CONTRACTS: CONCEPTS OF AGREEMENT The nature and function of contract law •
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Contract: an agreement between two or more people which is legally enforceable and
legally binding
Australian contract law is made up of: case law (judgements) decisions which give
effect to community values and current attitudes and legislation (statute, Act of
Parliament)
Requirements to satisfy a valid contract:
Agreement between parties which is usually constituted by an acceptance of an offer
Intention to create legal relations which characterises the parties’ intention to be
legally bound by their agreement
Consideration which amounts to the ‘price’ one party provides in return for the
promise of the other
Legal capacity which requires that the parties are not restricted in their right and
power to make a contract
Genuine consent which refers to a number of situations in which the validity of a
contract may be affected by what is called a vitiating factor’ which removes any real
and genuine consent to the agreement
Legality of objects: can you make a contract for an illegal purpose?
A contract may be: a simple contract or a formal contract
Simple contract: may or may not be in writing but will have consideration as an
essential element. A simple contract may be unilateral or bilateral
Unilateral contract: under which only one party assumes an obligation. A unilateral
contract is one in which the offeree accepts the offer by performing his or her side of
the bargain. As the High Court has explained, ‘the consideration on the part of the
offeree is completely executed by the doing of the very thing that constitutes
acceptance of the offer’. e.g. Carlill v Carbolic Smoke Ball Co (1893)
Obligations of one party (the offeree) are executed at the time of formation while the
obligations of the other party (the offeror) are executory
Bilateral contract: under which both parties assume obligations and which form the
vast majority of contracts. In a bilateral contract, the obligations of both parties are
executory at the time of formation. e.g. Zuijs & Wirth Bros Circus (1955)
Formal contract: one which is valid because it is made using a particular written
form called a contract under seal or a deed. If this form is used, consideration is not
required
Formation of contract: Offer, Acceptance, Consideration, Intention to create legal
relations, writing (where required)
Offer •
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Offer: expression of willingness to be bound on certain terms without further
negotiation
‘A definite undertaking made with intention...that it shall become binding...as soon as
it is accepted’, ‘A clear statement of terms upon which an offeror is prepared to be
bound’, ‘proposal indicating that an acceptance is invited and will conclude the
agreement’ (Carlill v Carbolic Smoke Ball Co (1893))
Takes place in the form of a proposal that gives the offeree the opportunity to choose
between acceptance or rejection
In determining whether an offer has been made, the crucial issues is whether it would
appear to a reasonable person in the position of the offeree that an offer was
intended, and that a binding agreement would be made upon acceptance e.g. Carlill v
Carbolic Smoke Ball Co (1893)
Carlill v Carbolic Smoke Ball Co (1893)
The manufactured and sold a device called the ‘Carbolic Smoke Ball’, which
claimed to prevent colds and influenza. They placed an advertisement in various
newspapers which said that £100 reward would be paid to any person who
contracted a cold or influenza after having used the device three times daily for
two weeks, in accordance with the directions supplied with each ball. The
advertisement said ‘£1000 is deposited in the Alliance Bank, showing out sincerity
in the matter’, along with testimonials of the success of the product. After reading
the advertisement, the plaintiff purchased a smoke ball, used it for several weeks
and then contracted influenza.
The defendants refused to pay the reward to the plaintiff. The plaintiff’s claim that
there was a contract between the parties was met with five arguments. The English
Court of Appeal rejected these arguments, and unanimously held that a contract
had been formed between the plaintiff and the defendants. That contract obliged
the defendants to pay £100 to the plaintiff.
1. Defendants first argued that no promise was intended, and the
advertisement was a ‘mere puff’ which meant nothing. The court held that
the statement relating to the bank deposit made it clear that a promise was
intended. The court construed the advertisement objectively, according to
what a reasonable person would think was intended.
2. No offer had been made to any particular person. The court held that the
offer was made to the whole world, and could be accepted by any person
who performed the conditions on the faith of the advertisement.
3. The plaintiff had no notified her acceptance of any offer. The court held
that although acceptance of an offer must normally be notified the offeror,
the offeror may dispense with that notification. An offer calls for
performance of particular conditions may be accepted by performance of
those conditions (i.e. an offer of reward).
4. The agreement was uncertain because it failed to stipulate a period with
which the disease must be contracted. The court held that a reasonable
construction must be placed on the advertisement, which made it
sufficiently certain.
5. The plaintiff had supplied no consideration for the defendant’s promise.
The use of the smoke ball by the plaintiff constituted both a benefit to the
defendant and a detriment to the plaintiff, either of which would have been
enough to constitute good consideration for the promise.
