CHAPTER 3

Contract Formation

Contract Formation in English Law

Under English law, in order for a contract to be legally binding and enforceable in a court of law it must be formed properly. First, it must be shown that the parties came to an agreement; essentially there has been a valid offer and acceptance. Second, there must be adequate consideration; the exchange of something which has tangible value in return for the promise. Third, it must have been the intention of the parties entering into an agreement to create a legally binding arrangement, in other words they intend to impose obligations that could be enforced by a court. Finally, it must be shown that the parties had the legal capacity to enter into the contract.

Thus, there are five elements required to form a legally binding agreement. It is often helpful to think of the formation of a contract as a hurdle race. At the start line, we have the parties and the subject matter. To get to the finish line, which is the legally binding and enforceable contract, we must jump over five hurdles; offer, acceptance, consideration, intention to create legal relations, and capacity. If we fall at any one of these hurdles we do not reach the finish line and we do not have a legally binding contract.

Offer

The traditional approach is that the law looks for an offer to be made by one party and an acceptance of that offer by the other. However, the courts over time have shown a willingness not to adhere strictly to this test. In the case of G Percy Trentham Ltd v. Archital Luxfer Ltd Lord Steyn favored prioritizing the intention of the parties and the commercial reality over the strict determination of a valid offer and acceptance.1 However, this is the exception rather than the rule and predominantly the ­traditional approach prevails.

An offer has been defined as “a clear and unambiguous statement of terms upon which the offeror is willing to contract.”2 There are two types of offer that can be made, and they are important as different rules of acceptance apply. The bilateral offer is made to identifiable parties and can only be accepted by those parties. For example, “I will give $10 to Stacey if she will make me a cup of coffee.” This is a bilateral offer, it has been directed to an identifiable party, Stacey, and only she can accept. A unilateral offer is made to a larger group of people and is capable of being accepted by anyone who fulfills the terms of the offer. For example, “I will give $10 to the first person in the room who brings me a cup of coffee.” This is a unilateral offer and it is open to everyone in the room. The first person to bring me a cup of coffee has accepted by fulfilling the terms of the offer and can claim the $10.

An offer can be made orally or in writing, but in some circumstances, it can be difficult to determine whether a statement was in fact an offer capable of being accepted, or whether it was an invitation to further negotiations.

Offer or Invitation to Treat

An offer is a statement which is capable of being accepted whereas an invitation to treat is merely seen as an invitation to make an offer. Determining whether a statement is one or the other will come down to the words used and their interpretation by the court. In Gibson v. Manchester City Council Mr. Gibson received a letter from the Council indicating that they “may be prepared to sell” his council house to him at a particular cost, but that the “letter is not be regarded as a firm offer of a mortgage.”3 Mr. Gibson was required to fill in an application form and send it to the Council. Before the matter was concluded there was a change in Council governance and the practice of selling Council owned properties was reversed. Mr. Gibson sought an order of specific performance (see Chapter 8) to force the Council to complete the sale. The House of Lords held that there was no contract in existence in that there was no valid offer capable of acceptance. The wording of the Council’s letter was an invitation to treat inviting Mr. Gibson to make an offer which could then be accepted or rejected by the Council. In contrast in Storer v. Manchester City Council the court considered a letter that stated “I understand that you wish to purchase your council house and enclose the agreement for sale” a valid offer capable of acceptance.4

There are two main areas where we consider whether a statement is an offer or an invitation to treat.

Advertisements

Generally, advertisements are to be considered as an invitation to treat and not an offer. In Partridge v. Crittenden the defendant was not ­liable for the statutory offence of unlawfully offering wild birds for sale as his advertisement was not an offer but rather an invitation to treat.5 In ­addition in Grainger and Son v. Gough (Surveyor of Taxes) the court found that the delivery of a price list does not amount to an offer, only when an order is placed, and accepted, is there a binding contract.6 One rationale underpinning this involves protecting a vendor from multiple claims of liability in circumstances where they may run out of stock. As such an advertisement generally is an invitation to treat, which in turn leads to an offer which can be accepted or rejected.

However, in certain circumstances an advertisement can be deemed to be an offer. The landmark case of Carlill v. Carbolic Smoke Ball Company involved an advertisement for a medicinal product.7 It claimed that if the smoke ball was used the user would not contract influenza. So confident were they in their claim that they offered £100 to anyone who used their product and contracted influenza. Further, it stated that to show its sincerity £1000 would be deposited in a bank to meet the cost of any such claims. The plaintiff herein used the smoke ball, contracted influenza, and claimed her £100 as per the advertisement. The company claimed that this was merely an invitation to treat, not an offer, and refused to pay. The court found that the specificity of the statements made, and the solicitation to act arising from the statements, were such that the reasonable person would assume that he could rely on them and therefore it was a unilateral offer, capable of being accepted by purchasing and using the product described.

In short, the general position is that advertisements are invitations to treat, however, where the advertisement is sufficiently specific such that a reasonable person would expect to be able to rely on it, and certain actions are requested or encouraged, then it will be deemed an offer.

Goods Displayed for Sale

The general rule here again is that goods displayed for sale are classified as invitations to treat. The leading case on this is Pharmaceutical Society of Great Britain v. Boots Cash Chemists.8 In this case the plaintiff alleged that the defendant had breached s 18 of the Pharmacy and Poisons Act 1933 which prohibited the sale of certain medicines without the supervision of a pharmacist. The question before the court was whether the display of the medicines on shelves was an offer which would be accepted when the customer picked it up and placed it in their basket; or was the display an invitation to treat, which became an offer when the customer brought it to the checkout to pay, which could then be accepted or rejected. The court determined that it was the latter such that bringing goods to the counter amounts to the offer, and the cashier processing the sale amounts to acceptance.9 Similar to the position with general advertisements, the displays in shops can construed as an offer. In R v. Warwickshire CC Ex Parte Johnson a notice placed in a shop window with the display of goods that stated, “we will beat any TV price by £20 on the spot,” was held to be an offer.10 Again, the specificity of the statement, and the solicitation to act, that is, find a cheaper price and “we will beat it,” gives rise to special circumstances which render the display an offer rather than an invitation to treat.

