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Introduction
Definition of a Contract
“Legally binding promise or agreement” – Carter & Harland 1996f
“An effective assumption of a legal contractual obligation” – Coote 1989
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Exchange of a promise/agreement
Enforceable in the courts
o The only function of the court is to enforce the terms of a contract
The subject and terms of a contract must be legal
History of Contract Law
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Medieval Times ! laws bound by formality
18th, 19th century ! rise of industrialisation and the freedom of contract in marketable
products
20th century ! rise of consumerism, protection from bad contracts, change of philosophy
Contract Continuum
1. Formation
2. Performance (or Breach)
3. Remedies for Breach
Promisor – Person who makes the promise
Promisee – Person to whom the promise is made
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Definitions
Valid
Contract that will be enforced by the law and creates legal rights and obligations. A contract valid
ab intio (from the beginning) contains all the three elements of formation; agreement, intention
and consideration
Void
Agreement that lacks legal validity and does not create legal rights and obligations. The contract
lacks one or more of the essential formation elements.
Voidable
A valid contract that contains some defect in substance or in its manner of formation that allows
one or sometimes both parties to rescind it. A voidable contract remains valid and can create legal
rights and obligations until it is rescinded. The party with the right to rescind may lose that right
by affirmative conduct, or undue delay, or where the rights of an innocent third party may be
harmed.
Unenforceable
A valid contract that contains some technical, substantive or procedural defect. Most commonly,
such a contract is illegal, either in its formation or its performance, as it offends either public
policy (the common law) or some statute. As a general rule the law will not allow the enforcement
of such a contract, alternatively the law may determine that such a contract is void with the
consequential loss of contractual rights.
Theories of Contract Law
Will Theory
Contracts are seen as expressions of the human will
Consensus ad idem
Subjective and objective meeting of the minds
Reinforces the classical common law of contract as agreement, consensus, offer and acceptance,
intention to contract, privity and the event of searching for the intention of each party.
Smith v Hughes (1871)
Taylor v Johnson (1983)
Paal Wilson and co v Blumenthal [1983]
Bargain Theory
2 parties
Results from the conjunction of agreement and consideration
It is held that this theory is too exclusive since necessarily, it is confined to contracts for
consideration and, even within the common law, excludes at least some contracts by deed.
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Promise Theory
Says that contracts are a promise, therefore should be kept and thus be able to be enforced by the
law.
Relies on both religion and popular morality and the expectation to perform
This theory is considered too wide since not all promises are contracts.
Reasonable Expectation Theory
The party receiving is expecting the promise to be performed
Reliance Theory
If the promise was not carried out then the promisee would suffer a loss
Principles of Contract Law
1. Freedom of Contract
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Every person has the choice to enter into a contract
Every person has the choice to negotiate the terms of the contract
Subject of the contract must be a legal one to be enforceable
2. Sanctity of Contract
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Courts should not re-write contracts ! their role is to enforce, not re-write or alter
3. Equality of Bargaining Power
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Courts assume that the parties were equal in entering the contract
Both parties are to benefit equally from the performance of the contract
Photo Production Ltd v Securicor Transport [1980]
Qualifications to Principles
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Common Law
o Capacity (age, state of mind etc)
" Freedom of contract is not absolute
o Standard form contracting
" Not open to negotiation ! a lot of forms of business contracts
Equity
o Duress
o Unconscionability
Statutory
o Mandatory terms (eg. CTP Insurance)
o Compulsory contracting
* Need to evaluate these principles of contract
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Agreement
There can be no contract in the absence of an agreement…agreements remain as the foundation of
contractual relations
Offer
Indication from one person to another of their willingness to enter into a contract on certain
terms. The willingness must be bound without further negotiation as to the terms of the proposed
contract.
○ Takes the form of the proposal that gives the offeree the opportunity to choose between rejection
and acceptance.1
○ A proposal only amounts to an offer if the person making it indicates that an acceptance is invited
and will conclude the agreement between the parties.
Whether a statement is an offer depends on whether the person to whom it is addressed would
reasonably interpret it as such = objective approach.
A valid offer:
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Must be communicated by the offeror to the offeree
May be made to a particular person, a group of persons, or to the entire world
Must be clear and unequivocal
•
Must be distinguished from ‘mere puffs’, a request for further information and
‘invitations to treat.’
Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256
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The defendants manufactured and sold a device called the ‘Carbolic Smoke Ball’, which was
claimed to prevent colds and influenza.
The Plaintiff (Carlill) saw an ad placed by the defendant in a newspaper claiming that their smoke
ball would cure all sorts of illnesses including influenza.
The advertisement stated that the defendant offered to pay 100 pounds to any person who used
one of their smoke balls and then succumbed to influenza within a specified time.
The advertisement said ‘€1000 is deposited with the Alliance Bank, Regent Street, showing our
sincerity in the matter.’
The plaintiff purchased the smoke ball and used it for several weeks and subsequently contracted
influenza
The defendants refused to pay the reward to the plaintiff and she sued them for the sum of €100
The defendants argued:
# No promise was intended and that the advertisement was a ‘mere puff’, which meant
nothing.
# No offer has been made to any particular person, i.e. offer cannot be made to the entire
world and must be bilateral.
# The plaintiff had not notified her acceptance of any offer
# The agreement was uncertain as it failed to stipulate a period within which a disease
must be contracted.
# The plaintiff had supplied no consideration for the defendants promise.
The court disagreed and held that an offer can be made unilaterally (i.e. to the entire world)
Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153, 171
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Offer must be communicated
An offer is ineffective until it is communicated by the offeror to the offeree. If the offeree is
unaware of the offer then it would be impossible to accept it.
Offer may be unilateral
In the case of a unilateral contract, the offer takes the form of a promise in return for the
performing of an act rather than in return for a counter-promise. In the case of unilateral
contracts, the performing of the act called for is the acceptance of the offer. However, in unilateral
contracts, the person accepting is never bound by any unperformed obligation.
Carlill v Carbolic Smoke Ball Co [1893]
• Advertisement in newspaper that a reward will be paid by the Carbolic Smoke Ball
Company to any person who contracts influenza after having used the ball three times
daily for two weeks.
o An offer can be made to the whole world
o Carlill had satisfied the conditions therefore accepting the offer
o Issue was whether the plaintiff had supplied any consideration, which enabled her
to enforce the defendants’ promise.
o Advertisement can be an offer
o Notification of acceptance is not always necessary
o Unilateral contract
Offer must be distinguished from the following
Mere Puffs
Offers must be distinguished from non-promissory statements made during the course of
negotiations. These statements are exaggerated and a reasonable person would not believe
or expect them to be true.
Request for further information
The request for further information is not an offer.
Harvey v Facie (1893)
" Plaintiff sent a cable requesting the defendant to sell a pen. In reply, the defendant
offered a price.
" The court held that there was no agreement and that the plaintiff had merely
requested information and made an offer to buy, which the defendant refused.
Invitations to treat
Simple an invitation by one party to commence negotiations, which may or may not lead
to an offer. The person that responds to the invitation to treat is the one making the offer
and this can be accepted or rejected. The difference between an offer and an invitation to
treat depends upon the objective intention of the parties.
o
Display of goods for sale
Goods displayed in shops for sale are invitations to treat, notwithstanding that a
price tag is attached.
Pharmaceutical Society if Great Britain v Boots Cash Chemists (Southern) Ltd
[1953
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Self-service pharmacy
Issue of whether they were offering the medicines or just inviting them to
buy
Courts ! The drugs were an invitation to treat and it is the
purchaser/consumer who makes the offer and the seller is the one who
accepts the offer
Customer is able to change their mind after picking up a product.
Advertising goods for sale in brochures
Advertising goods in a brochure, catalogue or newspaper is generally only an
invitation to treat. The reader makes an offer by placing an order or visiting the
shop, and the shop owner can either reject or accept the offer.
Grainger v Gough (1986)
• A wine merchant distributed a circular listing the prices of wines that he
stocked.
• The Court noted that a price list does not amount to an offer to supply an
unlimited quantity of goods at the published price.
However, there are now statutory restrictions that modify the common law in this
area.
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Sale by Auction
An auctioneer who puts a property up for sale is not making an offer to sell but
simple issuing a request for bids. The auctioneer has the right to revoke the offer at
any time before the fall of the hammer.
Payne v Cave (1789)
Harris v Nickerson (1873)
• Originally items were advertised for auction but were withdrawn. P
travelled to the auction and sued for travel expenses.
• Court held that it would be unreasonable to allow people to sue for travel
expenses and that the auction was only an invitation to treat.
