Summary Guide for Chapter 8
Foundations of
Australian Law
Fourth Edition
Callie Harvey
ISBN: 978-0-7346-1191-8 (print)
ISBN: 978-0-7346-2057-6 (ePDF)
Foundations of Australian Law, Fourth Edition
Chapter 8 – Contracts I
Answer guide to questions on the intention to create legal
relations
Intention to create legal relations refers to the fact that the parties intended to enter
into a legally binding agreement. There are two types of agreements: business
agreements, and domestic or social agreements.
Business agreements

Contract Law presumes that the parties to an agreement involving trade
or commerce intend to be legally bound.
Case example: Edwards v. Skyways [1964] 1 WLR 349

Rebuttal of presumption ‘Honour Clause’ – a business agreement may be
rebutted if an honour clause has been included in the contract stating the
agreement is binding in honour only, thus there is no intention to create
legal relations.
Case example: Rose & Frank Co v JR Crompton & Bros ltd. [1925] AC 455
Domestic or social agreements

Contract Law presumes that the parties who enter into a domestic or
social agreement do not intend to create legal relations.
Case example: Balfour v. Balfour [1919] 2KB 571

Rebuttal of presumption may be made through the application of the
objective test
Objective test:
‘Would the words and conduct of the parties lead a reasonable person to believe, on the
balance of probabilities, that the agreement was intended to legally bind the parties?
If the answer is ‘yes’, then there is an intention to create legal relations and the
rebuttal was successful.
Case example: Todd v Nicol [1957]
If the answer is ‘no’, the rebuttal was unsuccessful.
Case example: Wakeling v. Ripley [1951] 51 SR (NSW) 183
Answer guide to questions on agreement (offer and acceptance)
Agreement occurs when the parties are ad idem, i.e. they have reached the stage of
being of ‘one mind’.
Offer
An offer is a definite proposal. To determine if a statement is an offer, the court
applies the objective test:
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‘Would the reasonable person be bound by the terms in the statement if it is accepted?’
If the answer is ‘yes’, the presumption has been successfully rebutted and the
statement is an offer.
Case example: Carlill v Carbolic Smoke Ball Co. [1893]
Rules in relation to an offer
An offer is the initial stage of an agreement. It is a definite proposal made by
the offeror to the offeree.

An invitation to treat is not an offer. It is an inducement asking others
to make an offer. The law presumes that advertisements tenders,
catalogues, price lists and goods displayed in shops are an invitation
to treat.
‘Would the reasonable person consider the statement to be an inducement to
enter into negotiations?’
If the answer is ‘yes’, the statement is an invitation to treat and it may be an
offer.
Case example: Harris v. Nickerson [1873]
Case example: Grainer & Sons v Gough [1896] AC 325
Case example: Partridge v. Crittenden [1968] 2A11 ER 421
Case example: Fisher v Bell [1961] 1 QB 394
Case example: Pharmaceutical Society of Great Britain v. Boots Cash Chemist
(Southern) Ltd.

Offers made to individuals, group or to the world at large.
Case example: Carbolic Smoke Ball [1893] 1 QB 256

An offer is not effective until it has been communicated to the other
party (offeree).
Case example: R v. Clarke [1927] 40 CLR 227

A person who is supplying information in response to an inquiry is
not making an offer.
Case example: Harvey v. Facey [1893] 1 AC 552

When an offer contains terms, all of the terms must be clearly
expressed and brought to the attention of the offeree.

An offer sent by post is valid when it is received.

To keep an offer for a period of time it must be supported by
consideration.
Rules in relation to termination of an offer
An offer may be terminated if any of the following situations arise:
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Foundations of Australian Law, Fourth Edition

Revocation of an offer must take place prior to acceptance and it must
be communicated to the offeree by the offeror or a third party.
Case example: Dickinson v. Dodds [1876] 2 Ch D 463

An offer can be rejected expressly through words, or impliedly
through conduct or counter offer. A request for further information is
not a rejection of an offer.
Case example: Hyde v. Wrench [1840] 3 BEAV. 334

An offer ceases to exist if it is not accepted within the specified period
of time or within a reasonable period of time.
Case example: Ramsgate Victoria Hotel Co. ltd. v Montefiore [1866] LR 1
Exch109

If either party dies and the offer was of a personal nature, depending
on the circumstances, the deceased’s estate may be legally bound.

