A valid contract requires four essential elements: (1) agreement (offer and acceptance), (2) consideration, (3) intention to create legal relations, and (4) certainty of terms. The parties must also have the legal capacity to contract. This topic covers all elements except consideration, which is addressed in Topic 2.
Formation questions are among the most commonly tested areas. Focus on distinguishing offers from invitations to treat, identifying when acceptance is effective, and spotting capacity issues. Always work through each element methodically.
An offer is a clear and definite statement of willingness to be bound on specified terms, made with the intention that it will become binding as soon as it is accepted by the person to whom it is addressed. The person making the offer is the offeror; the person to whom it is made is the offeree.
An invitation to treat is not an offer but an indication of willingness to negotiate or receive offers. The key distinction is whether the party intends to be bound immediately upon the other party's response. If the party merely invites others to make offers, it is an invitation to treat.
| Situation | Classification | Key Case | Principle |
|---|---|---|---|
| Display of goods in shop window | Invitation to treat | Fisher v Bell [1961] | A flick knife displayed in a shop window with a price tag was held to be an invitation to treat, not an offer for sale. |
| Display of goods on self-service shelves | Invitation to treat | Pharmaceutical Society v Boots [1953] | Goods on shelves are an invitation to treat. The customer makes the offer at the checkout; the cashier accepts or rejects it. |
| Advertisements (general) | Invitation to treat | Partridge v Crittenden [1968] | An advertisement stating "Bramblefinch cocks, bramblefinch hens, 25s each" was an invitation to treat, not an offer for sale. |
| Advertisements (unilateral) | Offer | Carlill v Carbolic Smoke Ball Co [1893] | An advertisement promising £100 to anyone who caught flu after using the smoke ball was a unilateral offer to the world at large, evidenced by depositing £1,000 with a bank. |
| Auction sales | Invitation to treat | Payne v Cave (1789) | The auctioneer's call for bids is an invitation to treat. Each bid is an offer, accepted by the fall of the hammer. |
| Tenders | Invitation to treat (usually) | Spencer v Harding (1870) | An invitation to tender is generally an invitation to treat. Each tender submitted is an offer which the inviting party may accept or reject. |
Where the party inviting tenders undertakes to accept the highest or lowest tender, this may itself be a unilateral offer to accept. In Harvela Investments v Royal Trust Co of Canada [1986], the House of Lords held that where the vendor invited tenders and promised to accept the highest offer, they were bound to do so.
An offer does not last indefinitely. It may be terminated in several ways: revocation, lapse of time, death, rejection, or counter-offer. Once terminated, it can no longer be accepted.
| Method | Rule | Key Authority |
|---|---|---|
| Revocation | An offeror may revoke an offer at any time before acceptance, even if they promised to keep it open. | Payne v Cave (1789); Routledge v Grant (1828) |
| Communication of revocation | Revocation must be communicated to the offeree before acceptance. It is not effective until received. | Byrne v Van Tienhoven (1880) |
| Revocation by third party | Revocation is effective if communicated by a reliable third party. | Dickinson v Dodds (1876) |
| Lapse of time | An offer lapses after the time specified for acceptance, or after a reasonable time if none is specified. | Ramsgate Victoria Hotel v Montefiore (1866) |
| Death of offeror | The offer lapses if the offeree learns of the offeror's death before acceptance. If unaware, the position is uncertain, though the offer may survive for non-personal contracts. | Bradbury v Morgan (1862) |
| Death of offeree | The offer cannot be accepted by the offeree's estate or representatives. | Reynolds v Atherton (1922) |
| Counter-offer | A counter-offer destroys the original offer, which cannot then be accepted. | Hyde v Wrench (1840) |
| Rejection | An outright rejection terminates the offer immediately. | General principle |
A request for information is NOT a counter-offer and does NOT destroy the original offer. In Stevenson v McLean (1880), the offeree asked whether delivery could be spread over two months. This was a mere inquiry, not a counter-offer, and the original offer remained open for acceptance.
Special rules apply to revocation of unilateral offers. Once the offeree has begun performance, the offeror cannot revoke. In Errington v Errington and Woods [1952], a father promised to convey a house to his son and daughter-in-law if they paid all the mortgage instalments. The Court of Appeal held that the father could not revoke his offer once they had started paying the instalments. The offeree is not obliged to complete performance, but if they do, the offeror is bound.