AGC (Advanced) Ltd v McWhirter (1977)
• A reserve price which was originally intended was withdrawn.
• This was held to not affect the common law position on auctions.
Codified in the Sale of Goods Act 1923 (NSW)
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Sale by Tender
A tender is an invitation for interested parties to send in offers. The recipient of the
offers (or bids) can then enter into a contract by communicating acceptance with
the chosen tenderer.
However, if the request is made to specific persons and is stated that the contract
will be awarded to the highest or the lowest bidder, then this statement may be
binding as a unilateral offer.
Harvela Investments Ltd v Royal Trust Company of Canada (1986)
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Options
This is when a potential customer gives something to the vendor so that the vendor holds
the product for the purchaser to decide.
Routledge v Grant (1928)
Goldsborough Mort & Co Ltd v Quinn (1910)
o An offer may be revoked at any time before acceptance, except where some sort of
consideration is given
o Therefore an option cannot be revoked.
Identity of the Offeree
Issue as to whether an offer can be made to a large section of the public or to the world at large.
Carlill v Carbolic Smokeball Co [1983]
• Defendant argued that the promise was a ‘mere puff’ and could not be made to the
whole world and that there was no notification of acceptance
• Court held that the offer was not made to the whole world but to anybody who
performs the conditions named in the ad.
• Unilateral offer
Forms of acceptance as part of the offer
It is possible to include a form of acceptance as part of the offer
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Tinn v Hoffman and Co (1873)
o It was held that it is only where the offeree does more, and it is beneficial to the
offeror that a form of acceptance other than that specified for it to be accepted as a
valid acceptance.
Termination of the offer
Revocation
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Revocation before acceptance
An offer may be withdrawn or revoked by the offeror at any time before it has been
accepted. A revocation of an offer is ineffective until it is communicated to the offeree.
Byrne v Van Tienhovan (1880)
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Indirect communication may suffice
The offeror does not have to specifically communicate the revocation. It is sufficient if the
offeree learns of the revocation from a third party where a reasonable person would treat
the communication from a third party seriously.
o
Dickenson v Dodds (1876)
" Agreed to sell farm to Dickenson, however, Dickenson heard the day
before the offer was due to expire that Dodds had agreed to sell the farm
to another party. Dickenson tried to submit an acceptance.
" Courts found that this form of revocation will suffice
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Revocation of unilateral contracts
There are no decided Australian or English cases.
The revocation should take place in the same form as the offer was made: Shuey v United
States (1875)
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Revocation where there has been substantial performance
A revocation will not be effective if the offeree has commenced substantial performance of
a promise. Once the offeree has commenced performance, that party should be given a
reasonable opportunity to complete the acceptance.
Errington v Errington (1952)
Daulia v Four Milkank Nominees (1978)
Rejection
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Counter offer
A counter offer is a response from the offeree, indicating a willingness to contract but on
different terms from the original offer.
A request for information is not a counter offer.
Hyde v Wrench (1840)
" Wrench offered to sell the farm for a certain amount. Hyde refused and made a
counter offer, which Wrench rejected. Hyde then accepted the earlier offer which
the courts determined had expired when Hyde made the counter offer.
Stevenson, James and Co v McLean
" Plaintiff asked if the sale of iron at a certain price could be paid in instalments,
defendant sold to another party and was therefore liable because a contract had
already been formed and the plaintiff had merely requested further information.
Lapse
An offer remains open until the offeree accepts it or it lapses. When an offer lapses, it no longer
legally exists and the offeree can no longer accept it.
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Effluxion of time
An offer that requires acceptance within a specified time, lapses when that time expires.
An offer that contains no time limit for acceptance lapses after a reasonable time. What is
reasonable depends on the circumstances.
Ramsgate Victoria Hotel Co Ltd v Montefiore (1866)
o P was buying shares and waited for 5 minutes for the price to drop
o Court held that the offer had lapsed.
Telina Developments Pty Ltd v Stay Enterprises Pty Ltd (1984)
o Held that in calculating reasonable time, needed to look at:
" Circumstances at time of the offer
" The foreseeable dangers to the circumstances
" What actually happened and how the circumstances changed
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Death of the offeree or offeror
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The death of either party before acceptance of an offer generally causes the offer to lapse.
