Formation of a Contract and Exclusion Clause in Business Law

This article discusses the formation of a valid contract, including offer, acceptance, capacity, intention, illegality, and consideration. It also analyzes the application of an exclusion clause in a standard form contract, using relevant case law.

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Name of Student
Name of Institution
Instructor
Date
Business Law Assignment

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PART A: Formation of a Contract
Introduction
A contract is said to refer to that agreement that subsists between individuals which is
intended to be enforceable in law. For a contract to be enforceable and binding between the
parties to it, such contract has to be formed following the essential requirements for entering into
and formation of a valid and enforceable contract. The essentials elements include; offer,
acceptance of the offer, capacity, intention of the parties, illegality and consideration. An offer
and acceptance is what parties refer to as an agreement which gives rise to a contract. I shall then
proceed and analyze whether the essential elements of a valid contract were complied with in
this case scenario.
Was there an offer
An offer should be distinguished from an invitation to treat. Courts have held that display
of goods in supermarkets and kiosk windows does not constitute an offer but an invitation to
treat1. It is Rachel who made an offer to ChunkyChicken restaurant when she selected to buy
chicken; ChunkyChicken had the right to reject or accept the offer but chose to accept the offer
made by Rachel.
In Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd2, the
court stated that by displaying goods on shelves, interested buyers are invited to make offers to
buy; it is called an invitation to treat and not an offer at that time. Similarly, the decision in
Fisher v Bell3, the court held that goods displayed on the window of a shop did not amount to an
offer but an invitation to treat. The defendant could not therefore be convicted of offering to sell
1 Andrews, Neil. Contract law (Cambridge University Press, 2015) 34
2 Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd (1952) 2 QB 795
3 Fisher v Bell (1961) 1 QB 394

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dangerous weapons to the public. In this case therefore, Rachel made a valid offer which was
accepted by Chunky Chicken Restaurant.
Did acceptance occur?
Rachel made the offer to ChunkyChicken Restaurant staff who had the capacity to enter
into contracts of such nature for and on behalf of ChunkyChicken Restaurant. Acceptance of the
offer occurred at the point where a receipt was printed from the electronic machine with the price
to be paid and a description of the items bought and the order number. The offer was duly
accepted and such acceptance communicated to the offeror through the printed receipt. This is
what culminated into an agreement between ChunkyChicken restaurant and Rachael.
Intention to contract
All the parties should be willing to be bound by the terms of the contract. A contract is
void where a party is made to enter into a contract through threats, violence or misrepresentation.
These are called vitiating factors in contract. Intention of the parties can be discerned from the
surrounding circumstances at the time when the contract was negotiated as well as through
presumptions. Presumptions are the common methods through which intention is determined.
Parties to commercial contracts for instance are presumed to have had the intention to contract4.
This was the finding by the court in the case of Carlill v Carbolic Smoke Ball Co, where
the court stated that the advert that had been run by the defendant had the intention as they had
even deposited money in the bank to pay individuals as reward; and it being a commercial
contract, there was a presumption that the parties had the necessary intention. ChunkyChicken
restaurant runs a business popularly referred to as an eatery. This is a business enterprise and
4 Anson et al, Cartwright Anson's law of contract (Oxford University Press, 2010) 23

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persons who contract with them are presumed to have had the necessary intention required to
contract.
Did the parties have the capacity?
Capacity is an essential requirement for one to enter into a legally enforceable contract.
Certain persons are however incapacitated due to bankruptcy, minority age and insanity from
entering into contracts. Minors however can enter into contracts for necessaries. In this case
however, Rachel is majority age and there is no mention about her mental status. There is a
presumption that she possessed the required capacity to enter into the contract with
ChunkyChicken restaurant.
Was there any illegality?
Illegal contracts are not enforceable in a court of law. Example of an illegal contract is
for instance one entered into for the supply of hard drugs that are outlawed by the government.
However, it this case, ChunkyChicken restaurant operates an eatery and there is a presumption
that the business is legal and has obtained all the relevant licenses to operate. Therefore, the
contract entered into between Rachel and the restaurant can be said to be legal and enforceable
before a court of law5.
Was the contract supported with consideration?
Consideration is the contractual price. Most contracts except those made by deed must be
supported by consideration. In this case scenario, Rachel has paid the amount indicated on the
printed receipt. The amount paid by Rachel is the consideration in this case. Presence of
consideration in a contract between parties makes such contract to be legally binding and
enforceable before a court of law6.
5 Chen-Wishart, Mindy Contract law (Oxford University Press, 2012) 12
6 Coffee Jr et al, "Securities regulation: Cases and materials." (2015) 54

