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Essential Elements of a Valid Contract

Questions:

1.Can an offer in a unilateral contract be revoked if the party has already begun the performance?

2.Whether the terms of the offer certain?

Mobil introduced a scheme known as the Circle of Excellence Scheme in order to improve the performance of the franchise. He said that the franchise must achieve 90% improvement in performance for six years to obtain a free nine-year renewal of the franchise. After the expiry of 4 years, Mobil discarded the scheme and the franchises ceased to be judged. The remedies sought included legal action against Mobil were initiated by 154 franchises; prior to the proceedings Wellcome claimed renewal or damages for its 9 year franchise.

Wellcome won the prior case before the Federal Court where he claimed that those franchises that had achieved 90% improvement in performance for the past 4 years must be treated in the manner as if they had been achieving 90% in the remaining years.

A valid contract includes certain essential elements that make it enforceable before the court of law (McKendrick 2014). These elements include offer, acceptance, consideration, certainty, legal intention and legal capacity. Any party, who is willing to enter into a contract with another party, shall make an offer to such party. An offer is defined as an expression of readiness to enter into a contract with the legal intention to become bound by the contract as soon as the person to whom such offer was made accepts it. The terms of an offer Business Law must be clear and specific; it must avoid any form of ambiguity (Poole 2016). An offer is said to be accepted when the party to whom the offer was made communicates such offer to the party who has made such offer. The party making the offer is called the offeror and the party to whom such offer is and is called the offeree.  There are two kinds of contracts – bilateral contracts and unilateral contracts.

Bilateral contracts are contracts where two parties enter into a reciprocal arrangement and each of the parties promises to perform an act in return for the other party’s promise to do an act. In bilateral contracts, both the parties are bound by each other’s promises. In the event where party commits a breach of either the contractual terms or fails to perform respective part of their obligationn, that party is said to have committed a breach of the contract (Cartwright 2016). The aggrieved party becomes entitled to compensation for the damages suffered by him as a result of such breach.

Unilateral contracts are contracts where the offeror makes an offer and the offeree accepts the offer by way of performing his or her part of the contract. However, unlike bilateral contract, in unilateral contracts allows only one party to make a promise. Under unilateral contracts, if the party or the offeree fulfils his or her part of the contract, the offeror is under statutory obligation to fulfill its promise (Willmott et al. 2013). Unilateral contracts require the person who is making the offer to fulfill his promise and the person to whom the offer is made is not under statutory obligation to perform his or her duty.

Types of Contracts


In Business Law, the general rule is an offer becomes revocable at any time before it is accepted and a contract is formed. In case of unilateral contracts, once the required act is performed, acceptance is considered to be made. Under such circumstances, it is implied that communication has been waived as was stated in the Carlill v Carbolic Smoke Ball Co [1892] EWCA Civ 1. As per the rule in unilateral contract, it cannot be revoked once the offeree has begun the required performance.

In Australian Woollen Mills Pty Ltd v. The Commonwealth [1954], the high court held that in order to give rise to a unilateral contract, an offerror must make a promise to the offeror, which shall be made in return for the doing of the required act. The offeror shall only be prevented from revoking any offer before the offeree accepts such offer, if there is an estoppels or an implied contract. In case of unilateral contracts, a person shall be prevented from cancelling the contract; however, in case of a breach of a contract, it becomes revocable (Andrews 2015).

The estoppels principle safeguards a person against any loss suffered by him because of relying on any representation or promise. In case of unilateral contracts, the principle of estoppels shall be applicable if the revoked offer is detrimental to the offeree (Furmston 2017). In bilateral contracts, lack of consideration makes the contract unenforceable before the court of law. in unilateral contracts there is no consideration as the party relies on a promise, therefore, in case if the party suffers, he can seek remedies under the principle of estoppels. The principle of estoppels is applicable when the relying or the aggrieved party acts, relying on the representation and suffer damages because the conduct of the representor was not in consistent with his representation (Andrews 2016).

