problem questions; Identify the Issue Make sure that each issue is dealt with satisfactorily before moving onto the next. This will avoid confusion and overlap. State the rule Your explanation of the law needs to be clear and accurate. Apply the law to the facts and support with authority Make sure that you apply the law in a logical way, dealing with each issue in turn. Analyse the law, not the facts of the case. Reach a conclusion Ensure that your conclusion is based upon the preceding application of the law. Conclude on each incident or submission when you have dealt with them or as you go along - don't save your conclusions for the end of the piece as you would with an essay Problem solving is a vital skill in the study of Law. So how did you get on? Have a look at this reflective checklist and how you tackled these problems on consideration. Where can you further develop your skills? 1. What is the current issue? 2. What are your assumptions about answering problem questions? 3. What is the most important thing you have learnt about problem questions? 4. Were there any problems identified (eg non-participation, communications skills, confidence) 5. How did you respond to problems and challenges? 6. How can I use my reflection to improve my problem solving skills? D on't forget that you can your tutor for some help! Remember there is not necessarily a right answer to a case study it all depends on whether the judge decides to follow one authority or another. Be sure to highlight the potential possibilities and then conclude which one you find to be most likely or suitable. Make sure that you consider the realistic but alternative possibilities and make sure that you have forwarded the strongest points of each. Reach a reasoned and sensible conclusion. 45

46 Contract Law: Creating Legal Relations 46

47 Intention to Create Legal Relations Intention to create legal relations An agreement accompanied by consideration is not binding if the parties did not want to create legal relations. In the normal situation, where two parties exchange offer and acceptance, there is an intention to create legal relations. Especially in commercial agreements it is very unlikely that the parties do not want to be legally bound. However, there may be exceptions where a lack of intention to create legal relations for different reasons occurs. Overview over the reasons for a lack of intention to be legally bound The first reason why a person who offers or accepts something does not want to be bound could be that what he says is not intended to be taken seriously. There are mainly two instances for this category of cases: Declarations which are a mere puff and declarations made in jest or anger. If either of these circumstances is to be examined, the subjective view of the person making the statement is not conclusive. It must be deemed the viewpoint and interpretation of an officious bystander (objective test). The second reason why an agreement can lack intention to create legal relations is that the parties expressly do not want to be legally bound by their agreement. This is mainly the case in two instances: honour agreements and collective agreements. The third category of cases in which there is no intention to be legally bound is social arrangements. Example: Bob asks Sally: "Do you want to join us for a bring-a-bottle party this evening? We will take care of the catering but it would be most wonderful if you could bring a bottle of white wine with you." Sally answers" what a fantastic idea". In the evening, Sally does not turn up. Bob orders a bottle of white wine and asks Sally to reimburse the costs. The legal basis for Bob's claim could be breach of contract. This claim will succeed only if there is a contract between Bob and Sally. Bob offered access to his party and the catering; Sally offered to bring white wine with her in return. This could be regarded as an intended mutual exchange; so that what Bob and Sally said can be seen as two promises, both of which are accompanied by consideration. This is not intended though; neither Bob nor Sally wants to be bound by their arrangement. If Bob decided not to throw a party, he would be free to do so without having to pay anything to Sally. On the other hand, Bob also cannot claim under this arrangement, because the other party does not want to bind herself either and cannot be regarded by a reasonable third party looking at the situation as having herself bound. An agreement which lacks intention to create legal relations does not have to be 'social' in a narrow sense. For instance, the relationship with a golf club and a player who takes part in a competition held by the club is not a contract; apparently for lack of intention to create legal relations (Lens v Devonshire Club, The Times 4 December 1914; the case can be found in the times archive on k/tol/archive/). 47

48 The fourth category of agreements which lack intention to create legal relations is in domestic arrangements. This requires further examination. Domestic arrangements Harry and Sally, an American married couple, come to England for a while. Due to her illness, Sally has to stay in the UK while Harry goes back to America. They agree that Harry shall pay 1000 per month for Sally's maintenance. After a while Harry texts Sally "We had better stay apart" and stops paying; Sally sues him (Balfour v Balfour [1919] 2 K.B. 571). Read Balfour v Balfour [1919] 2 K.B Did all the judges come to the same conclusion? Did the judges come to their conclusion on the same basis? What are the main arguments to deny that there is a contract in this case? All the judges held that there was no contract. However, two of them came to this conclusion for lack of intention to create legal relations, while the third judge thought there was no contract for lack of consideration. Warrington L.J.: 'The matter really reduces itself to an absurdity when one considers it, because if we were to hold that there was a contract in this case we should have to hold that with regard to all the more or less trivial concerns of life where a wife, at the request of her husband, makes a promise to him, that is a promise which can be enforced in law. All I can say is that there is no such contract here. These two people never intended to make a bargain which could be enforced in law. The husband expressed his intention to make this payment, and he promised to make it, and was bound in honour to continue it so long as he was in a position to do so. The wife on the other hand, so far as I can see, made no bargain at all.' Duke L.J. 'What is said on the part of the wife in this case is that her arrangement with her husband that she should assent to that which was in his discretion to do or not to do was the consideration moving from her to her husband. The giving up of that which was not a right was not a consideration.' Atkin L.J. 48