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Did the contract have terms?
Terms of a contract are what the contracting parties have agreed on. During negotiations,
there are certain statements that are used to entice a party into entering a contract but do not
amount to terms. Terms can be conditions or warranties. A condition is the essential term that
goes to the root of the contract without which there is no contract. A warranty is a minor term,
usually a statement ancillary to the main term of the contract whose breach does not terminate or
repudiate the contract.
Rachel and ChunkyChicken restaurant entered into an electronic form of contract which
can also be referred to as a standard form contract whose terms are predetermined by one party7.
The weaker party accepts the terms as they are as there is no room for negotiating the contractual
terms. These terms were contained on the electronic devise which individuals had to press the
okay button to signify acceptance. Rachel can therefore be said to have accepted the contractual
terms.
Part B: Advice
Issue
Whether ChunkyChicken restaurant can rely on the exclusion clause to avoid liability
Rule
An exclusion clause refers to a term contained in a contractual document whose intention
is to exclude or avoid liability for injury caused to another party. These clauses are normally
witnessed in contracts that have been reduced into writing in form of standard form contracts.
For an exclusion clause to cushion a party from liability, courts apply certain rules to determine
7 Furmston et al, Cheshire, Fifoot and Furmston's law of contract (Oxford University Press, 2012) 29

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this. The courts look at the contract document to ascertain whether the clauses to be relied on are
contained on signed documents, unsigned documents or signs generally8.
If the document containing the exclusion clause has been signed, such clause is
applicable and the parties are bound by all the terms including the exclusion clause. Failure to
read the terms is not a defense at this stage. The signature rule was developed in L’Estrange v
Graucob Ltd9. The exclusion clause in such a case can only be avoided if a party proves
existence of fraud, misrepresentation or undue influence at the time of signing the contract
document.
If on the other hand the document was not signed and there is no provision for signing,
the court determines whether the said clause is a contractual term and if the answer is to the
affirmative, the exclusion clause is applicable. On the other hand however, the exclusion clause
shall not apply where it does not form part of the terms of the contract10.
The main tests applied by the court in such cases include;
1. Nature of the document test; and
2. Reasonable Notice test.
Where the document is a contractual document, the party seeking to rely on the exclusion
clause has to take reasonable steps to bring such clause to the attention of the other party at the
time of formation of the contract. In Thornton v Shoe Lane Parking Co11, the claimant got
injured in a car park and garage. The claimant had put some coins in a machine and got a ticket.
He got injured while parking inside the garage. The garage owner sought to avoid liability by
8 Hogg, Martin. Promises and Contract Law: comparative perspectives (Cambridge University Press, 2011) 16
9 L’Estrange v Graucob Ltd (1934) 2 KB 394
10 Knapp et al, Problems in Contract Law: cases and materials (Wolters Kluwer Law & Business, 2016) 30
11 Thornton v Shoe Lane Parking Co (1971)4 CLR 379

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relying on an exclusion clause contained at the back of the ticket. The court held that the clause
was not incorporated into the contract and the defendant could not rely on it to avoid liability.
Application
The exclusion clause that the restaurant is seeking to rely on were not made known to
Rachel before she entered into the contract. The clause is not a contractual term and it had not
been incorporated into the contract. Applying the decision of the court in Thornton v Shoe Lane
Parking Co12, the exclusion clause cannot be relied on by the restaurant to avoid liability. The
exclusion clause was brought to the attention of Rachel after breach of contract and it cannot be
relied upon in such circumstance. Being a standard form contract, courts will apply the exclusion
clause against the individual who puts reliance on it.
Conclusion
In conclusion therefore, ChunkyChicken restaurant cannot rely on the exclusion clause
contained in the electronic terms and conditions.
12Thornton v Shoe Lane Parking Co (1971)4 CLR 379

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Bibliography
Andrews, Neil. Contract law (Cambridge University Press, 2015)
Anson et al, Anson's law of contract (Oxford University Press, 2010)
Chen-Wishart, Mindy Contract law (Oxford University Press, 2012)
Coffee Jr et al, "Securities regulation: Cases and materials." (2015).
Furmston et al, Cheshire, Fifoot and Furmston's law of contract (Oxford University Press, 2012)
Hogg, Martin. Promises and Contract Law: comparative perspectives (Cambridge University
Press, 2011)
Knapp et al, Prince Problems in Contract Law: cases and materials (Wolters Kluwer Law &
Business, 2016)
Case Law
Carlill v Carbolic Smoke Ball Co [1892] EWCA Civ 1
Fisher v Bell (1961) 1 QB 394
L’Estrange v Graucob Ltd (1934) 2 KB 394
Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd (1952) 2 QB 795
Thornton v Shoe Lane Parking Co (1971)4 CLR 379