LICENCE 3 DROIT FacultРde droit UniversitГ© de Montpellier 1 MAKING THE CONTRACT Introduction Contract law provides the framework within which all commercial transactions, from the smallest consumer purchase to the most complex business deal, take place. The same framework of rules and principles governs contracts as diverse as buying a cup of coffee, or a holiday, or the services of a solicitor or garage mechanic, or negotiating a multi million pound business deal. Contract is essentially a case law subject and certainly the early law developed almost exclusively through the cases, many of which are still considered to be significant. One of the most important 19th century developments was the "consensus theory of contract", based on the notion that contractual obligations are self-imposed. The courts saw their role to be that of upholding contracts, not setting them aside, and this laissez faire philosophy still underlies Contract Law, but has been somewhat qualified by important statutes of the 20th century which have sought to ensure a fair trading environment, and by judicial decisions. This intervention by Parliament and the courts has mainly been aimed at ensuring that in situations where there is some "inequality of bargaining power", the stronger party is not able to take advantage of the weaker party (for example consumers). It is now recognised that different considerations may apply to commercial deals on the one hand and consumer transactions on the other. So what, then, are the conditions to enter into a valid contract ? It must be clear that the parties have concluded an agreement. The vast majority of contracts are "simple" contracts, that is contracts not made under seal. A simple contract will be enforced if fit can be shown to be a bargain - both parties must give consideration as the law will not enforce gratuitous promises (that is, a promise for which nothing is given in return). The parties must intend the agreement to be legally binding. Where appropriate, the proper formalities must be followed. Each party must have the capacity to contract. The contract must be made with the full consent of both parties. Generally, only the parties to the contract have any rights and obligations under it. 2 1. Agreement A contract is often described as an agreement which is enforceable by the law. Agreement is usually reached by a process of negotiation, which will culminate in one party (called the offeror) making an offer which the other party (called the offeree) accepts. An important requirement of a contract is that: the terms must be certain. In Scammell v Ouston (1941) Ouston agreed to purchase a van from Scammell on "his purchase terms". Before the precise nature of the terms were agreed between the parties, Scammell decided not to go ahead and the court had to decide whether a contract existed between the parties. The House of Lords held that there was no contract since the phrase "on hire purchase terms" could be interpreted in a number of different ways and the parties had therefore not reached an agreement which was sufficiently certain to constitute a contract. The Offer : definition Once an offer has been accepted the parties will be bound by the terms of the contract, as long as all the essential elements of a contract are present. It is therefore necessary to know at what point in the negotiations the parties are legally bound, so the process must be analysed in order to determine when an offer was made and when it was accepted. What then, is an offer? An offer, capable of being converted into an agreement by acceptance, must consist of a definite promise to be bound provided that certain specified terms are accepted" Several rules relating to offers were established in the famous case of Carlill v Carbolic Smoke Ball Company (1891). The defendants issued an advertisement for their product in which they claimed that it would prevent influenza if it were inhaled three times a day over a period of two weeks. They further promised that if anyone could show that they had bought and used the smokeball and still contracted flu, then the company would give that person Р’Р€100. Р’Р€1000 was deposited in the bank to show the company's "sincerity in the maker". Mrs Carlill bought and used the smokeball as prescribed and developed influenza in the course of treatment. When the company refused to pay her the Р’Р€100, she brought an action against them. A number of issues were raised before the court. The company's defense was that the advertisement was an advertising "puff" and there was no intention to create legal relations. They argued that the advertisement could not be construed as an offer because it was too vague - no time limit had been stipulated in which the user was to contract influenza, there had been no communication of acceptance, nor had the plaintiff supplied consideration, and that it was impossible to contract with the whole world. The court rejected these arguments. 