Websites selling goods are generally considered to be equivalent to shop windows and therefore invitations to treat rather than offers. ­E-Commerce Regulations require that websites provide all pertinent information and a receipt to customers.11 The buyer makes an offer by placing an online order which is accepted by either an acknowledgment or when the goods are dispatched. When pricing errors are made by websites the terms of acceptance can become very important. In 2002 Kodak advertised a camera for £100 in error (it should have been £330). 5000 people placed an order and were sent an electronic receipt. Kodak ­­honored the contract in light of a customer revolt and the fact that the issuance of the receipt could be deemed as an acceptance thereby creating a binding contract.12 In 2006 Amazon offered pocket computers for £7.32 instead of £274.99. On its website Amazon specifically stated that the contract only came into existence on dispatch of the goods and did not have to honor the lower price.

Termination of Offer

An offer does not last forever and can be terminated in a number of ways. If the offer does not specify the time for which it will last, it can terminate through lapse of time. The amount of time required to pass before this happens is very case and subject specific as evident in Ramsgate Victoria Hotel Co v. Montefiore where it was held that the amount of time will be a reasonable amount of time in the circumstances of the subject matter of the contract.13 An offer can also be terminated through revocation. It is a generally accepted rule that an offer can be withdrawn or revoked at any time until it has been accepted. This applies even where the offer states that it will remain open for a specified period of time.14 However rules surrounding revocation differ in the case of unilateral offers, where an offer cannot be revoked once performance of the terms has been commenced.15 In all cases in order for revocation to be effective it must be communicated to the offeree, it is not enough that the offeror has silently changed their mind.16

Otherwise, when an offer is rejected it is terminated,17 and any change in the terms of the offer by the offeree in his acceptance terminates the original offer and replaces it with a counter offer which can either be accepted or rejected by the initial offeror.18

Acceptance

An acceptance is a final, unconditional and certain indication of agreement to the terms of an offer, communicated to the offeror, with the intention of accepting and being bound by the offer. The two key concepts surrounding effective acceptance are: acceptance of the offer made and communication of that acceptance.

The mirror image rule states that the acceptance must mirror entirely the terms of the offer. Any variation, addition, or detraction from the offer will not constitute an acceptance but rather a counter offer.19

A unilateral offer is accepted by conduct, the performance of the terms set out in the offer.20 A bilateral contract can also be accepted by conduct in certain circumstances. In Brogden v. Metropolitan Railway Company the parties had been doing business for a number of years when they decided to formalize their arrangements by entering into a contract.21 A contract was drafted which was signed and approved by one party and then returned to the other where it was overlooked. The two parties acted in accordance with the agreement for a number of years until a dispute arose wherein it was claimed that there was no legally binding contract. The court found that the contract had been accepted by conduct as evidenced by the fact that they had abided by the terms therein.

As a general rule, an acceptance does not become valid until it has been communicated to the offeror. In Entores Ltd v. Miles Far East Corporation Lord Denning MR gave this famous example:

Suppose, for instance, that I shout an offer to a man across a river or a courtyard but I do not hear his reply because it is drowned by an aircraft flying overhead. There is no contract at that moment. If he wishes to make a contract, he must wait until the aircraft is gone and then shout back his acceptance so that I can hear what he says. Not until I have his answer am I bound […]22

This refers to the receipt rule, that the acceptance must be received by the offeror to be valid. The rationale underpinning this was explained in Carlill v. Carbolic Smoke Ball Company by Lord Justice Bowen as:

One cannot doubt that, as an ordinary rule of law, an acceptance of an offer made ought to be notified to the person who makes the offer, in order that the two minds may come together. Unless this is done the two minds may be apart, and there is not that consensus which is necessary according to the English law[...]to make a contract.

Aside from unilateral contracts where acceptance occurs with performance, and as such may not be known to the offeror, the only other exception to the receipt rule is known as the postal rule. This rule, as the name suggests, arises where contracts are settled by post. The doctrine is evident from the case of Adams v. Lindsell 23 where the court decided that acceptance took place when a letter of acceptance was posted rather than when it was received. This rule is now well established in contract law despite its sometimes-unfair effects, for example, where an acceptance may be lost in the post or may be delayed in arrival: however, where one chooses to contract via the postal system one is presumed to assume such risks.24

The position in relation to internet sales is addressed earlier, and again, generally where a supplier advertises goods for sale on a website this is to be seen akin to advertising in a shop and is an invitation to treat. The purchaser makes the offer which is accepted by the supplier. Acceptance is usually indicated by way of issuing a receipt or dispatching good depending on the terms of sale.25

Consideration

The offer and acceptance discussed earlier represent the agreement part of the contract. However, a mere agreement is not legally enforceable and in order for it to be legally binding, consideration must be present.26 To understand consideration it is best to regard offer and agreement as an exchange of promises, the offeror promises something, in return for which the offeree (the person who accepts) promises something in return. For example, if Jane offers to sell her car to John, she has promised her car. John, in turn accepts the offer, promising to pay $5000.

Consideration is the something provided in exchange for the promise, the quid pro quo. Most often it is in the form of monetary payment or promise thereof, for example, the payment provided for a service or an item. In our transaction, John provides consideration in the form of payment, and indeed Jane provides consideration in the form of her car.

In a bilateral contract, where a party agrees to pay for a service, both parties have not yet fulfilled the contract: however, they have agreed to mutual obligations in the future. This type of consideration is known as executory. Therefore, consideration may take the form of providing something of value or promising to do so. In terms of a unilateral contract the consideration is described as executed as it is based on an act. It consists of a promise, followed by an act. Therefore, one must be aware of the promise in order for the act to amount to consideration. The agreement must predate the consideration. In R v. Clarke there was an offer of a reward leading to an arrest.27 Clarke, who was unaware of the offer and whose primary motivation was to clear his own name, provided this information. He tried to claim the reward but was unsuccessful as he was not induced to act by the promise.

An essential element of consideration is that it must move. Traditionally, the position was that consideration had to move from the promisee and the contract could then only be enforced by the person who supplied the consideration, which effectively meant that third parties could not enforce the contract. It is now commonly accepted that in certain circumstances third parties can enforce contracts.28 Consideration may be valid where the promisee suffers a detriment (by performance of an act or the payment of monies) even where there has been no benefit conferred on the promisor. This can occur where a contract is entered into with a third party at the request of the promisor. A practical example of this is the operation of credit cards. The card issuer promises the retailer, who accepts payment using the card, that the retailer will be paid.

