Law of Contract

DIPLOMA IN LAW & MANAGEMENT

INTRODUCTORY READING MATERIALS

LAW OF CONTRACT

Introduction

The Law of Contract is a very important part of the business world. The law and rules

in this area touch every one of us almost daily, particularly at the workplace.

Knowledge of the law and the rules would help you to plan and manage your business

activities better and also to protect your personal interests.

These materials are designed to give you a general overview of the laws which govern

contractual relationship.

You are strongly urged to read at least one of the RECOMMENDED textbooks listed

in your ‘Contract General Instructions’.

In ADDITION, you may also refer to one of the following texts as a very basic and

INTRODUCTORY reference:

1. Contract law: ‘A Layman’s Guide’ by Catherine Tay Swee Kian

2. Basic Business Law in Singapore by Walter Woon.

3. Singapore Business Law by Benny S Tabalujan.

Prepared by Mrs. Annie P. Gomez

Lecturer, Diploma in Law & Management. 2006

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Prepared by Mrs. Annie P. Gomez

Lecturer, Diploma in Law & Management. 2006

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CONTRACT LECTURE 1

ELEMENTS OF A CONTRACT

LEARNING OBJECTIVES - OFFER

1. To understand the four elements of a contract.

2. To understand the following rules on “Offer”:

(a) An offer can be Oral or in writing

(b) Who an Offer can be made to

(c) Must the Offer be communicated?

3. To distinguish an offer from

(a) Invitation to treat.

(b) Supply of Information

(c) Declaration of Intent

4. To understand how offers can be terminated by:

(a) Revocation of the Offer

(b) Rejection by the Offeree

(c) Lapse of Time.

Elements of a Contract

A contract is an agreement which is enforceable by law between two or more

persons for some purpose, their intention being to create a legally binding

contract.

Prepared by Mrs. Annie P. Gomez

Lecturer, Diploma in Law & Management. 2006

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Prepared by Mrs. Annie P. Gomez

Lecturer, Diploma in Law & Management. 2006

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1. Elements of a contract

a. offer } agreement
b. acceptance }

c. intention to create legal relations

d. consideration

All four elements must be present in order for a contract to be valid.

The basis of a contract is an agreement. To have an agreement, there must be a

meeting of minds. Thus, if one party has one thing in mind and the other party

has something else in mind, there is no agreement.

An agreement is usually found to exist when one party makes an offer which the

other party accepts. The use of ‘Offer’ and ‘Acceptance’ is essentially for

determining whether there is agreement between two parties for a contract to

exist.

ELEMENT 1: OFFER

What is an offer?

A person is said to make an offer when he indicates to another his willingness to

enter into a contract on the terms which he sets out in the offer.

Terminology

OFFEROR: The party who makes the offer.

OFFEREE: The party to whom the offer is made.

Prepared by Mrs. Annie P. Gomez

Lecturer, Diploma in Law & Management. 2006

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Once the offeree accepts the offer, an AGREEMENT or contract comes into

being.

Prepared by Mrs. Annie P. Gomez

Lecturer, Diploma in Law & Management. 2006

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2. General Rules on Offer

2(a) An offer may be:

oral or
in writing or
it may be partly oral and partly in writing.

Examples:

i) Offer made orally:

A makes a phone call to B and asks B if he would like to buy A’s car.

ii) Offer made in writing:

X sends an email to Y and says that he would like to buy Y’s latest 3G

mobile phone.

iii) Offer made partly orally and partly in writing

S asks J if she would like to buy S’s used law text books. S then sends an

SMS to J stating that the books can be bought at an 80% discount.

2(b) An offer may be made to:

i. a single, definite person - if so, only that person can accept the offer;

ii a group of persons - if so, someone from the group can accept; or

iii the world at large - if so, anyone may accept by complying with the

terms:

Examples:

i) Offer to a single person:

Tan asks Lim if he is interested in buying Tan’s ticket to the concert by the

‘Black Eyed Peas’.

Prepared by Mrs. Annie P. Gomez

Lecturer, Diploma in Law & Management. 2006

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ii) Ram sends an SMS to his project group mates to ask if any one of them is

interested in buying his classic limited edition DVD album by the rock

group ‘U2’.

iii) Siti posts a notice on her website offering to sell her collection of Barbie

dolls and accessories to the first person who answers her all if her ‘Barbie’

quiz questions correctly.

Carlill v Carbolic Smoke Ball Co.

In their advertisement, the defendants promised to pay 100 pounds to any person who

contracted influenza after using their product - “the Carbolic Smoke Ball” and that

1,000 pounds had been deposited in a bank to prove their sincerity. Carlill used the

smoke ball as prescribed but still contracted influenza. She sued the defendants for 100

pounds.

