Contract law: practice questions with explanations

1What a contract is

A contract is an agreement that the law will enforce. You make contracts every day: buying a coffee, renting a flat, signing up for a phone plan.

Most contracts need no paper. A spoken agreement is usually just as binding as a written one. Writing is required only for some contracts, for example the sale of land in England and Wales.

This lesson follows English common law, the system most exam questions use. Where EU or Dutch law differs, it says so.

Contract law answers four questions, always in this order:

1. Formation: is there a contract at all?
2. Content: what are its terms?
3. Defects: is it affected by a problem such as a false statement, a mistake or pressure?
4. Breach and remedies: did someone fail to perform, and what can the other party get?

Contract law is private law. The usual result of a breach is money (damages) for the innocent party, not a fine or prison.

2Forming a contract

A contract exists when four elements are present. Check them one at a time.

1. Offer. A clear statement of terms by which the maker (the offeror) is willing to be bound as soon as the other person (the offeree) accepts.

An offer is different from an invitation to treat, which only invites offers. Shop displays, most adverts and price lists are invitations to treat. Stating a lowest price is not an offer either (Harvey v Facey).

An advert can be an offer when it promises something to anyone who performs an act. This is a unilateral offer, accepted by doing the act (Carlill v Carbolic Smoke Ball Co).

2. Acceptance. An unconditional yes to all the terms of the offer, communicated to the offeror. Silence is usually not acceptance (Felthouse v Bindley).

• A counter-offer rejects and ends the original offer (Hyde v Wrench). A mere request for information does not.
• The postal rule: a posted acceptance takes effect when the letter is posted (Adams v Lindsell). Instant methods count when received (Entores v Miles Far East).
• An offer can be revoked at any time before acceptance, but revocation counts only when it reaches the offeree (Byrne v Van Tienhoven).

3. Consideration. Each side must give something of value in exchange for the other side's promise: money, goods, a service, or a promise to do one of these.

• It must be sufficient but need not be adequate: a low price still counts.
• Past consideration is not good consideration. Something done before the promise was made usually does not count.
• Doing only what you already owed is not consideration (Stilk v Myrick), unless the promisor gets a practical benefit (Williams v Roffey).
• A promise in a deed needs no consideration.

4. Intention to create legal relations. Courts presume that commercial agreements are meant to be binding. Social and family agreements are presumed not to be (Balfour v Balfour). Either presumption can be rebutted by the facts.

3Terms, defects and remedies

Terms are the promises inside the contract. They can be express (stated by the parties) or implied (read in by a court or by statute).

• A condition is a fundamental term. Any breach allows the innocent party to end the contract and claim damages.
• A warranty is a minor term. Breach gives only damages.
• An innominate term allows termination only if the consequences of the breach are serious.

An exclusion clause limits or excludes liability. It must be part of the contract (signed, or given before the contract was made), and it must pass statutory control. Under the Unfair Contract Terms Act 1977, liability for death or personal injury caused by negligence cannot be excluded.

Defects can make a contract void (never valid) or voidable (valid until the affected party sets it aside):

• Misrepresentation: a false statement of fact that induced the contract. The usual remedy is rescission, and damages may follow. Opinions and sales talk (“the best coffee in the world”) are not statements of fact.
• Mistake: rarely affects a contract. A shared mistake that the subject matter does not exist makes it void.
• Duress and undue influence: illegitimate pressure or abuse of trust make the contract voidable.
• Frustration: an unforeseen event after formation makes performance impossible or radically different (Taylor v Caldwell). Being only more expensive or harder is not enough.

Remedies for breach. Damages aim to put the innocent party in the position they would have been in if the contract had been performed. Losses must not be too remote (Hadley v Baxendale), and the claimant must take reasonable steps to reduce them (mitigation).

Equitable remedies are given only when damages are not adequate: specific performance (an order to perform, for example for land or unique goods) and an injunction (an order not to do something).

4The method for a problem question

Use the same order every time. It keeps you from jumping to remedies before you know there is a contract.

1. Identify the parties and what each one wants. Write the issue as a question, for example “Is Anna bound to sell?”
2. Formation: find the offer (not an invitation to treat), the acceptance (no counter-offer, check timing rules), consideration and intention.
3. Content: list the relevant terms. Decide whether each is a condition, a warranty or an innominate term, and check any exclusion clause.
4. Defects: look for a false statement, a mistake, pressure or a frustrating event.
5. Breach: say which term was broken and how.
6. Remedy: damages (expectation, remoteness, mitigation), termination, or an equitable remedy if damages are not adequate.
7. Conclude in one sentence and name the leading case for each step you relied on.

5A worked example

Read the facts, then open the steps one at a time. Try to reach each conclusion yourself first.

6Common mistakes

• Applying the postal rule to revocations. The postal rule is for acceptances only; a revocation must actually be received.
• Calling every advert or display an offer. Most are invitations to treat; unilateral offers like Carlill are the exception.
• Forgetting that a counter-offer kills the original offer.
• Treating any value as consideration even when it is past, or when it is only a duty the person already owed.
• Going straight to remedies without first proving that a contract exists and which term was broken.
• Mixing up the aims of remedies: contract damages look forward (as if performed), rescission looks back (as if no contract).

7How exam questions look

• Easy: key terms and facts. For example: what is an invitation to treat, what is consideration, what is the usual remedy for breach.
• Medium: applying the concepts. A short scenario about acceptance, consideration, exclusion clauses, misrepresentation or damages, where you choose the correct legal result.
• Hard: cases and analysis. The facts of a leading case (Carlill, Williams v Roffey, Krell v Henry, The Achilleas…) and you choose what the court held and why.

For every option, ask which rule it relies on. Wrong options are often a real rule applied to the wrong situation, such as the postal rule used for a revocation.

Some questions compare systems. In Dutch law an offer with a time limit for acceptance cannot be revoked during that period, and EU consumer law gives a 14-day right to withdraw from most online purchases.