There are a number of important aspects of consideration.

Rule 1: Consideration Must Be Sufficient but Need Not Be Adequate

This rule effectively means that once the consideration provided has some monetary value (sufficient) it does not need to be of market value (adequate). It may have been that at some point the doctrine of consideration was created in order to ensure fairness in bargains and to protect against fraud and duress. However, the doctrine of the freedom to contract stifled contract law’s development in this way.29 This doctrine forms the basis of the maxim that consideration must be sufficient but need not be adequate and effectively allows for the freedom to bargain, even if it is at an undervalue. Ergo, if I want to sell my Porsche for $50 I can, and the law will not intervene to set aside the contract (unless there has been some duress, misrepresentation, mistake, or fraud) on the basis that the market value is far in excess of the sale price. The law allows for each person to bargain and enter into contracts regardless of whether it is a fair price. This does assume that everyone in the market place possesses the same level of bargaining power, which is not necessarily true.30 That said, even though I am desperate to feed my children, or pay my rent, and in that regard, I am more likely to accept a reduced price for any goods that I might be selling, this is not a substantive concern of the law. So, once it can be shown that the consideration had some real value, the law will not investigate as to whether this was of equivalent or market worth. For example, in Thomas v. Thomas a husband left his property to his widow in return she was to pay £1 in ground rent.31 Notwithstanding that this rent was grossly inadequate as it could fetch much higher rents on the open market, it was found to be of actual value and therefore amounted to sufficient consideration.

Therefore, all we need to show valid consideration is that it has some “actual value” in the eyes of the law and the contract will be enforceable. In Chappell v. Nestle the case involved a promotional scheme run by the company where a customer could claim a music record for a reduced price with three chocolate bar wrappers.32 The question arose as to whether the chocolate wrappers could be classed as consideration, and it was held that the wrappers had some nominal and tangible value, and could therefore constitute consideration, even if it could be shown that the defendant would just throw them away. In delivering his judgment, Lord Somerville stated:

It is said that when received the wrappers are of no value to Nestlé’s. This I would have thought irrelevant. A contracting party can stipulate for what consideration he chooses. A peppercorn does not cease to be good consideration if it is established that the promisee does not like pepper and will throw away the corn.33

Thus, consideration must be something that is of actual value in the eyes of the law, no matter how small in monetary value. Under equitable rules however, the court may set aside a contract where consideration is inadequate in circumstances where it amounts to an unconscionable bargain as considered in Chapter 8.

A final point is that actions can have value; however, so may inaction or forbearance. Thus, doing something of value will amount to sufficient consideration, as will refraining from doing something which may be of value.34

Rule 2: Past Consideration Is No Consideration

As we know, there must be the agreement or promise followed by an act, or forbearance, in order for the contract to be formed. If there is an act followed by a promise this does not result in a legally binding contract.

For example, I say, “I will give you $50 if you paint the wall in my garden” (Promise). You then paint the wall in the garden (Act). This illustrates a legally binding contract that you can enforce, and I will have to pay you the $50. In contrast, if I come home to discover that you have painted the wall and I then say, “Thank you, I will pay you $50,” this is not a legally binding contract that you can enforce as you acted without the promise to pay.

This is illustrated in the case of Re McArdle wherein the children were entitled to inherit a house after their mother’s death.35 One of the children paid for several repairs to be carried out on the property and subsequently the rest of the children signed a document agreeing that £488 should be repaid from the estate for the work done. This was held to be unenforceable as it amounted to past consideration, the work was not carried out in exchange for the promise.

There is an exception to this rule where the work has been done at the request of the promisor, and there is a legitimate expectation that payment will be received, although the precise details of the payment are unknown. The earliest example of this exception is seen in Lampleigh v. Brathwait.36 Brathwait was in prison for murder and he asked Lampleigh to obtain a pardon from the King, which he ultimately did. Brathwait then promised to pay £100. Technically this was past consideration as the act was carried out before the promise to pay. However, the court found that this case was different in that the act was carried out at the request of Brathwait and such request implied a promise to pay.

The two key elements here are that there was a request to perform the act and that there was an implied promise to pay. It would appear to be more difficult to apply this to cases of domestic or social contracts as doing acts to help a family member or neighbor tend not to imply a promise to pay. Indeed, as we shall see in domestic relationships there is additionally often a presumption that there was not an intention to create a legally binding agreement in any event, whereas in the commercial context it will be much easier to establish this implication. We examine the difference between these two types of contracts in the next section.

Rule 3: Performance of an Existing Duty Is Not Good Consideration

Where you already owe a duty to perform a particular act, generally the performance of that act cannot be said to be consideration as that act has been induced by the preexisting duty and not the promise. The duties tend to be divided into two categories: those imposed by law and those imposed by contract.

In terms of the duty imposed by law, the leading case is Collins v. Godefroy.37 Here the plaintiff was promised payment in return for giving evidence at trial. He was however obliged to do this as he had been summoned by subpoena to do so. The promise to pay was therefore unenforceable as he was under a legal duty to attend.

The exception to this rule is where the person goes above and beyond their preexisting legal duty. In Glasbrook Brothers Ltd v. Glamorgan County Council, the council was able to enforce a promise to pay where it provided a police presence over and above that generally required in order to provide for a greater level of security during a mining strike.38 As this was beyond the normal provision, it was in excess of the legal duty and therefore sufficient consideration.

The same premise applies to a duty already owed under contract, such that the performance of a preexisting contractual duty will not amount to sufficient consideration for a new promise.39 Similarly, an exception arises where the person goes beyond that existing contractual duty.40 Furthermore, an exception arises from the type of circumstances contemplated by the case of Williams v. Rafferty Bros and Nicholls (Contractors) Ltd.41 This allows for the fulfillment of an existing contractual duty to amount to sufficient consideration where something of additional value is conveyed to the other party arising from a change in circumstances. To come within this exception the following facts must arise:

• A contracts with B to do work or supply services in return for payment;
• At some point before completion B has reason to believe that A will not, or may not, be in a position to complete his side of the contract in a manner sufficient to meet B’s needs;
• B then promises A additional payment for A to complete his contractual obligations;
• As a result of this additional promise B in practice obtains a benefit or avoids a disbenefit, through the completion of the work in a manner which meets his needs;
• B’s additional promise is not given as a result of economic duress or fraud by A;
• The benefit to B, given by A, is capable of being construed as consideration for B’s additional promise, such that A can enforce the promise to pay for what was a preexisting ­contractual duty.

