Contracts and consensus
Every day
we form contracts, sometimes these are obvious such buying a property but
sometimes the contracts we enter into are barely noticeable for example buying
a newspaper. Establishing consensus between the parties is a major part of
contract formation however this article is going to examine how contract
formation is more than just mere consensus between parties. Consideration,
intention to create legal relations, communication of the offer and certainty
of terms are all key factors in contract formation. Contracts are not just
about establishing consensus between parties they also establish legal
relations and dependence between the parties.
It is
important to note exactly what is meant by ‘consensus between the parties’. A
consensus between parties is made up of an offer and an acceptance. These are
essential when creating a legally binding contract and help courts to identify
exactly when a contract was formed and consensus was reached between the
contracting parties. An offer is ‘a statement by one party to enter into a
contract on certain terms which he has put forward’[1]
It must be knowingly and unconditionally accepted in order for a contract to be
formed. A key case on this point is Gibson
V Manchester City council.[2]
In this case it was judged that a contract was not actually formed because an
offer was never made. Gibson received a letter from the council saying that
they ‘may be willing’ to let him buy his council house. The court judged that
this was not an offer but actually a supply of information and so Gibson could
not buy his council house because consensus between the parties in the form of
an offer and acceptance had never actually occurred. In order for an offer and
an acceptance to establish consensus between the parties the acceptance must
show that the offeree agrees to all of the important terms of the offer. When
consensus between the parties is reached the ‘two minds must have come together’[3]
meaning that the promisor and the promisee must agree on all of the important
terms of the contract.
Contract Formation- Consideration
Next we shall consider other factors which
play an important role in contract formation. The first of which is
consideration. Consideration was defined by Justice Lush as: ‘ 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.’[4]
In reality this means that the parties become
reliant upon each other because they act to their detriment and the other
party’s benefit on the reliance of the promise. Consideration does help to
establish consensus between the parties but it also establishes dependence
between the parties, another key piece of evidence to suggest a contract has
been formed. Consideration is deemed good so long as it is not an obligation
which arises under law independent of the contract[5],
an obligation which arises under a contract with a third party[6],
past consideration[7] or
an obligation which exists under a contract with a person who has made a new
promise for which the existing obligation is alleged to provide good
consideration.[8]
In the case of Chappel & Co v Nestle,[9] Nestle offered customers a record if they sent in
money and three Nestle wrappers. The question raised was: are used Nestle wrappers
good consideration? The Court found that
they were good consideration because even trivial things of very little
economic value are adequate consideration. This case demonstrates how
consideration ‘must be sufficient but need not be adequate’[10] and
really shows how the courts can use consideration to establish consensus
between the parties but also the reliance of the parties upon one another.
These are the court’s concerns not whether the contract was valuable.
Intention to create legal relations
Next we shall consider intention to create legal relations. Whilst
intention to create legal relations does help to establish consensus between
the parties, it also allows the contract to become legally binding. Intention
to create legal relations shows that the parties were aware that court action
could arise out of their consensus. Therefore they are not just agreeing
between themselves but also preparing for the future consequences of their
contract. This means that the parties can go to court in order to enforce
legally binding contracts and that the courts can ensure that parties who
breach contracts have to fulfil their contractual duties or pay compensation to
the other party. If all agreements could be enforced by courts they would be
inundated with cases and this is not practical. Subsequently, intention to
create legal relations is only usually recognised in commercial agreements and
not domestic agreements. An example to explain this rule is Jones v Paddavatton[11].
At first instances the court ruled that the
contract is not legally enforceable because there is no intention to create
legal relations as it is a domestic agreement. On appeal Fenton Atkinson LJ
explained that the appeal had failed because the contract was not legally
binding as the conduct of the parties indicated lack of intention to create
legal relations. Also the arrangement is too vague and the daughter's statement
included: 'what kind of mother sues her daughter?’[12]
Overall this shows how the intention to create legal relations establishes more
than just consensus between the parties but also an awareness that legal
consequences can arise from their agreement. This means that the rules of
contract formation not only elaborate on the requirement of establishing
consensus between the parties but also to establish that the parties are aware
of the consequences of their agreement.