3 They held that the deposit of Р’Р€1000 at the bank was a clear indication that claims would be met and therefore was evidence of an intention to create legal relations; the plaintiff's use of the inhalant as prescribed was sufficient consideration. Finally the court, by analogy with reward cases took the view that it was possible by way of an advertisement to make an offer to the whole world which was capable of being accepted by the conduct of the person who responded to the advertisement. The contract in this case was a unilateral contract, which may be described as a contract in which one party makes an offer which the other accepts by doing whatever is required. In a situation where the offer is made to the public at large the contract which results will usually be a unilateral contract. Most contracts are bilateral, where one person makes a promise in exchange for a promise by the other, so that both parties have an obligation to perform the contract. An everyday example of a bilateral contract is the sale of a car for a certain sum of money - the seller is obliged to deliver the car and the buyer is obliged to pay for it. Other requirements of an offer are that it must be definite in its terms and it is only effective when communicated to the offeree, but an offer can be made in any form. In Carlill the offer was made in writing (in the advertisement), but words or conduct may be equally effective. For example a shopper unloading his trolley at the till in a supermarket is, by his conduct, offering to purchase the goods at the marked price. On acceptance of the offer, as long as the other essential elements are present, the parties will be in agreement and will be legally bound. Distinction between an offer and an invitation to treat Clearly there are steps in the negotiations prior to this event, and it is important to distinguish an offer from an invitation to treat, which is merely a stage in the process of reaching agreement, an invitation to the other party to make an offer. Gibson v Manchester City Council : Mr Gibson was a council tenant in Manchester. In 1970 the council adopted a policy of selling council houses to tenants and in 1971 the City treasurer wrote to the plaintiff saying "the Council may be prepared to sell the house to you at the purchase price of Р’Р€27251 less 20 per cent. The letter invited Mr Gibson to make a formal application, which he did. In May 1971 political control of the council changed hands and the policy of selling council houses was reversed. The council decided to proceed only with those sales where exchange of contract had taken place. Gibson, in a test case which would affect some 350 other tenants in the same position, asserted that he had a binding contract with the council and claimed specific performance. The House of Lords held that the council's letter was an invitation to treat, so Gibson's application was an offer which the council was free to reject. Distinction between Offers and Tenders One situation where it is important to distinguish between an invitation to treat and an offer is when a business, local authority or other such organisation invites others to tender for a contract. It is now common commercial practice for one organisation wishing to purchase goods or services to invite others to put in a bid for the contract. 4 Bids are confidential and competitive and it is up to the organisation inviting tenders to select the successful bid. Generally, an invitation to tender is an invitation to treat and the tender itself constitutes an offer. Acceptance The rules relating to acceptance revolve around the need for consensus ad idem or as it is sometimes expressed a "meeting of minds" In order to form a contract there must be agreement in the sense that the parties know what their mutual rights and obligations under the contract are and there must be no doubt about the exact extent of those rights and obligations. So the contractual principles which have developed fall into two groups, first those relating to the need for certainty and secondly those relating to communication. Certainty of terms and counter-offers The terms of an offer must be certain and must be accepted unequivocally. It follows that if the terms of an offer are qualified in any way by the offeree, that cannot amount to an acceptance and will generally be a counter-offer. The counter-offer has the effect of destroying the original offer, and of constituting a fresh offer which the defendant is free to reject. There is often a fine line to be drawn between a counter-offer and a mere request for more information. Communication of acceptance : general rule The law has put the onus of communicating on one of the parties and English law favours the offeree in the sense that it will not allow the offeree to be put in the position where he or she must do something to indicate that he or she does not wish to be contractually bound. The general rule is that silence cannot be construed as an acceptance, so if you receive a letter through the post offering to sell you certain books any attempt by the seller to put the onus on you to reject the offer - for example by words like "the books will be sent to you and must be paid for unless we hear to the contrary within two weeks" will be ineffective according to the principles of English contract law. It is considered undesirable that the offeree should be put to the trouble and expense of communicating lack of consent. The offeror can stipulate that acceptance must be communicated in a certain way and then he or she will not be bound unless it is communicated in that way, so if in a commercial situation the offeror wants to be certain of acceptance and requests a written response to his offer, he will not be contractually bound by