Report on Contract Law: Formation, Terms, and Issues

This report provides a comprehensive overview of contract law, addressing key principles relevant to small family businesses. It begins with an executive summary and covers contract formation, including offer, acceptance, and consideration. It distinguishes between offers and invitations to treat, and explains the postal rule of acceptance. The report further explores contractual terms, including conditions, warranties, and exclusion clauses, along with their incorporation and interpretation. It also delves into legal issues such as misrepresentation, mistake, frustration, duress, undue influence, and the assessment of damages. The report concludes with a discussion on these topics, offering practical insights for businesses to safeguard their rights and avoid legal complications. The report uses relevant case law and legislation to support its arguments.

REPORT ON CONTRACT LAW 2
Executive Summary
Contract is a term which is commonly used in the day to day language by people belonging to
different classes, where their employment status is differentiated and even the nations are not
same. Yet, the common law of contract is nearly uniform in each nation and the different aspects
of contract law are more or less the same for all the businesses, irrespective of their type of
business form and the industry in which they operate. Contracts are formed for nearly every part
of the business of a person and have to conform to the principles which are formed under the
common law of contract.
Through this report, an attempt has been made to educate the family running the small family
business regarding the different feature of contract law. This includes a discussion on contract
formation, the vitiating factors, the different types and theories of contracts, the terms of contract
including the exclusion clauses, and the further legal issues, which are commonly raised in the
businesses running on day to day basis. The discussion of vitiating factors would not only cover
the discussion on these factors, but also on their sub-types and their impact on the contract. It is
suggested for the family to undergo this discussion and apply them aptly, on the basis of
requirements, in their business, so as to safeguard their rights and avoid any unwanted
consequences in form of damages for breach of contract or the rescission of contract owing to
misrepresentation.

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Contents
1. Introduction..............................................................................................................................5
2. Principles of Contract Law.......................................................................................................5
2.1. Basics of Contract Law.....................................................................................................6
2.2. Classifications of Contract................................................................................................6
2.3. Offer vs. Invitation to Treat..............................................................................................7
2.4. Acceptance and Postal Rules of Acceptance....................................................................7
2.5. Consideration and ’the Test of Enforceability’.................................................................8
2.6. Key Theories of Contract Law..........................................................................................9
3. Contractual Terms and Exclusion Clauses...............................................................................9
3.1. Condition vs. Warranty...................................................................................................10
3.2. Implied Terms.................................................................................................................10
3.3. Importance and Methods of Incorporation......................................................................10
3.4. Importance of ‘Construction’ for Interpretation of the Contract....................................11
3.5. Term vs. Representation.................................................................................................11
4. Further Legal Issues...............................................................................................................11
4.1. Term of Contract vs. Misrepresentation.........................................................................12

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4.2. Types of Misrepresentation.............................................................................................12
4.3. Categories of ‘Mistake’ and their impact........................................................................13
4.4. Frustration of Contract....................................................................................................13
4.5. Duress and Undue Influence and their impact................................................................13
4.6. Remoteness and Measurement of Damages and their impact.........................................14
5. Conclusion..............................................................................................................................14
6. Bibliography...........................................................................................................................15
6.1. Articles/ Books/ Reports.................................................................................................15
6.2. Cases...............................................................................................................................16
6.3. Legislations.....................................................................................................................17
6.4. Others..............................................................................................................................17

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1. Introduction
Contract law is such a sphere of law, which is encompassed in every sphere of life, particularly n
the businesses of the people. This is because for every work to be undertaken under the business,
a contract has to be formed1. This would include the contract of employment, contract for
services, contract for obtaining supplies, and this are just examples of some of the contracts
drawn for carrying on the business. This makes it important for businesses to understand the
nuances of the contract law, so as to use this law in the best possible way, to safeguard from their
rights being breached, and most importantly, to avoid the breaches of law2. In the following
parts, a conclusive report has been prepared, whereby the different aspects of the contract law
have been highlighted. This would help the small family run business in understanding the
important concept of contract law and also clarify the issues which can be raised under the
contract law, in the future.
2. Principles of Contract Law
A contract denotes a promise made, which has the power of binding the contracting parties in a
lawful manner. Under a contract, one side of the party promises the other party to do something
for them, and in turn, the other party promises to pay the first party, the sum of consideration,
which is mutually decided amongst them3.
1 Jeffrey A. Helewitz, Basic Contract Law for Paralegals (Aspen Publishers Online, 5th ed, 2007)
2 Linda Mulcahy, Contract Law in Perspective (Routledge, 5th ed, 2008)
3 Jill Poole, Casebook on Contract Law (Oxford University Press, 13th ed, 2016)

