Contract Formation

Topics: Contract, Contractual term, Sale of Goods Act 1979 Pages: 9 (2965 words) Published: December 2, 2012
Part A

Contracts are an integral part of business and everyday life, and are fundamental to construction as the industry relies on the formation of contracts for business agreements. “Contracts are based on the idea of a bargain, where each side must put something into the bargain. A contract may be defined as 'an agreement which is binding on the parties’” (Galbraith, 1998, pg78). There are a number of key components which must be present in the formation of such contracts.

Firstly, there needs to be an initial offer made by one party for the formation to begin. “An offer exists when one party effectively declares his readiness to be bound by a set of terms without any further negotiation” (Galbraith, 1998, pg79). It is interesting to note also that there is generally no requirement that the offer be made in any particular form, it may be made orally, in writing or by conduct (McKendrick, 2007, pg33). The exception to this is with speciality contracts such as the sale of land or estates or when deeds are formed between parties giving them twelve years liability instead of the six on simple contracts, and are frequently used within construction (Owen, 1998, pg47).

However there is a fine line between what constitutes an offer, and an invitation to treat. “An invitation to treat is simply an expression of willingness to enter into negotiations which will lead to the conclusion of a contract at a later date” (McKendrick, 2007, pg33). There is much confusion between the two, as shown in the cases of Gibson v. Manchester City Council [1978] and Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953]. An example of an invitation to treat in construction is the tendering process, in which the employer will invite contractors to make an offer based on the project information, which the employer can then choose to accept to form a binding contract.

In terms of the enforcement of contract law, when cases are examined McKendrick (2007, pg32) states “the courts adopt the 'mirror image' rule of contractual formation, that is to say they must find a clear offer which is matched by an equally clear acceptance”. Acceptance is also defined as “an unqualified expression of assent to the terms proposed by the offeror” (McKendrick, 2007, pg43). Therefore a contract can only be legally binding if the offer includes clear terms and is declared to the offeree, with communication of a clear and firm acceptance to be bound by these terms given back to the offeror. These two factors combined culminate in the agreement of the contract. However contract formation is rarely simple, and often the offeree will wish to introduce their own terms to the agreement as part of the negotiations, communicating this back to the offeror. This is known as a counter offer. Galbraith (1998, pg80) points out that “the offer – counter offer situation arises frequently in business where each side in the negotiations may be trying to make the contract on the basis of their own 'pro forma' standard documents. This gives rise to what us known as battle of the forms” The battle of the forms scenario succinctly defines the rules of offer and acceptance, in that any counter offer destroys the original offer making it irretrievable, with agreement of contract resulting when the last offer is accepted by the offeree. An example of this is evident in the case of Butler Machine Tool Ltd v Ex-Cell-O Corp [1979].

It is also important that there is an element of certainty to the terms of the contract, with the parties expressing their agreement in a form sufficiently certain for the courts to enforce (McKendrick, 2007, pg57). If there is an element of vagueness in the terms of the contract, it could be judged there is no valid contract at all, an example being the vague use of the term 'hire-purchase' in the case Scammell v Ousten [1941]. However if the parties have contracted with each other previously, it could be...
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