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Formation of Contract
© Daniel Atkinson 2000
The agreement of the parties is an essential ingredient in the formation of a contract. This may be analysed by offer and acceptance. An example is the quotation by a sub-contractor which is accepted by the main contractor. The acceptance must be unconditional. If the acceptance includes any terms or stipulations it will not bring a contract into existence but will constitute a counter-offer which can then be accepted by the original offeror. Contracts are often the result of many counter-offers.
This approach has been criticised by Lord Denning in the Court of Appeal in Gibson -v- Manchester City Council (1972) who considered that it was a mistake to think that all contracts could be so analysed, and that the correspondence as a whole and the conduct of the parties should be examined to see whether the parties had come to an agreement on everything that was material. However, it appears that the conventional approach of offer and acceptance will normally apply, and the broader approach is used only in exceptional cases.
In Hescorp Italia SPA v Morrison and Imregilo (2000) TCC the distinction between essential and non-essential terms was made, recognising that the parties may decide which terms are considered by them as essential to be agreed. The six principles from Pagnan S.p.A. v Feed Products Ltd [1987] 2 Lloyd's LR 601 are set out.
The distinction between an offer and an invitation to treat is that the latter is part of the preliminaries of negotiation, whereas an offer is legally binding once accepted, subject to compliance with the terms of the offer. A tender enquiry usually falls into the category of an invitation to treat.
The distinction is made by examining the objective intention of the offeror. The principle is that a transaction is an offer if it reasonably appears so on the factual circumstances and the offeree believes it is an offer The Hannah Blumenthal (1983).
Contractors and sub-contractors use varying terms when submitting a price for work. Tender, quotation, estimate, are words commonly used to depict an offer. In Crowshaw -v- Pritchard and Renwick (1899) the plaintiff invited tenders for work and the defendant submitted an `ESTIMATE'. It was held that the estimate was an offer to carry out work capable of acceptance and hence the formation of a binding contract.
In Butler Machine Tool Co -v- Ex Cell-O Corporation (1979) the sellers sent a quotation for £ 73,535 on their own standard form. The buyers placed the order on their own standard form. The two standard forms differed in crucial details; in particular the sellers form allowed for an increase in price owing to inflation but failed as it was held not to be part of the contract. The Court of Appeal adopted traditional offer and acceptance reasoning to resolve the dispute. The seller's form was an offer which was cancelled by the buyer's order (a counter-offer). The seller had then sent back a tear off slip provided by the buyer for acknowledgement of receipt of order. This was classified as an acceptance meaning the buyer's terms prevailed. The conflict between the seller's conditions and those of the purchaser is often referred to as the `Battle of the Forms' in which it is the party who answers last who wins
Where engineering work is completed without a written contract, there may be a contract concluded by conduct. The commercial nature of the transaction, and the fact that the work has been fully carried out, will normally be strong evidence of such a contract. G Percy Trentham -v- Archital Luxfer (1992) dealt with such a situation. The Court of Appeal held that a contract had been concluded, despite the parties' failure to execute a formal contract.
No contract would arise, however, where one party has made a continuing stipulation that a contract shall come into existence only if a written agreement is concluded. An earlier case dealing with this is Rees Hough Ltd -v- Redland Reinforced Plastics Ltd (1984) 27 BLR 136.
Generally, if a purported acceptance is expressed to be `subject to contract', or some other words are used which show that further negotiations or events are contemplated, there is no concluded contract Cranleigh Precision Engineering Ltd -v- Bryant [1965] 1 WLR 1293. However there are exceptions. In Fraser Williams (Southern) Ltd -v- Prudential Holborn (1992) the court found a concluded contract despite the offer being expressed to be `subject to contract'. The judge stated that the project was an important one and that it was `commercially improbable' that the parties would commence the project without concluding a formal contract between them. See also Hescorp Italia SPA v Morisson and Imregilo (2000) TCC
It is not uncommon for work to be commenced or goods supplied before a formal contract has been entered into. Subsequently the parties may sign a formal contract. The effect will be for the conditions embodied in the formal contract to have retrospective effect Trollope and Colls Ltd -v- Atomic Power Constructions Ltd (1963).
To establish a contract not only requires agreement by the parties on all the terms they consider essential, but also sufficient certainty in their dealings to satisfy the common law requirement of completeness. An intention to create a legally binding relationship must also be present. Letters of intent traditionally fail on both since they are usually incomplete statements preparatory to a formal contract. Under normal circumstances therefore, a letter of intent is binding upon neither party Turiff Construction Ltd -v- Regalia Knitting Mills Ltd (1971).