49 'I think, that such arrangements made between husband and wife are arrangements in which there are mutual promises, or in which there is consideration in form within the definition that I have mentioned. Nevertheless, they are not contracts, and they are not contracts because the parties did not intend that they should be attended by legal consequences.... All I can say is that the small Courts of this country would have to be multiplied one hundredfold if these arrangements were held to result in legal obligations. They are not sued upon, not because the parties are reluctant to enforce their legal rights when the agreement is broken, but because the parties, in the inception of the arrangement, never intended that they should be sued upon. Agreements such as these are outside the realm of contracts altogether. The common law does not regulate the form of agreements between spouses. Their promises are not sealed with seals and sealing wax. The consideration that really obtains for them is that natural love and affection which counts for so little in these cold Courts.' The principle we have been introduced to in Balfour v Balfour comes to an end when wife and husband split up. In this case, agreements between the former partners are usually made in order to sort things out, especially deciding who will keep which assets on what terms. It cannot be said that these agreements remain an element of the day to day life of a married couple and in which the court should not interfere. The element of reciprocity within their agreements becomes more important and so does the intention to obtain a legal right for what has been promised. Looking at it from the other side, so does the intention to create legal relations by giving a promise. This principle is illustrated in Merritt v Merritt [1970] 1 W.L.R. 1211, per Lord Denning M.R.: 'I do not think those cases [Balfour v Balfour; Jones v Padavatton] have any application here. The parties there were living together in amity. In such cases their domestic arrangements are ordinarily not intended to create legal relations. It is altogether different when the parties are not living in amity but are separated, or about to separate. They then bargain keenly. They do not rely on honourable understandings. They want everything cut and dried. It may safely be presumed that they intend to create legal relations.' Susan, mother of a seven-year-old boy, lives in New York, where she has a very well paid job. Her mother, who lives in England, offers to pay Susan 1,000 a month for her maintenance if Susan comes to England and reads for the Bar. Susan agrees and comes to England. Five years later her mother stops paying. Advise Susan. 49

50 The question is based on the famous case Jones v Padavatton [1969] 1 W.L.R In this case the Court of Appeal held that the daughter could not sue her mother for further maintenance; however, two judges came to this conclusion on the basis that there was a lack of intention to create legal relations while one judge (Salmon L.J.) came to the same conclusion on a different route. Danckwerts L.J. 'There is no doubt that this case is a most difficult one, but I have reached a conclusion that the present case is one of those family arrangements which depend on the good faith of the promises which are made and are not intended to be rigid, binding agreements.' Salmon L.J. 'In the very special circumstances of this case, I consider that the true inference must be that neither the mother nor the daughter could have intended that the daughter should have no legal right to receive, and the mother no legal obligation to pay, the allowance of 1,000 a month... ' 'Then again it is said that the duration of the agreement was not specified. No doubt, but I see no difficulty in implying the usual term that it was to last for a reasonable time. The parties cannot have contemplated that the daughter should go on studying for the Bar and draw the allowance until she was seventy, nor on the other hand that the mother could have discontinued the allowance if the daughter did not pass her examinations within, say, eighteen months. The promise was to pay the allowance until the daughter's studies were completed, and to my mind there was a clear implication that they were to be completed within a reasonable time. Studies are completed either by the student being called to the Bar or giving up the unequal struggle against the examiners. It may not be easy to decide... what is a reasonable time.... But... I cannot think that a reasonable time could possibly exceed five years...' Fenton Atkinson L.J. 'At the time when the first arrangement was made, mother and daughter were, and always had been, to use the daughter's own words, "very close." I am satisfied that neither party at that time intended to enter into a legally binding contract...' Binding domestic agreements A domestic agreement is not perceived to be legally enforceable in every case. This is illustrated by Parker v Clark [1960] 1 W.L.R. 286: Nancy and her husband often visit Nancy's aunt and her husband, an elderly couple, at their home. As the aunt and her husband are often unwell and the younger couple look after them, the elderly couple offers the younger couple to come to live with them. It is agreed that the older couple will leave their house to the younger couple. One year after the young couple sold their own house and went to live with the older couple, they ask the younger couple to leave. This case is different from the cases we have come across so far, in that the younger couple made life changing arrangements in reliance on the agreement. Not only did they move in with the elderly couple, but they also sold their own house, leaving them homeless once they had 50