Communication
Communication
of the offer is another important rule of contract formation. How the offer is
communicated is important in establishing consensus between the parties as it
is the way that the offeree finds out about the offer. It also helps to put a
time limit on the consensus so that the parties are not bound forever. In the
case of Payne v Cave[13]
it was judged that an offer expires after a ‘reasonable’ amount of time. This
is to ensure that the offeror does not get bound to receive and act on
acceptances forever. Much like intention to create legal relations this ensures
that the law on contract formation is practical and that all parties to the
contract know when acceptances have to be made. Communication of the offer is
also crucial in ensuring that all parties know that a contract has been formed
and ensures that the law only enables contracts to be formed when all parties
are aware that the offer and acceptance exist. A leading case on this point is Dickinson v Dodds[14]where
it was judged that the offeree
can be told by anyone that the offer no longer stands, it does not have to be
the offeror who tells the offeree that the offer has been revoked. Essentially
showing that it does not matter who tells the offeree about the offer as long
as they are trustworthy so that it can be ensured that both parties have
knowledge of the progress of the contract formation or offer revocation.
Certainty of terms
A final point to examine is the certainty of terms. Terms of a
contract must be understood between both parties to mean the same things so
that a contract can be executed. The court’s role is to enforce
and interpret what is agreed not create contracts.
Therefore if the parties agreement is incomplete or uncertain it is not
enforceable as a contract because uncertainty of terms means there is no
consensus between the parties (ad idem). There are two leading cases on this matter
May and Butcher ltd v The King[15]and Hillas and Co v Arcos.[16] In May and Butcher Ltd V the King,
the court held that there is no agreement on prices or dates and so no
concluded contract because there is no certainty of terms. Viscount Dunedin
stated that a concluded contract is 'one that settles everything that needed to
be settled.' [17] In this case there was an
arbitration clause containing a mechanism to work out a price but the court
said that the arbitration clause is not a price calculation mechanism. In the
other leading case Hillas and Co v Arcos,
the court said there was a contract for 1931 because it was implied in the
first contract and the conduct of the parties proved that the parties had an intention
to create legal relations. The cases of Hillas
and Co v Arcos and May Butcher ltd v
the King can be reconciled because in Hillas
and Co v Arcos the contract was almost complete and the parties’ conduct
gave the court away to determine what they intended and in May Butcher ltd v the King the greatest extent of required
certainty is displayed as since the required certainty has become more
flexible. Essentially, this shows how certainty of terms is key when
establishing whether the parties have reached consensus but also helps courts
to settle the cases brought to them as they can identify the intentions of each
of the party’s and remedy the situation accordingly.
Conclusion
After
examining a few of the main rules of contract formation this article concludes that
the rules of contract formation are primarily concerned with establishing
consensus between the parties but they can also be used to establish other key
facts such as reliance between the parties, the knowledge of the parties that
they have entered into a contract, that the parties know that there could be
legal consequences to their consensus and to ensure that the law on contract
formation is practical. All of the rules of contract formation that have been
examined help to establish consensus between the parties. Consideration also
helps to establish reliance between the parties. Intention to create legal
relations helps to establish that the parties know there could be legal
consequences to their consensus and makes the laws on contract formation
practical. Communication of the offer establishes the knowledge of the parties
and their understanding of the agreement. The need for certainty of terms helps to
establish that all parties had knowledge of the offer and acceptance. As a
result it is reasonable to say that the rules on contract formation are an
elaboration of the requirements of establishing consensus between the parties
but this is not their only function other facts also play a role.
[1] Ewan Mckendrick, Contract law text cases and materials (Fifth edition published
2012) p 44
[2] Gibson v Manchester City Council [1974] All E.R 842
[3] Carlill v
Carbolic Smokeball co [1893] 1 QB 256
[4] Lush
LJ in Currie v Misa [1875] LR 10 Ex 153, 162
[5]
Collins v Godefroy [1831] 1 B&Ad 950
[6]
Pao On v Lau Yiu Long [1980] A.C 614
[7]
Roscorla v Thomas [1842] 3 QB 234
[8]
Stilk v Myrick [1809] 2 Camp 317
[9] Chappel
and co v Nestle [1961] AC 87
[10] Ibid
[11]
Jones v Padavatton [1969] 1 WLR 328
[12] Ibid
[13] Payne
v Cave [ 1789] 3 T.R 148
[14] Dickinson
v Dodds [1876] 2 ch.D 463
[15]
May and Butcher ltd v the King [1934] 2 KB 17n
[16]
Hillas & Co v Arcos ltd [1932] 147 LT 503
[17]
Viscount Dunedin in May and Butcher ltd v the King [1934] 2 KB 17n