Fong v Cilli (1968)
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Failure of a condition
If an offer is made subject to condition, then the offer will lapse where the condition is not
satisfied.
McCaul (Australia) Pty Ltd v Pitt Club Ltd (1959)
Financings Ltd v Stimson (1968)
Statutory Intervention
The common law in relation to offers had been substantially modified by the Trade Practices Act
1974 (Cth), which regulates contracts entered into between consumers and corporations.
Equivalent state legislation, the Fair Trading Act 1987 (NSW)
Trade Practices Act 1974
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Misleading and deceptive conduct (s52)
False representations (ss53, 53A-C)
Offering gifts, etc, with the intention of not providing them (s54)
Bait Advertising (s56)
Damages (s82)
Other orders (that may be imposed for contravention) (s87)
Industry codes of practice may also provide remedies.
Acceptance
Communication to the offeror of an unqualified, unconditional assent to the terms of the offer,
either expressly or implied.
Unilateral Contracts
Notice of performance is notice of acceptance: Carlill v Carbolic Smokeball Co [1983]
Bilateral Contracts
The acceptance must correspond with an offer
Evans Dakin Industries v Queensland Electricity Generating Board (1984) and Clarke (1927)
A valid acceptance:
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Must be communicated by the offeree
Must be made in response to an offer
Must be made while the offer is still on foot
May be express or implied from conduct
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Acceptance must be communicated
Acceptance must be communicated by the offeree, or by his/her agent, to the offeror.
Acceptance must be made in response to the offer
• R v Clarke (1927)
o Clarke approached by police for information to a crime. Clarke disclosed
information, unaware that there was a reward for information.
o Courts affirmed that Clarke gave out the information for other reasons than the
reward and therefore was not an acceptance to the offer of the reward made by the
police.
• Evans Deakin Industries v Queensland Electricity Generating Board (1984)
o Courts held that if the offer’s acceptance seeks to vary the offer then it is usually
construed as a counter offer.
Acceptance may be express or implied
Acceptance of the offer by the offeree could be inferred from his/her conduct.
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Brogden v Metropolitan Railway Co (1877)
o Brogden had been supplying coal to Metropolitan without a formal contract
o The defendant had signed a draft contract and returned in, however, the plaintiff
did not sign the contract. Both parties proceeded to carry out the terms.
o Court held that the contract was binding since both parties had acted on the basis
that a contract existed.
Method of Acceptance
Where the offer tells you how to accept, then acceptance only occurs if this is complied with. If the
offer says ‘may’, then other means can be used, as long as it is advantageous to the offeror.
Tinn v Hoffman and Co (1873)
Silence as communication
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Silence does not constitute acceptance
Silence does not generally constitute acceptance of an offer.
o Felthouse v Bindley (1862)
" Uncle cabled nephew saying that he will purchase his horse and consider it
sold if he hears no reply
" Court affirmed that an offeror cannot compel an offeree to take positive
steps to reject an offer by stating that silence will amount to acceptance.
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Duty to communicate rejection of offer
There have been circumstances where the court will imply silence as acceptance.
o Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988)
" Building contract where there was no acceptance but the money was paid
" Court stated there is a duty to speak if you do not accept when the other
party is about to start performance
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Inertia selling
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Legislation prohibits inertia selling, the practice of sending unsolicited goods to a recipient
accompanied by a statement that if the goods are not returned within a specific time the
recipient will be taken as have agreed to buy them.
s64 (TPA) and s58 (FTA)
Postal Rule
States that if the parties contemplate or envisage that an offer can be accepted by post then the
acceptance of the offer exists at the time the acceptance is posted.
• Adams v Lindsell (1888)
o Offer to sell wool and acceptance was posted back that same day. Postal process
took longer than expected and the defendant sold the wool to another party
o Court held that there was a binding contract once the acceptance had been mailed.
• Cowan v O’Connor (1888)
o Extended the postal rule to include cables
Letters need to be date stamped or have some form of document proving the date of which the
acceptance was posted.
Exceptions to the Postal Rule
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Intention
o For the rule to apply, acceptance by post must have been contemplated by the
parties: Henthorn v Fraser (1892)
o It may be excluded by the offeror either expressly or impliedly
Holwell Securities Ltd v Hughes (1974)
" An option was “exercisable by notice in writing to the intending vendor
within six months from the date of the agreement”
" The plaintiff sent a written notice within the prescribed time but it was
never received.