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In unilateral contracts, an offer can lead to a binding agreement only if the offer
identifies the terms of the proposed agreement with sufficient certainty
Rules related to the making of an offer
• An offer must be distinguished from mere puffery
• An offer must be distinguished from an invitation to treat
• An offer must be distinguished from a supply of information
• An offer can be addressed to any number of people
• An offer must be communicated
• An offer can be revoked at any time before acceptance
Offer distinguished from puffery
• Puffery: statements which, though made to induce, are not reasonably believable
• Designed only to draw attention to a product
• Statements so far-fetched that no reasonable person would believe à not binding,
non-legal offer e.g. Leonard v Pepsico Inc (1999)
Leonard v Pepsico Inc (1999)
John Leonard sued Pepsico Inc in an effort to enforce an ‘offer’ to redeem 7,000,000
Pepsi Points for a Harrier Jet which Pepsico had shown in a portion of a televised
commercial that Pepsico argued was intended to be humorous.
The court rejected Leonards on the grounds that:
1. The advertisement featuring the jet did not constitute an offer
2. If it had been an offer, no reasonable person would have believed the terms
(given the Harrier jet was worth $23 million) i.e. that it was a mere puff
Offer distinguished from an invitation to treat
• Invitation to treat: invitation to trad or negotiate. If regarded as an invitation to treat,
the person responding will be treated as the offeror
• The maker of the invitation to treat can accept or reject any offers
• Depends on the language used and the surrounding circumstances that indicate what a
reasonable person intended for the effect of the statement
A. Advertisements
• In the usual case where foods or services are advertised for sale, they are usually
considered an invitations to treat i.e. Partridge v Crittenden (1968) or Grainger &
Sons v Gough (1896)
• Exception of Carlill v Carbolic Smoke Ball Co (1893)
Partridge v Crittenden (1968)
Partridge placed an advertisement in a magazine that said ‘Bramblefinch cocks,
bamblefinch hens 25s each’
Partridge was charged under the Protection of Birds Act 1954 (UK) that prohibited
‘offering for sale’ such birds. He was found not guilty on the basis that the
advertisement was an invitation to treat
Grainger & Sons v Gough (1896)
A wine merchant distributed a circular that listed the prices of wines he had in stock.
It was held that it was not an offer to sell the wine at those prices. It was an invitation
for people to respond by making offers to buy certain quantities of win at those
prices.
The commercial justification was ‘as soon as an order is given there is a binding
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contract to supply the quantity. If it were so...[would be unreasonable]”
B. Goods on display in a shop or self-service store
The display of goods for sales, whether in a shop window or on the shelves of a selfservice store are considered as an invitation to treat and not as an offer e.g. Fisher v
Bell (1961) and Pharmaceutical Society of Great Britain v Boots Cash Chemists
(Southern) Ltd (1953)
Fisher v Bell (1961)
Defendant was prosecuted under the Restriction of Offensive Weapons Act 1959
(UK) with ‘offering for sale’ an offensive weapon (flick knife). The basis of the
charge was that the defendant had displayed a flick knife in his shop window with a
price attached. It was deemed to not be an offer for sale, but merely an invitation to
treat.
Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd
(1953)
English Court of Appeal determined when a sale took place in a self-service
pharmacy in order to determine whether sales took place under the supervision of a
registered pharmacist. Pharmacists supervised transactions at the cash registers, but
did not supervise customers’ selection of goods from the shelf. The plaintiff argued
that the display of goods should be regarded as an offer, which was accepted when a
customer took an item from the shelf. Court of Appeal rejected this argument on the
basis that customers must be entitled to return and substitute articles they have
chosen from the shelf. Acceptance is not effective until communicated to the offeror,
at the checkout.
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C. Auctions
Auctioneer does not make an offer to sell, but invites offers from those at the auction
Each bid constitutes an offer, and the auctioneer communicated acceptance of the
final bid by the fall of the hammer
No contractual claim can arise if the auction is cancelled, a bidder is entitled to
withdraw his or her bid before it is accepted, and the auctioneer is not obliged to sell
to the highest bidder
If the auction is held ‘without reserve’, the same rules apply except an auctioneer who
refuses to the highest bidder may be able to be sued for contravening a separate
contractual obligation to sell to the higher bidder
AGC (Advances) Ltd v McWhirter – an announcement that an auction was to be held
without reserve did not alter the general rule. The holding of an auction without
reserve did not constitute an offer, and did not bind the vendor to sell to the highest
bidder
D. Tenders
Tenders are considered invitations to treat
The submission of a tender in response constitutes an offers e.g. Harvela Investments
Ltd. V Royal Trust Co of Canada Ltd (1986)
Harvela Investments Ltd. V Royal Trust Co of Canada Ltd (1986)
Seller of a parcel of shares decided it would call for sealed bids. Seller advised he
would accept the highest bid
Privy Council held that the seller ad made the offer not the bidders because it agreed
to accept the highest big. There was a binding between Harvela and the seller for the
sale of the shares at $2.71m.
