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The Institute of Chartered Accountants in England and Wales

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For exams in 2016

Study Manual

www.icaew.com
 Law
The Institute of Chartered Accountants in England and Wales

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ISBN: 978-1-78363-203-9
Previous ISBN: 978-0-85760-983-0

First edition 2007

Ninth edition 2015

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All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system or transmitted in any form or by any means, graphic,

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electronic or mechanical including photocopying, recording, scanning or
otherwise, without the prior written permission of the publisher.

The contents of this publication is intended to prepare students for the

ICAEW examinations, and should not be used as professional advice.

British Library Cataloguing-in-Publication Data

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A catalogue record for this book is available from the British Library
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Originally printed in the United Kingdom by Polestar Wheatons on paper

obtained from traceable, sustainable sources
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Polestar Wheatons
Hennock Road
Marsh Barton
Exeter
EX2 8RP

Your learning materials are printed on paper obtained from traceable,

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sustainable sources.
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© The Institute of Chartered Accountants in England and Wales

 Welcome to ICAEW
I am delighted that you have chosen ICAEW to progress your journey towards joining the chartered
accountancy profession. It is one of the best decisions I also made.
The role of the accountancy profession in the world’s economies has never been more important.
People making financial decisions need knowledge and guidance based on the highest technical and
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and organisations to think and act differently, to provide clarity and rigour, and so help create and
sustain prosperity all over the world.

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As a world leader of the accountancy and finance profession, we are proud to promote, develop and
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yourself, will realise career ambitions, maintain a professional edge and contribute to the profession.
You are now on your journey towards joining the accountancy profession, and a highly rewarding career

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with endless opportunities. So, if you are studying for our Certificate in Finance, Accounting and
Business (ICAEW CFAB) or our world-leading chartered accountancy qualification, the ACA, you too
have made the first of many great decisions in your career.

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You are in good company, with a network of over 26,000 students around the world made up of like-
minded people, you are all supported by ICAEW. We are here to support you as you progress through
your studies and career; we will be with you every step of the way, visit page ix to review the key
resources available as you study.
I wish you the best of luck with your studies and look forward to welcoming you to the profession in the
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future.
Michael Izza
Chief Executive
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ICAEW
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 Contents

 Introduction vii

 Law viii

 Key Resources ix

1. Contract formation 1

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2. Termination of contract 25

3. Agency 43

4. Negligence 59

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5. Companies: the consequences of incorporation 77

6. Companies: ownership and management 101

7. Companies: finance 135

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8. Insolvency law: corporate and personal 161

9. Partnership 185

10. Criminal law N 203

11. Employment and data protection law 225

 Glossary of terms 259

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 Index 267
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 1 Introduction

ACA qualification
The ICAEW chartered accountancy qualification, the ACA, is a world-leading professional qualification in
accountancy, finance and business.
The ACA has integrated components that give you an in-depth understanding across accountancy,
finance and business. Combined, they help build the technical knowledge, professional skills and
practical experience needed to become an ICAEW Chartered Accountant.

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Each component is designed to complement each other, which means that you can put theory into
practice and you can understand and apply what you learn to your day-to-day work. Progression
through all the elements of the ACA simultaneously will enable you to be more successful in the
workplace and exams.
The components are:

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 Professional development
 Ethics and professional scepticism
 3-5 years practical work experience
 15 accountancy, finance and business modules

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To find out more on the components of the ACA and what is involved in training, visit your dashboard
at icaew.com/dashboard.
ICAEW Certificate in Finance, Accounting and Business
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The ICAEW Certificate in Finance, Accounting and Business (ICAEW CFAB) teaches essential skills and
knowledge in the three key areas of finance, accounting and business.
ICAEW CFAB consists of the same six modules as the first level of our world-leading qualification, the
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ACA. This means, it can serve as a stand-alone qualification or as a stepping stone on your journey
towards chartered accountancy.
You can find out more about the ICAEW CFAB exams and syllabus at icaew.com/cfabstudents.
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To learn more about the ACA qualification and chartered accountancy, visit icaew.com/careers.
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Introduction vii
 2 Law
The full syllabus and technical knowledge grids can be found within the module study guide. Visit
icaew.com/dashboard for this and more resources.

2.1 Module aim

To provide candidates with an understanding of the principles of English law.
On completion of this module, candidates will be able to:
 Explain the nature of contractual agreements, the agency relationship and the consequences of

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negligence
 Understand the legal implications of incorporation, including the roles of shareholders and
directors, and the main implications of insolvency law
 Identify instances of criminal behaviour that may be encountered by professional accountants
 Identify other key areas in which the law affects the role and work of the professional accountant.

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2.2 Method of assessment

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The Law module is assessed by a 1.5 hour computer-based exam. The exam consists of 50 questions
worth two marks each, covering the areas of the syllabus in accordance with the weightings set out in
the specification grid. The questions are presented in the form of multiple choice or multi-part multiple
choice.

2.3 Specification grid

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This grid shows the relative weightings of subjects within this module and should guide the relative
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study time spent on each. Over time the marks available in the assessment will equate to the weightings
below, while slight variations may occur in individual assessments to enable suitably rigorous questions
to be set.
Syllabus area Weighting (%)
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1 The impact of civil law on business and professional services 35

2 Company and insolvency law 40
3 The impact of criminal law on business and professional services 10
4 The impact of law in the professional context 15
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100
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viii Law
 3 Key Resources
Student support team
Our student support team are here to help you as much as possible, providing full support throughout
your studies.
T +44 (0)1908 248 250
F +44 (0)1908 248 069
E studentsupport@icaew.com
Student website

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The student area of our website provides the latest information, guidance and exclusive resources to
help you as you progress through the ACA. Find everything you need (from sample papers to errata
sheets) at icaew.com/dashboard.
If you are studying for the ICAEW CFAB qualification, you can access exam resources and support at
icaew.com/cfab.

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Online student community
The online student community provides support and practical advice – wherever you are, whenever you
need it. With regular blogs covering a range of work, life and study topics as well as a forum where you

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can post your questions and share your own tips. ACA and ICAEW CFAB students can join the
conversation at icaew.com/studentcommunity.
Tuition
The ICAEW Partner in Learning scheme recognises tuition providers who comply with our core principles
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of quality course delivery. If you are receiving structured tuition with an ICAEW Partner in Learning,
make sure you know how and when you can contact your tutors for extra help. If you are not receiving
structured tuition and are interested in classroom, online or distance learning tuition, take a look at our
recognised Partner in Learning tuition providers in your area, on our website icaew.com/dashboard.
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Faculties and Special Interest Groups
Faculties and special interest groups support and develop members and students in areas of work
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and industry sectors that are of particular interest.

