On 15 October 2010 East Midlands Airways (‘EMA’) advertise a second-hand Airbus 321 for sale in an aviation industry trade journal for £10.4m. Later that same day, Paul, the Chief Executive Officer of Gunnell Aviation Ltd, phones EMA’s Managing Director, Joseph. Paul says that his firm would very much like to view the Airbus 321 but that he is off on a 5 day business trip to Zurich, Switzerland and will not be able to view the aircraft until he returns. Joseph says that if another buyer comes forward he will have to sell the Airbus 321 to that buyer. Paul then says he will pay £100,000 if EMA promises not to sell the Airbus 321 to another buyer for the next 5 days. Joseph agrees to this.
Analyse whether any contract has been made between the parties and if so, what are its terms? Refer to the relevant case law to support your answer.
This fact situation concerns the issue of contract formation and whether a valid and legally binding agreement exists between EMA and Gunnell Aviation. Agreement consists of an offer by an indication of one person (the "offeror") to another (the "offeree") of the offeror's willingness to enter into a contract on certain terms without further negotiations. For a contract to be valid there must be an offer, an acceptance of that offer on certain terms, an intention to create legal relations and consideration given by both parties. Once a contract has been made, both sides will be bound to honour its terms or suffer the legal consequences. The analysis that follows will examine the facts to determine whether a valid contract to purchase the Airbus exists between the parties.
Does EMA's advertisement amount to a valid offer to contract?
Almost all contracts are made through the process of offer and acceptance. One of the parties (the offeror) makes an offer by proposing a set of terms with the intention that these terms will form a legally binding agreement if they are accepted by the party to whom they are proposed, the offeree. In this scenario, EMA initially places an advertisement. Does EMA's advertisement amount to an offer in law is a key question? It is important to make a distinction between an offer and an invitation to treat. An invitation to treat is not an offer, rather, it is an invitation to negotiate or an invitation to make an offer. In legal terms by publishing its advertisement in the aviation industry journal EMA merely makes an ‘invitation to treat' : Partridge v Crittenden [1968] 1 WLR 1204. In other words, EMA's advertisement is an invitation to make a deal. It is quite safe for the business to make an ‘invitation to treat’ because whatever the reply, the business could not be forced to sell. A response to an invitation to treat cannot result in a binding contract therefore no contract between the parties has been formed at this stage. To reiterate, the main significance of an invitation to treat is that it is not an offer. Futher analysis of the communications between the parties is necessary.
Is there an offer and if so by which party?
Legal academic Treitel defines an offer as "an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed", the "offeree". Further, an offer is a statement of the terms on which the offeror is willing to be bound. An offer to buy can be written or spoken, or it can be inferred from the conduct of the offeror. At which point in the dealings between EMA and Gunnell Aviation is an offer made and who makes the offer? Whether two parties have an agreement or a valid offer is an issue which is determined by the court using the Objective test (Smith v. Hughes). Therefore the "intention" referred to in the definition is objectively judged by the courts. In the English case of Smith v Hughes the court emphasized that the important thing is not a party's real intentions but how a reasonable person would view the situation. This is due mainly to common sense as each party would not wish to breach his side of the contract if it would make him or her culpable to damages, it would especially be contrary to the principle of certainty and clarity in commercial contract and the topic of mistake and how it affects the contract. As a minimum requirement the conditions for an offer should include at least the following four conditions: Delivery date, price, terms of payment that includes the date of payment and detail description of the item on offer including a fair description of the condition or type of service. Without one of the minimum requirements of condition an offer of sale is not seen as a legal offer. Paul, of Gunnell Aviation, communicates to Joseph verbally that he is considering purchasing the Airbus 321, but applying the Objective Test, he does not appear to use words that amount to an offer in law. Significantly, none of the four minimum requirements for an offer is discussed. Indeed on the facts, he says that he wants to view the plane first, ostensibly before making a formal offer to purchase. This is because making an offer carries an element of risk in that if accepted and Gunnell Aviation would be legally bound to pay the agreed price (consideration). Accordingly, as no offer has been made by Paul to Joseph, no valid contract to purchase the Airbus exists between the parties. However, what is the status of Paul stating to Joseph via telephone that he will pay £100,000 to EMA if it agrees not to sell the Airbus to another buyer for a period of 5 days? Do these facts amount to a legally binding contract between the parties? There appears to be an offer from Paul on objective terms in accordance with Smith v Hughes. A reasonable person could state with certainty exactly what has been agreed. Note that Paul and Joseph, given the seniority of their positions within their respective organisations would have the authority to negotiate on behalf of their organisations.
Is there valid acceptance of Paul's offer?
As soon as an acceptance of an offer is received, a contract is created. The acceptance must be communicated: Powell v Lee (1908). Here, Joseph communicates clear and unequivocal acceptance to Paul verbally during the course of their telephon conversation. As soon as Joseph accepted Paul's offer, a contracct comes into existence and both sides are legally bound by the terms of their agreement: Entores Ltd v Miles Far East Corporation [1955] 2 QB 327 (Court of Appeal). There do not appear to be any factors to vitiate the contract eg misrepresentation, mistake or duress on the facts.
Is there valid consideration?
The next issue is whether there is valid consideration. Consideration consists of a right given to one party, or a loss or detriment suffered by another. The consideration moving from Paul is the promise to pay £100,000. The consideration moving from EMA is the forebearance from selling the Airbus to another potential buyer. This amounts to valuable consideration according to the legal definition of consideration in Currie v Misa (1875) LR 10 Ex 153. The £10,000 payment is known as 'executory consideration'. The consideration is called executory because when the contract between EMA and Gunnell Aviation is made, Paul has not yet performed (executed) his £10,000 consideration.
Presumption of intention to create legal relations
A contract will only be created if the parties appeared to intend to create a legal relationship. In the circumstances of the dealings between Paul and Joseph there is presumed intention to create legal relations as the agreement concerns a commercial matter between business people as opposed to a domestic or social matter: Esso Petroleum Limited v Commissioners of Customs and Excise (1976).
In conclusion, the offer and acceptance formula of contract law, developed in the 19th century, identifies a moment of formation when the parties are of one mind. Here, EMA's advertisement did not result in the formation of a contract between itself and Gunnell Aviation for the sale of the Airbus. However, it is clear upon further analysis there is nevertheless a legally binding contract between the parties. Namely, EMA cannot sell the Airbus for the next five days to a third party or else it will be in breach of its promise to Gunnell Aviation. Similarly, Gunnell Aviation must pay EMA £100,000 for EMA’s promise not to sell the Airbus to another buyer. The contract was formed via verbal telephone negotiations but is nevertheless still valid and binding on the parties. However, at this stage in the dealings there is no validly binding contract as regards the actual sale of the Airbus by EMA to Gunnell Aviation.
Commentary:
This answer effectively deploys the relevant case law at each point of the analysis of the facts. It provides a comprehensive analysis of the facts and ably applies the law to reach a conclusion on each requirement of a valid contract. The cases are clearly applied to the specific facts of the scenario in a logical fashion, supported by relevant sub-headings to provide an organised structure to the written answer.