an oral acceptance. Special rules There are, however, some unilateral contracts the offer is accepted by anyone who starts to perform the act. 5 Unilateral contracts The offeror can waive the need to communicate acceptance and this is common in unilateral contracts. The contract in Carlill v Carbolic Smoke Ball Company was a unilateral contract, the characteristics of which are that a promise is made in return for an act. If I offer to pay Р’Р€100 to anyone who provides me with information leading to the return of a valuable antique stolen from my house, you would not expect in a case like this that anyone would ring up or write to the offeror to tell me that my offer had been accepted and the said information was being sought. In unilateral contracts the offer is accepted by anyone who starts to perform the act. The postal rule : When the post is used to accept an offer. In the case of Adams v Lindsell (1818) a letter of acceptance was posted, and it was held that the contract was made at the time of posting, thus before the offeror could know that his offer had been accepted. This rule applies even when the letter never arrives because, for instance, it is lost in the post as happened in Household Fire and Carnage Accident Insurance Co v Grant (1879). Not surprisingly, since it can sometimes lead to injustice when a person is contractually bound before he or she knows it, the courts have been very willing to qualify the postal rule and limit it as much as possible. So it has been held that the rule will only apply if the offeree can show that the letter was properly stamped and addressed and properly posted, which means putting it in a post box or handing it in at the post office to someone who is authorised to accept letters for posting. The offeror gets some protection in that the postal rule can quite easily be excluded in the offer. The offeror can stipulate that he wants "actual notice in writing". Actual notice means he wants to know, so he will not be bound until he had the letter of acceptance in his hand. With the advent of modem office technology, the courts have had to decide whether the postal rule applies to new forms of communication, and first the Court of Appeal in Entores Ltd v Miles Far East Corporation (1955) and then the House of Lords in Brinkibon Ltd v Stahag Stahl GmbH (1983) have held that it does not apply when the method of communication is by telex. These cases involved offers being made in one country and accepted by telex in another and the question was where was the contract concluded. The answer was that the contract was made in the country where the telex message was received. There are still unanswered questions surrounding this problem - is the offeror bound when the telex message arrives on his telex machine (perhaps in the middle of the night), or when it is put on his desk, or when he actually reads it? In Brinkibon the House of Lords said obiter that a telex sent and received outside working hours could not be considered instantaneous, so the court would have to consider other factors to determine where and when the contract was concluded. Ending the offer 6 When an offer is accepted, we have seen that it merges into the contract, but it may be that an offer is made but not accepted. There are a number of ways in which an offer may be brought to an end. First an offer can be withdrawn (or revoked) at any time before it has been accepted, as long as the offeree is informed by a reliable person that it has been withdrawn. Three questions were discussed in the case of Dickinson v Dodds (1876) where the defendant gave the plaintiff a written offer to sell a house 'to be left over until Friday 12 June, 9 amРІР‚в„ў. On 11 June the defendant sold the house to a third party and the plaintiff was told of this sale by someone else. Nonetheless, before 9 am on the 12th the plaintiff handed to the defendant a formal letter of acceptance and then claimed that the defendant was bound to sell him the house. The Court of Appeal thought otherwise, saying that the plaintiff "knew that Dodds was no longer minded to sell the property to him as plainly and clearly as if Dodds had told him in so many words". This case illustrates the further point that an offeror is not bound by a gratuitous promise to keep an offer open for a specified period. Problems arise in unilateral contracts as a result of the convergence of two rules : that an offer can be withdrawn at any time before acceptance; and that in unilateral contracts acceptance need not be communicated. Thus it is important to decide exactly when an offer is accepted in a unilateral contracts It was held in Errington that an offeror cannot revoke his offer once the offeree has started to do whatever is required of him or her. An offer is ended if it is rejected, and a counteroffer amounts to rejection by the offeree of the original offer. Many contracts are concluded only after lengthy and complex negotiations in which there will be a series of offers and counter-offers before agreement is reached and even an everyday contract between neighbours for the purchase of a awnmower will probably involve some haggling about the price, so careful analysis of the facts may be necessary in the event of a dispute as to whether the parties are legally bound. Naturally if the offer is expressed to last for a specific period, then it will