Our seven faculties provide knowledge, events and essential technical resources. As an ACA or
ICAEW CFAB student, you can register to receive a complimentary e-newsletter from one faculty of
your choice each year throughout your studies.
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Find out more about faculties and special interest groups at icaew.com/facultiesandsigs.
Library & Information Service
The Library & Information Service is ICAEW’s world-leading accountancy and business library. The
library provides access to thousands of resources online and a document delivery service, you’ll be sure
to find a useful eBook, relevant article or industry guide to help you. Find out more at icaew.com/library.
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Introduction ix
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Law
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CHAPTER 1

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Contract formation N
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Introduction
Examination context
Topic List
1 The validity of a contract
2 Offer and acceptance
3 Intention to create legal relations
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4 Consideration
5 The terms of the contract
6 Privity of contract
Summary and Self-test
Answers to Interactive questions
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Answers to Self-test

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 Introduction

Learning objectives Tick off

 Define a contract

 Identify the essential elements of a contract

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 Be aware of factors which might affect the validity of a contract and their consequences

 Understand and apply the rules relating to offer, acceptance and the intention to create
legal relations

 Understand and apply the rules relating to consideration

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 Understand that contract terms may be express or implied into the contract.
The specific syllabus reference for this chapter is 1a.

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Syllabus links
As seen above, the issue of contract formation could be relevant in many different areas of the syllabus,
for example accounting and auditing, employment, business and financial management.
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Contracts are also important in assurance; for instance, a key contract is the engagement letter between
the client and the assurance provider.
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Examination context
Contract is an important part of the syllabus. Typically seven out of fifty questions relate to contract law.
Understanding the basic precepts relating to contract is vital.
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You are likely to be presented with scenarios and may have to conclude whether a valid contract has
been formed. Many cases are referred to in this and later chapters. They will not be examined directly,
but illustrate points of law that could be.
In the assessment, candidates may be required to:
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 Recognise when a legally binding contract exists between two parties

 Understand how a contract may be enforced
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2 Law
 1 The validity of a contract C
H
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Section overview P
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 A valid contract is a legally binding agreement, between two parties, which agreement may be E
evidenced by writing, words or action. R

 Three essential elements must be present, namely

– Agreement 1
– An intention to create legal relations

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– Consideration

It is almost invariably the case that the two parties to a contract bring with them differing levels of
bargaining power. A contract may be made between a large retail company and an individual for
example. In such cases, the agreement is likely to be in the form of a standard form contract, prepared
by the dominant party and which the other party has no choice but to take or leave.

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Generally speaking the law will not wish to restrict or interfere with the ability of contractual parties to
decide whether or not to enter into a contract and, if so, upon what terms (‘freedom of contract’).
However, it will often intervene where one party seeks an unfair advantage as a result of his superior
bargaining position.

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Such intervention will be made by the courts or by legislation. Thus, for example, the Sale of Goods Act
implies terms into a contract which impose obligations on the business seller as to the quality and fitness
for purpose of the goods he sells. Likewise the Consumer Credit Act affords the consumer protection
where he enters into credit agreements. In respect of exclusion clauses, in which typically the stronger
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party seeks to avoid liability, the Unfair Contract Terms Act (discussed in Chapter 2) may result in such a
clause being void outright or void if the court considers it to be unreasonable.
In order to be valid, three essential elements of a contract must be shown to be present. These are dealt
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with in detail in sections 2 – 4 below. Suffice it to say here that those elements are
 Agreement between the parties
 An intention to create legal relations
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 Consideration

1.1 Void and voidable contracts

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Even if these essential elements can be shown, a contract may nonetheless be rendered void or
voidable by one or more of the following vitiating factors:

Rule (in broad terms) Effect of rule not being followed

Lack of capacity An individual must be of sound mind and Voidable at the option of the
aged eighteen or over person without capacity
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Absence of free will A party should not be made to enter into a Voidable
contract other than by his own free will, ie
not by duress or undue influence
Illegality A contract should not be illegal or offend Void
public policy
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Mistake You should be aware that if one or both

parties alleges that they were mistaken in
some way, this may affect the validity of
the contract. However, the law is as
complex as the facts of each case are varied
and you do not need to know the law for
the purposes of your studies.

Contract formation 3
 Rule (in broad terms) Effect of rule not being followed

Misrepresentation If A makes a pre-contractual statement of Voidable

fact that is intended to and does cause B to
enter into the contract but turns out to be
untrue (misrepresentation) the other party
may choose to avoid the contract

The consequences of a contract being rendered void or voidable are as follows:

Void A void contract is not a contract at all. The parties are not bound by it and if they
transfer property under it they can generally recover their goods even from a third

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party.
Voidable A voidable contract is a contract which one party may set aside. Property transferred
before avoidance is usually irrecoverable from a third party.

1.2 Unenforceable contracts

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Even if a contract satisfies the above requirements and is valid, it may still be unenforceable. This means
that if either party fails to perform his part of the contract, the other party cannot compel him to do so.
A contract will be unenforceable where it is not in the correct form. Generally speaking a contract may

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be made orally or in writing and an oral agreement will be just as binding as a written contract.
However in certain cases the law provides that an oral contract will not be sufficient, for example
agreements for the transfer of land and consumer credit agreements (that are regulated by the
Consumer Credit Act 1974 (as amended by the Consumer Credit Act 2006)) must be in writing. Note
that, increasingly, contracts are made electronically and an electronic signature can be used as evidence
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of the validity of a contract in the same way as a written signature (s. 7 Electronic Communications Act
2000).
Another example with which you should be familiar is a guarantee. This is where a guarantor promises
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to pay a creditor the sum of the debtor’s debts, in the event that the debtor fails to pay them himself.
The agreement itself need not be in writing but the terms must be evidenced in writing before any
action is brought. The written evidence should be signed (or acknowledged in some way) by the
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guarantor.
Golden Ocean Group Ltd v Salgaocar Mining Industries PVT 2011
The facts: Brokers for Golden Ocean and SMI exchanged a number of emails in which the terms of
a charterparty by SMI’s Singaporean chartering arm, Trustworth, were negotiated, but they were
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never formalised into a written agreement. Emails early in the exchange had stated that the charter
would be ‘fully guaranteed’ by SMI. When Trustworth refused to take delivery, Golden Ocean sued
SMI on the guarantee.
Decision: The Court of Appeal recognised that contracts are often negotiated informally by email
(particularly in the shipping industry) and held that a single document was not necessary. Nor was
it material that no documents had been signed in the traditional way. The typed name of the broker
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for SMI in the final email had clearly signified his agreement to all negotiated terms and constituted
a valid signature.
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4 Law
 Interactive question 1: Essentials of a valid contract [Difficulty level: Easy]
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What will be the consequences of the following in relation to a purported contract between two parties? H
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Void Voidable Unenforceable P
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A There is clear agreement between the parties on all E
terms and they intend to create a legally binding R
agreement but there is no consideration.
B One of the parties is aged 17 1

C The contract is an agreement to defraud HM Revenue

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& Customs.
D The contract is made orally and provides for Graham
to pay Harry the debt owed to Harry by Imran.

See Answer at the end of this chapter.

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2 Offer and acceptance

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Section overview
 As noted above, the first essential element in the formation of a valid and binding contract is
agreement. This is usually analysed and understood in terms of ‘offer’ and ‘acceptance’.


