Law of Contract (i): Nature and Formation

The law of contract is the base of almost every other topic in this course. Sale of goods, hire purchase, insurance, agency, employment and banking are all contracts of a particular kind, and the rules in this topic apply to each.

Contract questions come up in nearly every sitting, in two forms: short list questions (the elements of a contract, the rules on consideration, the ways an offer ends) and problem questions in which you must decide whether a contract exists.

This topic covers the meaning of a contract, its five elements, offer (including invitation to treat, counter-offer and termination), acceptance, consideration and its rules, intention to create legal relations, capacity (infants, drunken and insane persons) and privity of contract with its exceptions. The terms of a contract, the factors that invalidate it, its discharge and the remedies for breach are in the next topic.

The meaning of a contract

A contract cannot be defined in exact terms, so it is best described by its features. The syllabus gives three descriptions. A contract is an agreement that creates obligations under the law and gives rise to enforceable rights. It is a voluntary agreement between two or more persons that confers legally enforceable rights, duties and liabilities.

It is a promise or set of promises that the law will enforce if not fulfilled. November 2020 Section A tested the second description.

Two elements are in every description: an agreement and a legal obligation enforceable by law. In Orient Bank (Nig) Plc v Bilante International (1997), Niki Tobi JCA described a contract as an agreement between two or more parties that creates reciprocal legal obligations to do or not to do a particular thing.

There must be mutuality of purpose and intention, so that the parties are saying the same thing at the same time. They must be ad idem, that is, of one mind.

In Okubule v Oyegbola (1990), the Supreme Court held that an agreement is not binding until the minds of the parties are at one both on matters cardinal to that kind of agreement and on the matters that are part of the particular bargain.

Some historical background appears in the syllabus. The law of contract grew out of agreements reached between people and was not first made by Parliament. The law also leaves the parties free to fix the terms of their agreement.

The elements of a valid contract

1. an offer;
2. an acceptance;
3. consideration;
4. an intention to create legal relations; and
5. capacity to enter into the contract.

Acceptance of the exact terms of the offer creates consensus ad idem, the meeting of minds. In addition, the purpose of the contract must be legal or in line with public policy. November 2015 asked for four elements (4 marks) and May 2023 asked for four essential elements of a valid contract.

The examiners’ answer in May 2023 listed offer, acceptance, intention to create legal relations, consideration (except in contracts under seal) and legal capacity of the parties.

Offer

The meaning

An offer is made when a person proposes terms to another and communicates that if the other accepts them he is willing and ready to contract. It is the definite, clear and final proposition made by an offeror to an offeree, with a clear intention to be bound by it if accepted (May 2019, 2 marks).

It is the final proposal that turns the offeror’s promise into a contractual obligation when accepted.

In Orient Bank v Bilante, the court said a valid offer must be precise and unequivocal, leaving no room for speculation about its content, and must show a clear intention to enter an agreement on defined terms. The offeree may accept, make a counter-offer, or reject outright.

In Union Bank v Saw Nigeria Ltd (1994), Iguh JSC said an offer capable of being converted into an agreement must consist of a definite promise to be bound provided that certain specific terms are accepted.

• An offer must be definite and made with the intention that it will be binding once accepted.
• It may be addressed to an individual, a group or the world at large.
• If the offeree is ignorant of the offer, it fails.

Invitation to treat

An invitation to treat is an invitation to negotiate. It invites the other party to make an offer. May 2021 asked for the difference between an offer and an invitation to treat (6 marks). The examples are:

Carlill is also authority for the point that an offer may be made to the whole world but a contract is made only with those who fulfil its terms, and for unilateral contracts, in which only one party has an obligation left to perform.

The distinction from Partridge is that Partridge’s advertisement invited negotiation (bilateral), while Carbolic’s was a promise that could only be accepted by using the product (unilateral). November 2021 asked a Carlill-type problem (Daniel and the vaccine for ₦1,000,000).

