The essential elements of contract formation
- Whether all contract elements are present amid Josie and Sam to build a valid contract?
- If assumed that Josie and Sam have established a contract, then, if the same is violated then what remedies are available?
There are five elements that are required in contract formation:
- An offeror makes an offer by communicating his intention to an offeree with a hope of approval and is held in Smith v Hughes.
An offer is different from invitation as in invitation, no offer is made but with the help of display of goods, advertisement etc, the offer were invited. The inviter must accept the offer to make a binding contract and is held in Pharmaceutical Society of Great Britain v Boots.
An offer when made is binding but if the offeror wants to revoke the same then it must be communicated to offeree before acceptance.
If the offer is revoked by leaving message on fax/answering machine, during normal hours then even if the machine is not working, still, the revocation is complete and is held in Brinkibon v Stahag und Stahlwarenhandelsgesellschaft mbH.
- The offer when approved by the offeree is an acceptance and is held in Crown v Clarke. When no acceptance is made and variation is made to the offer before acceptance then it is counter offer which cancel the original offer and is held in Hyde v Wrench. When the counter offer is again accepted without any changes then there is acceptance. When an acceptance is made through post then it is complete when the letter is post in transit. An acceptance must reach the knowledge of the offeror in order to hold it valid and is held in Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd.
An acceptance when made can be revoked before the same is reached to the offeror.
- Every offer and acceptance must be supported with consideration, that is, some kind of gain or benefit which makes the contract enforceable and is held in Coulls v Bagots Executor & Trustee Co Ltd.;
- The parties must be major and of sound mind;
- The parties when making offer and acceptance should have legal intention.
When a valid contract is made then the terms of the contract should be fulfill. If the core or essential term is violated then a condition is not performed an the aggrieved can cancel the contract and sue for damages. But, if secondary terms are violated then only damages can be sought from the parties.
The law is now applied to the facts of the case.
- Josie is a professional painter and he has painted a sunflower painting. The painting was displayed by her in her house studio. The action of Josie is an invitation to treat as she has displayed her painting with a price tag of $ 900. This action suggests that Josie has sought offers from interested parties and is held in Pharmaceutical Society of Great Britain v Boots.
One of the parties, Sam, saw that painting and intends to purchase the same. So, as per invitation, Sam must make an offer. So, on 19th February, he visited Josie house and offered to buy the painting for $ 700.
So, the offer that is made by Sam is for $ 700. Josie heard the offer but instead of accepting the offer, she refused the same and stated that she can only sell the same for $ 800.
So, a counter offer is made by Josie to Sam who has repudiated the offer of Sam of $ 700. So by applying the rule in Hyde v Wrench, the counter offer is a new offer which is made by Josie to Sam in written form and she desires that she can receive the acceptance from him by 21st January till midnight.
The offer is made by Josie to Sam whom is to be accepted by Sam till 21st February midnight.
However, before Sam would have accepted the offer, Josie has sold the same to Wendy.
The offer which is made by Josie to Sam was still open. It is necessary that Josie should cancel it before Sam makes any acceptance in order to avoid any consequences. So, in order to cancel the offer, Josie on 20th morning at 10AM called Sam in order to communicate his revocation. However since the phone was not working well so he left the revocation on the answering machine. As per Brinkibon v Stahag und Stahlwarenhandelsgesellschaft mbH, if a message is left on the answering machine then it is deem communication in law.
So, Josie has validly communicated the revocation of offer. Sam has accepted the offer through phone cal but is not complete due to error of phone. No acceptance is complete unless communicated. So, the acceptance was invalid. He posted a letter at 11Am for acceptance which is complete at 11AM itself as per postal rule. But, such acceptance is invalid because the offer against which the same is made is no longer active as the same is already revoked by Josie by leaving the message of the answering machine.
The significance of consideration in a contract
2. Now, if it is presumed that Sam and Josie have established a contract then, since Sam have sold the painting to Wendy then there is clear breach of contract. There is breach of condition in a contract because sale of painting is the essence of the contract. Since the subject matter upon which the contract is made is itself give to some other party then the sole purpose for which the contract was made was violated. So, Sam can terminate the contract and due Josie for damages.
