Formation of Contract

What was the last thing you bought? In 2017 there were 13.2 billion payments made on debit cards alone. But from a legal perspective, what do these transactions represent? Nobody wants to be left out of pocket if any of these transactions goes wrong. Perhaps the item you bought was the wrong size, or wrong colour, or that it was broken. This is where the law of contract steps in. Contract law aims to identify the types of agreements which can become legally binding contracts and those which cannot. 

The first step is therefore to investigate the rules surrounding the formation of contract, for which the courts have created 3 main legal tests (confirmed in Blue v Ashley (2017)). 

The first is that there must be an agreement. Traditionally, this has taken the form of offer and acceptance. Offers are usually characterised as a set of sufficiently certain terms, and will usually give the indication that the party making the offer intends to be bound by the agreement without further negotiation. Offers must be distinguished from invitations to treat, which function merely to entice someone to enter into negotiation. Distinguishing between offers and invitations to treat is difficult. In many circumstances the court has established presumptions. For example, a display of goods for sale, such as on a shop’s shelf, is presumed to be an invitation to treat (Pharmaceutical Society of GB v Boots Cash Chemists Ltd [1953]). 

The second rule is that there must be consideration. This test focuses on what each party brings to an agreement, and is traditionally framed such that consideration must be sufficient but not adequate. This means that each party must bring something which the court deems to have value, but the exchange does not have to be commercially sensible (Thomas v Thomas, 1842). For example, in the case of Chappel v Nestle (1960), the exchange of 3 chocolate bar wrappers in return for a record was deemed by the court to be valid consideration. This is based on whether the court thinks there is value, not what each party believes. 

Traditionally, value has been framed in two ways. Firstly, value may be judged in an economic way. Does each item have value in money, no matter how small? A second model of value also emerged as benefits and detriments (Currie v Misa, 1875); does the exchange bring a ‘benefit’ for one party and a ‘detriment’ for the other? Think of sponsoring a friend to run a charity race. By running the race they are using their time and energy, a detriment, but will gain your sponsorship money. Similarly, your detriment is that you are giving money to them. A final model of practical benefits emerged in Williams v Roffey (1990), though this complex and contentious issue will have its own dedicated article. 

Finally, the court must consider whether there was intention to create legal relations. As with the test for agreement, they are judged objectively; i.e. that the reasonable person would believe that there was intention. It is not based on what each party thought, but is judged by the court. This is done to separate non-binding ‘friendly’ relations from binding ‘contractual’ relations (Balfour v Balfour, 1919). 

This process is taking place all of the time, thousands of times per day, for transactions large and small. Whether you are buying your daily coffee on the way to university, or thinking of signing a tenancy agreement (a type of contract) for next year’s accommodation, consider how these steps relate to your purchase. 

 

Key terms:

Legally binding contract – contracts which the law will protect (so if they are broken, the court will give a remedy)  

Objectivity vs subjectivity –two of the main types of legal tests, prevalent in many areas of law. Objectivity is an assessment by the court based on what a ‘reasonable person’ would have thought/done. Subjectivity is based on what the person actually believed.   

Offers – the first stage of a valid contract. Must be a sufficiently certain proposal upon which to create a contract.

Invitations to treat – something which will fall short of an offer, usually due to lack of certainty, and cannot form a contract.

Consideration – the second stage in creating a contract, based on a reciprocal exchange

Sufficient but not adequate – the main rule of consideration. There must be a reciprocal exchange, but it does not need to be commercially sensible.

Benefits and detriments – one method of testing whether there has been an exchange of value. An alternative to the newer practical benefits approach.

Intention to create legal relations – the final test in creating a contract, based on whether both parties intended to enter a legally binding contract. 

 

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