CRICOS Provider Code 00301J Curtin Business School Making a contract CRICOS Provider Code 00301 © 2013 Reed International Books Australia Pty Ltd trading

CRICOS Provider Code 00301J Curtin Business School

Making a contract

CRICOS Provider Code 00301 © 2013 Reed International Books Australia Pty Ltd trading as LexisNexis

CRICOS Provider Code 00301J

• Attend a seminar and/or listen to the iLecture recording;

• Read chapter 3 of the Understanding Business Law text book;

• Do the E-tutorial ‘Contracts - Formation’;• Read the case study notes for topic three; and• Listen to the ‘Four step process’ vodcast (you will

need to view this vodcast prior to attempting assignment two).

What to do this week


After completing this topic you should be able to:• distinguish the processes of negotiation and reaching

agreement;• explain the nature of contractual obligations;• explain limitations on contractual capacity;• explain the doctrine of privity;• understand how and when contractual obligations

arise; and• identify the essential elements of contract formation:

agreement, intention to be bound and either formal execution or exchange of consideration.

Learning outcomes


Sequence of a contract• Negotiations precede the formation of a contract• Formation of a contract

– Topic 3

• Obligations under a contract (the terms)– Topics 4 & 5

• Discharge by performance, failing this there is a breach of contract and then enforcement (remedies).

– Topics 6 & 7


Contracts and the law• A contract is the most common legal transaction in business

and daily life

• The law is about enforcing promises

– The relevant question is whether a contract exists

• In interpreting contracts, Common law is the foundation complemented by modern legislation

• Common law sees contracts as personal (private) obligations to another

• Legislation recognises public values and seeks to impose standards of conduct on contracts


What is a contract?• Essentially an agreement involving promises

enforceable by a court– But more than just a moral obligation

• Comprises important features– Offer of terms for transaction by one party– Acceptance of those terms by the other party– Consideration – the cost of each other’s promise– Parties intend that promise can be enforced by

action in court


Capacity to contract• Minors (under 18 years of age)

– can make contract; problem is to enforce it against minor

– at common law contracts for necessaries – not luxuries – are enforceable. Similarly contracts for beneficial services, employment or apprenticeship are enforceable. See McLaughlin v Darcy (1918) 18 SR (NSW) 585

– legislation in NSW and South Australia makes enforceable a contract for minor’s benefit.


McLaughlin v Darcy (1918) 18 SR (NSW) 585

Facts:• Darcy was 20 year old boxer (minor in 1916)• Wanted to travel to US to further career• Hired lawyer, McLaughlin, via contract to present a

better case for the granting of a passport• McLaughlin was not able to obtain passport but put

in work (travelled to Melbourne) to ensure that Darcy’s request was considered favourably

• Darcy died before paying McLaughlin’s fees


McLaughlin v Darcy (1918) 18 SR (NSW) 585

Issue:• Was Darcy (his estate) obliged to pay McLaughlin’s

legal fee, even though he was a minor at the time of contracting?

Decision:• Yes, the contract was one for necessaries and the

work done by McLaughlin was essential to the welfare of Darcy.


Capacity to contract• Intoxicated persons

– contracts are prima facie valid

– can repudiate if they were incapable and other party knew that they could not understand, and were intoxicated

• Unsound mind

– void unless court has not declared them to be of unsound mind

– can repudiate if they were incapable and other party knew that they could not understand the agreement and were of unsound mind


Privity of contract• Only those who made the contract can derive benefits under it• Only parties to the contract can attempt to enforce it by the

courts: Jackson v Horizon Holidays [1975] 3 All ER 90 • Where a contract is made for the benefit of a third party that

person cannot enforce contract

• Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988)

The High Court effectively abolished the doctrine of privity in its application to contracts of insurance for the benefit of third parties.


Jackson v Horizon Holidays [1975] 3 All ER 90

Facts:• Jackson entered into contract with travel agent for

family holiday.• Holiday was a huge disappointment (selected hotel

was overbooked so they were transferred to an inferior hotel which was dirty, mouldy and did not have the expected facilities)


Jackson v Horizon Holidays [1975] 3 All ER 90 Issue:• Could the Jacksons, as a group, sue the travel

agent or only Mr Jackson as the sole party to the contract with the travel agent?

Decision:• Only Mr Jackson could sue, but as he entered into

the contract for the benefit of the whole family, he was able to claim for the ‘discomfort, vexation and distress’ that they had suffered.


INTENTION AGREEMENT CONSIDERATION

The elements of a contractFor a contract to come into existence the following three elements must be established:

A. Intention to be legally boundB. Agreement C. Either formal execution in a deed; or consideration

If one or more of these elements are not established then no contract is deemed to exist at law.