" Court held that the specified requirement for notice in writing made the
postal rule inapplicable.
o Nunin Holdings Pty Ltd v Tullamarine Estates Pty Ltd (1994)
" The court interpreted correspondence between the parties as excluding
the operation of the postal acceptance rule.
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Revocation
This rule does not apply to revocation by post.
Byrne and Co v Leon Van Tienhoven and Co (1880)
• The plaintiff (VT) posted a letter to the defendant offering to sell tinplate and
then posted another letter a week later revoking the offer.
• The revocation was not received till after the defendant had cabled its
acceptance.
• The court held that the postal rule is inapplicable, even though the revocation
was posted before the acceptance was received.
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Instantaneous Communication
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This rule does not apply to means to instantaneous communication such as telex,
telephone, facsimile or electronic mail.
o Entores Ltd v Miles Far East Corporation (1955)
" Commercial trade to sell and buy goods in London and Amsterdam.
Both parties owned a telex machine.
" Courts decided that the postal rule does not apply to ‘virtually
instantaneous’ communications.
" Therefore the agreement arose upon the receipt of the acceptance.
o Brinkibon Ltd v Stahag Stahl GmbH (1983)
" Lord Wilberforce stated that the question of where an acceptance takes
place will often be a complex one and will have “to be resolved by
reference to the intentions of the parties, by sound business practice,
and in some cases by a judgement where the risks will lie.”
o
Leach Nominees Pty Ltd v Walter Wright Pty Ltd (1986)
" The court held that the postal acceptance rule applied to an acceptance
sent by public telex.
Electronic Transactions Act 2000 (NSW)
Alternative Theories and Approaches
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Gibson v Manchester City Council (1978)
o Need to look at the correspondence and conduct as a whole ! on material terms
o Global approach: look at everything to decide on the existence of a binding
contract
Butter Machine v Ex-Cell-O Corp (England) Ltd (1979)
o Standard form of quotation
o Variation Clause “ these terms will prevail over the terms of the buyer”, “subject to
our terms and conditions”
Courts do not always rely on offer/acceptance theories
Consideration
An act or a forbearance of one party or a promise thereof, is the price for which the promise of the
other is brought and the promise for this given value is enforceable.
Sir Frederick Pollock
Dunlop Pneumatic Tyre Co Ltd v Selfridge Co Ltd (1915)
Some act or forbearance involving legal detriment to the promisee, or a promise of such an act or
forbearance furnished by the promisee as the agreed price of the promise.
Consideration is simply of value and may take the form of:
a) An act for a promise
b) A promise for an act
c) A promise for a promise
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d) A promise to forbear
Australian Woollen Mills Pty Ltd v Commonwealth (1954)
• The war had just ended and Australia was trying to redevelop its industries, therefore the
Commonwealth gave subsidies to those who bought Australian wool. In 1948 the
government decided that it no longer wanted to subsidise the industry and costs went up
and the plaintiff sued.
• Court held that although the purchase of the wool would appear to be good consideration,
this was not the case because the company needed to purchase the wool and the
government was only providing a subsidy.
Formal Contract
A formal contract is wholly in writing, usually in the form of a deed, and does not require
consideration.
A promise (or term) of a contract made by deed is called a covenant. A deed can be unilateral
(that is, made by only one party) and this is often called a deed poll. A deed made by two or more
parties is called an indenture. Some types of contracts must be in writing and must be made by
deed to be effective.
Simple Contract
A simple contract may be oral or in writing (or a combination of both). Simple contracts are made
between two or more parties and require consideration.
Types of Consideration
Executory Consideration
Contract in the process of being performed (Bilateral)
Executed Consideration
Contract formed when the act is executed (Unilateral)
The 12 Rules
1.
Simple contracts must have consideration
Rann v Hughes (1778)
o The defendant was administrator of an estate and made a promise to pay a debt
owed by the deceased to the plaintiff.
o Court held that as there was no consideration given by the plaintiff (Rann) for the
promise made, then the contract was void.
2.
Consideration must be sufficient
Objectively, if consideration of some value exists, the court is not concerned with its
adequacy.
• Thomas v Thomas (1842)
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The court held that the promise by a widow to pay annual rent (one pound)
was sufficient consideration for a contract with the executors to transfer a life
estate in the property to her.