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It is a matter of interpretation whether something amounts to an offer.
There are a number of rules which determine whether an offer has been validly accepted.
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2.1 What constitutes an offer?
An offer is a definite promise to be bound on specific terms. It is made by an offeror.
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It is a matter of interpretation as to whether something is sufficiently definite to comprise an offer

capable of acceptance. A statement that is vague and that cannot be rendered certain by reference to
previous dealings or custom cannot be an offer. Only an offer in the proper sense may be accepted so as
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to form a binding contract. A statement which sets out possible terms of a contract is not an offer
unless this is clearly indicated, although if, in the course of negotiations for a sale, the vendor states the
price at which he will sell, that statement may be an offer which can be accepted.
An offer must be something more than a supply of information or a statement of intention. For
example, advertising that an auction will take place is a statement of intention, not an offer to sell.
Potential buyers may not sue the auctioneer if the auction does not take place. Likewise, saying that you
might be interested in buying your neighbour’s car is a statement of intention not an offer to buy.
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It is also important to distinguish between an offer and a mere invitation to treat. Where a party is
initiating negotiations, he is said to make an invitation to treat. An invitation to treat cannot be accepted
to form a binding contract, it is simply an indication that a person is prepared to receive offers with a
view to entering into a binding contract.
That indication is evidenced in the following situations.
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 Advertisements (in a newspaper, for example).

 Goods displayed for sale in a shop window or on self-service shelves. (If it were the case that a
customer accepted an offer to sell by removing goods from the shelf, he could not then change his
mind and put them back as this would constitute breach of contract.)
 Circulation of a price list.

Contract formation 5
 Worked example: Offer or invitation to treat
Ken offered to sell Leah a flick knife for £20. He also advertised the flick knives in the local newspaper
and put one on display in his shop window with a price tag on it. Will he be liable to prosecution for
‘offering for sale’ an offensive weapon?
He will be guilty of the offence with regard to his offer to Leah. However, the advertisement and shop
window display are not offers but invitations to treat and do not render him guilty of this offence.

An offer does not have to be made to a particular person. It may be made to a class of persons or to
the world at large.

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Carlill v Carbolic Smoke Ball Co 1893
The facts: The manufacturers of a medicinal carbolic smoke ball published an advertisement by
which they undertook to pay ‘£100 reward ... to any person who contracts ... influenza ... after
having used the smoke ball three times daily for two weeks’. The advertisement added that £1,000
had been deposited at a bank ‘showing our sincerity in this matter’. Carlill read the advertisement,

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purchased the smoke ball and used it as directed. She contracted influenza and claimed her £100
reward.
In their defence the manufacturers argued against this.

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 The offer was so vague that it could not form the basis of a contract, as no time limit was
specified.
 It was not an offer which could be accepted since it was offered to the whole world.
Decision: It was a valid offer capable of acceptance. It was not vague but clear that the smoke ball
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must protect the user during the period of use. Further, it was accepted that an offer could be
made to the world at large (by analogy with reward cases where it was accepted that a notice
offering a reward could be accepted by anybody).
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You should note that Carlill is an unusual case in that advertisements are not usually regarded as offers.
However, it established the principle that an offer can be made to the world at large and is generally
seen as a landmark case. You should be familiar with it.
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Worked example: Negotiations in respect of a contract

It is often unclear at what point, if at all, actions or statements during negotiations constitute an offer
capable of acceptance. This was the case in Gibson v Manchester City Council 1979.
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Gibson lived in a council house in Manchester and received a brochure from the council seeking to
determine whether council tenants would be interested in buying their council houses. Interested
parties were advised to return the form attached to the brochure, which Gibson did. As a result, the
council sent him a letter saying that the council may be prepared to sell him the house for £2,180. The
letter enclosed an application form to purchase the house which Gibson filled out and returned.
After Gibson had sent his application, the council changed hands and the new council reversed the
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policy on selling council houses. Only in cases where there had been an exchange of contracts were the
sales completed. Gibson sued the council, claiming that the letter he had been sent by the former
council was an offer which he had accepted at the time when he made his formal application.
The House of Lords concluded that no binding contract had been formed because the council’s letter
was not a formal offer but was still part of the negotiations taking place surrounding the potential sale.
The letter was not unequivocal and it was still at a level of negotiation about a potential sale at a
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potential price.
Note that, in contrast, Gibson’s formal application could have been seen to be an offer capable of
acceptance. However, there would still not have been a contract, as the council had not accepted this
offer by the time that the council’s policy on selling houses had changed.

6 Law
 Interactive question 2: Offer or invitation to treat [Difficulty level: Easy]
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Bianca sees the following notice in a newspaper: H
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’20 orthopaedic beds, £100 each’ P
How would you describe this notice in terms of contract law? T
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Offer Supply of information

Invitation to treat Advertisement

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See Answer at the end of this chapter.

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2.2 Termination of offer
In the absence of an acceptance, an offer may be terminated in any of the following ways:

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Method of termination Consequence

Rejection Rejection by the offeree terminates the offer

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Counter-offer A counter-offer is when the offeree proposes new or amended terms,
thereby terminating the original offer (since acceptance must amount to
an unqualified agreement to all the terms of the offer). The counter-offer
is then open to the offeror to accept or reject.
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Hyde v Wrench 1840
The facts: D offered to sell property to C for £1,000. Two days later, C
made a counter-offer of £950 which D rejected. C then informed D
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that he accepted the original offer of £1,000.
Decision: The original offer of £1,000 had been terminated by the
counter-offer of £950.
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If the offeree’s response is actually a request for information, the offer is

not affected.
Stevenson v McLean 1880
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The facts: D offered to sell iron at ‘40s net cash per ton, open till
Monday’. C enquired whether he would agree to delivery spread over
two months. D did not reply and (within the stated time limit) C
accepted the original offer. Meanwhile D had sold the iron to a third
party.
Decision: There was a contract since C had merely enquired as to a
variation of terms and had not rejected the offer or made a counter-
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offer.
Lapse of time An offer may be expressed to last for a specified time. If, however, there
is no express time limit set, it expires after a reasonable time.
Ramsgate Victoria Hotel Co v Montefiore 1866
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The facts: D applied to the company in June for shares and paid a
deposit. At the end of November the company sent him an
acceptance by issue of a letter of allotment and requested payment of
the balance due. D contended that his offer had expired and could no
longer be accepted.
Decision: The offer was for a reasonable time only and five months
was much more than that. The offer had lapsed.

Contract formation 7
 Method of termination Consequence

Revocation by the offeror The offeror may revoke his offer at any time before acceptance either
expressly or by implication. Even if he undertakes that his offer shall
remain open for acceptance for a specified time he may nonetheless
revoke it within that time, unless he has bound himself to keep it open by
a separate contract.
Revocation initially takes effect when it is communicated to or received
by the offeree. (Note that the postal rule discussed below applies only to
acceptance and not to revocation of an offer.)

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Failure of a pre-condition An offer may be ‘conditional’ in that it is dependent on some event
occurring or there being a change of circumstances. If that event or
change of circumstances does not occur, the offer is not capable of
acceptance.

