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Scenario examining valid contracts for the sale of goods.
Example Contract Law Problem Question
On 1st October Sam placed the following advertisement (with a photograph) on Classic Cars, a website for vintage car enthusiasts. 'For sale: 1972 Triumph Herald, 50,000 miles, showroom condition; £4,000 for quick sale.' He includes an email address, mobile telephone number and postal address.
On 2 October at 2.00 pm Betty reads the advertisement and sends a text message to Sam's mobile 'phone ' Can you send more photos. How about £3,600?' She includes her email address. Sam receives this message and reads it on the same day. In response, he sends three photographs by email with a message saying '£4,000 is the lowest price. Must hear from you by 4th November.'
On 3 October at 5.00 pm Charles sees the advertisement on the website and sends an email stating 'Please reserve Triumph Herald for me at £4,000. Deposit in the post.' Sam is not on-line at the time, but his computer's server sends an automated message in his name: 'Thank you for this message. Sam will reply as soon as he is able.'
On 4 October at 3.00 pm Betty leaves a message (with her name) on the answer-phone of Sam's mobile telephone '1972 Triumph Herald: agreed at £4,000.'
On 5 October at 9.00 am a cheque for £500 drawn by Charles arrived by post at Sam's address together with a note stating 'with Charles's compliments as per our agreement'. Sam deposits Charles's cheque in his own bank account immediately. At 10.00 am Sam switches on his mobile 'phone and listens to Betty's telephone message.
On 6 October Betty and Charles both send email messages to Sam stating that they are looking forward to collecting their car and ask what arrangements for delivery they should make.
Discuss the contractual consequences, if any.
In order to create a legally binding contract there must be an offer, acceptance, intention to create legal relations and consideration1. If all of these elements are present a contract will have been made between the parties which is legally enforceable.
Sam places an advertisement on a website saying that his car is for sale for £4,000. Generally, advertisements are not offers, but are simply invitations to treat2. An invitation to treat is a preliminary statement expressing a willingness to receive offers3. They include catalogues and price lists4. Here, Sam merely states the price and the item to be sold. Therefore, this could be an invitation to treat.
However, the advertisement could potentially also be a unilateral offer. An offer is 'an expression of willingness to contract on specified terms'5. It must indicate that the offeror intends to be legally bound6. It must promise to do something and must also lay out what the offeree must do in return7.
A unilateral offer is a promise to do something in return for an act8. For instance, in Carlil v Carbolic Smoke Ball Co9 an advertisement stated that a company would pay £100 to anyone who contracted flu after using their smoke ball. The court held that this was a unilateral offer made to the world at large. There was no need to communicate any acceptance before performing the specified act. Here, though, communication is required as the offer is to sell the vehicle to anyone willing to pay the price. Anyone wishing to pay cannot do so without communicating with Sam.
Nevertheless, Sam adds that the car is '£4,000 for quick sale'. This indicates that the offeror does wish to be legally bound. It also lays out what the offeree must do in return. Therefore, it could still be an offer.
When deciding whether a statement is an offer or not courts will judge the parties' intentions objectively according to what a reasonable person would believe the offerer meant by his words or conduct10. The offeror's actual intention is irrelevant11. Therefore, if a reasonable person would have believed that Sam's advertisement is an offer, Sam could still be bound by it whether or not he envisaged further negotiations.
Betty's text message
Betty's message to Sam asking if he will sell it for £3,600 and asking for more photographs could be an offer. However, if Sam's advertisement is an offer, Betty's text could potentially be an acceptance.
An acceptance is 'a final and unqualified expression of assent to the terms of an offer'12. If Betty's text is merely a request for further information, this will not terminate the original offer provided there is no attempt to vary the terms of that offer13. Here, Betty does request more information by way of photos. However, Betty also seeks to vary the original terms, as she only offers £3,600, not the £4,000 Sam asked for. If the offeree seeks to vary the terms of the original offer, this is a counter-offer which terminates the original offer14. Consequently, Betty's text is a counter-offer.
Sam replies by e-mail to Betty saying that he will only accept £4,000. This indicates a willingness to be legally bound as it does not envisage any further negotiations. Therefore, this could be an offer as opposed to an invitation to treat.
Sam's reply also seeks to vary the offer from Betty. Therefore, this is not an acceptance of Betty's offer. Instead, it is another counter-offer and will terminate Betty's offer.
Sam's offer states that he needs to hear from Betty by 4th November. An offer may state the date it is to terminate on or, if no date is specified it will automatically expire after a reasonable time has passed15. Consequently, Betty could accept Sam's offer to sell the car for £4,000 until 4th November.
At 5pm on 3rd October Charles sends an e-mail to Sam asking Sam to 'reserve' the car at £4,000. He also states that a deposit is in the post. This may be an acceptance of Sam's original offer.