Chappell and Co v Nestle and Co Ltd (1960)
o The plaintiff (Chappell) owed the copyright in a song “Rockin Shoes” and
Nestle, in an attempt to increase sales, Nestle offered to ‘sell’ several popular
records (including Rockin Shoes) for the price of 1s6d and 3 chocolate bar
wrappers. Chappell received the royalties for the song and also the chocolate
bar wrappers as it was agreed by the court that the wrappers constituted part
of the consideration even thought they were discarded by the defendant.
o
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3.
Consideration must be lawful
The consideration must not be illegal or unlawful and must not involve a breach of civil
law or public policy.
• Parkinson v College of Ambulance Ltd and Harrison (1925)
o Parkinson gave the charity 3000 pounds in return for the promise he would
receive a knighthood.
o He sued after the knighthood did not eventuate and the court refused to make
the order because the consideration was a promise to do something to promote
public corruption and as this was against public policy it was illegal.
• Wyatt v Krelinger (1993)
o Said an unlawful promise is not sufficient
4.
Consideration must not be illusory
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5.
Placer Development Ltd v Commonwealth (1969)
o The plaintiff entered into a contract with the Australian Government to
establish a timber company in Papua New Guinea to produce plywood for
import to Australia.
o A clause stated that the Government will subsidise (at a rate determined only
by the defendant) the cost of import customs. This was stopped after a few
years.
o The court held (3:2 majority) that the clause was not binding on the defendant
because a promise of the government subsidy is meaningless in the absence of
some amount or some basis of calculation.
British Empire Films Pty Ltd v Ozford Theatres Pty Ltd (1943)
Consideration must be definite
The consideration must be so certain that a court is able to place a legal value on it, no
matter how inadequate it may actually be.
• White v Bluett (1853)
o Bluett promised ‘not to bore his father’ in return for a non-payment of a debt.
Following the father’s death, the plaintiff executor sought repayment of the
debt.
o The defendant relied on the agreement with his late father, however, the courts
found that the promise was too vague to have legally recognised value.
• Dunton v Dunton (1892)
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6.
Shiels v Drysdale
Past consideration is no consideration
Consideration can be present or future, but not past.
• Roscorla v Thomas (1842)
o Roscorla purchased a horse from the defendant for €30.
o After the sale, the defendant promised that the horse was in good health and
not vicious, however this was untrue and the plaintiff sued for breach.
o The court held that the promise was not binding as it was made independently
of the sale (after the sale); plaintiff had given no consideration; payment of the
purchase price was past consideration.
Exceptions
• Lampleigh v Braithwaite (1615)
o Braithwaite accused of murder and asked Lampleigh to ask for a pardon.
Lampleigh travelled around the country at his expense looking for a pardon.
o Braithwaite promised afterwards that he will pay him 100 pounds and didn’t.
o Courts held that the promise, although made after Lampleigh had travelled,
was still part of the same transaction.
• Re Casey’s Patents: Stewart v Casey (1892)
o In this case, the plaintiff had worked to promote the defendant’s patents and
was subsequently promised a 1/3 share of the patents.
o The court held that a subsequent promise to pay may be treated either as an
admission of an act (that is service) provided or as evidence that the parties
subsequently fixed the amount of reasonable remuneration for the act.
• Pao On v Lau Yiu Long (1980)
o Plaintiff’s had agreed to acquire shares in a public company under a contract
which required them not to sell 60 percent of the allotted shares for 12 months.
They entered into a second contract with the shareholders of the company. In
return for the plaintiffs performing their obligations under the first contract,
the shareholders agreed to indemnify the plaintiff’s against any loss resulting
from a fall in the share price during the 12-month period.
o When the plaintiffs sought to enforce that contract indemnity, the Privy
Council held that a promise to perform an act which the promise is already
under an existing obligation to a third part to perform will constitute good
consideration. The plaintiffs had provided good consideration because the
shareholders obtained the benefit of a direct obligation which they were able to
enforce. Moreover, the plaintiffs’ entry into the main contract could not be
regarded as past consideration, because the plaintiffs agreed to the restrictions
on selling their shares in the public company on the understanding that they
would be indemnified against lost resulting from a fall in the share price. The
granting of the indemnity therefore fell within the exception to the Past
Consideration Rule described by Bowen L J in Re Casey’s Patents..
o Lord Scarman noted the following requirements for the exception to apply
a) The act must have taken place at the promisor’s request
b) Objectively, the parties must have understood that the act was to be
remunerated or compensated
c) The remuneration or compensation must have been legally enforceable.