Worked example: Request for information about an offer

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Oscar has horses to sell and offers two each to Abby and Ben for £4,000, stating that the offer will be
open until Monday. Abby asks Oscar whether she could have one now and the other in a month’s time.
Oscar does not reply, so on Sunday, Abby accepts his original offer. Ben replies on Saturday saying that

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he will take them for £3,500. Oscar does not reply, so on Saturday Ben accepts his original offer.
If Abby’s enquiry whether she could have the horse now and the other later had been a counter-offer,
then she could not have accepted the original offer, as a counter-offer would have terminated it.
However, in this case, Abby has simply requested more details of the terms of the offer and can still
accept the original offer to form a contract. N
Ben’s reply amounts to a counter-offer which has the effect of terminating Oscar’s original offer. Ben’s
purported acceptance of the purchase at £4,000 is therefore not effective and there is no contract.
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2.3 Acceptance
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The offeree’s response must amount to an unqualified agreement to all the terms of the offer in
order to constitute a valid acceptance. Acceptance may be made by express words to that effect by the
offeree or his authorised agent, or it can be inferred from conduct.
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Brogden v Metropolitan Railway Co 1877

The facts: For many years C supplied coal to D. D’s agent sent a draft agreement to C for
consideration and the parties applied the terms of the draft agreement to their dealings, but they
never signed a final version. C later denied that there was any agreement between them.
Decision: The conduct of the parties was only explicable on the assumption that they both agreed
to the terms of the draft.
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There must be some act on the part of the offeree to indicate his acceptance. An offeror cannot dictate
that his offer shall be deemed to have been accepted unless the offeree actually rejects or accepts it.
Felthouse v Bindley 1862
The facts: C wrote to his nephew offering to buy the nephew’s horse, adding ‘If I hear no more
about him, I consider the horse mine’. The nephew intended to accept his uncle’s offer but did not
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reply.
Decision: C had no title to the horse as the nephew’s silence could not constitute acceptance.
Similarly in Carlill’s case (above), once Carlill began using the influenza product, this was a positive act
that constituted acceptance of the offer.

8 Law
 Worked example: Offer and acceptance
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In January Elle offered to buy Jane’s boat for £3,000. H
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Elle’s offer of £3,000 is an offer. Many offers are in fact made by prospective buyers rather than by sellers. P
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Jane immediately wrote a letter to Elle saying ‘For a quick sale I would accept £3,500. If not interested
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please let me know as soon as possible.’ R
Jane’s letter forms a counter-offer, which has the effect of terminating Elle’s offer. Elle may now accept or
reject this counter-offer.
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Elle did not see the letter until March when she returned from a business trip.

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There is nothing to indicate that Jane’s (counter-) offer is not still open in March. An offer may be expressed
to last for a specified time. It then expires at the end of that time. If, however, there is no express time limit
set, it expires after a reasonable time. It would not appear that the offer would have lapsed by March.
She then replied. ‘I accept your offer. I trust that if I pay £3,000 now, you can wait until June for the
remaining £500.’

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Elle’s reply, using the words ‘I accept your offer,’ appears conclusive. However, it is not. The enquiry as to
variation of terms does not constitute acceptance and is more than a request for information. Elle’s reply is
probably best analysed as being a new counter-offer including terms as to deferred payment.
On receiving the letter, Jane attached a ‘sold’ sign on the boat but forgot to reply to Elle.

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By affixing a ‘sold’ sign, it appears that Jane accepts the revised terms as to dates for payment of the
£3,500. However, the court would need to decide whether, in all the circumstances, acceptance can be
deemed to have been communicated (we will look at communication in the next section).

Interactive question 3: Offer and acceptance

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On 1 October, Adam posts a letter to Belinda offering to sell his fridge. On 2 October, Belinda receives
Adam’s letter. On 3 October, Adam changes his mind and posts a letter to Belinda saying that the fridge
is no longer for sale. Later that day, Belinda telephones Adam and accepts his offer.
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Which one of the following best describes the state of the contract between Adam and Belinda for the
sale of Adam’s fridge?
A It is valid because acceptance took place before Belinda received Adam’s revocation.
EC

B It is invalid because Adam posted his revocation before Belinda accepted.

C It is valid because Adam cannot revoke the offer once Belinda has received it.

See Answer at the end of this chapter.

SP

2.4 Communication of acceptance

The general rule is that acceptance must be communicated to the offeror and the acceptance is not
effective (and hence there is no agreement) until this has been done. However, it is always open to the
offeror to waive this requirement either expressly or by implication. Thus, in Carlill’s case it was held that
it was sufficient for the claimant to act on the offer without notifying her acceptance of it. The need for
acceptance to be communicated was impliedly waived.
IN

The offeror may require that communication of acceptance is made by some prescribed method, in
which case the offeree should communicate by that method or (unless the wording is very specific) by
some other method which is no less expeditious or effective.
Where no mode of communication is prescribed by the offeror, the offeree can choose any
reasonable method (a reply by letter to an offer by email, for example, might not be acceptable). Note
that where acceptance is made by post, communication will be effective the moment the acceptance is
posted even if it is delayed or lost altogether in the post, subject to the following:

Contract formation 9
  If the delay is attributable to the offeree’s negligence, for example by stating the address
incorrectly, it will not be the case that posting amounts to acceptance.
 Use of the post must have been within the contemplation of the parties, which intention can be
deduced from the circumstances and need not be express.
This is often referred to as ‘the postal rule’ (and applies only to acceptance, not revocation). The postal
rule will not operate where the offeror requires acceptance ‘by notice in writing’ as the words ‘notice in
writing’ must mean notice actually received by the offeror. Nor does the rule apply to instantaneous
methods of communication.
The law is unclear as to when an acceptance sent by email becomes effective. It is not possible to say
that the communication of acceptance is instantaneous, rather it is likely to be linked to when the

PY
offeror actually saw the email or when he should have read it or might have been expected to read it.
Given the legal uncertainty as to the time of acceptance by email, it is advisable for the terms of an offer
which is made online to make express provision as to the means and timing of acceptance.

Interactive question 4: Formation of contract [Difficulty level: Exam standard]

O
Frank writes to Xiao-Xiao on 1 July offering to sell him his sailing dinghy for £1,200. On 10 July, having
received no reply, he decides to withdraw this offer and sends a second letter. On 10 July, Xiao-Xiao
receives the original letter and posts a reply to Frank accepting the offer. Frank never receives Xiao-
Xiao’s letter and sells the boat to Mel on 13 July.

C
Indicate whether or not each of the following statements is true or false.

A Frank’s original letter constitutes an offer, which

True False
Xiao-Xiao is entitled to accept or reject
B N
Xiao-Xiao’s reply constitutes a valid acceptance

C Frank is legally entitled to sell the boat to Mel on 13

July since he revoked his offer
True

True
False

False
O
See Answer at the end of this chapter.
TI

Acceptance will only be effective to create agreement where the offeree is aware of the offer. Thus, if A
offers a reward to anyone who finds and returns his property and B, unaware of A’s offer, returns the
property, B cannot have ‘accepted’ A’s offer since he was unaware of it and there is no agreement.
EC

2.5 Agreement without offer and acceptance

As mentioned above, agreement is normally understood in terms of an offer made by one party being
accepted by the other party. However, in some cases this may not be appropriate but an agreement
might still be said to exist between the parties. The courts may consider the words and actions of the
parties and construct a contract. The following case illustrates this principle:
Clarke v Dunraven 1897
SP

The facts: C and D entered a regatta. Each undertook to obey the club’s rules, including an
obligation to pay for all damage caused by fouling. D’s yacht fouled C’s yacht, which sank. C sued
for damages. D argued that his only liability was under the Merchant Shipping Act 1862 and was
therefore set at £8 per ton.
Decision: A contract had been created between the parties when they entered their yachts for the
IN

regatta and accepted the club’s rules. C was entitled to recover the full cost of the damage.