While this deals with the promise to pay more, the promise to accept less than what is contractually owed has been a troubling prospect for common law courts. Arising from the Pinnel case it was held that a ­promise to accept less than what is due (and not to sue for the balance) was unenforceable unless it was supported by some fresh consideration, for example, fulfilling a request to pay less but at an earlier date at the request of the other party.42

Intention to Create Legal Relations

The fourth essential element in the creation of a legally binding contract is that there must be an intention between the parties to create legally binding relations. Even in circumstances where there has been a valid offer and acceptance, supported by sufficient consideration, if we never intended our agreement to be enforced by a court then the agreement will not be legally binding. For example, if you ask your friend to drive you home after work in exchange for gas money, and he agrees, we would have valid elements of offer, acceptance, and consideration. But if either your friend does not turn up, or you do not pay the gas money, did you intend that this would end up in court?

The law makes certain presumptions in relation to the intention depending on the circumstances or relationships associated with the parties entering into the agreement. For social and domestic contracts (this is contracts between family and friends) the presumption is that there is no intention to create legal relations. In Balfour v. Balfour a promise by a husband to pay the living expenses of his wife during their marriage was unenforceable as there was no intention to create legal relations.43 However, where maintenance has been agreed at the breakdown of the marriage rather than through its duration, the court has found this to carry required intention.44 Another example of the presumption against legal relations arose in Jones v. Padavatton where a promise by a mother to her daughter that she would pay her tuition fees, allow her to live in her property and provide a living expense for so long as she trained to become a barrister was not found to be legally binding.45

These are merely presumptions, and as with all presumptions, they can be rebutted with sufficient evidence. One way to rebut this presumption is to show that the matter is of considerable substance, and expressed in a manner which indicates an intention to bind the parties. The more substantial and specific the content of the agreement, the more likely it is to carry an intention to create legal relations. In Parker v. Clarke an elderly couple entered into an agreement with their niece and her husband that if the younger couple sold their house, moved in, and contributed to the household expenses then the elderly couple would leave them the house.46 They did this and subsequently the two couples fell out, with the younger couple being told to find alternative accommodation whereupon they sought damages for breach of contract. The court found that the use of language and the precise details coupled with the seriousness of the act (the selling of their own property) indicated an intention to create legal relations, and thus rebutted any contrary presumption.

In contrast, contracts which are commercial in nature carry a presumption that there is an intention to create legal relations. The clear purpose of commercial contracts is to stimulate exchange, and were this element required to be proven in each case it would become an additional hurdle for those seeking to enforce commercial contracts.47 Therefore, contracts of a commercial nature, notwithstanding the relationship of the parties, are presumed to carry an intention to create legal relations.

In turn, it is possible even in the case of commercial contracts to specifically rebut the presumption of intending to create legal relations such that the agreement will not be legally binding. This can be achieved through the use of so-called “honor clauses.” These clauses, inserted into the contract, expressly state that it will have no legal effect and be binding in honor only. The leading case recognizing this is Rose & Frank Co v. J.R Crompton & Bros Ltd.48 Here the plaintiffs were the defendant’s agent to sell a certain type of paper in the United States and the agency agreement contained an honorable pledge clause which said that the agreement was not to be viewed as a legal document subject to the jurisdiction of the courts. The plaintiffs from time to time placed orders and the defendant would fill them. The defendants announced that they would no longer fill orders from the plaintiff who then sued to enforce the terms of the agreement. The court upheld the clause and found that there was no obligation on the plaintiff to submit the orders and there was no obligation on the defendant to fulfill any orders.

Capacity

The final element required is that of contractual capacity. This relates to whether or not the person has the legal capacity to enter into a contract and whether they are of a sound mind. A person is deemed to lack capacity due to mental impairment if they are unable to understand the information relevant to making the decision, unable to retain that information, unable to weigh that information as part of a decision-making process and/or are unable to communicate that decision.49 A person can also lack capacity where they are so intoxicated so as not to understand the nature or consequences of his actions, and the other party was aware of such intoxication.50

The predominant concern in this section is the contractual capacity of minors. Generally, a minor (being under the age of 18 or 16 if married) does not have the legal capacity to enter into contracts and will not be bound by them. The notable exception to this rule is in relation to contracts for necessaries. These are contracts which include goods and services necessary and beneficial to the minor.51 Contracts of employment and apprenticeship also fall within this category and are binding on the minor so long as the minor is deriving more benefit than burden. In Proform Sports Management Ltd v. Proactive Sports Management Ltd this issue was examined.52 Here, the footballer, Wayne Rooney, entered into a player representation agreement at the age of 15 with the claimant that it would act as his executive agent and represent him exclusively. It was further alleged that the defendant had also entered into a player representation agreement and thereby procured breach of contract with Rooney. The court found that the agreement was not enforceable against Rooney as he was a minor and the general rule applied. Further it could not be classed as an apprenticeship as there was no training being provided. As the contract was voidable at Rooney’s option the defendant could not be liable for procuring a breach.

Formation of Contracts in American Law

Similarly, in the United States, a legally enforceable contract will be formed when one party has made an offer which has been effectively accepted by the other party, and consideration is present.

Intentionality

Courts will often look for a “meeting of the minds” or an objective “manifestation of assent”53 when deciding if a contract has been formed between the parties. An objective manifestation of intent can vary in form but it is generally a course of conduct which would lead a reasonable person to conclude that an offer is legitimate. For example, in the case of Lucy v. Zehmer,54 Zehmer encountered Lucy in a restaurant and proceeded to offer to sell Lucy a farm which he owned, initially he made a verbal offer, but then wrote the same offer on the back of a restaurant check and signed it along with his wife—this had taken place after Zehmer had consumed a not insignificant amount of alcohol. Though Zehmer and his wife claimed he had made the offer in jest, the court concluded that a reasonably prudent person would have taken Zehmer’s note as a valid offer to sell his farm; he was not able to avoid the legal consequences of his actions by claiming that he was inebriated, as the court found that he was not so inebriated as to fail to comprehend the nature and consequences of his actions in offering the farm to Lucy. Therefore, Lucy had a valid offer which he could, and did, accept. This may seem a harsh result, but in the mind of the court if the validity of a contract always rested on the “true or hidden intent” of one of the parties, it would be difficult to rely on the offers of others, if the consequences of those offers could be avoided by citing a subjective reason for which they did not intend to make an actual offer. This approach favors the stability of contract over the subjective intention of the parties.