British Steel Corporation -v- Cleveland Bridge and Engineering Co (1984) 1 All ER 504 is another example of a letter of intent not amounting to a contract, as is the case of
Kitson Ltd -v- Balfour Beatty (1991).
It is not uncommon where goods are on long delivery for the purchaser to instruct the seller to place orders for materials in advance of a contract being entered into. In the event of there being no subsequent contract the seller will be entitled to be paid on a quantum meruit basis, ie reasonable remuneration which would normally take the form of a cancellation charge.
Monk Construction Ltd -v- Norwich Union Life Insurance Society CA (1992), also followed this principle. It was noted however, that a letter of intent can, in appropriate circumstances, form the basis of a unilateral or an `if' contract, whereby an employer undertakes responsibilities such as payment to a contractor if the contractor starts the specified work. Terms may then be implied into that contract in accordance with normal principles. But for such a contract to arise, the letter of intent must contain all necessary terms. Further, it must be plain that the unilateral contract is to govern the main contract work in the event that no formal contract is concluded.
See also J. Jarvis & Sons PLC v Galliard Homes Ltd (1999) CA
An option is an agreement for consideration to keep an offer open for a period of time and is itself a contract. Unless an `option' exists, under English law an offer can be withdrawn at any time up to it being unconditionally accepted.
For the agreement to be legally binding the parties must have the intention to effect a legal relationship between them. The meaning of intention of the parties was explained by Lord Wilberforce in Reardon Smith Lane Ltd -v- Hansen-Tangera (1976) as being an objective intention. The parties cannot give evidence of what their intention was.
Consideration is some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.
Consideration avoids the enforcement of informal, gratuitous promises. Under English Law a party suing on a contract must show consideration, unless the contract is executed as a deed.
In the ordinary building or engineering contract, the consideration given by the employer is the price paid or the promise to pay, and by the contractor is the carrying out of the works or the promise to carry them out.
The law assumes that everyone has a capacity to contract. Where an exemption from liability for a contractual obligation is to be claimed, the incapacity must be proven by the person claiming the incapacity. The main classes of individuals who can claim incapacity are minors, mentally disordered persons and drunken persons.
Under English Law the age of capacity for the law of contract is 18 years. The only contracts binding on a minor are contracts for necessaries, for apprenticeships, and education and service and beneficial contracts.
Corporations are legal personae as much as individuals. Corporations can be created either by charter or by statute. If the corporation enters into a contract for which the subject matter is outside its constitution, then the contract is ultra vires and void. This applies to all statutory corporations and not only to companies incorporated under the Companies Act. The doctrine of ultra vires has been modified by section 35 of the Companies Act 1985.
An unincorporated association is not a legal person and cannot therefore be sued or sue unless authorised by statutory provisions as in the case of a trade union or trustee savings bank.
As a result of the Crown Proceeding Act 1947 proceedings against the Crown in contract are governed by essentially the same rules of procedure as between subjects.
Deeds, sometimes called speciality contracts, were formerly always documents which effected contracts under seal.
Following the Law of Property (Miscellaneous Provisions) Act 1989, S1(1)(b), which came into force on 31 July 1990, this no longer applies to deeds executed by individuals, for which a seal is no longer required.
A deed is validly executed by an individual if it is signed in the presence of a witness who attests the signature and providing it is described or expressed to be executed as a deed.
The matter of execution of a deed by a company is now found entirely in S.36A of the Companies Act 1985, having been amended by S.130 of the Companies Act 1989. S.36A(3) allows for execution by two directors or a director and secretary and for such an instrument to be a deed if so expressed.
The main characteristics of deeds are that they do not require consideration, and that they have a 12 year limitation period.
There is no general rule in English Law that a Contract should be made in a certain form. There are many exceptions, which now all depend upon statutes which deal with specific types of contracts, particularly relating to land or guarantees.
Generally in commercial situations the contract may be wholly in writing or wholly oral or may be partly oral and partly in writing. In order to achieve commercial certainty, and to avoid the problem of ascertaining what was said by the parties, all standard forms of contract attempt to reduce the contract to writing. This is normally achieved by defining the "Contract" by listing the documents which are incorporated into the Contract.
Some standard forms are drafted on the basis that a form of Agreement has been executed.
A Contract need not be made by formal Agreement, and may be created simply be acceptance by the Purchaser of the Contractor's Tender. This does not necessarily prevent a formal Agreement being entered into subsequently and separately.
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