10 Law
 3 Intention to create legal relations C
H
A
Section overview P
T
 The intention to create legal relations is the second essential element of a valid contract. It may be E
completely obvious but, if not, one of two rebuttable presumptions may be applied. R

The nature of the relationship Presumption 1

between the parties

PY
Social, domestic and family It is presumed that social, domestic and family arrangements are not
intended to be legally binding unless there is clear evidence which
points to the contrary. All circumstances will be taken into account,
including whether husband and wife were separated at the time of
contract, the nature of the relationship between the parties and the
type of contract. For example, if the parties are a husband and wife

O
living apart or if the contract relates to property matters, the
presumption is more likely to be rebutted.
Commercial It is presumed that there is an intention to enter into legal relations

C
unless this is expressly disclaimed or the circumstances give a clear
contrary indication. It is not easy to rebut this presumption. In
Edwards v Skyways Ltd 1964, where D promised to make an ex gratia
payment to its employee, the argument that the words ‘ex gratia’
showed that there was no intention to create legal relations failed.
N
Care needs to be taken during the negotiation stage as to whether a contract is intended. Use of
the words ‘subject to contract’ amounts to a strong presumption that no immediately binding
contract is intended.
O
RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH 2010
The facts: A letter of intent set out a draft contract which was not to become effective until
TI

signed and executed by the parties. The contract was not signed but the parties proceeded
with the project of installing two production lines in the claimant’s factory.
Decision: The Supreme Court held, first, that it was unrealistic to conclude that major works
would have been carried out in the absence of a contract and, secondly, that there was
EC

evidence of an agreement and an intent to create legal relations in this case. The court made
it clear that it would not always be the case, in circumstances where works commence
before a contract is finalised, that the contract that exists between the parties contains the
same terms as those in the negotiated contract. That would be a question of fact in all the
circumstances.
Similarly, calling an agreement ‘a personal agreement until a fully legalised agreement, drawn up
SP

by a solicitor and embodying all the considerations herewith stated, is signed’, was held to be a
binding agreement, notwithstanding that it was obviously intended to be replaced by a more
formal contract at a later date (Branca v Cobarro 1947).
IN

Contract formation 11
 4 Consideration

Section overview
 Consideration is the third essential element of a contract. Put simply, it is what each party gives or
agrees to give to the other, usually payment or a promise to do something in return.

In more legal language, consideration has been defined as follows:

’A valuable consideration in the sense of the law may consist either in some right, interest, profit or

PY
benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or
undertaken by the other,’ (Currie v Misa 1875) and
’An act or forbearance of one party, or the promise thereof, is the price for which the promise of the
other is bought, and the promise thus given for value is enforceable’ (Dunlop v Selfridge 1915).
There are three types of consideration


O
Executed (valid)
 Executory (valid)
 Past (generally invalid)

C
4.1 Valid consideration
Type of consideration Meaning

Executed A performed, or executed, act in return for a promise. For example,

N
payment for goods at the time those goods are delivered.
Executory A promise given for a promise. The consideration in support of each
promise is the other promise, not a performed act. For example, a promise to
O
pay for goods which are to be delivered and paid for at a later date.
TI

4.2 Invalid consideration

Past consideration is something which has already been done at the time the promise is made, for
example where works are carried out and then a promise is made to pay for them:
Re McArdle 1951
EC

The facts: Under a will the testator’s children were entitled to a house after their mother’s death.
During the mother’s lifetime, one of the children and his wife lived in the house with the mother.
The wife made improvements to the house. The children later agreed in writing to repay the wife
‘in consideration of your carrying out certain alterations and improvements’, but they refused to do
so when the mother died.
SP

Decision: The work on the house had all been completed before the promise was made. The
improvements were therefore past consideration and so the promise was not binding.
However, if it could be said that there was an implied promise before the works were carried out that
they would be paid for at a later date, then they will constitute valid consideration. Whether there was
such an implied promise will be a question of fact but it will need to be shown that the works were
requested by the promisor and that the parties must have understood and assumed that they would be
paid for. If such a promise is implied, then the amount to be paid will be determined by reference to the
IN

actual promise made after the works are completed.

12 Law
 Worked example: Essentials of a contract
C
A and B are negotiating to enter into a contract with the intention to enter into legal relations with one H
another. A
P
They have been negotiating for some time. When A says, ‘I will sell you twenty barrels of oil for £20 T
each, take it or leave it’, B says, ‘Done’. Here they have achieved a second essential as A has made an E
offer and B has accepted it, creating an agreement. R

The third essential element is consideration, which both parties giving (or promising to give) something
of value to the contract. In this case, A has promised 20 barrels of oil and B has promised £400, so this
1
essential element is also present.

PY
4.3 Adequacy and sufficiency of consideration
The court will also seek to ensure that a particular act or promise can actually amount to valid
consideration. Learn these rules:

O
 Consideration need not be adequate (that is, equal in value to the consideration received in
return). There is no remedy at law for someone who simply makes a poor bargain.
 Consideration must be sufficient. It must have some identifiable value in order to be capable in

C
law of being regarded as valid consideration.
It is presumed that each party is capable of serving his own interests, and the courts will not seek to
weigh up the comparative value (or adequacy) of the promises or acts exchanged.
Thomas v Thomas 1842
N
The facts: By his will C’s husband expressed the wish that his widow should have the use of his
house during her life. After death, his executors (the defendants), allowed her to do so (a) in
accordance with her husband’s wishes and (b) in return for her undertaking to pay a rent of £1 per
O
annum. They later said that their promise to let her occupy the house was not supported by
consideration.
Decision: Compliance with the husband’s wishes did not constitute valid consideration (since no
economic value attached to it), but the nominal rent was sufficient consideration (even though it
TI

could hardly be said to be adequate).

