Notes · LawUK · A-Levels

Formation and Terms of a Contract

This topic, one of the two optional areas for Paper 3, examines how a valid contract is formed - through offer, acceptance, consideration and the intention to create legal relations - and the content of a contract: its express and implied terms, the distinction between conditions, warranties and innominate terms, and the control of exclusion clauses.

4 sections~17 min reading time3 competenciesLevel Standard 3 · Advanced 1

T·141414 / 16

Exam profile

AO1 · Demonstrate knowledge and understanding of the formation of a contract and the classification and control of termsAO2 · Apply the rules of formation and the rules on terms and exclusion clauses to a factual scenarioAO3 · Analyse and evaluate the rules on consideration, the classification of terms and the control of exclusion clauses

Operators:explainapplyanalyseevaluateadvise

basic level

AS students should be able to identify offer, acceptance, consideration and intention and apply them to a simple agreement.

higher level

Full A-Level answers apply the rules on offer and acceptance (including the postal rule), consideration and estoppel, and the classification and control of terms.

Depth

Text

Contents · 4 sections

Formation and Terms of a Contract

Offer and acceptance#

StandardAQA 7162/3 - Formation of contractDfE GCE Law subject content

Formation of a contract

Fig. 1A binding contract needs agreement (offer and acceptance), consideration and an intention to create legal relations.

A contract is an agreement the law will enforce, and the first requirement is agreement, analysed as an offer met by a matching acceptance. An offer is a clear statement of the terms on which the offeror is prepared to be bound if the offer is accepted. It must be distinguished from an invitation to treat, which is merely an invitation to others to make offers. Goods displayed in a shop window or on the shelves are an invitation to treat, not an offer (Fisher v Bell (1961); Pharmaceutical Society of Great Britain v Boots (1953)), as are most advertisements (Partridge v Crittenden (1968)) and a statement that a party 'may be prepared to sell' (Gibson v Manchester City Council (1979)). An advertisement can, however, be a unilateral offer to the whole world where it promises to pay on the performance of an act, as in Carlill v Carbolic Smoke Ball Co (1893), where the company was bound to pay the reward it had advertised.

An offer may be terminated before acceptance in several ways. It may be revoked at any time before acceptance, but the revocation must actually be communicated to the offeree (Byrne v Van Tienhoven (1880)), though communication may be by a reliable third party (Dickinson v Dodds (1876)). It may be rejected, and a counter-offer amounts to a rejection that destroys the original offer (Hyde v Wrench (1840)), although a mere request for information does not. It may also lapse through the passage of a reasonable time or on the death of a party.

Acceptance must be a final and unqualified assent to all the terms of the offer - the 'mirror image' rule - and must generally be communicated to the offeror. Silence cannot amount to acceptance (Felthouse v Bindley (1862)). For instantaneous communications, acceptance takes effect when and where it is received (Entores v Miles Far East Corporation (1955)). The postal rule is an exception: where post is a reasonable means of acceptance, acceptance is complete as soon as the letter is properly posted, even if it is delayed or never arrives (Adams v Lindsell (1818)). Acceptance may also be by conduct (Brogden v Metropolitan Railway (1877)).

For evaluation, the offer-and-acceptance analysis provides a clear, workable framework for identifying the moment of agreement, but it can be artificial in modern transactions such as automated and online contracting, and the postal rule, born of nineteenth-century communications, can seem arbitrary today. A strong answer identifies the offer, distinguishes it from an invitation to treat, and applies the rules of acceptance and termination to fix whether and when a contract was formed.

Worked example

Worked problem question: offer, acceptance and the postal rule

D offers by letter to sell goods to C. C posts an acceptance. Before it arrives, D posts a letter revoking the offer. Advise on whether a contract exists.

Issue
Whether a contract was formed before the revocation took effect.
Rule / authority
Acceptance by post is complete when the letter is posted (postal rule; Adams v Lindsell (1818)), whereas revocation must actually be communicated to be effective (Byrne v Van Tienhoven (1880)).
Application
C's acceptance took effect when posted, forming the contract at that moment. D's revocation is effective only when communicated, which is after C posted the acceptance, so it comes too late; a contract had already been formed.
Conclusion
A binding contract was formed when C posted the acceptance; D's later revocation is ineffective.