51 been kicked out of the older couple's house. Moreover, it was understood by the parties that this step taken by Nancy and her husband and the care given to the elderly couple was a benefit to the older couple in consideration of which the younger couple should eventually get the house. Devlin J. in Parker v Clark: 'The question must, of course, depend on the intention of the parties, to be inferred from the language they use and from the circumstances in which they use it. On the plaintiff's side, I accept his evidence that he considered that he was making a binding contract. An important factor in this was that he disposed of his own residence.... He would not have done that, he says and I believe it unless he thought that he was securing another permanent home. There is, undoubtedly, in the arrangement a lack of formality, upon which Mr. Park greatly relies. This, I think, is largely explained by the relationship between the parties; it is easier to demand formal documents from a stranger than it is from a relative and friend.' It is important to remember the starting point: the question whether or not there is an intention to create legal relations is to be decided by considering the intention of the parties. What did the offeror want? What about the offeree? Of course, it is not important what the parties submit afterwards; only what the parties wanted when they entered into the contract. The approach is again 'objective' in that the behaviour has to be interpreted from the viewpoint of an 'officious bystander' (to this concept see Lesson 1). 51

52 Consider which of the following statements are true: 13. Domestic agreements are likely to be legally enforceable. 14. In Lens v Devonshire Club it was held that a golf competition does not create legal relations. 15. It is best to ask the parties themselves whether they wanted to be legally bound. 16. Balfour v Balfour deals with separation agreements. 17. Merritt v Merritt deals with separation agreements. 8. Domestic agreements are likely to be legally enforceable. - No, they are not. Within domestic agreements there is a presumption that family members do not want their relationship to be ruled by law. 9. In Lens v Devonshire Club it was held that a golf competition does not create legal relations. - Yes, that's right. 10. It is best to ask the parties themselves whether they wanted to be legally bound. - No. If you ask the promisor afterwards he would always say that he did not want to be legally bound; whereas the promisee always would say that the promisor made it clear that he wanted to be legally bound. This is of no help. Thus, the question has to be considered from an objective point of view. 11. Balfour v Balfour deals with separation agreements. - No, Balfour v Balfour deals with an agreement which the husband and his wife entered into while still together. 12. Merritt v Merritt deals with separation agreements. - Yes, that is right. Commercial agreements If parties enter into an agreement in the course of a business, it is understood that they usually want their agreements to be legally binding. That is what contracting is about: that one party promises something and the other party has not only to rely on the promisor's honour, but also has a legal right which he can enforce with the help of the courts. Thus, there is a presumption that agreements entered into by business parties are meant to be legally binding; that is to say, that the parties have the intention to create legal relations. The most famous definition of this principle has been established in Edwards v Skyways [1964] 1 W.L.R. 349: 'where an agreement was reached in the course of business relations, and there was an intention to agree, there was a heavy onus on the party alleging that it was not intended to give rise to legal obligations'. In this case, pilots who were made redundant were offered an 'ex gratia payment' should they leave the company. One pilot sued for this payment after leaving the company; the company, however, decided to change this policy. It was held that the offer of the 'ex gratia payment' was meant to be legally enforceable. 52

53 Exception: express statement As we have seen, the question whether or not there is an intention to create legal relations has to be answered by considering what the parties to the agreement wanted when they entered into the agreement. From this starting point, it is obvious that the parties are free to state expressly that they do not want to be bound by their agreement or to say that the agreement shall not be legally enforceable. This is illustrated by Rose and Frank v J. R. Crompton and Brothers [1925] A.C. 445, where the parties entered into a written agreement which stated: "This arrangement is not entered into, nor is this memorandum written, as a formal or legal agreement, and shall not be subject to legal jurisdiction in the Law Courts either of the United States or England, but it is only a definite expression and record of the purpose and intention of the three parties concerned, to which they each honourably pledge themselves, with the fullest confidence - based on past business with each other - that it will be carried through by each of the three parties with mutual loyalty and friendly co-operation. This is hereinafter referred to as the 'honourable pledge' clause." While it was pointed out that 'there is no explanation upon the record, and no suggestion was made by counsel at the Bar of any reason for the introduction of this remarkable clause', the judges held unanimously that this clause had the effect that the agreement lacked intention to create legal relations. 53