INTENTION TO CREATE LEGAL RELATIONS

AGREEMENT

plus

CONSIDERATION(informal contracts)

plus



INTENTION AGREEMENT CONSIDERATIONINTENTION

A. The element of intention to be boundThere must be an intention to enter a contract for there to be a legally binding contract.

The parties must prove that intention exists. This intention is to be judged objectively. The question for the court is, would a reasonable person regard the agreement as intended to be binding?

The court will also look at the surrounding circumstances to determine whether the intention to be legally bound exists.



A. The element of intention to be boundWhere the parties are in a commercial relationship, the presumption is that they intend to create a legally binding contract by their agreement.

Where the parties are in a purely domestic or social agreement, the presumption is that they do not intend to create a legally binding contract.

These presumptions can be rebutted by the presentation of evidence to the contrary.



Factors as to intention in a social or domestic agreement

• Are the alleged rights and obligations clearly spelt out – looks more like a binding contract

• If one party incurs considerable expense, inconvenience or substantial detriment, there is more likely to be a contract.

• The flavour of the agreement e.g. a car pool is more like a social arrangement

• Taking legal action was contemplated by the parties – it is more like a contract.



Expressed (rare) Implied

Agreements

Social Business



A. Domestic arrangements and Social agreements

• Woodward v Johnston [1992] 2 Qd R 214• Todd v Nicol [1957] SASR 72


Woodward v Johnston [1992] 2 Qd R 214

Facts:• Mrs Woodward agreed to help her husband do

work to establish a gravel supply business.• In return, her husband promised her 10% of the

business.• For 18 months, Mrs Woodward did a lot of work,

mostly on the weekends.• Her husband profited exclusively from this work and

did not formalise her interest in the business.


Woodward v Johnston [1992] 2 Qd R 214Issue:• Could Mrs Woodward rebut the presumption that

parties in domestic relationships do not intend to be in a legally binding contract?

Decision:• No. The arrangement was purely a family

arrangement. She was not forced to do this work by her husband and he would not have sued her if she failed to do the work.


Todd v Nicol [1957] SASR 72Facts:• Mrs Nicol resided in South Australia.

• She invited her sister-in-law and niece (the Todds), who lived in Scotland, to come and live with her.

• She promised them free accommodation and that she would alter her will so that after she died, the house would become theirs.

• Mrs Todd quit her job and she and her daughter moved to Australia.

• Later, an argument developed and Mrs Nicol told the Todds to leave the house.


Todd v Nicol [1957] SASR 72

Issue:

As it concerns this arrangement, could the requisite intention to be legally bound be established by the Todds?

Decision:

Yes. The Todds only moved from Scotland in reliance on Nicol’s promise, which if not honoured, carried significant consequences for the Todds.



A. Commercial or business agreements

• Esso Petroleum Ltd v Commissioners of Customs and Excise [1976] 1 All ER 117

• Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; (2002) 209 CLR 95

Esso Petroleum Ltd v Commissioners of Customs and Excise [1976] 1 All ER 117


ESSO PETROLEUMESSO

PETROLEUMESSO

PETROLEUM

ESSO



ESSO PETROLEUM

ESSO

The free coins are produced in quantity for

general sale and are therefore subject to the

purchase tax.

Did Esso have the intention to be legally bound by the offer to give the coins to motorists who purchased its

petrol?



ESSO PETROLEUM

ESSO

Yes, the terms of the promotions intended to be a legally binding promise. Although the offer of the coins was

described as a gift, it could be inferred from the commercial

circumstances that there was an intention to be legally

bound.

Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; (2002) 209 CLR 95




We refuse to pay you the accumulated leave you are entitled to under a

legally binding contract of employment as our

agreement was not intended to be legally

binding!



Could it be inferred from the circumstances that the appointment of the archbishop was intended to be a

legally binding contract of employment?

The agreement intended to a legally binding and Ermogenous was entitled to

payment for accumulated leave.



AGREEMENT

plus


plus

OFFER

ACCEPTANCE

plus




B. The element of agreement • Contracts are consensual transactions

– Parties must be in complete agreement

• Requires a meeting of the minds (consensus) where both parties comprehend what the essential terms of the contract are.

• The element of agreement has two components: OFFER and ACCEPTANCE.


OFFER

A statement that signifies a willingness to contract.

AND

ACCEPTANCE

A statement or action assenting to the terms of the offer.


INTENTIONAGREEMENT

CONSIDERATIONINTENTIONOFFER ACCEPTANCE

B. Agreement


ACCEPTANCEINTENTION

AGREEMENTCONSIDERATIONINTENTION

OFFER ACCEPTANCE

OFFEROR

The person / party that makes the offerAND

OFFEREE

The person / party who receives the offer

B. Parties to an offer


INTENTIONAGREEMENT


(i) Requirements of an ‘offer’• An offer must be:

• Sufficiently complete – the fundamental aspects of the offer must be outlined e.g. what is being offered, for what price, in exchange for what.