No contract is made amid Josie and Sam. If there would have been contract the Josie was in contractual breach by selling the contract to third party and must pay damages to Sam.
To form a valid contract the main essentials that are required are legal consensus (offer and acceptance), capacity, party’s legal intention. Along with these essentials a contract becomes enforceable only with the presence of consideration. It is nothing but the bargain element in any contract.
Consideration is something valuable (monetary or non-monetary) which supports the promises which are exchanged amid the offeror and the offeree. In Currie v. Misa, Lush J. defined consideration as “a variable consideration may consist of some right, interest, profit or benefit accruing to the one party or some loss, forbearance, detriment or responsibility given, suffered or borne by the other.”. Thus, it is something of value which has relevance in law and is analyzed in Thomas v. Thomas by Patterson J.
A valid consideration is something which is legal, real and must not be past. It is necessary that it is from the promisee that the consideration must move and must be provided to the promisor.
One of the most significant principles that govern consideration is that it must be something which is not equivalent to the existing contractual obligation but something extra must be desired from it. It must be something more than that. Thus, if the plaintiff is performing something which he is obligated to perform under its existing duties, then, it is not a valid consideration in law and thus cannot be enforceable. This principal was laid down in Stilk v Myrickwherein the captain of the ship established a contract with his crew members so that they can assist him in the journey from Britain to the Baltic Sea and back. When the journey began, two of the sailors deserted. The captain then agreed to distribute the wages of these two sailors amid the other crew members. But, he later refused to do so and was then sued. The court held that the remaining crew was already under an existing duty to perform and thus they cannot seek extra payment without furnishing some extra duty. However in Hartley v. Ponsonby payments were made to the crew member because they had performed extra from what they were contractual bound to perform and thus became a valid consideration. The principle was also found in Williams v Roffey Bros & Nicholls (Contractors) Ltd. In the said case it was held that when any contract is altered then there is necessary that if one party is performing something then there are some factual benefits which should be provided to support the variations which can then become the consideration for each other and can be enforced in law.
Case analysis: Contract formation and breach
But, when one party is willing to pay a lesser sun of money against the full settlement of the claim to the other party, then, can it be held to be the good consideration. If the Stilk v Myrick is applied that it is something a pre existing duty and cannot be held to be a good consideration. This was also, established in Pinnels Case wherein it was a settled law that if a debtor pays less for the full settlement of the due to the creditor and if the creditor accepts the same, still, it is not a valid consideration to support the promises amid the parties.
The facts reveal that Cole has to pay 8 pounds to Pennel which is due on 11th November 1600. However, before the due date, that is, on 1st October 1600, a request is made by Pinnel to Cole that if he would pay 5 pounds then the same will be considered to be the full settlement of the claim. Cole willingly paid 5 pounds to Pinnel considering that the due is now settled. But, later Pinnel file case against Cole for the reaming amount. It was held that what Cole did was nothing but an existing duty to perform and thus there cannot be any settlement as there is no consideration that is made amid the parties to make the contract enforceable. In Foakes v. Beer, the principle laid down in Pinnels cases again applied and retreated.
Thus, can be submitting that the rule in Pinnel’s case expresses the requirement for consideration in simple contracts. The basic gist is that whenever a contract is made then if any variation is brought to the same then it must be supported by some kind of factual benefit, if anything variation is brought which is succeeded by acts which the parties are to perform under their existing contractual duties, then, the same cannot be held to be valid consideration in law.
However, the rule that is laid down in Pinnel case is found to be very harsh and not justified. This is because, if the debtor is willing to pay part of its debt to the creditor in full and final settlement of the claim then the debtor is doing something which is not his existing contractual duty, rather, he is paying before the due date, that is, when the amount is due. Thus, he is actually giving factual benefit to the creditor by paying early and this must be considered to be valid consideration in law.
Considering the hardship that is caused because of the rule that is laid down in Pinnel case, there are few exceptions that were laid.
