Sample Notes: Nature of A Contract

A2 Level Law – Topic 3.1: Formation of a Valid Contract

Subtopic: 3.1.1 Nature of a Contract

Overview of Contract Law

• A contract is a legally binding agreement between two or more parties that creates rights and obligations enforceable by law.
• Key Elements of a Contract:
  • Offer
  • Acceptance
  • Consideration
  • Intention to create legal relations
  • Capacity to contract
  • Legality of purpose
• This section focuses on understanding the nature of a contract, especially the different forms: unilateral, bilateral, and collateral contracts.

Nature of a Contract

Agreement

• An agreement is formed when one party makes an offer and the other party accepts it.
• The objective test (how a reasonable person would interpret the conduct/statements) is applied to assess if a valid agreement exists.

Key Case: Smith v Hughes (1871)

• Principle: The court looks at what was objectively communicated, not secret intentions.
• Facts: A farmer believed he was buying old oats but received new oats; court held there was a valid contract as seller had not misrepresented anything.

Types of Contracts

1. Unilateral Contracts

• Involves a promise in return for an act.
• Only one party makes a promise; the other party accepts by performing the act.
• No obligation unless the act is completed.

Example:

• A offers £100 to anyone who finds and returns their lost dog.
• No one is obliged, but if someone does return the dog, A is legally bound to pay.

Key Case: Carlill v Carbolic Smoke Ball Co (1893)

• Facts: Company promised £100 to anyone who used their product and still got flu. Mrs Carlill did and sued.
• Held: This was a unilateral contract and the company was bound by its promise.

2. Bilateral Contracts

• The most common form.
• Both parties make promises: one to perform an act, the other to pay/compensate.
• Creates mutual obligations on both sides.

Example:

• A agrees to sell a car to B for £5,000.
• A promises to deliver the car; B promises to pay.

Key Case: Entores Ltd v Miles Far East Corporation (1955)

• Focus: Communication of acceptance in bilateral contracts must be received.
• Held: A bilateral contract arises when both parties exchange promises, and communication is crucial.

3. Collateral Contracts

• A secondary contract that exists alongside a main contract.
• It is formed when one party makes a promise to induce the other to enter into the main contract.
• The collateral promise must be intended to be legally binding and not contradict the main contract.

Example:

• A enters a contract to buy machinery from B, based on C’s promise (a third party) that the machinery will last five years.
• C’s promise can form a collateral contract enforceable by A.

Key Case: Shanklin Pier Ltd v Detel Products Ltd (1951)

• Facts: Shanklin Pier contracted painters to use Detel’s paint based on Detel’s assurance of its durability.
• Held: There was a collateral contract between Shanklin Pier and Detel.

Comparison Table

Key Principles

• Intention to be Bound: Must be clear from the language and conduct of the parties.
• Legal Effect: All three types of contracts are legally binding if validly formed.
• Certainty and Clarity: Courts require that terms be clear enough to enforce.

Reminders for Application

• Look at facts to determine whether the promise is unilateral or bilateral.
• Check if a third party made a promise that influenced the main contract (possible collateral contract).
• Always apply the objective test: what would a reasonable person believe?

Exam Tips

• Use clear case law to back up each type of contract.
• Show the intention to create legal relations even in unilateral cases.
• Be prepared to compare and contrast all three contract types.
• Clearly define each type, then give a relevant case and application.