Counter-offer

A valid offer is made on terms that are clear and final. If the offeree varies or modifies the terms, the original offer is destroyed and the modified proposal becomes a counter-offer.

In Okubule v Oyegbola, citing Chitty, a counter-offer has a triple significance:

• it is a rejection of the offer
• it destroys the offer so that it cannot later be accepted
• it is a new offer by the offeree, which the original offeror may accept

In Hyde v Wrench (1840), Wrench offered to sell his farm for £1,000. Hyde offered £950. Wrench rejected it. Hyde then purported to accept the £1,000, and the court held that the counter-offer had destroyed the original offer, which could not be revived. By contrast, a request for further information is not a counter-offer and does not reject the offer, which stands.

The examiners have tested the difference between an offer and a counter-offer (May 2016, 2 marks; May 2019, 4 marks): an offer is definite, clear and final, and a counter-offer is a response by the offeree that introduces new terms different from the terms of the offer.

Termination of an offer

As a general rule an offer may be revoked at any time before it is accepted. An offer lapses or ends by:

1. the death of either party;
2. non-acceptance within the time stated, or after the passage of time;
3. a counter-offer;
4. revocation before acceptance;
5. express rejection by the offeree;
6. intervening incapacity of one of the parties;
7. supervening illegality; or
8. failure of a condition precedent.

May 2016 asked for four ways. The examiners listed death, non-acceptance within the time, counter-offer, revocation before acceptance and intervening incapacity.

Acceptance

Acceptance is the assent of the offeree to the terms of the offer as stated by the offeror. The offer must be validly accepted before a contract exists.

Requirements

In Innih v Fernando (1990) the court held that, to be operative, the acceptance must be:

• plain;
• unequivocal;
• unconditional;
• without variance of any kind from the offer; and
• communicated to the other party without unreasonable delay.

A conditional acceptance, or the addition of a new term, is a counter-offer. It cannot make a binding agreement and destroys the original offer.

Communication and silence

Acceptance must be communicated by an external manifestation of consent, by words or by an act of the offeree or his authorised agent. Silence is not acceptance, and mental assent that is not apparent to the other side is not enough. The exceptions to the rule on communication are:

• Post. Where an offer is made by letter, acceptance takes effect when the acceptance is posted (Adams v Lindsell, 1818), provided the mode of acceptance is that signified by the terms of the offer (Afolabi v Polymera Industries, 1967).
• Waiver. The offeror may waive communication, expressly or by implication, as where acceptance takes the form of an act, such as finding a lost dog.

“Subject to contract”

In UBA v Tejumola & Sons (1988), the court held that the words “subject to contract” do not make a contract unenforceable where the terms have been agreed. If the terms have not been negotiated and agreed, the words may make it unenforceable.

Applying the rules: the time limit

In May 2019 Kehinde offered to sell his phone for ₦8,000 and told Comfort to reply by 16 October. Comfort answered, “I will give you ₦7,000”. Kehinde refused. On 17 October Comfort said she would pay ₦8,000. The examiners held there was no contract: Kehinde’s question was an offer, Comfort’s ₦7,000 was a counter-offer that destroyed it, and in any case the offer had lapsed after 16 October.

Consideration

Meaning

A contract is usually made to gain some benefit. Consideration is something of value exchanged for something of value. It may be an act, a promise, a forbearance, goods, or a detriment, loss or responsibility. The most common kind is money, property or a promise to pay or transfer. A promise without consideration is gratuitous and cannot be the basis of an enforceable contract.

In Anwasi v Chabasaya (2000), citing Currie v Misa, consideration may be a benefit to one party or a detriment, loss or responsibility given, suffered or undertaken by the other, including abandoning a legal right or limiting one’s future freedom of action.