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2.1. Basics of Contract Law
In order to form a contract, there are different requirements. This includes the presence of certain
key elements in an agreement, to transform it into a contract. The elements include offer,
acceptance, consideration, intention, clarity, capacity and consent. There are different factors
which affect the contract law4. The key one in this regard is the vitiating factors, which have
been explained later on. Apart from this, the 19th century continental influence, the economic
theory influence, the use of standard form of contracts, the relationship between standard form of
contracts, consumer protection, the inequality of bargaining power, and contractual behaviour are
just some of the factors which have an impact over the contract law5. For instance, in the case of
Commercial Bank of Australia v Amadio6, the court upheld the presence of unconscionable
conduct on part of the defendant, due to the inequality in the bargaining power of the plaintiff
and the defendant, where the latter held dominant control.
2.2. Classifications of Contract
A contract can be classified in different forms, which includes on the basis of formation, on the
basis of performance and on the basis of execution. On the basis of formation, a contract can be
classified into express, implied and quasi contract. The express contracts are created by expressly
reaching an agreement; the implied contracts are created through proposal of acceptance, which
is not put in words; and lastly, the quasi contracts are the ones created by law. On the basis of
performance, the contracts can be bifurcated into unilateral and bilateral contracts. The former
one is one-sided contract, whereas the latter requires obligations to be undertaken by both the
4 Brian A. Blum, Contracts: Examples & Explanations (Aspen Publishers Online, 4th ed, 2007)
5 M. P. Furmston, 2. Some Factors Affecting Modern Contract Law (2013)
<http://www.oxfordlawtrove.com/view/10.1093/he/9780199568345.001.0001/he-9780199568345-chapter-2>
6 (1983) 151 CLR 447; [1983] HCA 14

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parties. Lastly, on the basis of execution, the contracts can be classified into executed and
executory contracts. The former is the one which has already been performed and the latter has
some component in the contract, the performance of which is pending7.
2.3. Offer vs. Invitation to Treat
The first step in contract formation is an offer to be made. It is important that an offer is clearly
demarcated from the invitation to treat. The offer shows that the parties have the intent to enter
into lawful relations, whereas the invitation to treat highlights the intent of initiating the
negotiations between the parties, after which the offer is made8. The goods which the shop
keeper displays on the shelf of the shop are an invitation to treat, as per Pharmaceutical Society
of Great Britain v Boots9 and in such cases, the shopkeeper is not under the obligation to sell the
product. Generally, the adverts in the magazines and newspapers are considered as invitation to
treat, as was seen in Partridge v Crittenden10. Though, when they contain a unilateral offer,
which can be accepted through performance, it is deemed as an offer, as was seen in Carlill v
Carbolic Smoke Ball Company11.
2.4. Acceptance and Postal Rules of Acceptance
Acceptance is the second stage of contract formation. Any offer which is made has to be
accepted in the exact manner in which it was made and by the party it was made12. If any
modifications are changed while communicating the acceptance, the communication is not
7 Money Matters, Classification of Contracts by Formation, Performance, Execution | Other Contracts (2017)
<https://accountlearning.com/classification-contracts-formation-performance-execution-contracts/>
8 Neil Andrews, Contract Law (Cambridge University Press, 2nd ed, 2015)
9 [1953] 1 QB 401
10 [1968] 2 All ER 421
11 [1893] 1 QB 256
12 Steven Emanuel, Contracts (Aspen Publishers.., 8th ed, 2006)

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deemed as an acceptance, and is instead taken as a counter offer as was seen in Hyde v.
Wrench13. Also, it is crucial that the acceptance is communicated and a mere silence is not
deemed as acceptance as per Felthouse v Bindley14.
The general rule of acceptance, on the basis of instantaneous rules is that the communication has
to be received by the offering party. Also, the date on which the acceptance is attained by the
offering party is to be taken as the date of acceptance. However, an acceptance to this is the
postal rules of acceptance. As per these rules, the date of sending the acceptance communication
is deemed as the date of acceptance. And the actual date of receipt of this communication
remains irrelevant. Also, the acceptance by postal office is deemed as the acceptance by the
offering party, as the postal office is deemed as an agent of the offering party. Hence, the receipt
by the postal office is the receipt by the offering party15. Upholding the validity of these rules in
Adams v. Lindsell16, the court declared the contract as enforceable.
2.5. Consideration and ’the Test of Enforceability’
Another key element in contract formation is consideration. The consideration cannot be past and
has to be present. Further, the consideration does not have to be adequate and just has to be
sufficient. It is crucial that the consideration moves from the promisee to the promisor.
Consideration is the amount paid for fulfilling the promise and can be any amount, so long as it
has an economic value17. Owing to the condition precent, the three wrappers in the case of
Chappell & Co Ltd v Nestle Co Ltd 18was deemed as valid consideration. Consideration is used
13 (1840) 3 Beav 334
14 (1862) EWHC CP J35
15 Paul Latimer, Australian Business Law 2012 (CCH Australia Limited, 31st ed, 2012)
16 (1818) 106 ER 250
17 Ewan McKendrick, Contract Law (Pearson Education Limited, 11th ed, 2015)
18 [1960] AC 87