In order to be sufficient (however inadequate or tenuous), the consideration must contain some element
that can be seen as the price of the other party’s promise. If all that is offered is something that the
EC

promisee was bound to do anyway, then there is unlikely to be sufficient consideration. This can be the
case where the promisee is obliged to do something by law or under an existing contract, either with
the promisor or a third party. You should familiarise yourself with the following:

Performance of existing Not consideration unless it can be shown that some extra service over
statutory duty and above the scope of the statutory duty is also being offered.
For example, if someone agrees to pay another a sum of money for
SP

appearing in a court, when that other person has been subpoenaed to

attend in any event, there is no consideration to support the promise to
pay.
Performance of existing Not consideration unless it can be shown that the promisee is actually
contractual duty owed to giving or doing something over and above the scope of the contractual
the promisor obligation. The facts need to be examined closely in each case to see
IN

whether what is being done or offered is actually over and above the
existing contractual (or statutory) duty and also to ensure that the case is
not actually one of duress. It may be enough where the promisor obtains
some extra practical benefit:

Contract formation 13
 Williams v Roffey Bros & Nicholls (Contractors) Ltd 1990
The facts: D subcontracted part of its work refurbishing a block of
flats to C for £20,000. During the works C found itself in financial
difficulties and D promised to pay an extra £10,300 to ensure that
the work was completed on time, but later refused to pay all of the
extra amount.
Decision: D’s argument that there was no consideration for the
promise to pay £10,300 failed. It was significant that D’s promise
was not made as a result of C’s duress or fraud. It was considered
important that D derived the added practical benefit of not having

PY
to engage somebody else to complete the work and also of avoiding
a penalty clause for late performance in his own contract.
Where the question concerns the waiver of all or part of a debt, the
waiver needs to be supported by consideration and the decision in
Williams v Roffey Bros is not likely to be applied (see section 4.4 below).
Performance of existing This can amount to valid consideration. Thus in Scotson v Pegg 1861, C

O
contractual duty owed to contracted with X to deliver cargo as X directed. X directed C to deliver it
a third party to D. D contracted with C to unload the cargo if C delivered it to D
(which he was already bound to do under his contract with X). It was
held that C’s obligation owed to X to deliver the cargo to D was

C
sufficient consideration for D’s promise.
Forbearance or waiver of Forbearance or the promise of it may be sufficient consideration if it has
existing rights some value, or amounts to giving up something of value. For example, A
might agree to forego his right to take action against B in return for B’s

Worked example: Consideration

promise to A. N
O
A crew of 30 men contracts to sail a ship from Lands End to John O’Groats for £2,000 each. During the
voyage, two crew members desert and the captain promises an additional £500 to the remaining 28 if
they will complete the voyage short-handed. Can this promise be enforced?
TI

Solution
No. The 28 crew members are already contractually bound to complete the voyage and they would be
expected to deal with normal emergencies arising en route. The fact that they have to cover two missing
EC

crew members does not amount to something over and above what they are bound to do anyway.
If, on the other hand, many more had deserted, so as to make the continuation of the voyage
exceptionally hazardous, then their agreement to complete for an extra £500 each would amount to
valid consideration. (Note that the position might be different in each case if it were a case of the
remaining crew members refusing to go further without extra payment.)
SP

4.4 Waiver of existing debt

If X owes Y £100 but Y agrees to accept a lesser sum, say £80, in full settlement of Y’s claim, that is a
promise by Y to waive his entitlement to the balance of £20. The promise, like any other, should be
supported by consideration. The case below is important:
Foakes v Beer 1884
IN

The facts: D had obtained judgment against C. Judgment debts bear interest from the date of the
judgment. By a written agreement D agreed to accept payment by instalments, no mention being
made of the interest. Once C had paid the amount of the debt in full, D claimed interest, claiming
that the agreement was not supported by consideration.
Decision: D was entitled to the debt with interest. No consideration had been given by C for
waiver of any part of her rights against him.

14 Law
 However, in the following cases the waiver will be binding:
C
 Alternative consideration. If X offers and Y accepts anything to which Y is not already entitled, the H
extra thing is sufficient consideration for the waiver, for example goods instead of cash, or A
payment in advance of the due date. P
T
 Bargain between the creditors. If X arranges with creditors that they will each accept part E
payment in full entitlement, that is a bargain between the creditors. Even though X has given no R
consideration, the creditors are bound individually to the agreed terms.
 Third party part payment. If a third party (Z) offers part payment and Y agrees to release X from
1
Y’s claim to the balance, Y has received consideration, in the form of the offer from Z, against
whom he had no previous claim and that is sufficient.

PY
Worked example: Waiver of entitlement to debt
A owes B, C and D £100 each. Each of the creditors agrees to accept £90 in full satisfaction of the debt.
A also owes X £200. T offers to pay X £150 on the condition that X discharges A from the £200 debt.
Can creditors B, C and D take action against A for the remaining £30? Can X take action against A for
the debt of £200 or any part of it?

O
The answer is no in each case. The arrangement between the creditors will bind each of them as the law
effectively imports a consideration to support the creditors’ agreement (although the exact legal
reasoning for this is far from clear). X cannot sue A for the original debt as he has now received

C
consideration from T, against whom he had no previous claim. Like the creditors’ agreement, this
instance is another exception to the rule in Foakes v Beer.

Interactive question 5: Consideration [Difficulty level: Exam standard]

N
Alice owns a classic car. Alice and Barry are negotiating a deal for Barry to clean the outside of Alice’s car
for her before Saturday, when she is lending her car to Claudia for her wedding. Alice will pay £10 and
allow him to borrow the car on Sunday when Claudia is finished with it.
O
On Thursday Alice gets mud in the car and therefore when Barry comes on Thursday to clean the car,
she asks him to clean the inside as well.
Barry cleans the car and asks for £15 to cover the fact that he cleaned the inside as well as the outside.
TI

Alice refuses to pay Barry extra. She also discovers that she does not have £10 to pay him, only £5. She
offers him £5 and a week’s loan of the car in full settlement.
Indicate whether or not each of the following statements is true or false.
EC

A Alice’s consideration of £10 and a loan of her car is valid

True False
consideration for Barry’s promise to clean her car.
B By the time he raises the issue with Alice, the fact that Barry
has cleaned the inside of the car is past consideration and True False
therefore he cannot demand additional payment for it.
SP

C Alice has offered Barry additional consideration (extended

loan of the car) for his waiver of the other £5 and therefore, True False
on acceptance by Barry, the waiver will be binding.

See Answer at the end of this chapter.

IN

Contract formation 15
 5 The terms of the contract

Section overview
 As a general rule, the parties to a contract may expressly include in the agreement whatever
terms they choose. This is part of the principle of freedom of contract.
 Terms may also be implied into the contract by the courts, by statute or by custom.

5.1 Express terms

PY
In a wholly oral contract, the court must ascertain, as a question of fact, what was expressly agreed by
the parties.
In a written contract, as a general rule, the terms expressed therein will be treated as the contract.
However, the following should be taken into account:
 Terms must be substantially complete on the face of it or capable of being clarified. The parties

O
are entitled to leave a term to be determined at a later date, (for example a price can be left to be
determined by an agreed arbitrator). However, if a term is left outstanding and there is no
provision for its clarification, there will be no contract.

C
Scammell v Ouston 1941
D ordered a motor-van from C ‘on the understanding that the balance of the purchase price
can be had on hire-purchase terms over a period of two years’. The hire-purchase terms were
never supplied and so no agreement could be identified.