Result: The answer applies the postal rule to acceptance and the communication requirement to revocation to fix the moment of formation.

Typical mistakes

Treating a shop display or advertisement as an offer; it is generally an invitation to treat (Boots; Partridge v Crittenden).
Applying the postal rule to instantaneous communications; it applies only to acceptance by post, not to email or instant messaging (Entores).

Active revision

A seller writes offering goods; before the buyer's posted acceptance arrives, the seller posts a revocation. Advise on whether a contract has been formed.

Active recall

Recall the key points — then reveal.

Sources: GCE AS and A level subject content for law (Department for Education) · AQA A-level Law (7162) specification (AQA)

Consideration and intention to create legal relations#

StandardAQA 7162/3 - Formation of contractDfE GCE Law subject content

Beyond agreement, an enforceable contract (other than one made by deed) requires consideration - something of value given by each party in return for the other's promise, reflecting the idea that a contract is a bargain. Consideration must be sufficient but need not be adequate: the courts require something of recognisable value but do not inquire into whether the bargain was a good one, so even a token or trivial item can be consideration (Chappell & Co v Nestlé (1960), where chocolate-bar wrappers formed part of the consideration). Past consideration is not good consideration: a promise given in return for something already done is generally unenforceable (Re McArdle (1951)).

The performance of an existing duty is generally not good consideration for a fresh promise. Performing an existing contractual duty owed to the same party is not consideration (Stilk v Myrick (1809)), unless the party does more than the duty required (Hartley v Ponsonby) or confers a practical benefit on the other, as in Williams v Roffey Bros (1991), where a promise of extra payment to a subcontractor who completed on time was enforceable because the promisor obtained a practical benefit. The part payment of a debt is not consideration for a promise to forgo the balance (Pinnel's Case (1602); Foakes v Beer (1884)), though the doctrine of promissory estoppel, from Central London Property Trust v High Trees House (1947), may prevent a promisor from going back on a promise to accept less where the other party has relied on it - but estoppel operates as 'a shield, not a sword'.

The second additional requirement is an intention to create legal relations. In domestic and social agreements the law presumes there is no such intention, so they are not usually enforceable (Balfour v Balfour (1919), where a husband's promise of a monthly allowance to his wife was not a contract), but the presumption can be rebutted, as in Merritt v Merritt (1970), where a similar agreement between a separated couple was enforceable. In commercial agreements the law presumes the opposite - that the parties do intend legal relations - and this presumption is rebutted only by clear words, such as an express statement that the agreement is binding in honour only (Edwards v Skyways (1964) shows the strength of the commercial presumption).

For evaluation, the doctrine of consideration is criticised as technical and sometimes an obstacle to enforcing genuine bargains, and the relationship between Foakes v Beer, Williams v Roffey and promissory estoppel is not fully settled, leaving the law on the modification of contracts uncertain. The presumptions on intention are generally regarded as sensible reflections of the parties' likely expectations. A strong answer identifies whether valuable consideration was given and whether the relevant presumption of intention applies or is rebutted.

Worked example

Worked problem question: consideration for a variation

C promises D extra payment to complete building work on time, and D does so. C then refuses to pay the extra. Advise on whether the promise is supported by consideration.

Issue
Whether D provided consideration for the promise of extra payment when D was already contractually bound to do the work.
Rule / authority
Performing an existing contractual duty is generally not consideration (Stilk v Myrick (1809)), unless the promisor obtains a practical benefit from timely completion (Williams v Roffey Bros (1991)).
Application
D was already bound to do the work, so ordinarily there is no fresh consideration. But if C obtained a practical benefit - such as avoiding a penalty or the cost of finding another builder - by securing timely completion, that benefit is consideration on the Williams v Roffey principle.
Conclusion
The promise of extra payment is likely to be enforceable if C gained a practical benefit from D's completion, following Williams v Roffey.

Result: The answer applies the existing-duty rule and the practical-benefit exception with the correct authorities.

Typical mistakes

Confusing 'sufficient' with 'adequate'; consideration must be sufficient (of some value) but need not be adequate (a fair price).
Using promissory estoppel as a cause of action; it is a defence ('a shield, not a sword'), not a means of founding a claim.