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as the test of enforceability for the contract and in case a valid consideration is not present, the
contract would not be binding19.
2.6. Key Theories of Contract Law
There are three key theories under the contract law, i.e., the equity theory, will theory and
formalist theory. The first one asks the question regarding the exchange of items of equal value
between the parties; the second one poses the question regarding the parties agreeing to the terms
contained in the agreement; and the last one relates to whether or not the common elements were
present in the agreement, as the presence of these could only result in an enforceable contract
and without it, the same is not found.
3. Contractual Terms and Exclusion Clauses
One of the elements of contract formation relates to the clarity regarding the terms of the
contract. This means that the terms on which the contract is based, has to be very clear, as an
ambiguity can lead to the purpose of the contract not being met20. One of the key clauses in the
terms of contract is the exclusion clause. The exclusion clause is such a term through which, the
liability of one of the parties in the contract, is limited or extinguished21. The exclusion clause is
valid only when it does not oppose or limit the applicability of a law, and is brought to the
attention of the parties as was stated in Chapelton v Barry UDC22. Once a contract is signed,
which contains an exclusion clause, the clause becomes applicable irrespective of the fact that
the signing party read it or not, as was held in L'Estrange v Graucob23.
19 Richard Stone and James Devenney, Text, Cases and Materials on Contract Law (Routledge, 3rd ed, 2014)
20 Michael Furmston and G.J. Tolhurst, Contract Formation: Law and Practice (Oxford University Press, 2010)
21 Richard G. Lawson, Exclusion Clauses and Unfair Contract Terms (Sweet & Maxwell, 10th ed, 2011)
22 (1940) 1 KB 532
23 [1934] 2 KB 394

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3.1. Condition vs. Warranty
The condition which is covered under the contractual terms forms the base of the contract and
the obligations of the contracting parties are raised on the basis of it. In case of breach of the
contract, the contract is contravened24. Poussard v Spiers and Pond25 is a case where the breach
of condition led to the breach of contract. Warranty on the other hand is not that many significant
and minor preferences are depicted through these. And a breach of warranty is not a breach of
contract, as was held in Wills v Amber26 and is merely a breach of such clause.
3.2. Implied Terms
The implied terms in a contract are such terms which are not stated in an express manner, but are
obvious to the contracting parties. For instance, in an employment contract, an implied term is
the workers not working in detriment of the company27.
3.3. Importance and Methods of Incorporation
The incorporation of terms is crucial as through a proper incorporation, the validity to the terms
is given. The terms can be incorporated through notice, where the notice of terms is given before
contract formation and reasonable steps are taken to bring to the notice of the party the terms;
and on the basis of course of dealings, where the parties are signified that they are bound by the
incorporated terms28.
24 James Marson and Katy Ferris, Business Law Concentrate: Law Revision and Study Guide (Oxford University
Press, 3rd ed, 2016)
25 [1876] 1 QBD 410
26 [1954] 1 Lloyd’s Rep 253
27 Andy Gibson and Douglas Fraser, Business Law (Pearson Higher Education AU, 2013)
28 Paul S Davies, JC Smith's the Law of Contract (Oxford University Press, 2016)

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3.4. Importance of ‘Construction’ for Interpretation of the Contract
The construction of contract is significant as it helps the courts in interpreting the contract. The
first principle of construction of contract is that it has to be drawn in simple and unambiguous
terms, so that the purpose and terms of the contract can be easily considered29.
3.5. Term vs. Representation
The statements which are made during the negotiation phase of the contract can be deemed as
representation or a contractual term and the cause of action and remedies are decided on the basis
of the statement being one out of the two. The timing, the significance of the statement, the
expertise of the parties and the parole evidence rule help in deciding if the statement is a
representation or a term. As per the parole evidence rule, if the statement has been included in
the written document, it is a term. If the statement is significant and reliance was placed on it, it
would be a term. In case the representee had higher knowledge, it would be a representation30.
4. Further Legal Issues
There are different factors under the contract which can give rise to legal issues and the leading
ones in this regard are the vitiating factors.
4.1. Term of Contract vs. Misrepresentation
There is a key difference when it comes to a term of a contract and a misrepresentation. A term
of the contract is what forms the base of the contract is required for the contract. On the other
29 Catherine Elliott and Frances Quinn, Contract Law (Pearson Education Limited, 9th ed, 2013)
30 E-Law Resources, Contractual term or representation (2017) <http://e-lawresources.co.uk/Contractual-term-or-
representation.php>