E. Vending machines
• Constituted as an offer from Thornton v Shoe Lane Parking (1971)
• Lord Denning, ‘He was committed at the very moment when he put his money into
the machine. The contract was concluded at that time’
Offer distinguished from a supply of information
• A person merely supplying information in response to an enquiry is not making an
offer e.g. Harvey v Facey (1893)
Harvey v Facey (1893)
Harvey sent a telegram to Facey asking ‘Will you sell us Bumper Hall Pen?
Telegraph lowest cash price’. Facey replied ‘Lowest cash price for Bumper Hall Pen
£900.’ Harvey sent another telegram asying ‘We agree to buy Bumper Hall Pen for
£900 asked by you. Please send us your title deeds in order that we may get early
possession.’ Facey refused to sell, Harvey sued for breach of contract – the action
failed. Facey’s telegram was merely a supply of information. Harvey’s second
telegram was an offer which Facey did not accept.
An offer can be made to any number of people
• Unilateral contracts are made to the world e.g. Carlill v Carbolic Smoke Ball Co
(1893)
An offer must be communicated
• Unless an offer is communicated to offeree, there can be no acceptance
• Performance of act without knowledge of an offer is not acceptance
Termination of an offer
• An offer can be terminated by various means: revocation, lapse of time, nonoccurrence of necessary condition, rejection and counter offer and death
Revocation by the offeror
• An offer can be revoked by the offeror any time before it is accepted
• Not binding unless the offeree has given consideration for that promise
• A promise to hold an offer open is binding at common law if consideration has been
given in return for that promise, a separate contract is formed (called an option)
• The withdrawal of an offer is effective only when it has been actually communicated
to the offeree (no exception when made by post Bryne & Co v Leon Van Tienhoven
& Co (1880))
• Revocation is not effective until the offeree becomes aware of it
• Not necessary that the offeror personally communicate the revocation to the offeree
à it is sufficient if a reasonable person would be aware that the offer has been
withdrawn e.g. Dickinson v Dodds (1876)
Dickinson v Dodds (1876)
Dodds offered to sell Dickinson some houses for £800. This offer was stated to be
‘left over Friday 9am.’ However, Dodds sold the houses to someone else on
Thursday, Dickinson heard of this sale indirectly but still handed Dodds a formal
acceptance of the offer before 9am Friday. It was held that no contract was formed
with Dickinson. The offer had been revoked before acceptance since Dickinson had
actually received notice of revocation even though it was not from the offeror.
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Offers that might give rise to unilateral contracts, the rules are modified:
> Interpreted as involving an implied promise not to revoke the offer once the offeree
has started performance until there has been reasonable time for completion – implied
promise is enforceable (supported by the offeree’s commencement of consideration)
> Revocation is effective if it is made in the same manner as the offer irrespective of
whether a particular person who was aware of the offer was made aware of the
revocation e.g. U.S. Shuey, Executor v United States 92 73 (1875)
Time lapse
• Time can terminate an offer in two ways: where offeror imposes a time-limit or where
time-limit implied from circumstances
• An offer which is expressed to be available for acceptance for a particular period of
time will lapse at the end of that period or if there is a fresh offer
• If no period is stipulated, the offer will lapse after a reasonable time has passed
• Reasonable time will depend on circumstances, including the nature of the subject
matter and the form in which the offer was made e.g. Dencio v Zivanovic (1991)
• Verbal offer likely to lapse after a short period, whereas a written offer will be open
for acceptance for a relatively longer period
Dencio v Zivanovic (1991)
The plaintiff sued the defendant for damages for personal injury. The plaintiff’s
solicitor contacted the defendant’s solicitor and made an offer to settle the case for a
particular amount. The defendant did not respond for one year, in that time the
plaintiff’s solicitor had taken steps to prepare the case for a court hearing, some
known to the defendant’s solicitor. Then they attempted to accept the offer. The
court held there was no binding contract between the plaintiff and the defendant
since the offer made by the plaintiff to settle the matter had not been accepted within
a reasonable time.
