Lesson Three

Law of Contract
Prepared by :-
Mrs.(Dr) .Sathana.Vaikunthavasan
Senior Lecturer
Department of Marketing
University of Jaffna
Law of Contract
• Agreement
• Consideration
• Intention to create legal relationship
• Capacity to contract
• Legality of the contract
• Reality of the consent
• Terms of contract
• Termination of Contract
Basic of contract
• Contracts bind two or more parties.
• A contract is in fact a legally enforceable agreement between two or
more parties.
• Main requirements for the formation of a valid contract
• Agreement between parties
• Consideration
• Intention to create legal relationship
• Capacity to contract
• Legality of the contract
• Reality of the consent
Agreement
• An agreement is meeting of the minds between parties.
• Meeting of the minds could be implied by the conduct of the parties
which is known as ‘offer’ and ‘acceptance’.
• ‘Offer’ could be defined as the manifestation of a willingness to enter
into a contract if the other person agrees to the terms.
• An offeror is a person or an entity who makes a proposal to another
to enter in to a contract.
• An offeree is the person to whom the proposal to enter in to the
contract is made.
Agreement Continue……………….

It can take a quite number of forms as follows:

• An offer could be made to a specific person either verbally or in writing.
• An offer could also be made to a group of persons.
• An offer made to “world at large”.
• An offer can be inferred from conduct
• Offer must be a definite one and not doubtful
• Terms of offer must be specific and not vague
• A reply made to an inquiry/supply of information will not amount to an
offer
• An offer cannot be a declaration of the intention to do a thing
An offer made to “world at large”.
An offer made to “world at large”.
• The Carbolic Smoke Ball Co. made a product called the "smoke ball" and claimed
it to be a cure for influenza and a number of other diseases. They published
advertisements in newspapers, claiming that it would pay £100 (equivalent to
£11,000 ($ 13,390) in 2019) to anyone who got sick with influenza after using its
product according to the instructions provided with it. Mrs. Carlill who used it but
later contracted the flu, claimed £100 from the Carbolic Smoke Ball Company. The
issue is to know whether there as binding contract between the parties.
• According to the English contract law decision, an advertisement containing
certain terms to get a reward constituted a binding unilateral offer that could be
accepted by anyone who performed its terms.
Offer must be a definite one and not doubtful

• He filled out and sent the application form he had received from the
council and in response received a letter from the council stating that it
might be able to sell the property to him. Mr. Gibson asked the council if
the selling price could be lower as the path to the property was in need of
repair. The council stated that the price quoted had factored in the
condition of the path and hence the price was not negotiable. On 18 March
1971 Mr. Gibson sent a letter to the council asking to initiate the process
for purchasing the property as requested in the application he had sent.
However, before the process for selling the property could be initiated, the
control of the council changed in May 1971 and the council decided not to
sell the property to Mr. Gibson.
• An invitation to treat is not an offer but merely an act in negotiation.
Terms of offer must be specific and not vague
• The buyer of a horse, who was the plaintiff in this case, promised the seller
that they would pay $5 more for the horse, or buy another horse from the
seller if the horse was lucky. The horse was not in the condition that the
plaintiff believed and a dispute arose between the parties as to whether
the seller was owed the conditional payment mentioned by the buyer.
• The court held that the condition to pay $5 extra for the horse if it was
lucky was deemed to be too vague to create a binding contract between
the parties. The words contained in an agreement must be clear so that the
parties can be sure of the terms upon they are contracting.
A reply made to an inquiry/supply of
information will not amount to an offer
• Harvey was interested in buying a Jamaican property owned by Facey. He
sent Facey a telegram stating “Will you sell us Bumper Hall Pen? Telegraph
lowest cash price – answer paid.” Facey responded stating “Bumper Hall
Pen £900”.Harvey responded stating that he would accept £900 and asking
Facey to send the title deeds. Facey then stated he did not want to sell.
Harvey sued, stating that the telegram was an offer and he had accepted,
therefore there was a binding contract.
• Privy Council held that the indication of lowest acceptable price does not
constitute an offer to sell. Rather it is considered as an invitation to sell.