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hand, misrepresentation refers to a false statement made during the course of negotiations, so as
to induce the other party into entering the contract. The remedies for misrepresentation include
rescission of contract and claiming damages. So, misrepresentation does not form part of the
contract. However, the presence of misrepresentation makes the contract voidable at the option
of the aggrieved party, as was seen in Car & Universal Credit v Caldwell31, where the court
allowed Caldwell to rescind the contract as a result of misrepresentation of the other party. An
actionable misrepresentation is such where false statement has been made about the fact and not
an opinion. An actionable claim could be made in Smith v Land and House Property Corp32 due
to the party being in a position to know the truth of the matter. Bisset v Wilkins33 saw the
presence of statement of opinion cancelling the case of misrepresentation.
4.2. Types of Misrepresentation
There are broadly three types of misrepresentation, i.e., fraudulent, negligent and innocent.
Under the first, the false statement is knowingly made false, without having the belief of it being
true and in a reckless manner. Under the second, the statement is made without having the
reasonable basis for believing it to be true. And in the last one, the statement is made where the
reasonable grounds for believing it to be true were present34.
4.3. Categories of ‘Mistake’ and their impact
Mistake in the contract makes the contract void ab initio, thus having the effect that the contract
had never existed in the first place. There are three main categories of mistake, i.e., common,
mutual and unilateral. The common mistakes are such in which both of the contracting parties
31 [1964] 2 WLR 600
32 (1884) 28 Ch D 7
33 [1927] AC 177
34 E-Law Resources, Misrepresentation (2017) <http://e-lawresources.co.uk/Misrepresentation.php>

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make the very same mistake. The mutual mistakes are the ones in which the contracting parties
are at a cross purpose. In this case, the objective test is applied for coming to the conclusion
regarding possibility of saving the contract. The unilateral mistakes are such in which only one
of the parties makes the mistake35.
4.4. Frustration of Contract
A contract can be discharged through frustration where due to the changed conditions after the
contract formation, the contract becomes impossible to perform or the commercial purpose of the
contract is deprived36. In Taylor v Caldwell37, the court held that the contract was frustrated and
so, the same was discharged.
4.5. Duress and Undue Influence and their impact
There are five vitiating factors in a contract which can lead to the contract being voided or
voidable. Two of these are undue influence and duress. Duress is a situation in which the
individual enters into a contract owing to a threat and can take different forms, like economic
duress, duress to goods, and duress to person38. North Ocean Shipping v Hyundai39 saw the
contract being declared as voidable owing to economic duress. Undue influence is such a
situation in which a contract is entered into owing to certain pressure, which cannot be deemed
as duress, and where the dominating party takes advantage of their position against the weaker
35 E-Law Resources, Mistake (2017) <http://e-lawresources.co.uk/Mistake.php>
36 E-Law Resources, Frustrated contracts (2017) <http://e-lawresources.co.uk/Frustrated-contracts.php>
37 (1863) 3 B & S 826
38 E-Law Resources, Contracts Entered Under Duress (2017) <http://e-lawresources.co.uk/Duress.php>
39 [1979] 3 WLR 419

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party, to gain an unfair advantage40. Johnson v Buttress41 saw the presence of undue influence
resulted in the transfer of property being set aside.
4.6. Remoteness and Measurement of Damages and their impact
The purpose of awarding remedies in cases of breach of contract was given in Addis v
Gramophone42 as putting the aggrieved party in a place where they would have been, in case the
contract had been properly performed. The damages for a contractual breach are subjected to the
principles of mitigation, causation and remoteness. As per the rules of remoteness given under
Hadley v Baxendale43, the losses can only be recovered when it reasonably arises from the breach
of contract.
5. Conclusion
The discussion carried on through this report highlights the different aspects of contract law,
which have to be taken into consideration while running the business, irrespective of the size or
industry in which one operates. The aspects highlighted here show the rights which the parties
have under the contract law, along with the responsibilities which have to be fulfilled. Most
importantly, the discussion highlights the need to be aware of these aspects, so as to safeguard
from the chances of a contract being breached or rescinded.
40 E-Law Resources, Undue influence (2017) <http://e-lawresources.co.uk/Undue-Influence.php>
41 (1936) 56 CLR 113
42 [1909] AC 488
43 (1854) 9 Ex Ch 341