By contrast, in Leonard v. Pepsico,55 an individual saw a television commercial for Pepsi which showed various prizes which could be obtained by consumers who redeemed points they collected from Pepsi products they purchased or by points which they could buy separately for ten cents; the prizes included clothing and accessories, with the final prize shown on the advertisement being a Harrier jet with the tongue-in-cheek figure of “7,000,000 Pepsi points” listed next to it. The plaintiff in the case, Mr. Leonard, sent away for the jet in the prescribed manner with the requisite amount of Pepsi points. However, he did not receive his jet. In the resulting case, the court ruled that the advertisement did not represent a serious offer, and Mr. Leonard’s earnestness in believing that he was in receipt of an offer did not matter in this case, as a reasonable person would not have taken the offer seriously. Accordingly, Pepsi won the case and did not have to furnish the Harrier jet. The Restatement on this issue seeks to establish a manifestation of assent in the form of an exchange of promises or commencement of performance.56 A misunderstanding unique to one party, who may attach different meaning to its conduct, will not defeat contractual liability unless such a mistake was mutual, or the other party knew or should have known of the different meaning the party attached to its conduct.57

Offer

An offer is defined in the Restatement as “the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.”58 An offer as well can take a variety of forms in the American experience that may depend on the past conduct of the parties or the custom, usage, and trade that are unique to the circumstances of negotiation. Similar to English law, an offer may be bilateral, with reciprocal promises being undertaken by the parties, or unilateral, where acceptance can take the form of full or partial performance.59

Generally, advertisements or catalogues are not taken as offers, but as an “invitation to treat” which do not create legal obligations or represent earnest offers. By contrast, an advertisement which is unambiguous and leaves nothing to negotiation may be deemed an offer. This was the case in Lefkowitz v. Great Minneapolis Supply Store,60 where an advertisement which offered fur coats for $1.00 was held as valid because it was clear and certain (including a time and a specification of which coats were on offer) and only required an individual to say “yes” to the offer. In the case of unilateral offers, American jurisdictions favor the rule established in the English Carbolic Smoke Ball Company61 case examined earlier. For example, if I see a flyer which reads “Lost Puppy, Answers To Daisy, Reward of $50.00” I do not need to notify the poster that I intend to accept their offer and find Daisy; rather if I appear on their doorstep with Daisy in one hand and the flyer in the other, I can claim the reward, as I have accepted the offer by performance (I found Daisy). Conversely, if we imagine that I find and return Daisy to her grateful owners and see the flyer after she is returned, I cannot take the flyer to owners and demand the reward, as I did not return Daisy with reference to the offer in the flyer, much as with past performance in English law.

Extinguishing an Offer

In the American system, an offer is generally held open for a reasonable period or for a definite time, if such a time has been specified in the offer itself. Where an offer is for an indefinite time, it is revocable when notice is given to the offeree. According to §36(1) of the Restatement, an offer ceases to exist in four circumstances: (1) when a rejection of the offer or a counter-offer is made; (2) when a reasonable time has elapsed without acceptance (what counts as a reasonable time can vary depending on the circumstances); (3) when an offer is revoked (notice of the revocation can come directly or indirectly); (4) the death of the offeror. By way of illustration, we can imagine that Parker wishes to sell his bike to Edward. If Parker says, you can have the bike for $100.00 and Edward replies that he does not wish to buy the bike or makes a counter-offer, whereby he tells Parker that he will give him $25.00 for the bike only, the original offer by Parker has ceased. In the second instance, a reasonable time might be a few days, during which the offer by Parker is still available to Edward; however, if Edward comes back a year later seeking to buy the bike, then ­Parker’s offer will no longer be in existence, as a year is not a reasonable period of time for the offer to be held open, bearing in mind the circumstances and subject matter. In the third instance, if Edward tells Parker flatly that he no longer wishes to sell him the bike, the offer is revoked directly; if Edward is still mulling over the deal when he hears that he has sold the bike to another person, Sarah, Parker’s offer to Edward is revoked indirectly—however, if Edward does not hear that Parker has sold his bike to another person before he accepts the offer, the Parker’s revocation of his offer may not be effective. In the final instance, and quite evidently, if Parker dies before Edward accepts his offer to buy the bike, the offer ceases to exist. While the Restatement offers a handy consolidation of a general rule, in practice the validity of an offer can depend on the nature of the transaction or the rules particular to laws of an individual state.

Option Contracts and a “Firm Offer”

Similarly, if an offeree gives consideration (usually money) for an option to have an offer held open for a certain period of time, then the offer cannot be revoked before the option has expired.62 Returning to our example, if Parker offers the bike to Edward and he replies “great, I will give you $2.00 to keep the offer open for a day,” then Parker cannot revoke his offer before that time has run. Similarly, options can be created by operation of law; UCC § 2-205 provides a rule for firm offers which states generally that where a merchant has made a signed, written offer to buy or sell goods, this offer is not revocable for the stated period of time, or if no such period is provided, then for a reasonable time. Exceptionally, no consideration need be given for the offer to be held open. This provision reflects a need for stability in commercial offers and seems to take into account the relative sophistication of the parties involved, namely merchants who make such offers as a matter of course.