• It is important in case law that it defined the difference between an offer
and supply of information.
An offer cannot be a declaration of the intention to do a thing
• The defendant was an auctioneer who had advertised in the London
papers that certain brewing materials, plant, and office furniture would be
sold by him the plaintiff was a commission broker in London, who attended
the sale on the final day. However, on that day, all the lots of furniture were
withdrawn by the defendant. The claimant sought to recover his expenses
and the time wasted by attending, arguing that the withdrawal of the lots
was a breach of contract which had been formed by the offer made by the
defendant in the advertisement, and accepted by the claimant.
• The issue was whether the advertisement placed by the defendant was a
legally binding offer of sale, which had been accepted by the claimant’s
attendance at the auction, forming a completed contract.
• The court held, dismissing the claimant’s case, that the advertisement was
merely a declaration to inform potential purchasers that the sale was
taking place. It was not an offer to contract with anyone who might act
upon it by attending the auction, nor was it a warranty that all the articles
advertised would be put or sale. As such, it did not legally bind the
defendant to auction the items in question on any particular day.
Invitation to treat
• Initial negotiations between parties before a definite offer is
formulated is known as ‘invitation to treat.
• Here are some instances of invitation to treat;
• An advertisement (except ones with rewards for performance)
• Auction sales
• Tenders
• Goods displayed in a shop with price marked by the seller
• Sales of shares and
• Displaying notices (e.g.: notice of auction), handbills, circulars, prospectus etc.
are generally treated as an invitation to treat.
Invitation to treat- An advertisement
• The defendant advertised for sale a number of Bramble finch cocks
and hens, stating that the price was to be 25 shillings for each. Under
the Protection of Birds Act 1954, it was unlawful to offer for sale any
wild live bird. The Royal Society for the Prevention of Cruelty to
Animals (RSPCA) brought a prosecution against the defendant under
the Act. At his trial, the defendant was found guilty of the offence by
the magistrates. Partridge appealed against conviction.
• The issue on appeal was whether the advertisement was properly
construed as an offer of sale in which case the defendant was guilty
or an invitation to treat (in which case he had committed no offence).
• The court held that the advertisement was not an offer but an
invitation to treat, and as such the defendant was not guilty.
Goods displayed in a shop with price marked
by the seller
• The requirements of offer and acceptance in the formation of a contract
• It is an English contract law case concerning the requirements of formation
of contract. In the formation of contract, the case established that, where
goods are displayed in a shop together with a price label, such display is
treated as an invitation to treat by the seller, and not an offer. The issues
were whether the display of knife constituted offer for a sale. In which case
the defendant was guilty or an invitation he was not. The issue was
whether the display of the knife constituted an offer for sale or a Invitation
to treat.
• The court held that in accordance with the general principles of contract
law, the display of the knife was not an offer of sale but merely an
invitation to treat,
Termination of offer
• Offer may be terminated by rejection, revocation, lapse of time,
failure to fulfill a condition which the contract was subjected to and
death of parties.
1. Rejection: offeree rejects the offer, Offer may be rejected in two
ways:
• By express rejection or
• By a counter offer from the offeree.
By a counter offer from the offeree
• Wrench offered to sell his farm in Luddenham to Hyde for £1200, an offer which
Hyde declined. On 6 June 1840 Wrench wrote to Hyde's agent offering to sell the
farm for £1000, stating that it was the final offer and that he would not alter from
it. Hyde offered £950 in his letter by 8 June, and after examining the offer Wrench
refused to accept, and informed Hyde of this on 27 June. On the 29th Hyde
agreed to buy the farm for £1000 without any additional agreement from
Wrench, and after Wrench refused to sell the farm to him, he sued for breach of
contract.
• English contract law related to the issue on counter-offers and their relation to
initial offers.
• There was no contract. Where a counter offer is made this destroys the original
offer so that it is no longer open to the offered to accept.
By a counter offer from the offeree
• The defendant made an offer to sell land to the plaintiff for £280. The plaintiff replied accepting
the offer, enclosing £80 and promising to pay the balance in four monthly instalments.