lapse on the expiration of that period. So in Dickinson v Dodds the offer to Dodds would have lapsed on 12 June if it had not been revoked before that by the sale of the house to a third party. But if no time limit is put on the offer the useful concept of 'reasonableness' will be employed and the offer will lapse after a reasonable time, which will depend upon the nature of the contract in question. In Ramsgate Victoria Hotel Co v Montefiore (1866) six months was held to be longer than was reasonable in a case involving an offer to purchase shares. Failure of a precondition will also have the effect of causing an offer to lapse. For example, there may be an express condition in an offer to purchase a secondhand car that the purchaser will be able to raise finance for the deal - if he fails then the offer will lapse. 7 Finally, death of the offeror before the offer has been accepted, will terminate the offer. 2. Consideration The notion of consideration is central to English contract law. In any legal system it is obviously necessary to be able to distinguish between those agreements which the law will enforce and those which it will not. English contract law depends to a large extent on the doctrine of consideration (the price of the bargain) to make the distinction. For example a promise of gift of Р’Р€100 is not enforceable as a simple contract, but an exchange of Р’Р€100 for a bicycle is enforceable. Several points should be noted: • Consideration may be an act, or forbearance (that is the giving up of some right) or a promise. If A promises to pay B Р’Р€3000 for B's car, it is that promise which constitutes the consideration and which may be enforced. • Both parties must provide consideration - the law enforces bargains, not gratuitous promises. • Only a person who has provided consideration may enforce a contract. • Consideration must have some value. It is often said that consideration must be sufficient but it need not be adequate. There is much case law exploring the meaning of value and adequacy of consideration. Consideration may be either executory, executed or past. In most bilateral contracts the consideration will be executory - that is a promise given in exchange for another promise "I will give you delivery of my car in exchange for payment of Р’Р€3.000" When the contract is concluded the consideration consist of promises as yet to be performed. Executed consideration is consideration which has been provided when the promise of one party becomes enforceable - it is often described as an act in exchange for a promise "I will pay you Р’Р€100 if you find and return my lost bracelet". Here the obligation to pay Р’Р€100 only arises when the bracelet has been found and returned to the promisor, in other words when the consideration is executed. Past consideration, the general rule is past consideration is no consideration at all. Re v McArdle (1951) provides a modern example of a promise being unenforceable for lack of valuable consideration because the consideration was past. In this case a person who made improvements to her mother in-law's house and was then promised a sum of money for her work was unable to enforce the promise when the mother-in-lawРІР‚в„ўs executors failed to pay up. The rule that “past consideration is no consideration” has been much criticised for its injustice and technicality, so it has to some extent been modified in that if an act is done at the request of the promisor and it is understood that payment will be made, even though this may not be discussed at the time, then the promise will be enforceable. 8 "Sufficient" and "adequate" consideration Whether the consideration is executed or executory, it must be sufficient, that is it must be of some value. However, since consideration need not be adequate (that is, it need not represent a fair exchange), its value can be very small indeed. The courts have long taken the view that it is up to the parties to a contract to ensure that they each achieve a fair bargain and although Acts like the Sale of Goods Act 1979 (see for example s 14) contain provisions aimed at achieving fairness in the marketplace, the general rule remains that consideration must be sufficient but need not be adequate. The attitude of the courts is summed up in the statement by Lord Blackburn in Bolton v Madden (1873) : `The adequacy of the consideration is for the parties to consider at the time of making agreement, not for the court when it is sought to be enforced". What is sufficient consideration? It has long been settled law that a promise to perform or the performance of an existing duty is not good consideration, although doing something over and above what you are already bound to do is. Performing a public duty cannot be sufficient consideration, a point illustrated by Collins v Godefroy (1834). The plaintiff, who had received a subpoena to give evidence in court, agreed with the defendant that he would give evidence in return for his expenses. The court held that the defendant was under no obligation to pay the expenses since the plaintiff was under an existing duty to give evidence. By contrast, doing more than is demanded by an existing duty does provide sufficient consideration to support a contract. In Harris v Sheffield United FC (1987) the football club asked the police authority to provide a certain number of officers to police