The postal rule does NOT apply to revocation. In Byrne v Van Tienhoven (1880), the offerors posted a revocation, but the offeree had already posted an acceptance. The revocation was ineffective because it had not been received before acceptance was posted. Revocation must actually reach the offeree.
Acceptance is the final and unqualified expression of assent to the terms of an offer. It must correspond exactly with the terms of the offer (the "mirror image rule"). Any variation in the terms is a counter-offer, not an acceptance.
The "battle of the forms" arises where parties exchange standard form documents, each containing their own terms. Under the traditional approach, the last set of terms sent before performance constitutes a counter-offer accepted by conduct. In Butler Machine Tool Co v Ex-Cell-O Corporation [1979], the Court of Appeal held that the seller's original offer was destroyed by the buyer's counter-offer (their purchase order), which the seller accepted by returning a tear-off acknowledgement slip. The buyer's terms prevailed (the "last shot" doctrine).
In practice, advise clients to ensure their terms are the last to be communicated before performance begins. The "last shot" wins under the traditional analysis. However, be aware that courts may adopt a more pragmatic approach, looking at the parties' overall conduct and intentions.
The general rule is that acceptance must be communicated to the offeror and is not effective until received. This means the offeror must actually receive the acceptance for a contract to be formed.
| Method | When Effective | Key Authority |
|---|---|---|
| Face to face / telephone | When heard by the offeror | Entores v Miles Far East Corporation [1955] |
| Post (postal rule) | When the letter of acceptance is posted (properly stamped and addressed) | Adams v Lindsell (1818) |
| Telex / fax | When received by the offeror (during business hours) | Entores v Miles Far East Corporation [1955]; Brinkibon v Stahag Stahl [1983] |
| Email / electronic | When received (likely during business hours by analogy with Brinkibon) | Thomas v BPE Solicitors [2010] (obiter) |
| Silence | Silence cannot constitute acceptance | Felthouse v Bindley (1863) |
The postal rule is an exception to the general rule. Acceptance takes effect when a properly stamped and addressed letter is posted, not when it is received. It was established in Adams v Lindsell (1818). The rule applies where post is a reasonable or contemplated method of communication. It does NOT apply where the offer expressly requires actual receipt of acceptance, or where it would produce "manifest inconvenience and absurdity" (Holwell Securities v Hughes [1974]).
The postal rule does not apply to: (1) revocation of offers (Byrne v Van Tienhoven); (2) instantaneous communications such as telex, fax, or email (Entores; Brinkibon); (3) where the offer specifies that acceptance must be received; (4) where it would produce absurd results (Holwell Securities v Hughes). It also does not apply to acceptance of an option.
For instantaneous communications (telephone, telex, fax), the general rule applies — acceptance is effective on receipt. In Entores v Miles Far East Corporation [1955], the Court of Appeal held that a telex acceptance was effective where and when it was received, not where and when it was sent. In Brinkibon v Stahag Stahl [1983], the House of Lords confirmed this but noted that messages received outside business hours may only be effective when the office reopens.
Email and website acceptance are likely governed by the receipt rule by analogy with instantaneous communications. The Electronic Commerce (EC Directive) Regulations 2002 require acknowledgement of receipt of an order placed electronically. For SQE1 purposes, treat email like other instantaneous communications — effective on receipt during business hours.
Silence cannot amount to acceptance. In Felthouse v Bindley (1863), an uncle wrote to his nephew offering to buy his horse, stating: "If I hear no more about him, I consider the horse mine." The nephew did not reply. It was held that there was no contract — the offeror cannot impose a duty on the offeree to reject the offer. However, the offeree may waive the need for communication of acceptance if it benefits them.
For a contract to be enforceable, the parties must intend to create legal relations. The law uses two rebuttable presumptions depending on the context of the agreement: one for domestic/social agreements and another for commercial agreements.
| Context | Presumption | Key Cases |
|---|---|---|
| Domestic / social agreements | Presumption AGAINST intention to create legal relations | Balfour v Balfour [1919]; Jones v Padavatton [1969] |
| Commercial agreements | Presumption IN FAVOUR of intention to create legal relations | Edwards v Skyways Ltd [1964] |
In Balfour v Balfour [1919], a husband promised to pay his wife £30 per month while she remained in England for health reasons. The Court of Appeal held there was no enforceable contract because domestic arrangements between spouses living together are presumed not to be intended to be legally binding. Similarly, in Jones v Padavatton [1969], a mother's promise to support her daughter while she studied for the Bar was held not to create legal relations.