• Promissory – worded in such a way as to convey the offeror’s willingness to honour the terms of the offer if it is accepted i.e. an undertaking to give or do; or an undertaking of liability: Harvey v Facey [1893] AC 552


Harvey v Facey [1893] AC 552Facts:• Harvey sent Facey a telegram stating “Will you sell

us Bumper Hall Pen? Telegraph lowest cash price-answer paid.”

• On the same day, Facey sent Harvey a reply by telegram stating “Lowest price for Bumper Hall Pen £900.”

• Harvey sent Facey another telegram agreeing to purchase the property at the asking price.

• Facey refused to sell and Harvey sued.


Harvey v Facey [1893] AC 552Issue:

Was Harvey’s statement “Lowest price for Bumper Hall Pen £900.” an offer capable of being accepted by Facey.

Decision:

No. It was merely a statement providing information on what terms he might be willing to sell, not a promise to sell Facey the pen.


INTENTIONAGREEMENT


(i) Requirements of an ‘offer’• Must be more than a mere expression of

interest in doing business.

• Advertisements are not generally considered to be offers, rather they are ‘invitations to treat’

Partridge v Crittenden [1968] 2 All ER 421

http://en.wikipedia.org/wiki/Image:Fringilla_montifringilla_2_(Marek_Szczepanek).jpg



Bramblefinch cocks and hens, 25/-each

RSPCA

Partridge , the RSPCA is prosecuting you for the

statutory offence of unlawfully offering wild

birds for sale.



Bramblefinch cocks and hens, 25/-each

Was the advertisement an offer or was the advertisement merely an invitation to treat?

The advertisement was an invitation to enter into negotiations with interested

buyers who might themselves offer to buy the advertised birds.


INTENTIONAGREEMENT


(i) Requirements of an ‘offer’• Display of items for sale is generally

not regarded as an offer, but rather as an ‘invitation to treat’

Pharmaceutical Society of Great Britain v Boots Cash Chemists(Southern) Ltd [1953] 1 QB 401

Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401


BOOTS CASH CHEMIST SHOP



BOOTS CASH CHEMIST SHOP

PSGBThese regulated drugs are being sold without

supervision of a registered pharmacist!



Were the drugs and medicines selected by customers from the display shelves sold to the customer before the

customer took them to the cashier?

No, the sale of the drugs took place when the customer had

taken the goods they had chosen to a cashier.


INTENTIONAGREEMENT


(i) Requirements of an ‘offer’• An offer can be made to a particular

person or the whole world at large.

Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256

http://upload.wikimedia.org/wikipedia/commons/7/7e/Carbolic_smoke_ball_co.jpg


INTENTIONAGREEMENT


(i) Requirements of an ‘offer’

• Offer can lapse by passing of time or be revoked / withdrawn before acceptance

• Offer with no specified time is only open within reasonable time

• Rejection of an offer destroys it.• If a counter-offer is made (on different terms than

the original offer), the original offer lapses.


INTENTIONAGREEMENT


(ii) Requirements of an ‘acceptance’Acceptance:

• Is agreement on the terms of an offer• must be identical with the offer (meeting of the

minds), and cannot be conditional• can only come from the person to whom the

offer was made• must be communicated to the offeror – in

general, no particular form is required• cannot be undone once communicated


INTENTIONAGREEMENT


(ii) When acceptance is effective• General rule - acceptance occurs when it is communicated to maker

of offer (offeror).

• Therefore, an agreement is reached at the time and place where the acceptance is communicated to the offeror.

• The exception to this is when acceptance is made by post: The postal acceptance rule.

• Whenever the parties contemplate that the method of acceptance of an offer may be by post, the offer will be accepted at the time a properly addressed letter is put into the hands of the post office, and a binding contract is formed at the time when and the place where, the letter of acceptance is posted: Adams v Lindsell (1818)


Adams v Lindsell (1818) 106 ER 250Facts:• Lindsell wrote to Adams offering to sell him some wool

and asked for a reply 'in the course of post'.• The letter was delayed in the post.• On receiving the letter, Adams posted a letter of

acceptance the same day.• After Adams had posted the letter of acceptance, but

before Lindsell had received it, Lindsell on-sold the wool to a third party.

• Adams sued for breach of contract.


Adams v Lindsell (1818) 106 ER 250Issue:

Was an agreement between Adams and Lindsell reached prior to Lindsell on-selling the wool to the third party?

Decision:

Yes. Because of the effect of the postal acceptance rule, an agreement was reached the moment that Adams posted the letter of acceptance to Lindsell. Lindsell, asking for a reply 'in the course of post‘, was in no position to deny that the mode of acceptance used by Adams was effective.