N
However if a term is vague but also meaningless and unnecessary (such as ‘the usual conditions of
acceptance apply’) it can be disregarded.
A statement of fact made before the contract which induces a party to enter into the contract
may become a term of the contract. The court will consider all the circumstances to determine
O
whether it became a term or was simply a representation.
Thus if the person making the statement had special knowledge of the subject, it is more likely the
statement will be treated as a term of the contract. Likewise the courts will asses the significance of
TI

how much time passed between the representation and the making of the contract and why the
contract omitted to incorporate the statement. (If the statement is not treated as a term of the
contract, remedies might lie in misrepresentation but not for breach of contract.)
 Oral evidence will not usually be admitted to add to, vary or contradict written terms, unless it can
EC

be shown that the document was not intended to comprise all the agreed terms.
SS Ardennes (Cargo Owners) v SS Ardennes (Owners) 1951
D contracted to take C’s cargo of oranges to London ‘by any route, directly or indirectly’. D’s
agent gave a verbal undertaking that the vessel would sail direct from Spain to London. In fact
the ship went via Antwerp so that the oranges arrived late and a favourable market was
missed. It was held that the verbal undertaking amounted to a warranty and was admissible as
SP

oral evidence to override the written term in the bill of lading.

In a contract entered into online, the general terms and conditions are normally in a standard form and
the other party is required to scroll through them and click ‘accept’ before making the contract.
Parties to an international contract are well advised to include an express clause which specifies which
country’s law will apply to any dispute arising under its terms (usually called a ‘choice of law’ or
‘governing law’ clause). In the absence of such a provision, the relevant law will be determined in
IN

accordance with the Contracts (Applicable Law) Act 1990 (as amended, in particular to take account of
European regulation ‘Rome I’ in 2008). (A governing clause may also provide for non-contractual
disputes, although this is less straightforward.)

16 Law
 5.2 Implied terms
C
Additional terms of a contract may be implied by law. Such implied terms will be deemed to form part H
of the contract even though they are not expressly mentioned. In some cases they will add to the A
express terms, in others they may override express terms. Terms can be implied in the following ways: P
T
E
 By reference to custom But not if that would produce an inconsistency with the express terms
R
 By statute For example by the Supply of Goods and Services Act 1982 which
implies terms that work and materials should be of satisfactory quality.
Such implied terms often override any express terms that do not offer as 1
much protection to the weaker party.

PY
 By the courts (1) Necessary to give business efficacy
Terms may be implied if the court concludes that the parties must have
intended those terms to apply to the contract in order to give business
efficacy to the contract.
The Moorcock 1889

O
The facts: The owners of a wharf agreed that a ship should be
moored alongside to unload its cargo. It was well known that at
low water the ship would ground on the mud at the bottom. At
ebb tide the ship settled on a ridge concealed beneath the mud

C
and suffered damage.
Decision: It was an implied term that the ground alongside the
wharf was safe at low tide, since both parties knew that the ship
must rest on it.
N
(2) Implicit in the nature of the contract itself
The court may also imply a term, not based on the presumed intention
of the parties, but because it is considered to be implicitly required by
O
the nature of the contract used. Such an implied term may form a
precedent for future contracts of the same type and parties will be
advised to express clear wording if such an implied term is not required.
Liverpool City Council v Irwin 1977
TI

The facts: A tenant in a tower block with no formal tenancy

agreement withheld rent, alleging that the owner of the block had
breached implied terms because (among other things) the lifts did
not work and the stairs were unlit.
EC

Decision: It was held that since tenants could only occupy the
building with access to stairs and/or lifts, the agreement between
the parties implicitly required implied obligations on the owner’s
part to maintain the common parts of the building.

5.3 Battle of the forms

SP

Disputes sometimes arise because each party is accustomed to doing business on its own standard terms
and argues that they apply to the contract, rather than the other party’s terms. Great care should be
taken during the negotiation stage to clarify which standard (or other) terms will apply. Where it is not
clear, the contract must be considered objectively, but taking into account what has actually happened
(the ‘factual matrix’).
IN

GHSP Inc v A B Electronic Ltd 2010

The facts: The claimant, a manufacturer of control systems for motor vehicles, purchased pedal
sensors from the defendant which were defective and caused substantial losses. Both parties argued
that their standard terms applied to the contract. The defendant’s standard terms excluded liability
for consequential loss or damage and limited liability to carrying out works of repair.
Decision: The contract was not governed by either set of standard terms, as it was clear that
neither party had accepted the other party’s terms. The court held that the contract was
governed by the terms implied by the Sale of Goods Act 1979.

Contract formation 17
 6 Privity of contract

Section overview
 As a general rule, only a person who is a party to a contract has enforceable rights or obligations
under it. This is the doctrine of privity of contract.
 The Contracts (Rights of Third Parties) Act 1999 has had a fundamental effect on the doctrine.

The law requires that consideration must move from the promisee and only a party to a contract can
enforce it. No-one may be entitled to or bound by the terms of a contract to which he is not a party.

PY
Where A promises B that (for a consideration provided by B) A will confer a benefit on C, then C cannot
as a general rule enforce A’s promise since C has given no consideration for it.
There are a number of equitable and statutory exceptions to the privity of contract rule, for example a
person injured in a road accident may claim against the motorist’s insurers under the Road Traffic Act
1972. However the two principal exceptions of which you should be aware are as follows:


O
Where an agent enters into a contract with a third party on behalf of his principal, the resulting
contract is actually enforceable by and between the principal and the third party. The agent cannot
enforce it.
 The Contracts (Rights of Third Parties) Act 1999 provides that a third party may enforce a term

C
of the contract provided:
– The contract expressly provides that he may
– The term confers a benefit on him, unless it appears that the contracting parties did not
intend him to have the right to enforce it.
N
The third party must be expressly identified in the contract by name, class or description, but need
not be in existence when the contract is made (for example, an unborn child or a future spouse).
The Act enables a third party to take advantage of exclusion clauses as well as to enforce ‘positive’
rights. The Act does not apply to employment contracts, so, for example, a customer of an
O
employer cannot use this Act to enforce a term of a contract of employment against an employee.

Interactive question 6: Essentials of a valid contract [Difficulty level: Exam standard]

TI

You have been asked to act as legal advisor to Catherine, advising her whether or not a contract exists
between her and David after the following course of events.
On Monday, David advertised a table and chairs for sale for £100 in the local newspaper. Catherine saw
EC

the advertisement and telephoned David offering him £75. David offered to sell the table and chairs to
Catherine for £80. She accepted. Two days later, Catherine rang David and said that she would give
him £85 if he delivered the table and chairs as well. David refused. Catherine said that if she had to
collect the table and chairs herself she would only give David £75. During the course of their
negotiations, Catherine and David have discovered that they know each other through the local
gardening club.
SP

Indicate whether each of the following statements is true or false.

A As Catherine and David are acquaintances, they cannot

True False
form a binding contract.
B Catherine and David have not formed a valid contract as
they have been unable to come to an agreement about True False
IN

price.
C Delivery is capable of constituting sufficient consideration
True False
for an increase in contract price.
D If David accepts Catherine’s final suggestion, there will be
True False
a binding contract between them at a price of £75.

See Answer at the end of this chapter.