Acceptance

Form and Effectiveness of Acceptance; the Mirror Image Rule

Acceptance in the American system can be a controversial topic as well. Generally, acceptance must take place in whatever form is specified in the offer;63 the offer cannot be accepted after notice of revocation is given to the offeree or generally when a reasonable time has elapsed.64 The offeror has control over their offer and can specify both the way acceptance should be given and form in which the offer must be accepted. This will often vary as a function of the chosen means of contracting (by post, e-mail, electronic signature) for the bargain. Generally, there are two means by which an offer can be accepted: by the offeree giving a reciprocal promise, which corresponds in every respect with the offer made, or by performance (i.e., acting in the manner prescribed in the offer).65 If the promise given by the offeree is at variance in any respect with the offer made by the offeror, it is not effective, and constitutes a counter-offer. For example, if Parker offers to sell his bike to Edward for $200.00, and Edward replies, “sold for $150.00.” Edward’s reply is not effective acceptance, but would be deemed a counter offer, because it is not a mirror-image of the offer made. An offeror can invite acceptance with the exchange of a reciprocal promise, which conforms to the terms of the offer in the case of a bilateral contract, or, in the case of a unilateral offer, by performance or partial performance of the terms of the offer. Where the offer does not specify the manner of acceptance, either performance or the exchange of a promise may be acceptable.

Exceptions

As in English law, acceptance is effective when received by the offeror. An exception to this is the mailbox rule (as first established in the English case Lindsell 66) which holds that acceptance by post is effective on dispatch, not when the offeror receives it. Likewise, the UCC establishes some exceptions to the general requirements for effectiveness of acceptance and the mirror-image rule. As seen earlier, UCC § 2-205 states that where a “firm offer”67 has been made, this is not revocable by the offeror for a reasonable period of time, or until the period stated in the offer has expired; the offeree does not need to extend consideration (i.e., money) for this option.

In a similar manner, the UCC at § 2-206(1)(b) provides an exception to the mirror-image rule. It remedied previous defect which allowed sellers who shipped goods which did not match an order placed by the buyer to avoid a suit for breach of contract by arguing that no contract had indeed been formed as their “acceptance” in the form of the nonconforming goods did not correspond to the order by the buyer—violating the mirror-image rule.68 Here, the UCC permits the nonconforming shipment to constitute acceptance, unless action is taken by the seller to notify the buyer that they intend it as “accommodation.”69

Another common occurrence provided for in the UCC is the so-called “Battle of the Forms.”70 This occurs where one party makes an offer to another with a pre-drafted contract and the offeree responds with their own pre-drafted contract, the terms of which are different from the contract of the offeror. In these situations, a dispute arises as to which contract is controlling. Under the mirror image rule, the contract from offeree with different or additional terms would be deemed a counter offer. Under UCC §2-207, however, an exception is made whereby the contract by the offeree counts as acceptance rather than a counter-offer, unless the acceptance is made conditional on the other party agreeing to the terms.71 Otherwise the additional terms are treated as proposals.72

Consideration

As in English law, some form of consideration must be offered, whether that be an exchange of corresponding promises or actions between the parties to a contract, or where one party promises another to cause them to act or refrain from acting in a certain way, and the other party does, in fact, respond accordingly. Otherwise, the agreement will be treated as a mere gratuity, and not legally enforceable. American jurisdictions also follow the rule that consideration for a contract must be bargained for by the parties but there is no requirement as to the adequacy of the consideration offered,73 and the consideration present does not have to be the reason for which the parties obligate themselves.74 In other words, if a bargained-for exchange takes place, the court will leave a contract undisturbed and enforce it if necessary. The question then emerges as to what counts as sufficient consideration: a contract may recite (state) nominal consideration, or something that appears to be consideration but is actually not.75 Deciding whether sufficient consideration exists to support an agreement is a fact-intensive inquiry and will depend on the context of the purported contract as a whole. That said, we can conceptualize certain things as being either sufficient or insufficient as consideration. Generally, consideration should have an economic value; this can vary when you consider a unilateral promise that invites performance. For example, in Hamer v. Sidway,76 an uncle promised $5,000.00 (a large sum of money at the time) to his nephew if he refrained for certain behaviors such as tobacco use, gambling, and consuming alcohol until his 21st birthday. The question arose in this case about whether the abstemious behavior of the nephew counted as effective consideration. The court ultimately believed it did, arising from the forbearance from engaging in activities one was otherwise entitled to engage in, even if the forbearance sought is beneficial to the offeree as well.

Past consideration, or purported consideration, for example, the performance of a preexisting legal duty will not count as consideration.77 The preexisting duty rule usually arises in the context of one party seeking to modify an agreement that has already been concluded. For example, if Party A offers to supply certain goods and services to party B for use for definite amount of money and then later seeks to increase that amount to money, the demand is without effect as it is a unilateral change of terms, and no consideration is offered by the other party for the increased price. Rather, they re-commit in essence to a preexisting obligation which they have under the unaltered contract. That is not to say that additional increases in price might not be justified. For example, if there’s been an exceptional change of circumstances or the parties agree to modify the original contract, then a lack of consideration might not lead to the subsequent agreement being unenforceable.78

Generally, American jurisdictions follow the rules established under the English common law that past consideration does not amount to sufficient consideration for a contract, because the actions do not follow a bargain.79 That is not to say that the individual involved does not have any recourse to the courts, but the contract itself is unenforceable. For example, in the case, Mills v. Wyman,80 the plaintiffs took care of the defendant’s ailing son and when the father learned of this he made a promise to pay for any expenses that they had incurred. The father later changed his mind. Mills then sued to enforce the agreement to pay expenses; however, the court said that there was not sufficient consideration in this case. The court would not enforce the promise and was of the view that a moral obligation did not count as consideration sufficient to enforce the agreement.

However, moral obligations have given rise to legal obligation. For example, in Webb v. McGowin,81 Webb had intervened to save ­McGowin’s life but had become seriously debilitated in the process. McGowin made an agreement to send Webb weekly payments in recognition of the fact that he had saved his life. Here the moral obligation was taken as sufficient consideration for the contract or agreement to be enforced. McGowin had received a benefit that was proportionate to the agreement to pay. These two contrasting cases illustrate the principle that present in Restatement §86, which states that a promise that recognizes a benefit that has already been received is enforceable so as to prevent injustice; it excludes circumstances in which the promisor intended for the benefit to be a gift or if the promise is disproportionate to the benefit received.