• The proposal for deferred payment was a variation of the terms of the offer. No acceptance since
the normal terms of a contract for the sale of land are that the entire price is payable as a single
sum at completion. Therefore the plaintiff’s acceptance was not an unqualified one
Termination of offer Continue………
2. Revocation
Withdrawal of an offer by the offeror, before offeree makes the acceptance
• Dodds delivered an offer to sell houses to Dickinson on Wednesday. Dodds
promised to keep open the offer until 9 A.M. Friday. Although Dickinson
decided to accept the offer on Thursday, he said nothing to Dodds because
the offer was valid until Friday morning. Another man told Dickinson that
the homes had already been sold to someone. Dickinson met Dodds at 7
A.M. Friday then argued about the offer. Dodds said it was too late.
Dickinson decided to sue for breach of contract. The issue was whether Mr.
Dodds had promised to keep the offer until Friday morning and whether
the claim was binding between the two parties.
• The court held that Mr. Dodds' statement was nothing more than a
promise. In fact, there was no binding contract formed.
Termination of offer Continue………
2. Revocation
Withdrawal of an offer by the offeror, before offeree makes the
acceptance
• Grant wrote to Routledge offering to purchase the lease of his house.
The offer was to remain open for six weeks. Grant then changed his
mind about purchasing the lease and, within the six weeks, withdrew
his offer. After Routledge had received Grant’s letter withdrawing the
offer he wrote to Grant, within the six weeks, accepting Routledge’s
offer. Whether Grant could withdraw his offer within the six weeks
period. Whether he was bound contractually given that Routledge
had accepted the offer within the timescale.
• The offer could be withdrawn within the six weeks period without
incurring any liability. One party cannot be bound without the other.
 Termination of offer Continue………
3. Lapse of time
If a time is fixed for acceptance and that is not adhered by the offeree then the offer will
lapse
• The defendant, Mr. Montefiore, wanted to purchase shares in the complainant’s hotel.
He put in his offer to the complainant and paid a deposit to his bank account to buy
them in June. This was for a certain price. He did not hear anything until six months later,
when the offer was accepted and he received a letter of acceptance from the
complainant. By this time, the value of shares had dropped and the defendant was no
longer interested. Mr. Montefiore had not withdrawn his offer, but he did not go through
with the sale.
• The complainant brought an action for specific performance of the contract against the
defendant. The issue was whether there was a contract between the parties after the
acceptance of the original offer six months after it was made.
• The court held that the Ramsgate Victoria Hotel’s action for specific performance was
unsuccessful. It stated that what would be classed as reasonable time for an offer to
lapse would depend on the subject matter. In this case, it was decided that six months
was the reasonable time before automatic expiration of the offer for shares.
Termination of offer Continue………

4. Failure of a condition which the offer was subject to

• The offer may be conditional and If those conditions are not fulfilled
then the offer will lapse.
5. Death of parties
• The offer terminates when the offeror or the offeree or both of them
die before acceptance is made.
Consideration
• Something, which is of value given by a person in exchange for a promise
made to him “Generally, both sides must give something.
• Consideration could be divided in to three categories:
• Executory consideration
• Executed consideration and
• Past consideration.
• Executory consideration means, a promise given for a promise.
• Executed consideration means, an act in return for a promise.
• Past consideration is where one party has already performed an action
before the other party even agreeing to a reciprocal consideration/
obligation. Therefore, there is no valid consideration as there has been no
bargaining in the first place.
• Roscorla v. Thomas (1842)
• Jayawickrema v. Amerasuriya (1918)
Past consideration
• Past consideration not sufficient consideration to support a contract. The
claimant bought a horse from the defendant. After the sale finished the
defendant told the claimant that it was a sound horse and did not have any
vice such as bad temper. The truth however was quite different from what
the claimant had been told. The horse had very bad temper and was
ferocious and the claimant sued the defendant.