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6. Bibliography
6.1. Articles/ Books/ Reports
Andrews N, Contract Law (Cambridge University Press, 2nd ed, 2015)
Blum BA, Contracts: Examples & Explanations (Aspen Publishers Online, 4th ed, 2007)
Davies PS, JC Smith's the Law of Contract (Oxford University Press, 2016)
Elliott C, and Quinn F, Contract Law (Pearson Education Limited, 9th ed, 2013)
Emanuel S, Contracts (Aspen Publishers.., 8th ed, 2006)
Furmston M and Tolhurst GJ, Contract Formation: Law and Practice (Oxford University Press,
2010)
Gibson A, and Fraser D, Business Law (Pearson Higher Education AU, 2013)
Helewitz JA, Basic Contract Law for Paralegals (Aspen Publishers Online, 5th ed, 2007)
Latimer P, Australian Business Law 2012 (CCH Australia Limited, 31st ed, 2012)
Lawson RG, Exclusion Clauses and Unfair Contract Terms (Sweet & Maxwell, 10th ed, 2011)
Marson J, and Ferris K, Business Law Concentrate: Law Revision and Study Guide (Oxford
University Press, 3rd ed, 2016)
McKendrick E, Contract Law (Pearson Education Limited, 11th ed, 2015)
Mulcahy L, Contract Law in Perspective (Routledge, 5th ed, 2008)

REPORT ON CONTRACT LAW 16
Poole J, Casebook on Contract Law (Oxford University Press, 13th ed, 2016)
Stone R, and Devenney J, Text, Cases and Materials on Contract Law (Routledge, 3rd ed, 2014)
6.2. Cases
Adams v. Lindsell (1818) 106 ER 250
Addis v Gramophone [1909] AC 488
Bisset v Wilkins [1927] AC 177
Car & Universal Credit v Caldwell [1964] 2 WLR 600
Carlill v Carbolic Smoke Ball Company [1893] 1 QB 256
Chapelton v Barry UDC (1940) 1 KB 532
Chappell & Co Ltd v Nestle Co Ltd [1960] AC 87
Commercial Bank of Australia v Amadio (1983) 151 CLR 447; [1983] HCA 14
Felthouse v Bindley (1862) EWHC CP J35
Hadley v Baxendale (1854) 9 Ex Ch 341
Hyde v. Wrench (1840) 3 Beav 334
Johnson v Buttress (1936) 56 CLR 113
L'Estrange v Graucob [1934] 2 KB 394
North Ocean Shipping v Hyundai [1979] 3 WLR 419

REPORT ON CONTRACT LAW 17
Partridge v Crittenden [1968] 2 All ER 421
Pharmaceutical Society of Great Britain v Boots [1953] 1 QB 401
Poussard v Spiers and Pond [1876] 1 QBD 410
Smith v Land and House Property Corp (1884) 28 Ch D 7
Taylor v Caldwell (1863) 3 B & S 826
Wills v Amber [1954] 1 Lloyd’s Rep 253
6.3. Legislations
Contract Law
6.4. Others
E-Law Resources, Contracts Entered under Duress (2017)
<http://e-lawresources.co.uk/Duress.php>
E-Law Resources, Contractual term or representation (2017)
<http://e-lawresources.co.uk/Contractual-term-or-representation.php>
E-Law Resources, Frustrated contracts (2017) <http://e-lawresources.co.uk/Frustrated-
contracts.php>
E-Law Resources, Misrepresentation (2017)
<http://e-lawresources.co.uk/Misrepresentation.php>
E-Law Resources, Mistake (2017) <http://e-lawresources.co.uk/Mistake.php>

REPORT ON CONTRACT LAW 18
E-Law Resources, Undue influence (2017) <http://e-lawresources.co.uk/Undue-Influence.php>
Furmston MP, 2. Some Factors Affecting Modern Contract Law (2013)
<http://www.oxfordlawtrove.com/view/10.1093/he/9780199568345.001.0001/he-
9780199568345-chapter-2>
Money Matters, Classification of Contracts by Formation, Performance, Execution | Other
Contracts (2017) <https://accountlearning.com/classification-contracts-formation-performance-
execution-contracts/>