CONTRACT: CLASSIFICATION AND FORMATION

INTRODUCTION

Contracts are entered into by each of us on a daily basis. Some of the contracts are longstanding, for example a contract of employment; some are of very short duration such as the purchase of a piece of fruit or a meal but they all have the same features of a contract.

One very common mistake people make when speaking of contracts is to assume that a contract means in law a written contract. They assume that if the agreement is not in writing no legal rights flow. This is quite wrong. Most legally binding contracts arise orally and they are no less enforceable than written ones. Of course it is an easier task to prove a written contract because you can point to the particular clauses which favour you and allow the words to speak for themselves. On the other hand, with oral contracts the court has to rely on the recollection of conversations by the parties which may well vary on a particular point. The difficulties with oral contracts are more a matter of proof than of the substantive law.
Quite frequently you find there is a halfway house between a written and an oral contract. Part of the contract may be in writing or evidenced in writing. The best example is a receipt for the purchase of goods which will contain some of the terms of the contract (such as the price, description of the goods, etc.) but the balance of the terms will have been agreed orally.

OBJECTIVES

On successful completion of this module, you should be able to: the classification of contracts, using example •distinguish between a contract under seal and a simple contract•list the three basic elements for the formation of a simple contract•apply the rules relating to offer, termination of an offer and

acceptance logically and thoroughly in order to determine whether an agreement has been reached.

Definition of Contract

Most definitions of contract usually refer to four elements: An agreement , By two or more parties containing , Promises by each party Which are intended to be enforceable at law.
Background to the Development of the Law of ContractHistorically, there have been two main factors which have had a substantial impact on the modern law of contract.

The Notion of Agreement ; The Courts have always been very concerned with the notion that agreement is fundamental to the law of contract. To have a binding contract there must exist between the parties a concurrence of intentions or a meeting of minds.You might think that the need for the presence of agreement in a contract is self-evident. However, in some jurisdictions, the courts do not place such weight on the need to find a consensus between the parties.
Perhaps what is more important for our purposes is the fact that when courts are attempting to assess if there is a meeting of minds, little or no weight is placed on what a party says was in his/her mind when the alleged contract was formed. Rather, the emphasis is placed on the objective evidence such as the letters between the parties written at the time and the surrounding circumstances generally. Notice the same distinction between objective and subjective evidence or tests as we discussed in relation to negligence.

Laissez Faire The economic philosophy of laissez faire with its strong emphasis on individualism and enterprise had a profound influence on the law of contract. This influence is apparent in three ways: The courts considered that the parties to a contract had complete freedom to lay down their own terms. It was not considered the function of courts to consider whether those terms were fair to the parties. To use a modern expression the courts did not see themselves as ‘consumer protection watch dogs’. Of course in the 19th century, when the laissez faire doctrine was most influential and before the huge increases in large corporations, it was much more reasonable to expect the parties to a contract to be on an equal footing.

This policy of non-interference by the courts has meant that the initiatives towards consumer protection have all been statutory ones, coming (by common agreement) not before time.
Once formed, the contract in the eyes of the law was sacred and should be upheld at all cost. This notion arose from the common lawidea that the contract was the basis of the operations of the business world. People in business must be confident that the courts will uphold the agreement reached between the parties.
A contract should represent a bargain in the sense that both parties should receive something out of it. If one party was giving all and receiving nothing the agreement was not a contract. Contracts some systems where frequently a gratuitous promise solemnly made is enforceable at law. This aspect of the law of contract is examined at some length under the heading ‘consideration’.

Classification of Contract As a result of the historical development of the common law in this area, particularly the writs available under the old pre-Judicature Act forms of action, contract have been classified as follows:

Formal Contracts;These are not contracts in the real sense because they do not necessarily arise out of an agreement and they may also lack consideration. They are enforceable only because they follow a prescribed form. Formal contracts are of two types:

1. Contracts of Recor; These are judgments and recognizance (bond), which are entered in the records of the court and ipso facto enforceable. They are not particularly relevant to this course.
2. Contracts under Seal; These are more important as they are often used in important commercial transactions, for example, to document loan agreements and mortgages. A contract is classified as being a contract under seal, or a deed, because of the form in which it is expressed. In the past it may have actually been ‘signed, sealed and delivered’ using parchment and sealing wax. However, now a contract is a deed if it follows the formal requirements set out in statute. Some important distinctions between a contract under seal and a simple contract are that the former does not require consideration for validity, merely the appropriate form, and an action arising under a deed in Nigeria is not barred by the Limitations of Actions Act until after twelve years, whereas actions under simple contracts are barred after six years. The notion of ‘consideration’ is discussed in detail later in this module. For the moment it can be equated with money’s worth. Promises or undertakings made under seal or by deed are often referred to as covenants, as opposed to terms within a simple contract.