Active revision

A builder threatens to abandon a job unless paid extra; the owner agrees to pay more to get the work finished on time. Advise on whether the promise of extra payment is binding.

Active recall

Recall the key points — then reveal.

Sources: GCE AS and A level subject content for law (Department for Education) · AQA A-level Law (7162) specification (AQA)

The terms of a contract#

StandardAQA 7162/3 - Terms of contractDfE GCE Law subject content

The terms of a contract

Fig. 2Terms are express or implied, and are classified as conditions, warranties or innominate terms, which fixes the remedy.

The terms of a contract define the parties' obligations. Terms may be express (agreed in words, written or spoken) or implied (read into the contract without being stated). Terms are implied by the courts where necessary to give the contract business efficacy - to make it work as the parties must have intended - as in The Moorcock (1889), or where a term is so obvious that it goes without saying (the 'officious bystander' test). Terms are also implied by statute: the Consumer Rights Act 2015 implies into consumer contracts that goods will be of satisfactory quality, fit for a particular purpose made known to the trader, and as described, and that services will be performed with reasonable care and skill; the Sale of Goods Act 1979 implies similar terms into business-to-business sales.

Terms are classified by their importance, which determines the remedy for their breach. A condition is a major term going to the root of the contract; its breach entitles the innocent party to treat the contract as at an end (repudiate) and to claim damages (Poussard v Spiers (1876), where a singer's failure to appear for the opening performances was a breach of condition). A warranty is a minor term; its breach entitles the innocent party only to damages, not to terminate (Bettini v Gye (1876), where a singer's failure to attend some rehearsals was a breach of warranty).

Not every term can be neatly classified in advance. An innominate (or intermediate) term is one whose classification depends on the seriousness of the consequences of the breach when it occurs. In Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha (1962) the Court of Appeal held that whether the innocent party could terminate depended on whether the breach deprived them of substantially the whole benefit of the contract; if it did, they could terminate, but if the consequences were less serious, only damages were available. This approach gives flexibility but at the cost of certainty, because the remedy cannot always be known until the breach and its effects are examined.

For evaluation, the statutory implied terms provide important protection, especially for consumers under the Consumer Rights Act 2015, while the condition/warranty distinction promotes certainty by allowing the parties to know in advance which breaches permit termination. The innominate-term approach introduces useful flexibility but reduces certainty, and the tension between certainty and flexibility runs through this area. A strong answer classifies the term in issue and states the remedy that flows from its breach.

Worked example

Worked problem question: classifying a term

C engages D to sing at the opening of a season. D fails to appear for the crucial opening nights. Advise on whether C may treat the contract as terminated.

Issue
Whether the term breached is a condition, allowing termination, or a warranty, allowing damages only.
Rule / authority
Breach of a condition (a term going to the root of the contract) allows termination and damages (Poussard v Spiers (1876)); breach of a warranty allows damages only (Bettini v Gye (1876)).
Application
Appearing for the opening nights goes to the root of the engagement, as in Poussard, so it is a condition. D's failure to appear is a breach of condition, depriving C of the essential benefit of the contract.
Conclusion
C may treat the contract as terminated and claim damages, because the term breached was a condition (Poussard).

Result: The answer classifies the term as a condition and derives the remedy of termination plus damages.

Typical mistakes

Assuming every breach allows the innocent party to terminate; only breach of a condition (or a sufficiently serious breach of an innominate term) does.
Overlooking the statutory implied terms, especially the consumer protections in the Consumer Rights Act 2015.

Active revision

A performer misses the first three nights of a run under a contract. Advise on whether the other party may terminate or only claim damages.

Active recall

Recall the key points — then reveal.

Sources: GCE AS and A level subject content for law (Department for Education) · AQA A-level Law (7162) specification (AQA)

Exclusion clauses and their control#

AdvancedAQA 7162/3 - Terms of contractDfE GCE Law subject content

Is an exclusion clause valid?

Fig. 3A clause must clear all three hurdles - incorporation, construction and statutory control - to be effective.