Non-occurrence of necessary condition
• An offer may be made subject to an express or implied condition that must be fulfilled
before the offer can be accepted
• It may be made the subject to an express or implied condition that it should lapse
upon the happening of a certain event e.g. Financings Ltd v Stimson
Financings Ltd v Stimson
The defendant signed an offer to purchase a car on hire-purchase terms from a
finance company, containing a clause that it would not be binding until it had been
accepted on the finance company’s behalf. Before the company signed, the defendant
took possession of the car and returned it as he was unsatisfied. The car was stolen
and then recovered in bad condition. The company sued the defendant for breach of
hire-purchase agreement. The English Court of Appeal held that the defendant’s
offer was subject to an implied condition that the car should continue in the
condition it was in when the offer was made and that, on the failure of that condition,
the defendant’s offer lapsed.
Rejection and counter offer
• Once an offer has been rejected, it is no longer available for acceptance
• The making of a counter-offer is treated as a rejection of the original offer and will
also extinguish it (Harris v Jenkins (1922))
Death
• When an offer has not been accepted it is automatically terminated on the death of the
offeror or the offeree
• Death of the offeror – the offer can be accepted by an offeree who is not aware of the
offeror’s death unless the offer requires personal involvement by the deceased person
Acceptance •
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Acceptance: a final and unqualified assent to terms of the offer made in a manner
specified by the offeror
An offeror may expressly or impliedly dispense with the need for actual
communication, and will commonly do so in one of two ways
> The offeror may agree to treat the doing of an act as an effective acceptance –
unilateral contracts are accepted by the doing of an act, and bilateral contracts can
also be formed in this way
> The offeror may treat the despatch of an acceptance by a particular method as
effective, whether or not the acceptance is received by the offeror (i.e. signature)
Postal rule: acceptance is effective as soon as acceptance is posted – it has the effect
that a contract is made when the acceptance is posted, and the contract is formed at
the place where the acceptance is posted e.g. Household Fire and Carriage Accident
Insurance Co Ltd v Grant (1879)
Rules related to acceptance
• Must be in reliance on the offer
• Acceptance must be absolute and unqualified
• A counter offer is a rejection of the offer
• Must be communicated to the offeror
• Offeror may prescribe a method of acceptance
Must be in reliance on the offer
• Acceptance must be made in reliance on the offer
• Australian High Court held that knowledge itself is not sufficient – the offer must also
be present to the offeree’s mind at the time of acceptance (‘present in the mind of the
offeree’) e.g. R v Clarke (1927)
R v Clarke (1927)
Plaintiff failed in an action to claim a reward offered for information leading to the
conviction of a murdered. He knew of the reward but he admitted that he gave the
information to save himself from being charged with the murder and with the reward
‘not present to his mind’
Acceptance must be absolute and unqualified
• Must be a clear commitment to all the terms of an offer
• If it attempts to introduce any qualifications or new terms, it is seen to be a counteroff nullifying the previous offer e.g. Masters v Cameron (1954)
Masters v Cameron (1954)
The memorandum evidencing a sale of real property contained a clause providing
that ‘This agreement is made subject the preparation of a formal contract of sale
which has to be acceptable to my solicitors on the above terms and conditions.’ The
sale fell through and a dispute arose as to which party was entitled to the deposit. If
there was an enforceable contract, the vendor was entitled to the deposit. If there was
not an enforceable contract the purchaser was entitled to the deposit. It was held that
no contract had arisen.
A counter offer is a rejection of the offer
• A counter-offer is a cancellation of the original offer
• If offeree contradicts terms of the offer, they destroy it
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If offeree accepts offer on added terms, it may also cancel the offer
A mere request for more information is not a counter offer e.g. Stevenson, Jacques
and Co v McLean (1880)
Stevenson, Jacques and Co v McLean (1880)
Offer by X to sell iron at a set price per ton, open ‘until Monday’. Y asked X if X
would accept the price over 2 months, if not, the longest limit you would give. X did
not respond to this. Y later accepted X‘s original offer, but had sold the iron to
another party, Z. X’s defence was that Y’s inquiry amounted a counter-offer. It was
held that Y’s inquiry contained ‘nothing by the way of...rejection’ and was a mere
request for information. X was in breach of the contract.