Simple Contract

All those contracts which are not formal are known as simple contracts. They rely for their validity, amongst other things, on the presence of consideration and accordingly their form is generally irrelevant. Most simple contracts are verbal, eg the purchase of lunch at a take-away food bar, but others are required to be in writing or evidenced in writing, eg contracts for the sale of land.

Unless specific reference is made to contracts under seal, the balance of this study book when mentioning contracts, refers to simple contracts only.

Formation of Simple Contracts

There are three basic elements of the formation of a simple contract:(a) Agreement: offer and acceptance (b) Intention to create legal relations. (c) Consideration.
All three elements must be present if a party is to argue that the promises made by the other form part of a contract and are therefore enforceable. While some texts include other elements as essential such as the capacity of the parties to contract; absence of fraud etc we have included these issues in the discourse. For present purposes let us assume that the parties are of full age and they were not misled etc when entering the contract and so the focus is on the three basic elements identified above
Agreement

In attempting to discover if an agreement has been reached between the parties the courts have traditionally looked for an offer from one party and an acceptance of the offer by the other party. The person making the offer is called the offeror and the person receiving the offer is the offeree. If the offer is clear, (eg ‘you can buy my car for N200,000.00’) and the acceptance corresponds with the offer (eg ‘I accept your offer’) then you have an agreement. In this case you have an express agreement. However, agreement may be implied from the conduct of the parties.

In Clarke Dunraven [1897] AC 59 at P. 63:

One of a number of yachts in a regatta fouled and sank another. The participants had agreed with the club organizing the regatta to obey the club rules. One of these provided that participants should pay all damages caused by fouling. The question arose as to whether there was any contract between the participants themselves, or whether each had contracted with the club only. The House of Lords affirmed the view taken by the Court of Appeal, holding that, in the words of Lord Herschell: ‘The effect of their entering for the race, and undertaking to be bound by these rules to the knowledge of each other, is sufficient …where those rules indicate a liability on the part of the one to the other, create a contractual obligation to discharge that liability’.
So while the participants did not communicate directly with each other, and there was no offer and acceptance in the usual way, the court found a contract based on their agreement to participate.
Offer

There are a number of basic principles or rules regulating the legal effect of offers.