The rules of consideration

May 2023 and May 2024 asked for four rules (4 and 6 marks). The syllabus gives these:

1. It must move from the promisee. The person with whom the simple contract is made must have given the consideration to the promisor. There is an exception for bank guarantees, where consideration moves from the promisee to the bank.
2. It must be sufficient but need not be adequate. It must be of some value in the eyes of the law.
3. It must not be illegal, immoral or contrary to public policy.
4. It may be executory (to be done in the future) or executed (present) but must not be past. Past consideration is valid if: the past act was ordered by the promisor; it was understood from the start that payment would be made; there is promissory estoppel; or under section 27 of the Bills of Exchange Act an antecedent debt or liability is valuable consideration.
5. It must be definite and not vague.
6. It must not be something the promisee is already bound to do or refrain from doing, whether by contract or public duty.

Intention to create legal relations

There must be a clear intention to be legally bound. It may be inferred from the subject matter, and the test is objective.

November 2020 applied these. Two friends who agreed to meet at the gym made a social agreement, so no suit lay for breach. A sale of ten bales of textile to a friend was a commercial agreement, so the seller could sue for the price. A promise to attend a luncheon was social, so the host could not recover the cost of the special dish.

Two ways the courts decide the question, as the examiners put it in November 2020: where the parties expressly say the agreement is to be legally enforceable the court gives effect to it, and otherwise the court decides from the nature of the agreement, presuming no intention in domestic and social agreements.

Capacity to contract

Parties must have the legal capacity to acquire rights and incur obligations. Persons here are natural persons and corporate persons such as companies. Three categories may suffer disabilities: infants, drunken persons and insane persons. November 2021 asked for two categories of persons with limited capacity.

Infants

The syllabus defines an infant as a person under the age of 21 years. (The May 2016 solution used “below 18 years” for minors. If a question gives an age, use it. Otherwise use the syllabus and state it.) The law protects infants. Contracts with infants fall into four groups:

1. Valid and binding: contracts for necessaries, things reasonably required for the infant’s condition in life, and contracts for his education or apprenticeship that benefit him. Goods are not necessaries if the infant is already well supplied. In Nash v Inman (1908) an undergraduate bought 11 fancy waistcoats when well supplied, and the tailor could not recover. An infant is also bound where he is the seller.
2. Voidable at the infant’s option: contracts in which he acquires a permanent or long-term interest, with continuing rights and liabilities. He must repudiate within a reasonable time after reaching majority, or it binds him. Repudiation is not retrospective.
3. Void against the infant: contracts to repay money lent, and contracts for goods supplied that are not necessaries. A contract made in adulthood to pay a loan taken in infancy is also void.
4. Unenforceable against the infant unless ratified: all other contracts, unless he ratifies them on reaching majority.

Drunken and insane persons

A drunken person may avoid a contract if he proves that at the time he was so affected that he could not understand its import. The drunkenness must be certifiable. He may ratify the contract when sober, and he may be made to pay a reasonable price for necessaries. Insane persons are in the same category, with the same rules.

In November 2020 the examiners added that a drunken person lacks capacity only if the other party knows of his condition, and that an insane person lacks capacity but is liable on contracts made in a lucid interval.

Privity of contract

Privity is the relationship between the parties to a contract. Unless expressly stated, a person who is not a party cannot enjoy the benefits or suffer the burdens of the contract. A stranger cannot sue or be sued on it.

In Dunlop Pneumatic Tyre Co v Selfridge & Co (1915), Dunlop sold tyres to X on terms that they would not be sold below a stated price. Selfridge bought from X, and agreed with X to keep to the price, but broke it. Dunlop sued Selfridge and lost, because no consideration passed between them.

Exceptions

1. Insurance. Under the Motor Vehicles (Third Party Insurance) Act, a third party affected by the insured’s act may sue the insurer and the insured on giving notice. A named beneficiary under life insurance may also sue.
2. Trust. A trustee holding property in trust for another can sue in respect of it. Executors and administrators can sue for the deceased’s property.
3. Agency. The rights and benefits normally accrue to the principal, but the agent, usually under a power of attorney, can sue and be sued on behalf of his principal.
4. Restrictive covenants. A restriction on the use of land runs with the land, so a later purchaser is bound.
5. Negotiable instruments. A guarantor of a negotiable instrument becomes a party by substitution.