18 Law
 C
Summary and Self-test H
A
P
T
E
R
Summary

A valid contract is a legally 1

binding agreement, formed by

PY
the mutual consent of two parties

The three essential There are a number A contract contains Generally speaking it
elements of a of factors which may express terms and can only be enforced
by the parties to it.

O
contract are offer affect the validity of a additional terms
and acceptance, contract. For a may be implied by Exceptions
consideration and contract to be custom, statue or Agency
intention to enter binding it must also the courts Contracts (Rights
satisfy various tests of Third Parties)

C
into legal relations Business efficacy
relating to certainty, Necessarily Act 1999
legality, form and incidental
the genuineness of
consent of the parties

A contract which is
N
O
not valid may be:
Void (neither party
is bound)
Voidable (the
TI

contract is binding
unless and until
one party chooses
to avoid it)
Unenforceable (the
EC

contract is valid
but its terms
cannot be enforced
in a legal sense
(although it may
be ratifies)
SP
IN

Contract formation 19
20
Law
IN
SP
EC
TI
O
N
C
O
PY
 Self-test
C
Answer the following questions. H
A
1 Which one of the contracts below is a standard form contract? P
T
A A document put forward for the customer’s signature by a supplier of goods in which pre- E
printed contractual terms are set out R
B A document signed by both parties to a contract in which contractual terms as negotiated
between them are set down
1
C An oral agreement to enter into relations on the basis of terms as agreed following

PY
negotiations between the parties
D An oral agreement between two parties who have negotiated terms regarding the standards
of performance to be met by each party in the main contract
2 A new Common European Sales Law has been proposed and will be mandatory in all cross-border
contracts.

O
True

False

C
3 A valid contract is a legally binding agreement. The three essential elements of a contract are
(1) ........................................ (2) ........................................ and (3) ........................................ .
4 A voidable contract is not a contract at all.

True

5
False

Match the term to its definition.

N
O
(a) Voidable (1) The contract is valid but the parties cannot be
held to its terms
TI

(b) Unenforceable (2) Neither party is bound

(c) Void (3) The contract is binding unless and until one party
chooses to avoid it
EC

6 How is the circulation of a price list categorised in the law of contract?

Offer Tender
Invitation to treat Auction

7 Fill in the blanks in the statements below, using the words in the box.
SP

 As a general rule, acceptance must be (1) ........................................ to the

(2) ........................................ and is not effective until this has been done.
 An (3) ........................................ is a definite promise to be bound on specific terms, and
must be distinguished from a supply of (4) ........................................ and from an
(5) ........................................
IN

 A counter-offer counts as (6) ........................................ of the original offer.

 information  offer  invitation to treat

 rejection  communicated  offeror

Contract formation 21
 8 Advertising an auction is an offer to sell.

True
False
9 Give three examples of situations likely to be invitations to treat.
.........................................................................................................................................................
.........................................................................................................................................................
.........................................................................................................................................................
10 As a general rule, silence cannot constitute acceptance.

PY
True

False
11 Define the postal rule.
12 Give four instances when an offer is terminated.

O
13 Distinguish between executed and executory consideration.
14 Past consideration, as a general rule, is not sufficient to make a promise binding.

C
True

False
15 Consideration need not be (1) ........................................ but it must be (2)
........................................ .
16
N
A promise of additional reward for existing duties is not generally binding.

True
O
False
17 In the context of contractual considerations, payment of a lesser sum cannot be satisfaction for the
whole sum unless something is added to it, such as earlier payment, or payment by a different
TI

method.

True

False
EC

18 What is the name of the express clause typically incorporated into an international contract and
which specifies which country’s law will apply to any dispute under it?
......................................................

Now go back to the Learning Objectives in the Introduction. If you are satisfied you have achieved these
SP

objectives, please tick them off.

IN

22 Law
 C
Answers to Interactive questions H
A
P
T
Answer to Interactive question 1 E
R
A Void
B Voidable
C Void 1
D Unenforceable

PY
Answer to Interactive question 2
An advertisement is an invitation to treat, ie an invitation to a reader to make an offer which the
advertiser can either accept or reject.

O
Answer to Interactive question 3
A It is valid because acceptance took place before the revocation was received. Revocation must be
received to be effective. It is not effective on posting (unlike an acceptance).

C
Answer to Interactive question 4
A True. Frank’s letter constitutes an offer.
B True. The acceptance by Xiao-Xiao takes effect when posted on 10 July. The revocation letter
N
posted 10 July will arrive too late to prevent acceptance on 10 July. Therefore a contract is formed
on 10 July.
C False. Frank’s sale of the dinghy to Mel is in breach of his contract with Xiao-Xiao.
O
Answer to Interactive question 5
TI

A True. Consideration does not have to be adequate but must be sufficient. In other words, it must
have identifiable value. In this case, Alice is offering both £10 and the loan of her car, both of
which have identifiable value and thus constitute valid consideration.
B True on the face of it, since anything that has been done before a promise in return is given is past
EC

consideration. However, if it can be argued that the parties must have assumed that there would
be payment for this extra work, then it may be valid consideration.
C True. Alice cannot afford to pay Barry the £10 she agreed and asks him to waive his right to it. This
request is accompanied by additional and alternative valuable consideration (the extension of the
loan period to a week) and if he accepts those terms, the waiver is binding.
SP

Answer to Interactive question 6

A False. The presumption that friends do not intend to form contractual agreements is rebuttable and
is rebutted in this case – their acquaintance was not recognised or relevant at the time of making
the contract.
B False. David’s original advert is an invitation to treat so cannot be accepted as an offer. Catherine’s
IN

offer of £75 is rejected by David so no contract is formed at this point. However, David then makes
an offer of £80 which is accepted by Catherine, at which point a contract is made. The further offer
of £85 is rejected but this does not affect the agreement already reached.
C True. Delivery is clearly valuable to Catherine, as she implies by her offer of an extra £5 for delivery.
D False. Catherine is asking David to waive his rights under the contract but there is no consideration
to support this waiver and it would not be binding on David.

Contract formation 23
 Answers to Self-test

1 A
2 False. The proposed Common European Sales Law is intended to be voluntary and apply to sales of
goods, digital content and related services only.
3 Offer and acceptance, consideration, intention to create legal relations
4 False

PY
5 Voidable (3)
Unenforceable (1)
Void (2)
6 Invitation to treat

O
7 (1) communicated (2) offeror (3) offer (4) information (5) invitation to treat (6) rejection
8 False. It is merely a statement of intention.

C
9 Advertisements
Exhibition of goods for sale
Circulation of a price list
10 True N
11 The postal rule states that, where the use of the post is within the contemplation of both the
parties, the acceptance is complete and effective as soon as a letter is posted, even though it may
be delayed or even lost altogether in the post.
O
12 Rejection
Lapse of time
TI

Revocation by the offeror

Failure of a condition to which the offer was subject
Counter-offer
EC

13 Executed consideration is an act in return for a promise, such as paying for goods when the
shopkeeper hands them over. Executory consideration is a promise given for a promise, such as
promising to pay for goods that the shopkeeper puts on order for you.
14 True
15 (1) adequate (2) sufficient
SP

16 True
17 True
18 Governing law clause or
Choice of law clause
IN

24 Law