In the mentioned case, both the parties advanced their contentions before the full court of the Federal Court. Wellcome argued that Mobil induced them to confirm their participation and annual judging by providing them with a brochure, videotape and conducting regional meeting. He also claimed that the conduct of Mobil was completely misleading. In his defense, Mobil argued that their representatives said that they have work to do which implied that they were working on the scheme offered to theme and that it was merely on the developmental stage.

He further argued that the offer was totally at the discretion of the franchises and was not forced. Moreover, the scheme was favorable for both parties to the dispute and the scheme did not cause any detriment to the franchises either (Frey 2015). Furthermore, since there was no consideration as it was a unilateral contract and therefore, under these form of contracts, only when the offeree performs his or her part of the obligations, the offeror becomes statutory obligated to fulfill his part of the contract (Bishop 2014). Here, according to the scheme, if improvement were achieved to the extent of 90% for a period of 6 years, they would become entitled to free nine-year renewal of their franchises. Therefore, acceptance in this case would be complete of the franchises achieved 90% improvement at the end of 6 years; hence, Mobil claimed that he was free to revoke the offer.

Revocation of Offers in Unilateral Contracts

The Federal Court of Australia was of the opinion that in order to safeguard the offeree who have relied upon the promise made by the oferror from being exploited by the offeror, the following factors must be taken into consideration. One must consider the extent of performance by the offeree, that is, justice shall vary between an offeree who has completed one per cent of the required performance and an offerree who has completed 99 percent of the performance.

Further, as per the general rule of unilateral contracts, if an offeree has already begun his performance, the offeror cannot revoke the offer. An offeror is barred from revocating the offer if the offeree has relied on the promise or has significantly completed the stipulated performance. The court opined that the the franchisee already started to perform their part of the obligations in order to achieve high standard to enhance the efficiency in the business. The court questioned the suggestion that whether the franchisee have started to perform their part of the obligation as required by the offer in the first year, a month, a week or even a day, it shall deem to imply that they have commenced the performance to achieve 90% within 6 years. The question that arises is does it bind Mobil not to revoke the offer.

Under unilateral contracts, acceptance is said to be complete, if the offeree fulfills his or her part of the obligation (Frey 2015). In the mentioned case, the revocation made by Mobil regarding the offer was considered by the franchisees to be an incomplete act of acceptance (Frazer and Terry 2015). According to the Trial Judge, once the offeror makes an offer, which requires performance to be an act of acceptance, the offeror cannot revoke the offer if the offeree has started fulfilling his obligation.

However, the Full Court did not agree with the decision given by the Trial judge. The full court held that in certain cases, there may be an implied ancillary unilateral contract’ wherein the offerror promises the offeree that the offer shall not be revoked once the offeree starts commencing the performance required by the offer (Jackson 2015). However, this does not imply that the original offer cannot be revoked and there is no universal proposition as such that an offeror cannot revoke any offer once the offeree commences to perform his part of the obligation, thus completing the act of acceptance.

The Full court of the Federal court held that the Mobil did not make an offer to the franchisee and gave its decision against Wellcome stating the grounds of its decision. The court asserted that the representative, Mr. Stumbles, made his point clear that after Mobil proposed the scheme, the franchisee said that they have been working on it, which implied that the scheme was at its development stage. Moreover, the commitment made by the franchisee to find a way was too ambiguous and lacked certainty, which is imperative in order to create a valid contractual obligation. Therefore, there was no offer made by Mobil to the Franchisee.

Principle of Estoppel

The court further stated that under certain unilateral contracts, a person is prevented from revoking an offer unless there is a breach of contract as revoking a contract that has been breached, gives rise to revocation (O'Sullivan and Hilliard 2016). Where the offeree acted on relying upon the promise of the offeror and the conduct of the offeror causes damage to the offeree, he shall be entitled to compensation for the damages suffered on the ground of estoppels principle. If there is no contract and the principle of estoppels cannot be applied, then the offeror may revoke the offer. Any offer that causes detriment to the offeree he or she may seek remedies on the ground of estoppels principle (Smits 2014). The federal court further held that an offer that is made in return for the performance of an act is revocable at any time like any other offer (Davies 2016).