Acceptance must be communicated to the offeror
• Acceptance is effective at the time it is communicated to the offeror (Hebb’s case)
• The rule is applied even where the offeror states that he will treat silence as an
acceptance of the offer
• Acceptance by silence is not possible e.g. Felthouse v Bindley (1862)
Felthouse v Bindley (1862)
The plaintiff had offered to buy the horse saying that ‘if I hear no more, I will
consider him to be mine at that price’. The owner gave no response, with the intent
to accept the contract. However, when the horse was sold at the auction it was
constituted that there was no acceptance of the initial contract.
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Acceptance must be communicated to the offeror by the offeree or someone who has
been authorised by them e.g. Powell v Lee (1908)
Powell v Lee (1908)
The plaintiff was informed by a member of a committee who was acting without
authority that his application was successful. He committee reconsidered and
resolved to appoint another applicant. The plaintiff’s action for breach of contract
was unsuccessful à court held that acceptance is not effective unless it is
communicated by the offeree or their agent.
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Acceptance can take place by conduct so silence of the offeree can equate to conduct
e.g. Northstate Carpet Mills Pty Ltd v B.R. Industries Pty Ltd (2006)
Northstate Carpet Mills Pty Ltd v B.R. Industries Pty Ltd (2006)
The defendant wished to obtain carpet from the plaintiff on credit – the credit
application form was filled out but not the guarantee. The plaintiff supplied the
carpet, but the defendant defaulted on its payment. The plaintiff sued under the
guarantee, arguing that the guarantee had been acceptance by virtue of conduct. It
was held that there was no contract of guarantee between the plaintiff and defendant.
• Two exceptions to the rule that acceptances must be communicated:
> Where the offeror waives the requirement of communication (unilateral contracts) e.g.
Carlill v Carbolic Smoke Ball Co (1893)
• The postal rule acceptance: where acceptance takes effect at the time of posting rather
than time of receipt e.g. Household Fire & Carriage Accident Insurance Co v Grant
(1879)
• It applies only where circumstances are such that parties though the post might be
used to communicate acceptance, and even when the offeror never receives the letter
It does not apply to any circumstances where the offeror requires that acceptance must
actually be received, revocation of an offer (e.g. Henthorn v Fraser (1892)), any
instantaneous methods of communication (i.e. email, fax) (e.g. Holwell Securities Ltd
v Hughes (1974))
Offeror may prescribe a method of acceptance – conditions must be complied with
• If offeror specifies, acceptance must take the form specified e.g. George Hudson
Holdings Ltd v Rudder (1973) – the contract was required to be ‘in writing and
posted to this business address’, it was instead delivered personally, it was held that it
did not constitute acceptance of the offer
• Otherwise, form of acceptance must be contemplated by the parties (particularly the
offeror)
A. Acceptance by fax
• Fax is an instantaneous form of communication
• The contract is complete when acceptance is received by the offeror
• Contract is made where acceptance is received e.g. Entores Ltd v Miles Far East
Corporation [1955] 2 QB 327 (Telex)
Entores Ltd v Miles Far East Corporation [1955] 2 QB 327 (Telex)
Entores sent an offer by telex for purchase of copper from a company based in
Amsterdam. The Dutch company sent acceptance by telex. Contract was not
fulfilled, so Entores attempted to sue the owner of the Dutch company for damages.
It was held that the postal rule could not apply to instantaneous communications, so
the place of formation was London.
B. Postal acceptance rule
• Major exception to the rule that acceptance must be communicated
• Contract is formed in the place and moment the letter was posted e.g. Household Fire
& Carriage Accident Insurance Co v Grant (1879)
Household Fire & Carriage Accident Insurance Co v Grant (1879)
Grant applied by post for shares in the company. The company’s letter of acceptance
to Grant was never delivered, despite proper measures undertaken. Because the
defendant had not received the letter, he assumed that his offer had not been accepted
and the amount owing was not paid. The court held that there was a contract.
C. Acceptance by email
• No precedent – judges suggest acceptance when and where the email is received
(postal rule not applicable)
• Same category as instantaneous forms – Electronic Transactions Act 2000
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Additional: Preliminary Agreements
• Parties that have negotiated the principal terms of a proposed transaction may enter
into a preliminary written agreement – with the intention of recording their agreement
formally in the future
• May be ‘subject to contract’ or ‘subject to preparation of a formal contract’
• If one wishes to withdraw from the transaction after the preliminary agreement has
been signed, it will be necessary to determine whether it was intended to be binding
• Was the intention to be bound or to defer legal commitment until formal contract is
made
• A preliminary agreement will be binding if it appears that the parties intended it to be
binding e.g. Masters v Cameron (1954)