The presumption against intention in domestic cases can be rebutted where the circumstances indicate the parties intended legal consequences. In Merritt v Merritt [1970], a husband and wife who had separated agreed in writing that the husband would transfer the house to the wife when she finished paying the mortgage. The agreement was enforceable — separated spouses deal at arm's length. In Parker v Clark [1960], an elderly couple invited a younger couple to live with them, promising to leave their house to them. The detailed arrangements and the younger couple giving up their own home showed intention to be legally bound.
Look for these factors that may rebut the domestic presumption: (1) parties who have separated or are at arm's length; (2) written agreements; (3) significant reliance or financial sacrifice by one party; (4) precision and detail in the terms agreed. The more formal and significant the arrangement, the more likely it is to be binding.
In commercial agreements, there is a strong presumption that the parties intend to create legal relations. In Edwards v Skyways Ltd [1964], an employer's promise to make an "ex gratia" payment to a redundant pilot was held to be legally binding. The use of "ex gratia" did not rebut the presumption — it merely meant the employer did not admit prior legal liability. The burden of rebutting the commercial presumption is heavy.
An "honour clause" or "gentleman's agreement" clause expressly states that the agreement is not intended to be legally enforceable. Such clauses can successfully rebut the commercial presumption. In Rose and Frank Co v JR Crompton and Bros [1925], an "honourable pledge clause" stated the agreement was "not subject to legal jurisdiction." The House of Lords held the agreement was not a legally binding contract, though individual orders placed under it were separate enforceable contracts.
A contract must be sufficiently certain in its terms to be enforceable. If the terms are too vague or incomplete, the court cannot determine what the parties have agreed and the agreement will be void for uncertainty.
While an agreement to negotiate (lock-in agreement) is unenforceable (Walford v Miles), a lock-out agreement — where a party agrees not to negotiate with anyone else for a specified period — may be enforceable if the period is definite (Pitt v PHH Asset Management [1994]). Distinguish carefully between the two in SQE1 questions.
Certain categories of persons have limited capacity to enter into contracts. The main categories are minors, persons with mental incapacity, intoxicated persons, and companies acting outside their powers.
| Type of Contract | Validity | Key Authority |
|---|---|---|
| Contracts for necessaries | Binding — minor must pay a reasonable price (not necessarily the contract price) | Sale of Goods Act 1979, s 3; Nash v Inman [1908] |
| Beneficial contracts of service, apprenticeship, education, or training | Binding if the contract as a whole is for the minor's benefit | Doyle v White City Stadium [1935]; De Francesco v Barnum (1890) |
| Voidable contracts (shares, leases, partnerships) | Valid until repudiated by the minor — minor may repudiate during minority or within a reasonable time of reaching 18 | Edwards v Carter [1893] |
| All other contracts | Not binding on the minor unless ratified on reaching 18 | Minors' Contracts Act 1987 |
Necessaries are goods or services suitable to the condition in life of the minor and to their actual requirements at the time of sale and delivery (Sale of Goods Act 1979, s 3). In Nash v Inman [1908], a tailor could not recover the price of 11 fancy waistcoats sold to an undergraduate because the student was already adequately supplied with clothing — the goods were not necessaries in the circumstances.
A contract of employment, apprenticeship, education, or training is binding on a minor if, taken as a whole, it is substantially for the minor's benefit. The court looks at the contract as a whole, not individual terms. In Doyle v White City Stadium [1935], a contract requiring a boxer to forfeit his purse if disqualified was binding because the contract as a whole (providing professional boxing opportunities) benefited the minor. In contrast, De Francesco v Barnum (1890) held that oppressive apprenticeship terms were not beneficial.
The rules for intoxicated persons mirror those for mental incapacity. A contract is voidable if the person was so intoxicated that they did not understand what they were doing, and the other party knew of their condition (Gore v Gibson (1845)). They must pay a reasonable price for necessaries (Sale of Goods Act 1979, s 3).
Historically, a company could only act within the scope of its objects clause (the ultra vires doctrine). Under the Companies Act 2006, s 31, a company's objects are unrestricted unless specifically limited by its articles. Section 39 provides that the validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company's constitution. This effectively abolishes the ultra vires doctrine as a defence against third parties dealing in good faith.