An exclusion (or exemption) clause is a term by which a party seeks to exclude or limit their liability. Because such clauses can be used unfairly, especially against a weaker party, the law controls them in three stages: incorporation, construction, and statutory control. A clause is only effective if it has first been incorporated into the contract. Incorporation may be by signature: a person who signs a contractual document is generally bound by its terms whether or not they read them (L'Estrange v Graucob (1934)). Incorporation may be by reasonable notice given before or at the time the contract is made: notice given too late does not incorporate a clause, as in Olley v Marlborough Court (1949), where a notice in a hotel bedroom came after the contract was made at reception, and Thornton v Shoe Lane Parking (1971), where a term on a car-park ticket issued by a machine came too late. Incorporation may also arise from a consistent course of dealing between the parties.

Even if incorporated, a clause is construed strictly against the party relying on it (the contra proferentem rule): any ambiguity is resolved against that party, and clear words are needed to exclude liability, especially for negligence. The clause must, on its proper construction, actually cover the loss and the breach that occurred.

The most important control is statutory. In business-to-business contracts, the Unfair Contract Terms Act 1977 renders some exclusions wholly ineffective and subjects others to a test of reasonableness: liability for death or personal injury caused by negligence can never be excluded, while liability for other loss caused by negligence can be excluded only so far as it is reasonable. In consumer contracts, the Consumer Rights Act 2015 provides that a term is not binding on a consumer if it is unfair - if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights to the consumer's detriment - and it prevents traders from excluding the statutory rights in respect of goods and services, giving consumers strong protection.

For evaluation, the layered control of exclusion clauses is generally regarded as a good example of the law balancing freedom of contract against fairness, protecting weaker parties (especially consumers) while allowing commercial parties of equal bargaining power to allocate risk. The rules on incorporation and construction can be technical, and the reasonableness and fairness tests introduce some uncertainty. A strong answer works through incorporation, construction and statutory control in turn and reaches a conclusion on whether the clause is effective.

Worked example

Worked problem question: an exclusion clause

A consumer books a service; a term seeks to exclude the business's liability for personal injury caused by its negligence. The consumer is injured. Advise on whether the exclusion is effective.

Issue
Whether the clause validly excludes liability for negligently caused personal injury against a consumer.
Rule / authority
An exclusion clause must be incorporated and construed to cover the loss, and it is controlled by statute; liability for death or personal injury caused by negligence cannot be excluded (UCTA 1977 s.2(1); mirrored for consumers by the Consumer Rights Act 2015).
Application
Even if the clause were incorporated and clearly worded, the law prohibits the exclusion of liability for personal injury caused by negligence. As a consumer contract, the Consumer Rights Act 2015 applies, and such a term is not binding on the consumer.
Conclusion
The exclusion clause is ineffective: liability for negligently caused personal injury cannot be excluded, so the business remains liable.

Result: The answer applies the statutory control that liability for negligently caused personal injury cannot be excluded.

Typical mistakes

Treating a clause as effective without checking incorporation; a clause notified too late is not incorporated (Olley; Thornton).
Applying the Unfair Contract Terms Act 1977 to a consumer contract; consumer contracts are now governed by the Consumer Rights Act 2015.

Active revision

A consumer is injured using a leisure facility that displayed a notice excluding all liability. Advise on whether the exclusion clause protects the business.

Active recall

Recall the key points — then reveal.

Sources: GCE AS and A level subject content for law (Department for Education) · AQA A-level Law (7162) specification (AQA)

References & sources

Sources

Department for Education

GCE AS and A level subject content for law

AQA

AQA A-level Law (7162) specification

Formation and Terms of a Contract

4 sections~17 min reading time3 competenciesLevel Standard 3 · Advanced 1

Formation and Terms of a Contract

Key points

Worked problem question: offer, acceptance and the postal rule

Key points

Worked problem question: consideration for a variation

Key points

Worked problem question: classifying a term

Key points

Worked problem question: an exclusion clause

Sources

Formation and Terms of a Contract

Key points

Worked problem question: offer, acceptance and the postal rule

Key points

Worked problem question: consideration for a variation

Key points

Worked problem question: classifying a term

Key points

Worked problem question: an exclusion clause

Sources