• The court only considered the contract for the sale of the horse. There was
not good consideration. Because this had preceded the defendant’s
promise, and also it was not part of the bargain and not given in exchange
for the promise. The consideration for the soundness warranty had already
been made through the original contract of sale, and so new consideration
would have had to be provided in order for the warranty to have legal
effect. This decision demonstrates the rule in English contract law that
consideration contracted for in the past does not amount to good
consideration for a present agreement.
Past consideration
• This was the case of Jayawickrema v Amarasuriya (1918). The plaintiff
stated that the defendant had got property from his mother. which was
meant to be held in trust for both the plaintiff and the defendant in equal
shares. The plaintiff had wanted to sue the defendant to implement that
trust but the plaintiff had not done so because the defendant had
promised to pay him Rs. 150,000/- each year for five years.
• The defendant did not pay this sum and when the plaintiff sued, the
defendant argued that there had been no consideration for the
undertaking.
• According to Roman Dutch law applied and that the plaintiff undertaking
not to sue the defendant on the earlier occasion was sufficient to pay the
plaintiff the Rs. 150,000/- for five years as promised. Hence the plaintiff
was entitled to sue the defendant for breach of contract.
Intention to create legal relations
• An agreement is not binding unless there is an intention that legal
consequences must follow from it.
• For this purpose, contracts are divided in to two:
• Commercial agreements
• Domestic agreements
• A husband worked overseas and agreed to send maintenance payments to
his wife. At the time of the agreement the couple were happily married.
The relationship later soured and the husband stopped making the
payments. The wife sought to enforce the agreement. Do the husbands
promise to pay £30 per month constitute a valid contract which can be
sued upon?
• The agreement was a purely social and domestic agreement and therefore
it was presumed that the parties did not intend to be legally bound.
Domestic agreements
• Mr. Merritt and his wife jointly owned a house. After that Mr. Merritt left to live
with another women. They made an agreement that Mr. Merritt would pay Mrs.
Merritt a euro 40 monthly sum and eventually transfer the house to her. But Mrs.
Merritt kept up the monthly mortgage payments. When the mortgage was paid
Mr. Merritt refused to transfer the house.
• Mr. Merritt contended the agreement was a domestic arrangement between
husband and wife and there was no legal intention to create legal relations (non
enforceable contract). Then Mrs. Merritt argued that they were in the process of
separation and the presumption of there being no intention to create legal
relations did not apply
• Mr. Merritt’s appeal was unsuccessful because the parties were in the process of
separating and it was an intention to arrangement legal relations. The
arrangement was sufficiently certain to be enforceable and the paying of the
mortgage was ample consideration for Mr. Merritt promise. Mrs. Merritt was
entitled to the matrimonial home entirely.
Capacity to contract
• Certain kinds of persons are protected by law due to their disabilities,
by not granting them the full contractual capacity. They are;
• Minors
• Mentally disordered persons
• Intoxicated persons
• Minors: Most contract with a minor are “voidable” at his option. That
is to say he has a right not to be bound by the contract. Such
contracts are described below.
• Binding on the minor
• Contracts for necessities
• Beneficial service contracts
Contracts for necessities
• Nash, a tailor supplied 13 waistcoats and other things of that kind to
an undergraduate student Inman. Student was a minor and his father
had been supplied adequately clothes for him. Student refused to pay
for the goods supplied and tailor brought this suit against him for
recovery of price of those goods.
• Whether the goods so supplied fall into the category of necessary?
• If the answer is No, whether the contract was enforceable at law?
• On whom does he was responsibility to prove or disprove the
necessity of goods so supply fall?
• Inman was a minor and already had enough clothing; the contract
could therefore not be for necessities..
Beneficial service contracts

This is regarding a Bond, by a minor, who is the first defendant, along

with her father, who is the second defendant. The bond says that, the
girl will finish her studies and work as a teacher in a registered school
for five years, otherwise they will pay Rs.300 to the majesty the king.
She entered the mussels training college, but she failed in the
examination and she left the college. So the bond breached.
The bond was not in a correct format but it didn’t affect the validity of
the bond, they can be recovered by a penalty under the law.