home matches. When the club denied its liability to pay for the policing of home matches the court held that there was a valid contract between the club and the police authority because the number of officers provided was greater than would have been provided if the police had simply been fulfilling their public obligation to keep the peace. Moreover, performance of an existing contractual duty will not support a new contract, but doing more or something different will amount to good consideration. The 19th century cases, Stilk v Myrick (1809) and Hartley v Ponsonby (1857), still provide a useful comparison. In the first case a ship sailed from England to India with eleven men in the crew. Two deserted and the captain agreed to share the wages of the deserters between the remaining men if they accepted to sail the ship back to Britain. After the ship had returned, he refused to pay and when Stilk sued for his share, the court held that no extra consideration had been provided for the promise because he had only done was he was already bound by contract to do. On the other hand in the second case where almost all the crew deserted, the court was prepared to hold that as the ship had become dangerous, a new contract was negotiated between the captain and the remaining crew members, entitling the men to the extra payments promised. The recent case of Williams v Roffey Bros & Nichols (Contractors) Ltd (1990) has cast some doubt on this area of law. 9 In summary, the facts were these. The defendants were the main contractors in a building contract for the refurbishment of a block of 27 flats, which contained a clause entitling the customer to a penalty if the work was not completed by a certain date. They had a contract with the plaintiff, a carpenter, under which they had agreed to pay him Р’Р€20,000 for the carpentry work. The plaintiff ran into financial difficulties, partly because he had underestimated the cost of the work. The defendants agreed to pay the plaintiff a further Р’Р€90,300 at the rate of Р’Р€575 per flat as each flat was completed. Only Р’Р€1500 was paid and the plaintiff stopped work and sued for the damages. The defendants contended that no consideration had been provided for the payment of the additional amount. The Court of Appeal, however, held that in the absence of any economic duress or fraud on the part of Williams in procuring the promise, the main contractors had received a benefit and judgment was given for the plaintiff. Consideration and the variation of contracts Since Pinnel's case in 1602 it has been recognised that if the parties vary a contract by agreement, that agreement must itself be supported by consideration. Pinnel's case involved part-payment of a debt and the rule which emerged may be expressed thus: "Payment of a lesser sum on the day the debt is due cannot be any satisfaction for the whole". This rule was accepted by the House of Lords in the later case of Foakes v Beer (1884). Mrs Beer had obtained a judgment debt against Dr Foakes. She agreed that she would take no further action if he paid the debt by instalments which he duly did. However, judgment debts carry interest and the House of Lords held that Mrs Beer was entitled to claim the interest which had accrued. Dr Foakes had not given any consideration for her promise to take no further action on the debt as he was bound to pay the full debt plus any interest. There has been some suggestion that the principle established in Williams v Roffey should apply to part payment of a debt and that an agreement to receive part payment in full settlement of the debt should be binding on the parties if the creditor gets some practical benefit from accepting part payment. However, in Re v Selectmove (1995) this position was not accepted by the Court of Appeal. Selectmove was a company which had fallen into financial difficulty and owed the Revenue sums of money in respect of PAYE (Paye As You Earn) and National Insurance. The managing director offered to pay these debts by instalments and to pay future liabilities as and when they fell due. When the Revenue petitioned for the company to be wound up, the company argued that the agreement to pay by instalments was binding because the Revenue obtained a benefit (they were likely to receive more by this method of payment than if the company was wound up). The Court of Appeal rejected this argument and applied Foakes v Beer. There was no consideration for the promise to pay by instalments. If the ordinary rules of consideration are applied, the common law exceptions which have developed will be readily understood. The rule in Pinnel's case will not apply if the debtor does or gives something in addition to the part- payment - so for example a chattel delivered in full settlement of the debt will discharge the debt. This is termed "substituted performance" and the rule that consideration need not be adequate applies. So in Sibree v Tripp (1846), Alderson B said: `A man may give, in satisfaction of a debt of Р’Р€100, a horse of the value of Р’Р€5, but not Р’Р€5". 