In order to evoke the principle of estoppels it is imperative for the plaintiff to establish that the defendant has encouraged an assumption that the offer shall give rise to an interest or a specific legal relationship (Martin 2016). Further, in the given case, there is a lack of the essential elements of this lawful relationship as a mere commitment to ‘find a way’ does not establish the fact that the legal relationship has given rise to an assumption. Since, there is no element of assumption; therefore, the principle of estoppels cannot be applicable in this case. Therefore, the decision of court was in favor of Mobil.

Conclusion

Offer forms one of the essential elements of a valid contract and lack of a valid offer makes a contract unenforceable at law. The terms of the contract must be specific and lawful.  An offer is said to be acceptable when the offeree communicates such acceptance to the offeror. However, in case of unilateral contracts, since only the offeror is legally obligated to enforce his or her promise, the acceptance of such offer takes place when the offeree completes or commences to perform his or her part of the obligations (O'Sullivan and Hilliard 2016). As per the general rule, once the offeree commences his part of the performance relying on the promise made by the offeror, the offeror cannot revoke such contract.

However, lack of certainty and clarity does not create an offer valid, hence in the absence of a valid offer, the offeror may revoke the offer anytime he or she wants as was held in the Mobil v Wellome case. Further, in case the offer causes damages to the offeree, in the absence of consideration, the offeree may claim reliefs on the principle of estoppels. Nevertheless, in this case, owing to uncertainty and vagueness, the offer made by Mobil is not regarded as a valid offer. Since no valid offer was made, contract cannot formed, therefore Mobil cannot be held liable for committing breach of the contract and Wellcome is not entitled to any compensation.

Reference list

Andrews, N., 2015. Contract law. Cambridge University Press.

Andrews, N., 2016. Sources and General Principles of English Contract Law. In Arbitration and Contract Law (pp. 165-175). Springer International Publishing.

Bishop, J., 2014. My Click is My Bond: The Role of Contracts, Social Proof. Gamification for Human Factors Integration: Social, Education, and Psychological Issues: Social, Education, and Psychological Issues, p.1.

Carlill v Carbolic Smoke Ball Co [1892] EWCA Civ 1.

Cartwright, J., 2016. Contract law: An introduction to the English law of contract for the civil lawyer. Bloomsbury Publishing.

Davies, P.S., 2016. JC Smith's the Law of Contract. Oxford University Press.

Frazer, L. and Terry, A., 2015. Factors affecting franchise agreement terminations: lessons for the franchising sector. Journal of small business strategy, 13(1), pp.105-116.

Frey, M.A., 2015. Essentials of contract law. Cengage Learning.

Furmston, M.P., 2017. Cheshire, Fifoot, and Furmston's Law of Contract. Oxford university press.

Jackson, L., 2015, July. Towards an administrative estoppel. In AIAL Forum (No. 81, p. 62). Australian Institute of Administrative Law.

Martin, P., 2016. Estoppel: Binding promise without a contract: Court of appeal considers proprietary estoppel. LSJ: Law Society of NSW Journal, (23), p.93.

McKendrick, E., 2014. Contract law: text, cases, and materials. Oxford University Press (UK).

O'Sullivan, J. and Hilliard, J., 2016. The Business Lawof contract. Oxford University Press.

O'Sullivan, J. and Hilliard, J., 2016. The law of contract. Oxford University Press.

Poole, J., 2016. Textbook on contract law. Oxford University Press.

Smits, J.M., 2014. Contract law: a comparative introduction. Edward Elgar Publishing.

Willmott, L., Christensen, S., Butler, D. and Dixon, B., 2013. Contract law.

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