Capacity to contract continue………………
• Mentally disordered persons
• Defendant when lunatic signed a promissory note as surety upon which
plaintiff brought an action and defendant took the defense of insanity.
• Whether defendant can successfully claim insanity as a defense?
• To successfully take the defense of insanity as breach of contract, defendant
must show not only that he was so insane at the time of executing the deed
such that he was incapable of understanding the implications of the
agreement; but also that at the time of the contract his insanity was known
to the plaintiff. The burden of proof must lie on the defendant.
• Intoxicated persons
Legality of contracts
• Contracts entered in to for an illegal purpose such as contracts to kill,
drug dealing and prostitution will be null and void contracts.
Reality of consent
• Agreement shows the free consent or assent of the parties. However,
this free consent will be affected under the following situation;
• Mistake
• Misrepresentation
• Duress
• Undue influence
• So, under those instance where the genuine consent is not present,
the contract entered in to
Misunderstanding
• Raffles offered to sell cotton to the Wich. It would be bought by a ship
From Bombay. The ship was called by the Peerless. There were two
ships that had the same name. But both of them thinking about the
different Peerless ships. Wich thought about which was leave in
October, but Raffles sold them which was left in December. So Wich
refused to pay due to months' delay.
• It is a mutual misunderstanding by the parties a ground for
invalidating a contract. The two parties did not agree to the same
thing and there was no binding contract. Therefore, the defendants
prevailed and did not have to pay.
Common mistake
• The sales of a specific cargo of corn were on abroad for sailing from
Salonica to the UK. When the contract was made the cargo of corn
was sold by the master of the ship because it was fermented.
• Buyer would sue for non-delivery of the goods. Seller’s argument was
that the buyer he agreed to pay against delivery of the shipping
document. So, it’s a common mistake.
• Between two contracting parties about the possibility of performing
of an agreement. The corn effectively did not exist at the true of
contract. There was a total failure of consideration and the buyer
were not liable to pay the price.
Mistake
• Mr. Bell was the managing director for five years of a company that was owned by Lever Bros Ltd.
Mr. Bell had traded for personal profit during his employment, which was opposite to his contract
with the company. Without knowledge of this, Lever Bros Ltd made an offer of redundancy to Mr.
Bell, terminating his contract and offering a £30,000 payment as compensation.
• Due later finding out about his trading whether the redundancy contract that was created and
accepted by Mr. Bell, could be void by a common mistake. Lever Bros Ltd argued that this cover-
up and misconduct was a breach of his duty that was detailed in his earlier employment contract.
• The court held that the contract was not void, as the mistake was not an ‘essential and integral’
part of the contract. The personal trading that had happened during the employment was not
related to the subject matter of the contract and was said to be minor compared to the profits
Mr. Bell had made for Lever Bros Ltd. Only a mistake to the identity of the parties or of subject
matter to the contract, as well as an item’s quality, would be able to successfully negate consent
and therefore void a contract as if it had never existed. The mistake must be essential to the
identity of the contract.
Terms of contract
1. Terms
• The promises or understanding by the parties in the contract
• Terms are
• Conditions
• Warranties
• Innominate terms
Conditions
• Vital term of the contract
• Goes into the root or the foundation of the contract
• Madam Pous was under contract with Spiers, a theatre company to sing in an opera at the Theatre. She
agreed in writing to sing and play the lead role at Spiers at the Theatre for £11 a week for three months. The
opera was to run for three months and started around November 14. The obligation to perform from the
first night was a condition of the contract. The first performance was announced for November 28 and
Poussard did not object to it.
• She came to the rehearsals but the composer delayed the music and she did not get the music for the last
part of the opera till a few days before the date of the show (November 28). Thereafter she was taken ill and
did not attend the final rehearsals in the last week. Spiers engaged another performer, Miss Lewis to be
ready to take over if Poussard could not make it on the first night of the show. It was agreed that Miss Lewis
would receive £15 a week. Poussard continued to be ill for the first three days of that week. On Thursday
December 04, she was well again, but Spiers refused to have her back.
Terms of contract continue…………….