This list was asked in March/July 2020 (three exceptions, 6 marks), November 2021 (three exceptions) and applied in problems: Bature Co and Chinedu Enterprises (a distributor’s undertaking not to resell above a price, signed with Ratita but not with Chinedu), Esther and Bode (May 2016), and Omokaro, Unique Pami and Umiena (November 2023).

A contract under seal and a simple contract

November 2021 asked for this distinction. A simple contract needs consideration. A contract under seal, a deed, does not, which is why the examiners list consideration as an element “except contracts under seal”. A deed is executed formally, signed, sealed and delivered, while a simple contract may be made orally, in writing or by conduct.

Working through the rules

Offer or invitation to treat?

Is there a contract?

Valid, void, voidable and unenforceable infant contracts

Worked problems

Problem 1: Kehinde and Comfort

1. The offer. Kehinde’s question was an offer, with a deadline.
2. The counter-offer. The ₦7,000 reply varied the price. It rejected the offer and destroyed it (Hyde v Wrench).
3. The lapse. The offer also expired after 16 October, so the 17 October acceptance was out of time.
4. Advice. There is no contract, and Kehinde may refuse to sell.

Problem 2: Daniel and the vaccine

1. The advertisement. In general an advertisement is an invitation to treat. But a promise to pay on performance of a stated act is an offer to the world (Carlill v Carbolic Smoke Ball Co).
2. Acceptance. Daniel accepted by performing the act. Consideration was his taking the vaccine, a detriment.
3. Advice. Daniel’s action for breach of contract is likely to succeed.

Problem 3: Bature and Chinedu

1. The rule. A person who is not a party to a contract cannot sue or be sued on it (privity), as in Dunlop v Selfridge.
2. The application. Bature has a contract with Ratita, not with Chinedu. None of the five exceptions applies.
3. Advice. Bature’s action against Chinedu will fail. Ratita, which has a contract with Chinedu, may sue him.

Problem 4: friends and family

1. (a) A social agreement. There is a presumption of no intention to create legal relations, so A should not sue.
2. (b) A commercial agreement, so the court presumes an intention to be bound. A may sue for the price.
3. (c) A social agreement, so B should not sue.

Questions that have been asked on this topic, and how to answer them

Common mistakes in the exam

• Calling an advertisement an offer without saying that Carlill is the exception.
• Treating a counter-offer as acceptance, or saying a counter-offer leaves the original offer open.
• Treating a request for information as a counter-offer.
• Saying silence is acceptance.
• Forgetting that the postal rule applies only to acceptance, and only where post is a proper mode.
• Saying consideration must be adequate. It must be sufficient, not adequate.
• Accepting past consideration without the four exceptions.
• Applying a commercial presumption to a family or social arrangement.
• Saying infants’ contracts are all void. Necessaries and beneficial contracts of service are valid.
• Letting a stranger sue on a contract without checking the five exceptions.

Quick revision

• Contract: an agreement creating obligations enforceable by law. Elements: offer, acceptance, consideration (not in a deed), intention, capacity, legal purpose.
• Offer: definite, clear, final. Invitation to treat: advert, tender, auction, goods on display. Carlill exception. Counter-offer rejects and destroys. Offer ends by death, lapse, counter-offer, revocation, rejection, incapacity, illegality, failed condition.
• Acceptance: plain, unequivocal, unconditional, communicated. Silence is not acceptance. Postal rule (Adams v Lindsell). Waiver.
• Consideration: from the promisee, sufficient not adequate, not illegal, not past (four exceptions), definite, not already owed.
• Intention: domestic and social presumed not, commercial presumed yes (Balfour, Rose and Frank).
• Capacity: infants (four groups), drunken and insane persons. Privity: five exceptions (insurance, trust, agency, restrictive covenants, negotiable instruments).

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Section A style: multiple choice

Section B style: written questions

Model answers

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