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7.
Consideration must move from the promisee
Apart from the promisor, the only party who can enforce the contract is the other party
who has provided the consideration for the promise.
• Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd (1915)
o Dunlop entered into a contract to sell tyres to the dealer (Dew and Co). The
contract provided that the dealer will not sell tyres below the plaintiff’s list
price and would obtain a similar undertaking from any retailer they onsold to.
o Dew and Co sold tyres to the defendant (Selfridge) who gave the required
undertaking, however sold it to a customer below Dunlop’s list prices.
o The court found in favour of the defendant because they held that the plaintiff
had not provided any consideration for the defendant’s promise to the dealer.
o The plaintiff was not even a party to the contract.
Joint promisees
This rule is satisfied if consideration moves from one (or only some of) joint promisees.
o Coulls v Bagot’s Executor and Trustee Co Ltd (1967)
" Coulls owned land and granted permission to company to quarry stone
in return for 5 pounds. The money was paid to Coulls and his wife.
" Coulls dies and his wife tries to recover the money.
" Court found that his wife was entitled to the royalties.
Third Party
This rule does not require that the promisor must receive the benefit of the consideration
provided by the promisee. Consideration need not move to the promisor, but can be
provided to a third party.
8.
Consideration can be a forbearance to sue
Chance of success is irrelevant: Callisher v Bishoffsheim (1870)
•
Hercules Motors Pty Ltd v Schubert (1953)
o Schubert bought a car from the defendant. The plaintiff later found that the car
had faulty paintwork and initially demanded a new car, however, the
defendant offered to re-paint the car. The parties also agreed for a
representative of a paint company to supervise the work and report on it. The
paintwork was unsatisfactory and Schubert sued.
o The argument raised by the defence was that there was no consideration for the
defendant’s promise.
o Courts held that the agreement to repaint as a compromise to the genuine
dispute and this compromise was good consideration.
•
Wigans v Edwards (1973)
o Edwards signed a contract to purchase a house from the defendant who was an
owner-builder. Subsequently he found several defects that they told the
defendant required fixing before they considered going ahead with the
purchase. The defendant gave a written promise and the contract was
completed. However, the defendant failed to carry out that promise.
o The court found that there was consideration in the compromise made by the
plaintiff.
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9.
A promise to perform an existing obligation is not good consideration
A promise to perform an existing contractual obligation is not good consideration.
• Stilk v Myrick (1809)
o Stilk signed on as a crewmember on a ship. During the voyage, two
crewmembers deserted and the defendant promised to divide the wages that
would have been paid to the deserters among the remaining crew.
o The defendant failed to honour his promise and the plaintiff sued
o Court held that there was no consideration for the promise to pay the extra
wages. Under the original agreement, the plaintiff and the other crew members
contractually promised “to do all they could under all emergencies of the
voyage”
However, different outcome in following case.
• Hartley v Ponsonby (1857)
o The defendant captain promised the plaintiff (Hartley) an additional payment
if he helped bring the ship back to its home port. The plaintiff agreed and sued
when the captain refused to pay.
o Unlike the previous case, nearly half of the crewmembers had deserted the
ship; therefore the plaintiff had done more than he was contractually bound to
do, therefore provided consideration.
Factual Benefit
• Williams v Rofey Bros and Nicholls (Contractors) Ltd (1991)
o The court held that the general rule will not apply if the promisor receives
factual benefits from the performance of the existing obligation.
• Musumeci v Winadell Pty Ltd (1994)
o Court stated that the general rule will not apply if the promisor avoids a
‘disbenefit’ that might have resulted from the promisee’s failure to perform an
existing obligation.
Exceptions to the existing duty rule:
"
"
"
"
"
10.
Fresh consideration
# Hartly v Ponsonby
Practical benefit
# Williams and Roffey Bros & Nicholls (Contractors) Ltd (pg 95)
# Musumeci v Winadell Pty Ltd
Promises made to third party
# Pao On v Lau Yiu Long
Compromise and forbearance to sue
# Wigan v Edwards
Termination and replacement
A public obligation is not good consideration
A duty imposed by the State will not amount to consideration unless it involves an excess
of legal duty.
• Collins v Godefroy (1831)
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