INTENTIONAGREEMENT


(ii) When acceptance is effective

• For the postal acceptance rule to apply:

• The posted acceptance must be correctly addressed

• If the parties specify a different mode of acceptance, then the postal rule of acceptance will not apply


INTENTIONAGREEMENT


(ii) When acceptance is effectiveThe postal acceptance rule does not apply to instantaneous methods of communication such as telephone, email and facsimile.

• An agreement is formed at the time and the place where acceptance is communicated to the offeror is applied, see Entores Ltd v Miles Far Eastern Corp [1955]

• N M Superannuation Pty Ltd v Baker (1992): acceptance takes place when the fax is received


INTENTIONAGREEMENT


(ii) When acceptance is effective• States and territories have introduced legislation for uniformity

of contract formation by electronic means: for example Electronic Transactions Act 2000 (NSW); Electronic Transactions Act 2000 (Vic).

• Electronic communication takes place when the communication enters the information system of the offeror (unless otherwise agreed upon)

• An agreement is signed if an appropriate indication of identification and consent are clear



Tenders• A call for tenders is an invitation to treat• A person calling for tenders (the principal) incurs no

contractual liability.• Tenderers offer their services for the project in line

with the specifications outlined in the tender document.

• The principal then accepts the tender bid that was made on the best terms.



Internet shopping

A customer collects items (in the shopping basket) and then provides identification. When asked whether to proceed to payment, ‘yes’ will be an offer to buy. When the seller responds there is acceptance.



Auctions• An advertisement announces the auction (an

invitation to treat).• Bidders attending make an offer• Acceptance takes place on ‘the fall of the

hammer’, noting that the auctioneer may set conditions of acceptance.



AGREEMENT

plus


plus

OFFER

ACCEPTANCE

plus




C. Consideration• Consideration amounts to an exchange of promises

• It is the price paid for the other person’s promise

• Consideration must move from the promisee (the person receiving the promise). In essence, both parties assume the role of promisee.

• Person wishing to enforce contract must show that he/she provided consideration

• Important to note: Consideration need only be provided for informal contracts – contracts that are not executed in deed form (Formal contracts)



C. What can consideration validly consist of?

• Anything valuable to promisor can be consideration

• Value, not adequacy is the test• Consideration need not be adequate, but it must

be sufficient in the eyes of the law – even for a small amount: Thomas v Thomas (1842) QB 851

Thomas v Thomas (1842) QB 851


If my wife survive me, she should be allowed to live in my house until her death.

Following the wishes of Mr Thomas, you may occupy the house in return for a payment of 1 pound per year.

Thomas v Thomas (1842) QB 851


Had sufficient consideration been provided by Mrs Thomas to make the agreement with the executors

legally enforceable?

There is no requirement that consideration be of equivalent value: it is enough that it be of

some value, even if relatively small




• For the consideration to be valid it must be provided in response to the promisor’s promise to perform their obligations under the current agreement – it cannot relate to a pre-existing obligation. This would be past consideration which is not good consideration.

Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256




• A promise to perform an existing obligation to the promisor is not valid consideration.

Stylk v Myrick (1809) 2 Camp 317; 170 ER 1168





If you work extra hard to get the ship safely back home, you can share the

deserters’ pay.



I refuse to honour the captain’s promise!



Had the crew given consideration for the captain’s promise, so as to create a binding contract?

The crew had given nothing of value in exchange for the captain’s promise.

Accordingly, no binding contract for extra pay was created.


Case study

Making a contract


Franco is an exchange student from Italy studying at a university in Australia. He bought a bicycle when he arrived so he could easily travel around the campus and to his accommodation. He met with Robert and agreed to sell his bicycle to him for $500 and to deliver it at the end of semester, but has since decided to extend his exchange for another semester: he now wants to keep his bicycle. Whether he can legally renege on the deal with Robert or not depends upon whether a legally enforceable contract has been made.


1. What elements need to be present to decide if there is a binding contract between Franco and Robert?

2. Identify exactly what conduct or actions would constitute each of the required elements in the agreement between Franco and Robert?

3. Is there a problem with any of the required formation elements in the agreement between Franco and Robert? If so, identify which element(s) may be a problem.


Over coffee and via phone calls and SMS messages, Jeremy and Anna are negotiating over the sale of some computer equipment. Finally, on Tuesday, Jeremy says, ‘Look, you can have it all for $1500 – just let me know by Friday.’ Anna goes to the Gold Coast for a short break. On Thursday she posts Jeremy a postcard saying, ‘Having a great time and I hope you are as well. I will buy that computer equipment for $1500.’ On Friday, Jeremy, who has not received the postcard, sends Anna an SMS message that says, ‘Have sold computer equipment to Bonita for more money.’ Advise Anna as to her rights.


Documents

CRICOS Provider Code 00301J Curtin Business School Making a contract CRICOS Provider Code 00301 © 2013 Reed International Books Australia Pty Ltd trading