10 Similarly payment of a lesser sum before due date will do, as will payment of a smaller amount at a different place at the creditor's request. The equitable doctrine of promissory estoppel In addition to the common law exceptions discussed above, an equitable exception to the ride in Pinnel's case has also been recognised. The High Trees case : the plaintiffs were entitled to the full rent from the date of the action, but they would not be entitled to claim the full rent for the years when the flats were empty during the war. The High Court was of course bound by the House of Lords decision in Foakes v Beer, but it was able to rely on Hughes v Metropolitan Rail Company (1877), also a House of Lords authority, as a precedent for the use of equity. The principle laid down in High Trees became known as the doctrine of promissory estoppel and may be stated as follows: "A simple promise to waive performance of a contractual obligation is binding if it is intended to be acted upon and is acted upon" In other words, "if A promises not to enforce his strict legal rights and B, as intended, alters his position in reliance on this, then the promise can be a defence for B in equity despite the lack of consideration": It was at first thought that the doctrine would only be used if the promisee had acted to his detriment in reliance on the promise. However, later cases have suggested that reliance on the promise need not be detrimental to the promisee. Because this rule is based on equity, it will not apply in circumstances where it would be inequitable to use the ride. In D & C Builders Ltd v Rees (1965), the defendant owed Р’Р€482 to the plaintiffs, a small firm of builders, for work which they had done. He delayed payment for several months and then offered them Р’Р€300 stating in effect that if they did not accept this amount they would get nothing at all. As the plaintiffs were in desperate financial straits, a fact known to Rees, they accepted Р’Р€300 in full payment of the debt. However, on the advice of their solicitor, they later sued for the balance of the debt. Again the case came before Lord Denning, who took the view that the defendant must pay the balance. The rule in Pinnel's case was applied rather than the doctrine of promissory estoppel as Lord Denning held that it was not inequitable for the plaintiffs to go back on their promise to accept a lesser amount than was due. The settlement was not truly voluntary since the defendant had improperly taken advantage of the plaintiffРІР‚в„ўs financial situation. It is important to note that the doctrine of promissory estoppel has not swept away the need for promises to be supported by consideration. Its application is limited to situations involving the discharge or variation of contracts, and it has no application at all in the formation of contracts where the need for consideration remains intact. ln Combe v Combe (1951) it was said that the doctrine of promissory estoppel "may be used as a shield not as a sword", that is it can be used to prevent someone from going back on a promise; not to enforce a promise. 11 3. Intention to create legal relations The law does not proclaim the existence of a contract merely because of the existence of mutual promises. In addition to agreement and consideration, a third element is required - the intention to create legal relations. Clearly, difficulties of proof can arise in relation to intention, and the courts have approached the problem by dividing agreements into two categories: social and domestic agreements on the one hand, - commercial agreements on the other. Courts make different presumptions for each class. Social and domestic agreements The vast majority of agreements made within the family or between friends are never intended to give rise to legal action. If Mary invites Joe to dinner and Joe fails to turn up, Mary would not think of taking him to court; if a parent agrees to give a child an allowance and fails to pay up, the child would not issue a writ. But the line must be drawn somewhere. Compare Balfour v Balfour (1919) and Merritt v Merritt (1970). In the first case a husband, on his departure to a foreign country, agreed to pay his wife a sum of money each month. It was held there was no contract as there was no intention between them to be legally bound. On the other hand in Merritt v Merritt, a couple who were separating made an agreement "at arms length", which the wife insisted should be put in writing, and it was held that the circumstances showed that the parties did intend that their agreement should have legal consequences. Simpkins v Pays provides another interesting example. A grandmother, granddaughter and paying lodger regularly entered a competition in a weekly magazine. They took it in turns to complete the entry form and pay the fee. On one occasion the grandmother (the defendant) won and the court had to decide whether the others were legally entitled to a share of the winnings. It was held that the parties had entered into a common enterprise, that they did have the intention to create legal relations and thus a contract had been made by which they had agreed to share any winnings. Commercial agreements While in the case of domestic agreements it is for the party who wants to enforce the contract to prove in the light of the surrounding circumstances of the case that the parties intended to be legally bound, in the case of commercial agreements the courts will presume that the parties intended their agreement to be legally binding. However, this presumption can be rebutted. Generally, in order to rebut the presumption, it will be necessary expressly to declare that a transaction