The exceptions include under which the rule laid down in Pinnel case is not applicable.
- When the parties prior establishing a contractual relationship has set out in their deed that part payment of debt is considered to be a valid consideration against the full and final settlement, then, such part payment is valid and is enforceable in law;
- Also, when the part payment is made not on the date when the amount is due but the same is paid before the due date, that is, earlier on time, then the same is considered to be a valid consideration to hold the action enforceable in law. This rule is validly established in Pinnel case itself.
- The rule of part payment was decided in Pinnels case, but, later in Couldery v Bartrum, this rule was criticised and it was decided that if the debtor is ready to pay something other than the amount for full settlement of the claim, then it can be held to be the valid consideration in law. The other thing can be some horse or cannery but it must not be something in the form of money;
- When the debtor is ready to pay the part payment of his full amount at a place which is different from the place which is decided amid the parties, then, the same is held to be a valid consideration in law;
- When there is a presence of composite agreement as per the Bankruptcy Act 1966, and as per the agreement if the debtor is paying part payment in full settlement of the claim and the creditor is then precluded from bringing any future action for the balance amount, then, such action is considered to be invalid as the same will be then held to be incurring fraud by the creditor on the debtors.
- When the debtor is willing to pay part of the dent in full settlement of the claim in some other currency and the creditor is willing to accept the same then the transaction is held to be valid in law;
- If the debtor can provide that the payment of part of the dent is supported by the principle of equity estoppel, then, the creditor cannot deny the full settlement of the claim. The principle of equity estoppel submits that the debtor has agreed to pay the part of the debt by relying on the promise that is made by the creditor and when the debtor is acting on the promise of the credit then the creditor is forbidden to deny his promises;
- When any third party is paying part of the debt in settlement of the debt and which is received by the creditor and discharged the debtor from his obligations, then, such part payment of debt is held to be valid in law and is rightly established in Welby v. Drake.
Thus, these are some of the exceptions in which the rule that is laid down in Pinnal case is not applicable.
Thus, it is rightful in submitting that the rule that is laid down in Pinnel case is applicable in simple contracts wherein if variation is brought in the contract then there is need that some kind of factual benefit must construe from the same. However, the rule is harsh at times and thus there is a need that there must be exception to the said rule to bring relive to the debtors who pay part dents in full settlement of the claims.
Eliza, MIK, ‘The Effectiveness of Acceptances Communicated by Electronic Means, Or – Does the Postal Acceptance Rule Apply to Email’ (Journal of Contract Law, 2009)
Gillies, Pete, ‘Business Law’ (Federation Press, 2004).
Poole, Jill, ‘Textbook on Contract Law’ (Oxford University Press, 21-Apr-2016 ).
Brinkibon v Stahag und Stahlwarenhandelsgesellschaft mbH [1983] 2 AC 34 at 42.
Crown v Clarke (1927) 40 CLR 227.
Coulls v Bagots Executor & Trustee Co Ltd (1967) 119 CLR 460.
Couldery v Bartrum (1880) 19 Ch. D. 394
Currie v Misa (1875) LR 10 Ex 153.
Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 527.
Foakes v. Beer (1884).
Hyde v Wrench (1840) Beav 334.
Pharmaceutical Society of Great Britain v Boots [1953] 1 QB 401.
Roscorla v. Thomas (1842) 3 QB 234.
Pinnels Case (1602).
Smith v Hughes [1871] LR 6 QB 59.
Stilk v Myrick (1809) 170 ER 1168
Thomas v Thomas (1842), 2 QB 851.
Williams v Roffey Bros & Nicholls (Contractors) Ltd [1989] EWCA Civ 5.
Welby v. Drake (1825)
Online Material
Clark, Julie, ‘Australian Contract Law’ (2012) < https://www.australiancontractlaw.com/law/formation-agreement.html#acceptance>.
Kuklik, Alex, ‘The Law of contract’ (2017) < https://sydney.edu.au/lec/subjects/contracts/Summer%202016-17/LPAB%20-%20Contract%20-%20Summer%202016%20-%20Lecture%203.pdf>.
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