ICAEW BL · Chapter 2
Formation of contract MCQs with Answers
10 multiple-choice questions on Formation of contract for ICAEW BL Business Law. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A garden centre places an advertisement in a trade magazine: 'Commercial patio heaters, £180 each, while stocks last.' A restaurant owner sends an order for ten heaters, but the garden centre refuses to supply them because it has decided to keep its remaining stock for its own outdoor café. In law, what was the advertisement?
- A) An offer, which the restaurant owner accepted by sending the order
- B) An invitation to treat, so the restaurant owner's order was an offer that the garden centre was free to reject
- C) A unilateral offer binding the garden centre to supply anyone who orders before stocks run out
- D) A binding promise that the heaters would remain available at £180
Show answer & explanation
Answer: B) An invitation to treat, so the restaurant owner's order was an offer that the garden centre was free to reject
Advertisements of goods for sale at a stated price are generally invitations to treat, not offers (Partridge v Crittenden). This avoids an advertiser being bound to supply more customers than it has stock for. The customer's order is the offer, which the seller may accept or reject. An advertisement is a unilateral offer only where it shows a clear intention to be bound to anyone who performs a stated act, as in Carlill v Carbolic Smoke Ball Co, which an ordinary price advertisement does not.
Question 2
On Monday Dalby Supplies emails Kerrow Ltd offering 600 tonnes of grit salt at £90 a tonne. Kerrow replies, 'We will take the full 600 tonnes at £84 a tonne.' Dalby answers that it will not reduce its price. On Wednesday Kerrow emails, 'We accept your offer of 600 tonnes at £90.' Dalby has meanwhile sold the salt elsewhere. Is there a contract?
- A) No, because Kerrow's reply at £84 was a counter-offer that rejected and ended Dalby's original offer, so Kerrow's Wednesday email was only a new offer
- B) Yes, at £90 a tonne, because Kerrow accepted the original terms within a reasonable time
- C) Yes, at £84 a tonne, because that was the last price Kerrow proposed
- D) Yes, at £90 a tonne, because Dalby never expressly withdrew its original offer
Show answer & explanation
Answer: A) No, because Kerrow's reply at £84 was a counter-offer that rejected and ended Dalby's original offer, so Kerrow's Wednesday email was only a new offer
A counter-offer operates as a rejection of the original offer, which then ceases to exist (Hyde v Wrench). Kerrow's Wednesday email could not accept Dalby's original offer; it was a new offer that Dalby was free to ignore. No express withdrawal was needed because the original offer had already ended, and Dalby never agreed to £84. Contrast a mere request for information (Stevenson v McLean), which does not destroy the offer.
Question 3
On Monday morning Kestrel Ltd posts an acceptance of a written offer from Barrow plc, which had invited a reply by post. On Monday afternoon Barrow plc posts a letter revoking the offer. The revocation reaches Kestrel Ltd on Tuesday and the acceptance reaches Barrow plc on Wednesday. When, if at all, was a contract formed?
- A) On Tuesday, when the revocation was received
- B) On Wednesday, when the acceptance was received
- C) No contract was formed, because the offer was revoked before the acceptance arrived
- D) On Monday, when the acceptance was posted
Show answer & explanation
Answer: D) On Monday, when the acceptance was posted
Where acceptance by post is reasonable or invited, the postal rule makes acceptance effective when the letter is properly posted. A revocation, by contrast, takes effect only when it is actually received. Acceptance on Monday morning came before the revocation arrived on Tuesday, so a binding contract was formed on Monday.
Question 4
On Monday Delia offers to sell Okafor a used industrial printing press for £45,000. Okafor pays Delia £500, and in return Delia promises in writing to keep the offer open until Friday. On Wednesday Delia tells Okafor she is withdrawing the offer because she has received a higher bid. On Thursday Okafor accepts the offer in writing. What is the legal position?
- A) There is no contract, because an offer can be withdrawn at any time before acceptance and Delia withdrew it before Okafor accepted
- B) There is no contract, because Delia communicated the withdrawal to Okafor personally
- C) There is a contract, because Okafor gave consideration for Delia's promise to keep the offer open, creating a binding option, so her purported withdrawal was ineffective
- D) There is a contract only if Okafor's acceptance reached Delia by post
Show answer & explanation
Answer: C) There is a contract, because Okafor gave consideration for Delia's promise to keep the offer open, creating a binding option, so her purported withdrawal was ineffective
The general rule is that an offer may be revoked at any time before acceptance, even if the offeror promised to keep it open, because a bare promise is not supported by consideration (Routledge v Grant, Dickinson v Dodds). The position is different where the offeree gives consideration for the promise. Okafor's £500 bought an option, which is itself a binding contract, so Delia could not withdraw the offer during the option period. Okafor's acceptance before Friday is effective, and if Delia refuses to deliver the press she is in breach. No particular method of acceptance was required.
Question 5
After a colleague voluntarily repairs Sita's laptop over a weekend, Sita promises to pay him £150. She later refuses to pay. Why can the colleague probably not enforce the promise?
- A) His consideration is past, because the work was done before the promise and was not requested
- B) Consideration must be adequate, and £150 is too much for a laptop repair
- C) Promises between colleagues are conclusively presumed not to be legally binding
- D) A promise to pay money is enforceable only if it is made by deed
Show answer & explanation
Answer: A) His consideration is past, because the work was done before the promise and was not requested
Consideration must be given in return for the promise. An act already completed before the promise was made is past consideration and is not sufficient (Re McArdle). The court does not assess whether consideration is adequate. The presumption against legal intention in social settings can be rebutted and is not conclusive. Promises do not have to be made by deed.