Capacity

Generally, a lack of capacity can lead to mandatory or possible ­invalidity of a contract.82 The Restatement specifies four categories83 of individuals who lack capacity: minors (under 18 years of age), the mentally ill or defective, intoxicated persons, and those under guardianship (a legal-­protective relationship where a vulnerable individual is placed in the charge of another). Those subject to guardianship are absolutely prevented from incurring contractual liability; whereas the other categories of individuals may take action to avoid the contractual liability they have incurred. The voidability of contractual obligations due to lack of capacity depends upon the individual at the center of the transactions. 84 Under the Restatement, different classes of individuals are specified as having no capacity to contract or limited capacity; transactions entered into by those with no capacity are void (without legal effect); those made with those with limited capacity are voidable, meaning generally that the party with limited capacity can act to avoid their contractual obligations. Under the Restatement, minors are only capable of entering into voidable contracts until they reach the age of majority.85 By contrast, those suffering from mental illness or “defect” that prevents them from full comprehension of the nature and consequences of the transition are unable to do so, unless the terms of the agreement are objectively fair and the other party did not know of the illness or defect.86 Intoxicated persons have limited ability to avoid contractual liability—this is only where he or she was unable to understand the nature and consequences of the agreement or unable to act in a reasonable manner, and the other party knew or should have known that he or she was intoxicated.87

Contract Formation in the Civil Law Tradition

We now move our attention away from the Anglo-American tradition to examine contract formation in civil law jurisdictions. Generally, civil law jurisdictions track the requirements of offer and acceptance that are present in common law jurisdictions. However, the doctrine of consideration is absent in the civilian tradition. There are, in turn, concepts concerning creation and validity, which are unique to civil law jurisdictions, such as: cause and object, as well as other “indicia of seriousness.”88 Another unique aspect of the civilian tradition is that unilateral, gratuitous (ones which confer a benefit without expectation of one in return) contracts are enforceable, if they take the prescribed form; even so, civilian courts may also deem a promise that does not take the prescribed form as a bilateral contract, provided the parties intended for it to have legal effect.89

Contract Generally

A contract in French law is defined as category of obligation that takes the prescribed legal form and has the force of law between contracting parties. Every contract must satisfy three criteria: (1) there must be consent to be bound by the party who obligates itself; (2) that party must be capable of obligating itself; and (3) there must be a lawful and definite subject matter for the contract.90 The 2016 revision of the French code91 eliminated the requirement of “cause” which served previously as a necessary element of contract formation which examined the motivation of a party for entering the contract and the purpose for which the contract was made. Though cause has been formally eliminated in the French code, it is still arguably the palimpsest of other requirements the new code92 and cause remains a requirement in other civilian jurisdictions. It is discussed in further detail later in this chapter. French law specifies contracts as to type and effect between parties. Bilateral (synallagmatic)93 contracts require reciprocal obligations undertaken by each party, whereas unilateral ones do not. The German code contains no formal definition of a contract, but it can be understood as an objective manifestation of a desire to be bound between the parties.94

Civilian traditions place contracts within the larger category of obligations. Obligation is employed as a general term for legal responsibilities that can arise from statute, certain factual scenarios or relationships, and from contractual relationships. This latter category is the subject matter of the descriptions of contracts which follow. The French code provides an extensive categorization as to types of contract; these include: unilateral95 and bilateral,96 gratuitous97 and onerous,98 commutative99 (for a definite exchange of performances) or aleatory100 (where performance is dependent upon the occurrence or nonoccurrence of a future event); negotiated101 (where both parties negotiate freely the terms of the ­contract) and contracts of adhesion102 (where one party puts forth the conditions within a contract which are excluded from negotiation), and formal,103 informal,104 real105 (made for the delivery of a thing) contracts. Even if a contract is not patent with any of these definitions, it may still be enforced under the general terms of the code.106

Generally, the French code provides the following definition of a contract: “a contract is accord of wills between two or more people designed to create, modify, transfer, or extinguish obligations.”107 The German code does not contain a general definition of a contract, but a contract comes into existence in circumstances similar to the French code: “[a] contract consists of declarations of will which agree with each other from at least two persons. A contract is normally necessary for the creation or alteration of an obligation relationship.”108 Thus, contracts are of the same nature in both civilian systems. Also, common to both systems are ­general form requirements for certain types of contracts. For example, both ­systems require that a contract over a certain amount or which involves the ­transfer of real estate be formalized in order to take effect.109

Offer and Acceptance

Definitive Nature of an Offer

The civilian tradition examines whether a firm offer that has been made by one party has been accepted in a legally effective way by the other, thereby creating a legally enforceable contract. However, acceptance by the other party is not immediately required to create an obligation in the case of a unilateral contract, such as a donation.110 Much like common law jurisdictions, for bilateral contracts, the offer must be definite and the behavior of the parties must evidence an intention to be bound, that is, to create legal relationship.111 A firm offer, as opposed to an invitation to further negotiation, defines all essential elements of a contract and will demonstrate that the offeror intends to be bound by his offer.112

The French system varies the classic scenario of offer and acceptance in certain areas, such as in regard to promises involving third parties, as with the promesse de porte-fort,113 which allows a party to make a promise to another for the performance of a third party. If the third party performs or consents to what was promised, the underlying agreement is valid; if not, the party who made the promise may be liable for damages.114 For example, if I co-own a property and I make a contract to sell, and promise that the other co-owners will ratify the agreement, this is a promesse porte-fort. If the others agree, this retrospectively validates the agreement to sell, as though the co-owners had taken part in the original agreement themselves. Here, the other co-owners did not authorize me to act on their behalf, but their approval retrospectively makes effective the action that I have taken in their name, in this case, selling the property.

In the French tradition, offers to the public are generally binding once accepted, and goods on display are offers which are deemed accepted from the moment the item is taken up by the customer.115 German law, conversely, does not hold offers to the public to be binding and the offeror can specify what might otherwise be an offer as an invitation to treat (freibleibend) in its terms.116

Acceptance

Once a definite offer has been made, all that is necessary to create a legally enforceable contract is that a valid acceptance is made by the offeree. In contrast to English law, the definite offer has a much more binding character in the civilian tradition.117 For example, under French law, an offer cannot be revoked before a period of time fixed within the offer itself, or, if none is provided, then before a reasonable time has elapsed.118 Similarly, German law holds an offer as binding, and will not allow revocation before a stated or reasonable time.119 This stands in contrast with the Anglo-American traditions which allow for the revocation of an offer at any time before the other party has made effective acceptance of that offer. Acceptance can be made by an assent to all the terms contained within the offer.120 In such instances the acceptance is effective when it comes into the possession of the offeror,121 or when acceptance is made,122 depending on the relevant provision of the respective code. In this manner, the “mailbox rule” does not operate per se in civil law jurisdictions. Much as with common law jurisdictions, acceptance can also be made by conduct (such as performance) indicating acceptance. Silence alone cannot be taken as acceptance; but may constitute acceptance if allowed by legislation, custom and usage, or the context of previous dealings between the parties in French law.123 As mentioned earlier, German law does not require notification of acceptance generally, but the circumstances in which it will nevertheless be effective are sufficiently narrow as to render express acceptance a general rule.124 Acceptance must generally take the form contemplated by the offer and will not be valid if it seeks to add terms or to qualify the acceptance being tendered; rather, it will be taken as a new offer.