is not binding in law. For example, a declaration on football pool coupons to the effect that `This transaction ... is binding in honour only" has been held to mean that it is not intended to be binding in law In Rose & Frank Co v J R Crompton & Bros Ltd (1924) the agreement contained the following words: 12 “This arrangement is not entered into nor is this memorandum written, as a formal or legal agreement, and shall not be subject to legal jurisdiction in the law courts either of the United States or England, but it is only a efinite expression and record of the purpose and intention of the parties concerned, to which they each honour and pledge themselves". This was an ordinary commercial agreement between a New York firm and an English manufacturer, but the court nonetheless held that there was no contract since the parties had made it clear that they did not intend their agreement to be legally binding. Agreements which are made "subject to contract" - as in Winn v Bull (1877) - may be regarded as agreements which can be ignored by either party as they have shown that they do not intend to be legally bound at that stage. Sometimes the question may arise whether a contract is sufficiently certain to be enforced. In Kleinwort Benson Ltd v Malaysia Mining Corporation Bhd (1988), the plaintiffРІР‚в„ўs bank agreed to make a loan facility of up to Р’Р€10,000,000 available to a wholly-owned subsidiary of the defendant (MCC Metals ixd). The plaintiffs wanted a guarantee from the defendants, which they (the defendants) were not prepared to give, but after lengthy negotiations it was agreed that the defendants would give the plaintiffs a letter of comfort rather than a guarantee, but that the defendants would charge a higher rate of interest. The letter of comfort stated "It is our policy to ensure that the business of [MMC] is at all times in a position to meet its liabilities to you". When MMC became insolvent, the plaintiffs claimed that the defendants should reimburse them for the subsidiary's indebtedness. At first instance it was held that this was a commercial agreement and there was nothing to rebut the presumption that it was intended to be legally binding. However, the Court of Appeal approached the question by looking at the legal meaning attached to the form of words used in the letter of comfort, which amounted only to a statement of the defendants `present intention" and not to a legally binding agreement. 4. Formalities The general rule is that a contract may be made in any form: in writing, orally or by conduct. Some types of contract require certain formalities. Contracts which must be made in writing : Contracts for the sale or other disposition of land; regulated consumer credit agreements. These contracts must be made in writing and all the terms of the contract must be included in the written agreement. Further, the contract must be signed by the debtor and by or on behalf of the creditor. If the contract is not 'properly executed', then it will not be enforceable against the debtor. Contracts which must be evidenced in writing In these cases, it is not necessary for the actual contract to be in writing, but there must be written evidence of the contract otherwise it will not be enforceable by the courts. 13 Contracts which must be made by deed Contracts which are not supported by valuable consideration (ex : a promise of gift, the lease of land for more than three years). 5. The parties to the contract 5-1 /Capacity In general, adults of sound mind have full contractual capacity but there are certain categories who, it is considered, need some protection in the marketplace. Minors That is people under the age of 18. Acts passed by minors are regulated by the Minors' Contract Act 1987. Valid contracts passed by minors Contracts for necessaries It is recognised that minors, like everyone else, have certain basic requirements. The term 'necessary' in relation to goods is statutorily defined in the Sale of Goods Act 1979: 'necessaries mean goods suitable to the condition in life of the minor ... and to his actual requirements at the time of the sale and delivery'. In Peters v Fleming (1840) the court held that a watch and chain could be regarded as necessaries for an undergraduate, but that the jury must decide whether it was reasonable that the chains should be gold. In Nash v Inman (1908), an undergraduate at Cambridge, already well-supplied with clothes, bought 11 fancy waistcoats on credit from a Saville Row tailor. It was held that the goods were net necessaries, so the tailor was unable to enforce the contract. The Sale of Goods Act 1979 imposes that the minor pays a reasonable price Beneficial contract of service Certain contracts, if they are beneficial to the minor, will be binding on the minor (for example contracts of employment, contracts of apprenticeship). A trading contract is never binding on a minor, no matter how beneficial its terms may be. In Mercantile Union Guarantee Corporation v Ball (1937), a hire purchase contract involving a lorry entered into by a minor who had a haulage business was held to be a trading contract and therefore not binding on the minor. Voidable contracts Contracts in this group are voidable in the sense that they are binding on the minor unless he or she repudiates the contract before reaching the age of 18 or within a reasonable time after