Question 6
Brightwater Ltd asks Leona, a self-employed systems consultant, to review its payroll controls. Nothing is said about her fee, but both parties are businesses and understand the work would be paid for. When Leona finishes, Brightwater's managing director promises her £2,000. Can Leona enforce the promise?
- A) No, because her work was completed before the promise was made and is therefore past consideration
- B) Yes, because the work was requested, both parties understood it would be paid for, and payment would have been enforceable had it been promised in advance
- C) No, because there was no written contract between Leona and the company
- D) Yes, but only for a reasonable sum, because a promise made after performance cannot fix a price
Show answer & explanation
Answer: B) Yes, because the work was requested, both parties understood it would be paid for, and payment would have been enforceable had it been promised in advance
This falls within the exception to the past consideration rule recognised in Lampleigh v Brathwait and Pao On v Lau Yiu Long. If the act was done at the promisor's request, both parties understood payment would follow, and the promise would have been enforceable had it been made beforehand, the later promise is enforceable. The agreed £2,000 fixes the amount. No writing is required for this contract.
Question 7
Ferris Digital Ltd has promised its client that a new booking platform will go live on 1 September, and it faces heavy penalties if it is late. Its subcontractor, Lomax, has underpriced the coding work and warns that it may not be able to finish. To secure completion and avoid having to find a replacement, Ferris promises Lomax an extra £30,000 to deliver on time. Lomax delivers on time, but Ferris refuses to pay the extra. Lomax applied no improper pressure. What is the most likely outcome?
- A) Lomax cannot recover, because performing an existing contractual duty owed to the promisor can never be consideration
- B) Lomax cannot recover, because the promise was not made by deed
- C) Lomax can recover the £30,000 because Ferris obtained a practical benefit from the promise
- D) Lomax can recover only a reasonable sum, not the promised £30,000
Show answer & explanation
Answer: C) Lomax can recover the £30,000 because Ferris obtained a practical benefit from the promise
Under Williams v Roffey Bros, performing an existing contractual duty owed to the promisor can be good consideration for a promise of extra payment. This applies where the promisor obtains a practical benefit and the promise was not extracted by fraud or economic duress. Ferris avoided the client's penalties and the cost and disruption of finding a replacement, so the promise of £30,000 is enforceable. The strict rule in Stilk v Myrick is therefore displaced on these facts, and no deed is needed.
Question 8
Priya owes Harland Ltd £10,000, due on 1 June. At Harland's request she pays £8,000 on 1 May, and Harland agrees to accept this in full settlement. In July Harland demands the remaining £2,000. Is Priya liable?
- A) Yes, because part payment of a debt can never discharge the whole debt
- B) Yes, because Harland's promise was not supported by a deed
- C) No, because a creditor who accepts any part payment is automatically estopped from claiming the balance
- D) No, because early payment at the creditor's request is fresh consideration for the promise to accept less
Show answer & explanation
Answer: D) No, because early payment at the creditor's request is fresh consideration for the promise to accept less
Under Pinnel's Case and Foakes v Beer, paying a smaller sum on the due date does not discharge the whole debt. However, paying early at the creditor's request provides fresh consideration, so Harland's promise to accept £8,000 is binding. Promissory estoppel is not automatic and depends on its own requirements. Fresh consideration means a deed is not needed.
Question 9
Two companies sign a detailed supply agreement. In which situation is the presumption that they intended to create legal relations most likely to be rebutted?
- A) The agreement was negotiated by email rather than at a meeting
- B) One company is much larger than the other
- C) The agreement states clearly that it is binding in honour only and not intended to be legally enforceable
- D) The price was agreed at below market value
Show answer & explanation
Answer: C) The agreement states clearly that it is binding in honour only and not intended to be legally enforceable
In commercial agreements the law presumes an intention to create legal relations, but clear express words can rebut this. An 'honour clause' is the classic example (Rose and Frank v Crompton). How the agreement was negotiated, how big the parties are, and whether the price is below market value do not rebut the presumption.
Question 10
Alder Ltd contracts with Birch Ltd for Birch to service Alder's boilers. A clause states that Birch's obligations 'are also for the benefit of, and may be enforced by, Cedar Ltd', a company that leases part of Alder's premises. Birch services the boilers negligently and Cedar Ltd suffers loss. Under the Contracts (Rights of Third Parties) Act 1999, can Cedar Ltd sue Birch Ltd on the contract?
- A) No, because Cedar Ltd provided no consideration to Birch Ltd
- B) Yes, because the contract expressly provides that Cedar Ltd may enforce the term
- C) No, because only Alder Ltd is a party to the contract and privity cannot be displaced
- D) Yes, but only if Alder Ltd first assigns its contractual rights to Cedar Ltd
Show answer & explanation
Answer: B) Yes, because the contract expressly provides that Cedar Ltd may enforce the term
The 1999 Act allows a third party to enforce a contractual term if the contract expressly says so, or if the term purports to confer a benefit on the third party and the parties did not intend otherwise. Cedar is expressly named, so it may enforce the term without providing consideration and without any assignment. This is a statutory exception to the doctrine of privity.