1. The single most important test of an offer is that it must show, on the part of the offeror, an intention to be legally bound. Put another way, it is a final commitment by the offeror, a point of no return which, if accepted by the other party, will legally bind the offeror. In this context the language of the supposed offeror is closely examined by the courts to determine whether the communication in question is still part of preliminary negotiations or in fact the final commitment. Most of the rules that are discussed below are really examples or extensions of this basic requirement.
2.  An offer must be sufficiently definite so as to be capable of acceptance. If the so-called offer is too vague or leaves out too many basic terms then it is unlikely that it is an offer at all. Certainly, it is hard to argue that there is a final commitment in that case. If, for example, a person selling her car said that she would like to get ‘around N100,000.00’ for it then that expression is not likely to be sufficiently definite for the offeree to respond with an acceptance. Obviously, what ‘around’ means to one person could well be different to another. Similarly, if a possible sale was discussed without any mention of price at all that could hardly be classified as an offer. It’s not that the offer must contain all the terms that might ultimately end up as part of the contract but there must be enough to indicate agreement. There must be enough for the offeree to make up her or his mind as to how they wish to respond and to accept the offer should they wish to.
3. An offer is often distinguished from an invitation to treat. As the term suggests, an invitation to treat is an invitation to enter into negotiations. Examples of invitations to treat are advertisements that list items for sale, catalogues, the display of goods and the calling of tenders for a contract. In these cases, the seller is regarded as advertising their goods to the public who in turn come and make the offer to buy. The mere advertising of the goods does not ordinarily show an intention to be bound on the part of the seller. The distinction between invitations to treat and offers is based on sound commercial practice. If the advertisement contained offers to customers then the customer could come to the seller and purport to accept that offer and claim a binding contract. This would work injustice because the merchant may well in good faith have sold all the particular items advertised. So invitations to treat are simply a means of attracting customers to look at the goods and hopefully (from the seller’s point of view) to make an offer to purchase. Perhaps the most illustrative case on invitations to treat is the Pharmaceutical Society of Great Britain v Boots Cash Chemists [1953] 1 QB 401.The question was whether a contract between a seller and a customer was concluded when the customer took down an article from a shelf in a self-service store and put it in his basket or whether the customer made an offer when he took his selection to the cashier, which was accepted when the cashier indicated the total price. The Court of Appeal preferred the latter view. On the former view, the display of goods on the shelves would amount to an offer, with the consequences that a customer who had taken an article from a shelf and put it into his basket would not subsequently be able, without the proprietor’s consent, to replace it should he find something he liked better. This was contrary to common sense, and the view which would have produced this result was rejected.Note the different point in time when the contract would be formed if it were held that the display were an offer and the legal effect of this.
4. Another way to identify an offer is to compare it with what courts have described as a ‘mere puff’. A puff is a representation about the subject matter of the contract such as a service to be provided, or an item to be sold, which usually exaggerates the features of the service or item and often in circumstances that cannot be proven. An example might be a statement that ‘this car is a little beauty’. Such a statement will not form part of the offer because there is no intention on the part of the maker to be bound. In fact, the words are too vague to become part of a contract. 
5.  An offer must be distinguished from a mere answer to a request for information. Again, such a response will not usually show an intention to be legally bound. These are often made during communications between prospective parties to a contract. An example in point is Harvey v Facey [1893] AC 552:The plaintiff telegraphed to the defendants ‘Will you sell us Bumper Hall Pen? Telegraph lowest cash price’. The defendant telegraphed in reply ‘Lowest price for Bumper Hall Pen £900’. The plaintiff’s then telegraph ‘we agree to buy Bumper Hall Pen £900 asked by you. Please send us your title-deeds’. The court held that no contract existed as the defendant’s response was only an answer to a request for information rather than an offer. 
6. An offer can be revoked at any time before acceptance unless an option has been granted. An option is a separate contract whereby the would-be seller gives the prospective purchaser an option to buy the property at a stipulated price, provided the option is exercised within a given time period. It may or may not be followed by a contract to sell the property depending on whether the ‘purchaser’ decides to exercise the option. To be enforceable the purchaser must give some consideration for the option. As mentioned above ‘consideration’ is money or money’s worth. So if the offeree was to say to the offeror ‘I will pay you $10 to keep your offer open (to me) for one month’ then a valid option will come into effect – assuming of course that the offeror agrees. The important point is that the offeree must pay something for the right to have the offer remain open. If not, then the offeror can revoke the offer at anytime even where she or he has said they will keep the offer open for certain period. A case demonstrating this area of law is Goldsborough Mort & Co Ltd v Quinn. When reading this case do not concern yourself at this stage with the meaning of the term ‘specific performance.
7.  An offer can be made to one person, a class of persons or the world at large. It is unusual to have an example of the latter because normally a communication to the world at large is an invitation to treat. Again it depends on whether there was an intention to be bound. 

Termination of Offer ; An offer can be terminated in one of three main ways: Revocation; Rejection; and Lapse.

Revocation of Offer by Offeror

(a) The fundamental rule is that the offer can be revoked at any time before acceptance. As we have seen, an exception to this rule is when a valid option is granted. In such circumstances, the seller is bound to keep the offer open in favour of the would-be purchaser until the end of the period stipulated in the option. Any attempt to revoke the offer in the interim would be a breach of the terms of the option.

Another exception to the rule is where the offer is made for the doing of an act, then the offeror cannot revoke the offer after the offeree has partly performed the act.

(b) Revocation is not effective until it is communicated to the offeree. See Byrne & Co. v Leon Van Tienhoven & Co. (1880) 5 CPD 344. Thus, it is not sufficient that the revocation be merely posted, it must reach the offeree. A different rule applies to the acceptance of an offer, as will be discussed below.

(c) It is not necessary that the revocation be communicated by the offeror only – as long as the offeree learns of it from some reasonably reliable source.