Held: The advertisement was an offer to the world and is a valid offer even though

the contract was made with a limited portion of the public who came forward

and accepted the offer.

2(c) An offer must be communicated

An offer must be communicated or made known to the offeree before it can be

accepted. The offeree cannot accept an offer unless he knows of its existence.

Example:

Prepared by Mrs. Annie P. Gomez

Lecturer, Diploma in Law & Management. 2006

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The police offer $10,000 to anyone in the public who can give information on a wanted criminal.

A, who is not aware of the reward but who knows of the criminal's whereabouts, cannot collect

the reward because he cannot accept an offer he did not know of.

Prepared by Mrs. Annie P. Gomez

Lecturer, Diploma in Law & Management. 2006

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3. Situations which do not amount to an Offer

An offer is the last step before acceptance by the offeree. Once accepted, you

have an agreement. Therefore there is a difference between an offer and the

following situations:

a. invitations to treat

b. supply of information

c. declaration of intent

In these instances, the courts have ruled that these are not "offers" but only a step

in the negotiations which may or may not lead to an offer being made.

3(a) Invitation to Treat

An invitation to treat is an invitation to others to enter into negotiations which

may lead to the making of an offer:

Example: The display of goods in a self-service shop or in a shop window is an

invitation to treat, not an offer.

Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern)

Ltd
It   was   an   offence   to   effect   any   sale   of   prescriptive   drugs   in   a
pharmacy   without   consulting   a   registered   pharmacist.   In   the
defendant’s   pharmacy,   customers   could   select   any   of   the   products
(including   prescriptive   drugs)   and   bring   them   to   the   counter   for
payment   where   the   pharmacist   could   remove   any   prescriptive   drugs.
Whether the pharmacy committed an offence depended on whether a sale
(contract) was concluded when the customer brought the drugs to the
counter.
Held: The display of goods on the shelves was merely an invitation to treat. Hence,

when the customer selects a prescriptive drug from a shelf and brings it to the

counter, it is an offer from the customer to buy the drug. There is therefore no

Prepared by Mrs. Annie P. Gomez

Lecturer, Diploma in Law & Management. 2006

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sale (no contract) until the customer’s offer to buy the product is accepted by

the Pharmacist.

3(b) Supply of Information

The supply of information or a statement of selling prices given in reply to a

request is not an offer.

Example:

A asks B: "What is the lowest price for your car?"

B replies:"$30,000."

A says: "I agree to buy your car for $30,000."

Is there a contract between A and B?

No contract as B is merely stating the lowest price. It is not an offer. B never stated that

he wanted to sell the car to A.

Harvey v Facey

Harvey telegraphed Facey in relation to a piece of property known as “Bumper

Hall Pen” :”What is the lowest price for Bumper Hall pen?”

Facey replied “Lowest price for Bumper Hall Pen is 900 pounds”

Harvey replied “We agree to buy Bumper Hall Pen for 900 pounds asked by

you”.

Held: No contract. Facey was merely stating the lowest price (supplying

information) as requested by Harvey. He was not offering to sell the property to

Harvey.

3(c) Declaration of Intent

Prepared by Mrs. Annie P. Gomez
Lecturer, Diploma in Law & Management. 2006

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A statement expressing an intention to do something is not an offer
capable of being accepted:

Example:
Robinson’s Department Store announces that there will be a big mid-year sale but it was later

cancelled. If you had gone to Robinson’s believing there to be a sale, can you sue Robinson’s for

breach of contract? NO.

Why? The reason is that Robinson’s did not make an offer, they were merely declaring their

intention of holding a sale.

4. Termination of Offers

An offer may be terminated in three ways:

a. revocation of the offer

b. rejection by the offeree

c. lapse of time

4(a) Revocation of the offer

An offer can be revoked at any time before it is accepted but the revocation must

be communicated to the offeree. This means that the offeree must actually know

of the revocation of the offer by the offeror:

Byrne v Van Tienhoven

Oct 1st: A of UK sends a letter offering to sell goods to B in New York

Oct 11th: B receives the letter and immediately telegraphs his acceptance

Oct 8th: A writes another letter revoking his earlier offer

Oct 20th: B receives the letter of revocation

Prepared by Mrs. Annie P. Gomez

Lecturer, Diploma in Law & Management. 2006

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Held: Applying the postal rule, the offer was accepted on Oct 11. The

revocation is therefore ineffective as it was received after the offer was

accepted.

4(b) Rejection by offeree

Rejection of an offer can take place when:

i the offeree communicates his rejection of the offer to the offeror or

ii the offeree makes a counter offer. A counter offer is a new offer made by

the offeree by modifying the original terms of the offeror's offer.