No Consideration Required in the Civilian Tradition

Consideration in the common law tradition serves a certain ­public order function whereby the doctrine prevents contracts which lack a ­transaction of benefit and burden between the parties involved from becoming ­effective. 125

While the civilian tradition does not have a correlative doctrine, courts in those systems will generally look for other “indicia of seriousness”126 which would show that the parties intended to be bound by their promises. As such, no consideration, monetary or otherwise, need be evidenced in order for two parties to conclude a binding contract.127 Moreover, even gratuitous contracts, or contracts where one party confers a benefit upon another and receives nothing in return, are enforceable, provided they are made in the correct notarial form.128 Notarial form refers to the formalities associated with recording the contract in writing, signed, and certified by a public official.129 The civilian tradition does adduce other criteria to its analysis to reach a conclusion about whether a contract has formed and each party is bound by the obligations contained therein. These depend on the nature of the contract itself or certain other general requirements are discussed in continuation—these may include the motivations of the parties, the subject matter of the contract, and public policy considerations.

Capacity

In the civilian tradition, all persons are presumed to have the capacity contract,130 except as otherwise provided by legislative act or code provision or if a formal judicial process has been undertaken to place them under the guardianship of another. Minors131 and persons living with certain diagnosed metal illnesses,132 the character of which impinges upon their ability to make decisions, are two representative classes of individuals in the civilian tradition who have limited contractual capacity. Nevertheless, minors are capable of certain transactions under the German code after the age of 7;133 as well, the French code provides that minors may incur voidable obligations, 134 meaning that the party or their guardian who is alleging that they lacked capacity at the time of making the contract must act to avoid the contractual obligations.135 Equally, the party who lacked capacity at the time of making the contract can later confirm it136 once they have regained their faculties or reached the age of majority, as the case may be. Narrow exceptions to the validity of transactions for those who lack capacity are provided by the codes; for example, persons who lack capacity generally may still make valid everyday transactions under normal terms (e.g., buying food in a shop).137 In this regard the civilian tradition shares some of the attributes of the Anglo-American approach, however, there are some subtle differences noted earlier.

Civil law jurisdictions have adopted differing stances where an offeror dies before his offer is accepted or where the offeror subsequently loses capacity. Some civilian jurisdictions have taken the view that the death or incapacity of the offeror does not affect the ability of the offeree to accept, thereby creating a legally binding contract; this is the stance adopted by German law. By contrast, the death or incapacity of the offeror extinguishes the offer, as is the case in French law.

Cause; Object

Now that we have examined some points of convergence between the civilian and common law traditions, it is fitting to introduce certain concepts which are uniquely found in the civil law tradition: “cause” and “object.” Some scholars align cause with the doctrine of consideration in a broad sense, though none think them equivalent.138 The object of a contract has been rephrased as the “content” in the most recent revision to the French civil code, but the substance of the requirement for establishing the validity of a contract remains the same.

To begin, cause is a concept which dates from Roman law with the requirement that beyond agreement and capacity, all contracts must evidence a cause (causa) in order to be legally enforceable;139 this concept can still be found in civil law systems.140 However, with the 2016 reform of the French civil code, the requirement of cause has been eliminated; therefore, the continued vitality of the doctrine of cause in that tradition is thrown into question. However, the requirement of cause is still present in, among others, the Spanish civil code.141 In the subjective sense, cause can be understood as the personal motivation for which parties enter into a contract, either for the promise or performance in bilateral onerous contracts, or for reason of pure goodwill or beneficence of the offeror in gratuitous contracts.142 In an objective sense, cause is the purpose for which parties have chosen to obligate themselves.143 While the concepts of cause may seem vague, the consequences of its absence are not. If the cause of a contract is determined to be illicit144 or if the contract lacks a cause entirely,145 it is without legal effect; similarly, if a contract were to have a false cause,146 it was void unless a valid cause could be demonstrated. While the requirement of cause has been formally eliminated from the French civil code,147 the grounds for which, in the past, courts may have determined that a contract lacks cause arguably have survived in other code provisions.148 In this manner, the French code still bears the traces of the requirements of cause but in other terms, such as “motivation,”149 thus any clause that relieves an obligor of an essential obligation (taken as the reason for which the obligor entered into the contract) is invalid. Therefore, the concept remains relevant to a discussion of the formal requirements for the formation of a contract in civil law.

We turn now to the concept of object, or content, as it is now phrased in the French civil code.150 The enforceability of a contract in the civilian tradition can also depend of the existence of a valid object151—or thing for which the agreement is made. In the main, the object (subject matter) of a contract must be determined or determinable, lawful, and possible.152 This means the premise upon which the parties have given their consent to a contract must sufficiently firm and capable of being executed in a lawful manner without further negotiation, specification, or agreement. The level of determinacy required for a contract to have a valid object can vary according to the nature of the agreement; however, the concept itself finds its force when parties are seeking to avoid the consequences of the contracts into which they have entered for lack of definitiveness.153 The object of a contract can be a future thing, such as the collection of a harvest, as long as it is capable of being specified at a later time.154 Further, in French law, the terms or aim of a contract cannot derogate from public order155 or contravene the law.156

Point of Commonality: Illegal or Immoral Contracts

Within the Anglo-American and civilian tradition, courts will not enforce contracts that are illegal or run counter to public policy considerations; essentially, it is seen that society as a whole does not have an interest in protecting or upholding these contracts.157 This is not to be confused with unconscionable or unfair bargains as discussed in Chapter 8, which focus on the potential unfairness of a contract itself.