If a condition is not fulfilled, then the offer will lapse.
Rules in relation to acceptance
Acceptance occurs when the offeree communicates gives their consent to an
offer made by the offeror.

Acceptance must be unqualified, i.e. have no counter offers. The offeree
cannot revive an offer after rejection has occurred.
Case example: Hyde v Wrench [1840]

A conditional acceptance occurs when the offeree introduces a new term
or condition to the contract. A conditional acceptance is not effective
unless the offeror has been informed of the condition and they have
agreed to the new term.
Case example: Masters v. Cameron [1954] 91 CLR 353.

Acceptance is considered to be effective at the time that it is
communicated to the offeror.

Silence does not constitute acceptance.
Case example: Felthouse v. Bindley [1862] 142 ER1037

Acceptance must be made in reliance to an offer.
Case example: R v Clarke [1927]

Acceptance is effective when it is communicated to the offeror by the
offeree or an authorised party.
Case example: Powell v. Lee [1908] 99 LT 284

Conditions set by the offeror as to the mode of acceptance must be
followed.
Case example: Eliason v. Henshaw [1819] 4 Wheaton 225
Case example: Entores v. Miles [1955] 2 QB 327
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Case example: Scammell & Nephew Ltd. v. Ouston [1941] AV 251.

Acceptance must be made in accordance with the prescribed mode of
acceptance. If no mode was prescribed, acceptance must be made using
the same or faster mode as the offer was made.

Acceptance using instantaneous modes, e.g. email, fax, telephone, etc., is
effective when it is received.

Acceptance must be made within reasonable period of time.
If the offer has prescribed a period of time for acceptance to occur, then
acceptance must take place within this specified period.
If there is no specified period of time, then acceptance must be made
within a reasonable period of time. To assess what constitutes a reasonable
period of time, the objective test may be used.
Once acceptance has been made, there is an agreement and it can only be
revoked if the parties, i.e. both the offeror and the offeree, have agreed to
release each other from the contract.
Rules as to contracts by post

An offer by post is effective when it is received.

Revocation of an offer by post is effective when it is received.

Acceptance of an offer is effective when it is sent/posted.
Case example: Adams v. Lindsell [1818] 106 ER 250
Case example: Byrne & Co v Lean Van Tienhoven & Co [1880]
Consideration
Consideration may be described as the ‘price’ paid in exchange for another
person’s promise. It is something of value being exchanged between the
promisor and promisee.
Types of consideration
Executed (present) consideration – an act representing consideration is
performed in return for a promise. The consideration is given as part of
the same transaction as the promise.
Executory (future) consideration – the parties to a contract both promise
to do something of value for the other in the future.
Past consideration (bad consideration) – when a promise is made after an
act has been performed, we say that past consideration has been
performed. Past consideration is not enforceable under contract law.
Case example: Roscorla v. Thomas [1842] 3 QB 234
Rules of consideration

Consideration must be present in all simple contracts.
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Foundations of Australian Law, Fourth Edition

Consideration must be sufficient but need not be adequate (correct)
value.
Case example: Chappell & Co. ltd. v. Nestle Co. ltd. [1960] AC 87

Insufficient consideration includes: duty imposed by law, and duty
imposed by contract.
Case example: Glassbrook Bros ltd. v. Glamorgan County Council [1925]
AC270
Case example: Stilk v. Myrick [1809] 107 ER 1168

Consideration must be capable of being performed.

Consideration must be legal.

Consideration must be definite and clear.
Case example: Scammell v. Ouston [1941]

Consideration must be supplied by the offeror and the offeree.
Case example: Dunlop Pneumatic Tyre Co. ltd. v. Selfridge & Co. Ltd. [1915]
AC 847

Part-payment may not be sufficient consideration.
Case example: Foakes v. Beer [1884] 9 App Cas 605

Consideration may be present or future, but never past.
Case example: Roscola v Thomas [1842]
Case example: Anderson v Glass [1869]
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