An acceptance must be an unqualified assent to all the terms of the offer16. Here, it appears that Charles is agreeing to pay the £4,000 asked by Sam. However, he is also asking Sam to 'reserve' the car and is offering a deposit. This was not in the terms of the original offer. Sam also stated that he wanted £4,000 for the car in order to achieve a quick sale. This is not the same as reserving the car and paying a deposit. Therefore, a court will probably conclude that Sam only wished to sell the car for one single payment, and not to reserve it for a later sale. If so, Charles's e-mail will only amount to a counter-offer, not acceptance.
Betty's voice message
At 3pm on 4th October Betty leaves a message on Sam's phone agreeing to buy the car for £4,000. This is an unqualified assent to all the terms of Sam's last offer. Therefore, this is an acceptance and would normally constitute a binding contract at this moment.
However, acceptances must also be communicated to the offeror17. Here, Betty does leave a voice mail in an attempt to communicate this to Sam. The postal rule states that an offer is accepted when the acceptance is posted, rather than when it is received18. This is regardless of whether the acceptance is ever actually received19. This might suggest that it is irrelevant whether Sam actually hears the message.
However, the postal rule does not apply to instantaneous forms of communication such as telexes20. A telephone is an instantaneous form of communication, as the speaker can be heard immediately by the person on the other end of the line. Lord Denning in Entores v Miles Far East Corpn said that this exception to the postal rule was justified because the other person will instantly know whether the communication was successful21. Therefore, he said that instantaneous methods of communication should be treated the same way as face to face conversations. This approach was confirmed by the House of Lords in Brinkibon v Stalag Stahl in relation to telexes22. However, neither case says what should happen if the acceptance was sent outside of office hours and was not received at once on the other side.
Academics have suggested that, regarding telephone messages, an acceptance must either be heard and understood clearly by the other party or, if a message is left on an answerphone, the acceptance will only take effect when it would have been reasonable for the offeror to check their messages23. Here, Betty leaves her voice message at 3pm. This is within office hours. Therefore, if this was a weekday it would have been reasonable for Sam to check his phone messages before 5pm that day. If so, this will be an effective acceptance. However, if it is a weekend, it may not be reasonable for Sam to check his messages until the following Monday. If so, the acceptance would only take effect on that Monday.
Charles's cheque arrives by post at 9am on 5th October. This may be before Betty's voice message has been validly communicated to Sam. However, the postal rule only applies to acceptances, not to offers. Charles's posting of the cheque is not yet a valid acceptance. It only amounts to an offer so far. Therefore, this does not yet constitute a contract.
Sam then deposits the cheque in his bank account. This is an unequivocal assent to the terms of the offer made by Charles. Therefore, this is an acceptance by Sam of Charles's offer.
However, acceptance must be communicated to the offeror24. The acceptor must take reasonable steps to do this25. Silence in itself is not acceptance26. Nevertheless, this does not mean that communication always has to be verbal, and this requirement can be waived either expressly or impliedly in the circumstances27. For instance, in the Carbolic Smoke Ball case the offer was to pay money in return for an act. Performance of the act was deemed to be an acceptance of the offer. This is similar to the present case when all Sam has to do is accept the payment by cheque of the deposit in order to accept Charles's offer.
In an American case a court held that it was reasonable that the offeree did not notify the offeror that they were accepting the offer due to their previous dealings28. Charles's last message told Sam to treat the cheque as a deposit. This implies no communication is necessary. Academics suggest that English courts would take the same approach as the American case29. Furmston states that the true principle at work is that the contract is formed when the offeree unequivocally manifests his acceptance of the offer30. If so, this would happen when Sam deposits the cheque into his bank account, as by doing so he is unequivocally indicating that he accepts Charles's deposit and, therefore, the terms of Charles's offer.
Sam deposits the cheque immediately after receiving the cheque at 9am. At 10am he checks his voice mail messages on his phone. If this is during the week, then it may have been reasonable for him to check his voice messages before depositing the cheque. If so, Betty's acceptance will take effect before Sam accepts Charles's cheque. Therefore, she will have the valid contract with Sam, not Charles.
However, if this is a weekend and not within office hours, then Sam could still cash the cheque, accept Charles's offer first, and Charles would have the valid contract with Sam. Betty's acceptance would not be received until Monday.
The intention to create legal relations is presumed to apply to commercial agreements31 unless the contract expressly says otherwise32 . Sam advertises the car for sale on a website for strangers. Therefore, this is a commercial agreement, and the presumption will apply.
Consideration is 'the price for which the promise of the other is bought'33. Here, Sam is offering to hand over ownership of the Triumph Herald in exchange for money from either Betty or Charles. Consideration must move from the promisee34. Here, both sides promise to do something. Therefore, there is sufficient consideration.