Dickinson v Dodds (1876) 2 Ch D 463:On 10 June Dodds made an offer to D to sell him a dwelling-house for £800: ‘This offer to be left over until Friday, 9 o’clock am, 12 June’ On 11 June Dodds contracted to sell the house to A. D heard of this from one Berry on the same afternoon. He nevertheless handed Dodds an acceptance of the offer at a few minutes before 9 a.m. on 12 June. Dodds said ‘You are too late. I have sold my property’. Dodds, by entering before 9am on 12 June. Dodds sell to A, showed an unequivocal intention to revoke his offer to sell to D. This revocation was communicated by B to D before D had accepted. There was therefore no contract between D and Dodds. Notice of the revocation was good, although it was communicated by a third party, B, and not by Dodds himself.

(d) Revocation can take any effective form. It can be in writing, verbal or as demonstrated in Dickinson v Dodds, communicated by a third person.

Rejection of Offer by Offeree

(a)The rejection can be express (b) It can also be implied. This leads to the rule that a counter offer terminates the original offer.
In the case of Hyde v Wrench [1840] 49 ER 132.

Wrench wrote to Hyde on the 6th June offering to sell his farm for £1000. On the 8th
June. Hyde replied by offering £850, which was rejected by Wrench on 27th June. On 29 June Hyde wrote again to Wrench stating he was prepared to pay the £1000. The Court held that no contract had arisen as Hyde’s counter offer of £950 had rejected Wrench’s offer of £1000 and he could not revive the offer by writing on the 27th June purporting to accept it.

Compare this with the case of Stevenson, Jacques & Co v McLean (1880) 5 QBD 346 where the response from the offeree was characterized as a request for information, not a counter offer. The facts of Stevenson v McLean were:

The parties had been corresponding regarding the sale of certain iron. Finally on Saturday the defendant wrote to the plaintiff offering to sell at 40s net cash per ton, the offer being left open until the following Monday. At 9.42am on the Monday the plaintiff telegraphed the defendant enquiring ‘whether you would accept 40s for delivery over two months if not, longest limit you would give’. Receiving no reply, the plaintiff at 1.34pm on the same day telegraphed an acceptance of the offer to sell at 40s net cash per ton. At 1.46pm on the same day the plaintiff received a telegram from the defendant, sent at 1.25pm, advising that the iron in question had been sold elsewhere. The court had to decide whether the plaintiff’s telegram sent at 9.42am was a counter offer, in which case the plaintiff was not free to accept the original offer by his 1.34pm, telegram, or whether it was simply a request for information. The court, considering, amongst other matters, the unsettled state of the iron market at the time the telegram was sent, found that the telegram in question should have been regarded by the defendant not as a counter-offer but as a mere enquiry. As such it did nor reject the defendant’s original offer, and the plaintiff’s subsequent acceptance at 1.34pm was legally effective.
Lapse

(a)Death; Death of either party may result in the offer lapsing. Factors relevant to determining this issue are which party dies, the time at which the other party knew of the death and whether the offer was personal to the party who died. (An example of an offer being personal to one of the parties would be an offer to an artist to pay a sum of money if he/she were to paint the offerer’s portrait.)
(b)Death of Offeror
After Acceptance - contract already formed (if all three elements present).
Before Acceptance - whether the offer lapses depends on the knowledge of the offeree at the time of purported acceptance and the nature of the contract.- if the offeree is aware of the death - no contract.

- if the offeree is not aware of the death - if the offer is personal to the offeror-no contract.

- if the offer is not personal to the offeror – there may still be a valid acceptance.
c) Death of the Offeree As a general rule this cause the offer to lapse because only the person to whom the offer is made can accept the offer. There is authority however for an exception in the case of an option if the offer is not personal to the offeree. In such a case if the afferee dies during the option period the offer may be accepted by the executors of the estate within the time stipulated.

(d)Time
The offer may lapse if it is not accepted within the prescribed time or, if no time is prescribed, then a reasonable time. What is a reasonable time depends upon the circumstance; it will be quite short if the goods are perishables but much longer if the offer relates to land.

Condition

If an offer is made subject to a condition and the condition is not fulfilled then the offer lapses. An example of this is when there is an offer to purchase land subject to the buyer obtaining finance. If the finance is not obtained then the offeror cannot be held to his offer.

SELF ASSESSMENT

1. How may an offer be terminated 
2.  What is an option?