The party who made the original offer may accept the counter offer

which then becomes a binding contract but the offeree who makes the

counter offer cannot change his mind and revive the original offer unless

the offeror agrees to do so.

Hyde v Wrench

Facts:

W offered to sell a farm to H for 1000L. H rejected the offer and made a

counter offer to W to buy the farm at 950L. W rejected it. H then said he

would pay 1000L after all. W by now had decided that he did not want to

sell to H for 1000L. H sued for breach of contract.

Held:

H failed in his suit because his offer of 950L was a counter offer which

terminated W's original offer of 1000L which could not be revived after

the rejection by H.

Prepared by Mrs. Annie P. Gomez

Lecturer, Diploma in Law & Management. 2006

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4(c) Lapse of offer

An offer lapses in the following situations:

i Death of either offeror or offeree before acceptance. Death after

acceptance does not affect the contract unless personal service of

contracting party is crucial to the contract.

ii Where the offer has not been accepted within the prescribed time. If there

is no time limit set, it lapses after a reasonable time:

CONTRACT LECTURE 2

LEARNING OBJECTIVES : ACCEPTANCE

1. To understand what is meant by acceptance.

2. To understand the following rules on Acceptance:

(a) Acceptance can be oral, written or by conduct

(b) Acceptance must be absolute and unconditional

(c) Methods of acceptance

(d) Acceptance must be communicated

3. To understand the following exceptions to the general rule that acceptance must be

communicated:

(a) The Postal Rule

(b) Waiver of communication.

INTENTION TO CREATE LEGAL RELATIONS

Prepared by Mrs. Annie P. Gomez
Lecturer, Diploma in Law & Management. 2006

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4. To understand why intention to create legal relations is necessary

5. To discuss the use of presumptions in determining an intention to create legal

relations

CONSIDERATION

6. To understand what is “consideration”.

7. To understand the following rules on Consideration.

(a) Consideration must be real

(b) Consideration need not be adequate

(c) Consideration must move from the promisee

(d) Consideration must be legal

(e) Consideration must not be past

ELEMENT 2: ACCEPTANCE

1. What is Acceptance?

It is the unconditional consent by the offeree to all the terms of the offer.

2. General Rules on Acceptance

2(a) Acceptance may be oral, in writing or by conduct (for eg. sending a cheque by
post for some goods) to indicate that you have accepted the offer to buy those
goods at the stated price.

2(b) Acceptance must be absolute and unconditional ie. the offeree must accept all
the terms of the offer without modification.

2(c) The acceptance must conform to the prescribed method. If a particular method
of acceptance is prescribed by the offeror, then that method should be followed.

Prepared by Mrs. Annie P. Gomez

Lecturer, Diploma in Law & Management. 2006

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If, however, if no particular method of acceptance has been indicated, whatever

mode of acceptance which is deemed to be reasonable in that trade would be

acceptance.

EXAMPLE

A offers to sell his Reebok shoes for $30 and indicates that acceptance should be by

phone. B sends his acceptance by leaving a note on A's table. Has there been effective

acceptance? Why?

No. Not accepted by the method specified.

2(d) Acceptance must be communicated.

Therefore, silence is not acceptance.

Felthouse v Bindley

Felthouse wrote to his nephew offering to buy his horse for 30 pounds and

added “If I do not hear from you, I will consider the horse mine at that price”.

The nephew did not reply and subsequently sold his horse to a third party2

weeks later.

Held: No contract since the nephew’s silence in this situation could not be

taken as acceptance.

3 Two exceptions to this rule that acceptance must be communicated are:

(a) Acceptance by post (The Postal Rule) 

Acceptance by letter or telegram is complete when the letter is posted, even if it

arrives late or never arrives. This is known as the "Postal Rule".

Prepared by Mrs. Annie P. Gomez
Lecturer, Diploma in Law & Management. 2006

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Exception to the Postal Rule: But in all other types of communication, eg.

telephone, telex and fax, the Postal Rule DOES NOT APPLY and acceptance

of the offer must be actually communicated to the offeror.

Entores Ltd v Miles Far East Corporation

The plaintiffs, a London company, offered to sell goods to the defendants who

the were in Amsterdam. The defendants communicated their acceptance of offer

to the plaintiffs in London by Telex. The defendants breached the contract and

the plaintiffs sought to establish that the contract was formed in London (where

the acceptance telex was received) and not in Amsterdam (where the acceptance

telex was sent).

Held: For instantaneous communications, the contract is formed when the

acceptance is received. Hence, the contract was formed in London.