the age of 18. Such contracts confer on the minor an interest of a permanent nature in the subject matter of the contract, for example: a contract to buy shares in a company, or to enter into a lease or a 14 partnership. Contracts void unless ratified Void contracts are considered never to have existed. They cannot be enforced. The Minors' contract act 1987 stipulates that void contracts, such as repayment of a loan made to minors, may be ratified by the minor after he turns 18. An adult can also guarantee a contract agreed to by a minor. The guarantee is enforceable against the adult, although the contract could not have been enforced against the minor Liability of a minor in tort. People under 18 may be liable in tort, depending on the circumstances. The law of torts may not be used as a roundabout way of enforcing a contract. Fennings v Rundall (1799) in which a minor hired a horse for riding. As a result of his unreasonable and excessive riding, the mare was injured and it was held that the minor was not liable in negligence. In contrast, in Bernard v Haggis (1863) where the horse in question was injured as a result of jumping her in contravention of the express terms of the contract, the defendant was liable in negligence. In the first case the injury arose directly out of the performance of the contract, whereas in the second the injury was in a sense independent of the contract. If a minor lies about his or her age, then the other party will be able to make a claim for damages in the tort of deceit. Mental disorder and drunkenness In the case of a person suffering from a mental disorder (defined by the Mental Health Act 1983) the contract will be voidable at that person's option if at the time it was made he or she was incapable of understanding the nature of the contract and the other party to the contract was aware of that fact. If the contract is for necessaries, then it will be binding on the person who is mentally disordered, but the person must pay a reasonable price for them. Similar rules apply in the case of people who are so drunk that they do not appreciate the nature of the contract, if the other party is aware of that fact. The contract may be ratified by the drunken person when he becomes sober again. Corporations A corporation is a person in the eyes of the law and as such is able to make contracts which can be enforced against the corporation. In contrast, an unincorporated association such as a club has no capacity to make contracts. The capacity of a corporation is governed by the method of its creation. 15 The powers of statutory corporations are to be found in the statute creating the corporation. Corporations created by royal charter have no limitation on their capacity to contract. Before the Companies Act 1985, amended in 1989, inspired by European Union regulations, the capacity to contract of registered companies were defined in the memorandum of association. Any contract outside the object of the company was said to be "ultra vires" and void. Companies Act 1985 provides: '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 memorandum'. 5-2 / Privity of contract According to the privity rule, only a person who is a party to a contract may incur rights and liabilities under that contract. In Tweddle v Atkinson (1861), the fathers of William Tweddle (the plaintiff) and his wife agreed with each other that, in order to provide for the couple, they would each give a sum of money. One father paid up, the other did not and when the defaulter died, Tweddle sued the executor for the money. His action failed because he was not a party to the agreement. However, the courts have recently shown themselves more willing to award substantial damages, particularly in the context of building contracts where, because of complex subcontracting arrangements, the contracting party has suffered no loss and the third party cannot bring an action because of the privity rule. There are a number of exceptions to the privity rule in various domains such as life insurance, All of the above exceptions are attempts to confer the benefit of a contract to a third party. But what about the burden? Again the general rule is that only the parties to a contract are bound by its terms. Tulk v Moxhay (1848). The plaintiff owned several plots of land in Leicester Square. One of the plots was sold and a covenant (agreement) was included in the deed of sale to the effect that the Square should be kept 'open as a pleasure ground and uncovered with buildings'. The Land was bought and sold again several times and eventually it was purchased by the defendant, who claimed that he was entitled to build on it, despite the fact that he had notice of the covenant, because he was not a party to it. It was held that the burden of a restrictive covenant will run with the land in equity, as long as the purchaser of the land purchases the land with notice of the covenant. The law of privity has been the subject of a lot of criticism, mainly because third parties are unable to enforce benefits arising out of contracts to which they are not privy. The current situation creates difficulties in commercial deals because so many exceptions have been developed to the rule making the law highly complex. Furthermore third party rights are accepted in most other legal systems in the European Union and other parts of the world.