54 Commercial agreements: difficult cases In the famous case Kleinwort Benson Ltd. v Malaysia Mining Corporation Berhad [1989] 1 W.L.R. 379 a company wrote to the bank that was about to give credit to the company's subsidiary in England: 'it is our policy to ensure that the business of [the subsidiary] is at all times in a position to meet its liabilities to you'. After the subsidiary had gone into liquidation the bank sought to rely on the promise given by the company. In this case it was considered and affirmed that commercial agreements are usually meant to be legally enforceable; however, it was held that the words of the letter did not amount to a promise not to change the policy in future. The case shows that there is a small borderline between deciding whether or not an agreement is meant to be legally binding and the interpretation of the agreement. During the Olympic Games 2008, a petrol station gives - as advertised - a coin with the picture of participating English athletes to each customer for every 50 litres of petrol they buy. When Richard buys 50 litres, the attendant says, 'Sorry, we just ran out of coins'. Advise Richard. 54

55 The question is based on Esso Petroleum Co. Ltd. v Customs and Excise Commissioners [1976] 1 W.L.R. 1. In this case three judges held that there was an intention to create legal relations on the part of the petrol company, while two judges held it was not. Viscount Dilhorne True it is that the respondents are engaged in business. True it is that they hope to promote the sale of their petrol, but it does not seem to me necessarily to follow or to be inferred that there was any intention on their part that their dealers should enter into legally binding contracts with regard to the coins; or any intention on the part of the dealers to enter into any such contract or any intention on the part of the purchaser of four gallons of petrol to do so.... If what was described as being a gift, which would be given if something was purchased, was something of value to the purchaser, then it could readily be inferred that there was a common intention to enter into legal relations. But here, whatever the cost of production, it is clear that the coins were of little intrinsic value. Lord Simon of Glaisdale (Lord Wilberforce agreeing) In the first place, Esso and the garage proprietors put the material out for their commercial advantage, and designed it to attract the custom of motorists. The whole transaction took place in a setting of business relations. In the second place, it seems to me in general undesirable to allow a commercial promoter to claim that what he has done is a mere puff, not intended to create legal relations Lord Fraser of Tullybelton The purpose of the promotion scheme was to attract motorists, and perhaps their children, and to persuade them to buy Esso rather than some other brand of petrol, and it cannot be right that a motorist who had been persuaded to buy four gallons of Esso should be liable to be met at the end of the transaction with a refusal to give him a coin. Lord Russell of Killowen In my opinion it would have been thought by Esso, and rightly, that there could have been no occasion, in order to ensure success of the scheme, for an outlet proprietor to subject himself to a contractual liability to deliver a coin to a motorist who had bought four gallons. The subject matter was trivial: the proprietor was directly interested in the success of the scheme and would be in the highest degree unlikely to renege on the free gift offer, and indeed there is no suggestion that a motorist who qualified and wanted a medal ever failed to get one: from the motorist's viewpoint, if this had ever happened, I cannot think that he would have considered that he had a legal grievance, though he might have said that he would not patronise that outlet again: similarly in my opinion if a garage advertised "Free Air" and after buying petrol or oil the motorist was told that the machine was out of order that day. 55

56 Collective agreements While commercial agreements are usually enforceable, this is not true of collective agreements; that is, agreements between employers and trade unions. When looking at the case law, one has to admit that this is not contrary to the principle we have discussed: that everything depends on the will of the parties. In Ford Motor Co Ltd v Amalgamated Union of engineering and foundry workers [1969] 2 Q.B. 303 the judge examined very carefully whether or not the parties to the agreement wanted their agreement to be legally enforceable. This approach has not been followed by the legislator; see section 179(1) Trade Union and Labour Relations (Consolidation) Act 1992: '(1) A collective agreement shall be conclusively presumed not to have been intended by the parties to be a legally enforceable contract unless the agreement 11. is in writing, and 12. Contains a provision which (however expressed) states that the parties intend that the agreement shall be a legally enforceable contract.' While in the Ford Motor situation the result will be the same (no legally enforceable agreement), the approach is totally different in that, at law, and everything depends on the will of the parties; whereas the Act overrules the will of the parties by means of conclusive presumption. 56

57 Knowledge Checks 57

58 Knowledge Checks - Solutions 58.