(b) Waiver of communication

If the offeror expressly or impliedly waives the need for communication, then

acceptance need not be communicated.

ELEMENT 3: INTENTION TO CREATE LEGAL RELATIONS

4. What is Intention to Create Legal Relations?

Before a contract can be legally enforceable, it must be shown that the parties

had intended the contract to be legally binding. If they expressly state that

intention, the courts will respect it.

Prepared by Mrs. Annie P. Gomez

Lecturer, Diploma in Law & Management. 2006

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5 Where it is unclear what the intention of the parties' is, the courts will then

make some presumptions:

2 types of presumptions:

a) for commercial and business agreements – ‘intention to be bound’

b) for domestic and social agreements - ‘no intention to be bound’

a) Commercial and business agreements

The court presumes that the parties want their contract to be legally

binding. But the parties to a business agreement can easily get out of this

by expressly indicating that the contract is to be binding "in honour

only",i.e. not enforceable.

b) Domestic and social agreements

The court presumes that the parties do not intend their agreement to

have legal effect. Again, this can be rebutted if the parties indicate

expressly that they want to have a legally binding contract.

EXAMPLE A

Mr and Mrs Tan agree that Mr Tan's salary will be used to pay for all of Mrs Tan's

personal expenses if she stopped working to look after the children. Can Mrs Tan sue Mr

Tan for the money if he stops paying? NO.

EXAMPLE B

Prepared by Mrs. Annie P. Gomez

Lecturer, Diploma in Law & Management. 2006

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But if Mr Tan had made the promise at a time when the couple was planning to separate

and especially if the couple had written down this agreement, then would Mrs Tan be

able to sue? YES.

ELEMENT 4: CONSIDERATION

6. What is Consideration?

It is some benefit or profit accruing to one party or some detriment or loss

suffered or undertaken by the other.

Every agreement involves a promise, either to do something or not to do

something. A promise is only legally binding if it is made in return for another

promise or an act. This requirement for "something for something" is called

consideration. The party making the promise must gain some benefit for the

promise while the party receiving the promise must suffer some detriment.

Terminology

PROMISOR:

The party who makes the promise to do something or not to do something.

PROMISEE:

The party to whom the promise is made.

7. General Rules on Consideration

All contracts must be supported by consideration to be legally binding. An

important exception is contracts under seal, or deeds. These are very formal

contracts which are clearly and carefully worded to be legally binding, where the

Prepared by Mrs. Annie P. Gomez

Lecturer, Diploma in Law & Management. 2006

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parties sign their consent and their signatures are witnessed by a third party,

usually a lawyer.

Rules on Consideration

7(a) Rule 1: Consideration must be real.

This means that there must be some value, however small.

Examples of acts which are NOT consideration:

i. acts of love and affection, eg. between parent and child or husband and wife

ii. acts done out of a moral or social duty, eg. the act of a lifeguard saving a

drowning child is not valuable consideration because he is employed to do it.

7(b) Rule 2: Consideration need not be adequate.

The general rule is that the parties are free to decide on the terms of their

contract. As long as some value is given, it does not matter whether it is

proportionate in value to the thing given in return.

7(c) Rule 3: Consideration must move from the promisee (Privity of Contract).

Privity of contract means that only a party to a contract can sue or be sued on

that contract. This means that the person to whom the promise is made must

furnish the consideration. No third party can derive any benefit or incur any

liability on a contract to which he is not a party to. If a person has given nothing,

he cannot enforce the promise if it is not kept.

Price v Easton

Prepared by Mrs. Annie P. Gomez

Lecturer, Diploma in Law & Management. 2006

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X owed some money to Price. Price therefore worked out a scheme whereby X
would work for one Easton and in return Easton would pay Price. X did the
work as agreed but Easton did not pay the money to Price. Price sued Easton.

Held:
Price was not a party to the contract between X and Easton. Since there was no
contract between Price and Easton, Price is not entitled to sue Easton for the
debt.

7(d) Rule 4: Consideration must be legal.

EXAMPLE

David agrees to pay Philip $50,000 if Philip poisons Charlie's coffee. Philip's act of

poisoning Charlie is illegal. He cannot therefore sue David for the money even if Charlie

is poisoned.

7(e) Rule 5: Consideration must not be past.

When a promise is made in exchange for an act which has already taken place in

the past, then there is no value for the promise.

EXAMPLE

A saves B's child from drowning in a pool. B then promises to pay A $500 for the act

of saving. A's act of saving the child is past consideration and he cannot sue B for

the $500 because past consideration is no consideration.

Prepared by Mrs. Annie P. Gomez

Lecturer, Diploma in Law & Management. 2006

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