• Warranties
• A minor term of the contract
• Incidental to the main purpose of the contract

• Hong Kong Firm agreed to rent their ship to Kawasaki for 24 months and stated on the date of delivery that
the ship was fitted or use in ordinary cargo service. However, due to the fact that the engine room staff was
inefficient and the engines were very old, the ship was held up for 5 weeks, and then needed 15 more
weeks’ worth of repairs after the deal had been made. Kawasaki repudiated the contract, and Hong Kong
Firm sued for wrongful repudiation. Hong Kong Firm was successful at trial and Kawasaki appealed. The issue
here is, what is the test for determining if a breach of a contract leads to a right of repudiation Here the
appeal was dismissed. Diplock, writing for a unanimous court, states that the test does not always depend
on whether the thing that was breached was a warranty or a condition, as sometimes the circumstances are
more complex than this. He states that the correct test is to look at the events which have occurred as a
result of the breach at the time
• Innominate terms
• Parties have failed to classify the terms in contract
Terms of contract continue…………….
2. Express and implied terms
Express terms: specially mentioned and agreed between parties at the
time of entering in to the contract.
Implied terms: not been specially mentioned and agreed between
parties at the time of entering in to the contract. Implied three ways:
• By statue
• By court or
• By trade customs
Termination of Contract
• The contract could be terminated by the following methods
• By performance
• By a new agreement
• By frustration
• By breach
• By performance: when parties fulfill their contractual obligations, the
contract will be terminated
• By new agreement: contract come to end by agreement in two forms
as Bilateral and Unilateral
By performance:
• There was an agreement for the sale of 3,000 tons of canned fruit
packed in cases of 30 tins. When delivered it was discovered that half
the cases contained only 24 tins although the total number of tins
was still 3,000. So, the market values were not affected.
• The Court of Appeal held that notwithstanding that there was no loss
to the buyer
Termination of Contract continue…………..
• Frustration : each party is released from performing any obligation
after the frustrating event occurs. It can be discharged under the
following circumstances
• Destruction of the subject matter-
• Personal incapability-
• Non-occurrence of a special event-
• By breach: By breach a party to the contract fails to perform any term
of the contract without a legitimate legal excuse.
Frustration: Destruction of the subject matter
• Taylor sued Caldwell for breach of contract to rent out Defendant’s facility
for four concert dates.
• The case is a fundamental case in the area of frustration with regards to
contract law.
• The parties regarded the continuing existence of the hall as the foundation
of the contract, and the contract contained an implied condition that both
parties would be excused if the hall did not exist. Therefore, the
destruction of the hall without fault of either party excuses both parties,
the Plaintiff from taking the gardens and paying the money and the
Defendant from performing their promise to give the use of the hall.
• This is the case where the doctrine of impossibility through destruction of
the subject matter was established in this case.
Frustration: Personal incapability
• The claimant suffered a mental breakdown and was told by his doctor
that he should not play the drums perform more than 4 nights per
weeks
• He brought a claim for wrongful dismissal.16 year old agreed by
contract to play the drums for the defendant band for 7 nights per
week for 5 years. was told by his doctor that he should not perform
more than 4 nights per week. The band dismissed him.
• The claimant's action was unsuccessful as his medical condition made
it impossible for him to perform his contractual obligations and the
contract was thus frustrated.
Frustration :
Non-occurrence of a special event-
• By contract in writing of 20 June 1902, the defendant agreed to hire
from the plaintiff a flat in Pall Mall on 26 June and 27 June, on which
days it had been announced that the coronation processions would
take place and pass along Pall Mall. The contract did not contain any
express terms on the coronation processions or any other purposes
for which the flat was to be hired. The defendant paid the deposit
upon signing the contract. The processions, however, did not take
place on the announced dates. As a result, the defendant declined to
pay the balance of the agreed rent.
• Was the defendant obliged to pay the rent despite the fact that the
processions did not take place as planned?
Why You Need a Contract
• Support to navigate the law
• Helps to get paid
• Minimize disputes or problems
• Protect intellectual property
• Limits liability
• provide in-depth coverage of your business
• build trust and give peace of mind
End