A breach of contract is committed where a party fails or refuses to perform their obligations under the contract or does so in a defective manner35. Therefore, if either Charles or Betty's acceptances are validly received, but Sam agrees to sell the car to the other party, they may sue Sam for breach of contract.
The injured party may claim damages36. The aim of these damages is to put the parties in the position they would have been in, as far as possible, if the contract had been carried out properly37.
Damages may be measured according to the expectation measure or the reliance measure38. The expectation measure is what the claimant expected to receive under the contract39. If the defendant fails to perform the contract, then damages will be the cost of obtaining the same goods or services that should have been supplied40. This may be either the price of the goods41 or the market value if this is higher42. Therefore, the injured party could claim the difference between the contract price and the market value of a 1972 Triumph Herald in showroom condition with similar mileage, if this is higher.
Betty has not spent money in reliance on the contract. However, Charles has spent £500. Therefore, Charles could recover his deposit under this measure.
Sam's advertisement could be either an invitation to treat or a unilateral offer. Betty sends Sam a counter-offer. Sam responds with another counter-offer. Charles's e-mail is another counter-offer. Betty's voice message is an acceptance of Sam's last offer. However, it will only take effect when it would have been reasonable for Sam to check his messages. This will depend on whether it was a weekend or not. Sam accepts Charles's offer when he cashes the cheque. However, if he could reasonably have checked his voice messages before this, Betty will be able to sue Sam for breach. If Sam later fails to supply the car to Charles, Charles will be able to sue Sam for breach as well. Either party may claim damages if the market value of the car is higher than £4,000 or claim the return of any deposit.
1 S Fafinski and E Finch, Contract Law (Pearson Education Ltd., Harlow 2009) 2.
2 Partridge v Crittenden 1968 1 WLR 1204 (DC).
3 Fainfski and Finch (n1) 4.
4 Grainger and Sons v Gough 1896 AC 325 (HL).
5 G Treitel, The Law of Contract (Sweet and Maxwell, London 2003) 8.
6 J O'Sullivan and J Hilliard, The Law of Contract (Oxford University Press, Oxford 2010) 15.
8 Fainfski and Finch (n1) 6.
9 (1893) 1 QB 256 (CA).
10 Gibson v Manchester City Council 1979 1 All ER 972.
11 Smith v Hughes (1871) LR6 QB 597 (QB).
12 Treitel (n5) 16.
13 Stevenson Jacques & Co v McLean (18890) 5 QBD 346 (QB).
14 Hyde v Wrench (1830) 3 Beav 334 (Ch).
15 Ramsgate Victoria Hotel Co Ltd v Montefiore (1865-66) LR 1 Ex 109 (Exchq).
16 Treitl (n5) 16.
17 Entores Ltd v Miles Far East Corp 1955 2 QB 327 (CA).
18 Adams v Lindsell (1818) 1 B & Ald 681 (KB).
19 Household Fire Insurance v Grant (1879) 4 Ex D 216 (CA).
20 Entores Ltd v Miles Far East Corp 1955 2 QB 327 (CA).
21 Per Lord Denning Para 332.
22 Brinkibon Ltd v Stalag Stahl and Stahlwarenhandel GmbH 1983 2 AC 34 (HL).
23 O'Sullivan and Hilliard (n6) 32.
24 Entores Ltd v Miles Far East Corp 1955 2 QB 327 (CA).
25 Brinkibon Ltd v Stalag Stahl and Stahlwarenhandel GmbH 1983 2 AC 34 (HL).
26 Felthouse v Bindley (1862) 11 CBNS 896 (Ct Cmmn Pleas).
27 M Furmston, Cheshire Fifoot and Furmston's Law of Contract (16th edn Oxford University Press, Oxford 2012) 64.
28 Ammons v Wilson 1936 176 Miss 645, 170 So. 227 (1936) (US).
29 Furmston (n27) 64.
30 Ibid, 66.
31 Fafinski and Finch (n1) 26.
32 Rose & Frank Co v JR Crompton & Bros Ltd 1925 AC 445 (HL).
33 Dunlop Pneumatic Tyre Co Ltd v Selfridge Ltd 1915 AC 847 (HL) per Lord Dunedin Para 855.
34 Tweddle v Atkinson (1861) 1 B & S 393 (QB).
35 Treitel (n5) 832.
36 O'Sullivan and Hilliard (n6) 413.
37 Addis v Gramophone Co Ltd 1909 AC 488 (HL).
38 O'Sullivan and Hilliard (n6) 416.
39 Robinson v Harman (1848) 18 LJ Ex 202 (Exchq).
40 Fafinski and Finch (n1) 180.
41 Charter v Sullivan 1957 2 QB 117 (CA).
42 WL Thompson Ltd v Robinson (Gunmakers) Ltd 1955 Ch 177 (Ch).