Making a contract
CRICOSProvider
Provider Code
Code 00301
CRICOS
00301J
© 2013 Reed International Books Australia Pty LtdCurtin
tradingBusiness
as LexisNexis
School
What to do this week
• 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).
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Learning outcomes
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.
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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
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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
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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
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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.
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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
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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.
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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
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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.
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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)
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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.
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INTENTION
AGREEMENT
CONSIDERATION
The elements of a contract
For a contract to come into existence the following three elements
must be established:
A. Intention to be legally bound
B. 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.
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INTENTION
AGREEMENT
INTENTION TO CREATE
LEGAL RELATIONS
plus
AGREEMENT
plus
CONSIDERATION
(informal contracts)
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CONSIDERATION
INTENTION
AGREEMENT
CONSIDERATION
A. The element of intention to be bound
There 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.
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INTENTION
AGREEMENT
CONSIDERATION
A. The element of intention to be bound
Where 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.
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INTENTION
AGREEMENT
CONSIDERATION
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.
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INTENTION TO CREATE
LEGAL RELATIONS
Expressed
(rare)
Implied
Agreements
Social
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Business
INTENTION
AGREEMENT
CONSIDERATION
A. Domestic arrangements and Social
agreements
• Woodward v Johnston [1992] 2 Qd R 214
• Todd v Nicol [1957] SASR 72
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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.
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Woodward v Johnston [1992] 2 Qd R 214
Issue:
• 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.
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Todd v Nicol [1957] SASR 72
Facts:
• 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.
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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.
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INTENTION
AGREEMENT
CONSIDERATION
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
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Esso Petroleum Ltd v Commissioners of
Customs and Excise [1976] 1 All ER 117
ESSO
ESSO PETROLEUM
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ESSO
PETROLEUM
Esso Petroleum Ltd v Commissioners of
Customs and Excise [1976] 1 All ER 117
Did Esso have the intention to be legally bound by the
offer to give the coins to motorists who purchased its
The free coins are
petrol?
produced in quantity
for
general sale and are
therefore subject to the
purchase tax.
ESSO
PETROLEUM
ESSO
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Esso Petroleum Ltd v Commissioners of
Customs and Excise [1976] 1 All ER 117
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
ESSO
bound.
PETROLEUM
ESSO
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Ermogenous v Greek Orthodox Community of
SA Inc [2002] HCA 8; (2002) 209 CLR 95
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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!
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Ermogenous v Greek Orthodox Community of
SA Inc [2002] HCA 8; (2002) 209 CLR 95
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.
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INTENTION
AGREEMENT
CONSIDERATION
INTENTION TO CREATE
LEGAL RELATIONS
plus
OFFER
AGREEMENT
plus
plus
ACCEPTANCE
CONSIDERATION
(informal contracts)
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INTENTION
AGREEMENT
CONSIDERATION
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.
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INTENTION
AGREEMENT
AGREEMENT
OFFER
ACCEPTANCE
CONSIDERATION
B. Agreement
OFFER
A statement that signifies a willingness
to contract.
AND
ACCEPTANCE
A statement or action assenting to the
terms of the offer.
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INTENTION
AGREEMENT
OFFER
CONSIDERATION
ACCEPTANCE
ACCEPTANCE
B. Parties to an offer
OFFEROR
The person / party that makes the offer
AND
OFFEREE
The person / party who receives the offer
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INTENTION
AGREEMENT
OFFER
ACCEPTANCE
CONSIDERATION
(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
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Harvey v Facey [1893] AC 552
Facts:
• Harvey sent Facey a telegram stating “Will you sell
us Bumper Hall Pen? Telegraph lowest cash priceanswer 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.
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Harvey v Facey [1893] AC 552
Issue:
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.
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INTENTION
AGREEMENT
OFFER
ACCEPTANCE
CONSIDERATION
(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
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Partridge v Crittenden [1968] 2 All ER 421
Partridge , the RSPCA is
prosecuting you for the
statutory offence of
unlawfully offering wild
birds for sale.
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RSPCA
Partridge v Crittenden [1968] 2 All ER 421
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.
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INTENTION
AGREEMENT
OFFER
ACCEPTANCE
CONSIDERATION
(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
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Pharmaceutical Society of Great Britain v Boots
Cash Chemists (Southern) Ltd [1953] 1 QB 401
BOOTS CASH CHEMIST
SHOP
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Pharmaceutical Society of Great Britain v Boots
Cash Chemists (Southern) Ltd [1953] 1 QB 401
BOOTS CASH CHEMIST
SHOP
PSGB
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These regulated drugs
are being sold without
supervision of a
registered pharmacist!
Pharmaceutical Society of Great Britain v Boots
Cash Chemists (Southern) Ltd [1953] 1 QB 401
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.
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INTENTION
AGREEMENT
OFFER
ACCEPTANCE
CONSIDERATION
(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
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INTENTION
AGREEMENT
OFFER
ACCEPTANCE
CONSIDERATION
(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.
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INTENTION
AGREEMENT
OFFER
ACCEPTANCE
CONSIDERATION
(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
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INTENTION
AGREEMENT
OFFER
ACCEPTANCE
CONSIDERATION
(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)
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Adams v Lindsell (1818) 106 ER 250
Facts:
• 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.
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Adams v Lindsell (1818) 106 ER 250
Issue:
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.
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INTENTION
AGREEMENT
OFFER
ACCEPTANCE
CONSIDERATION
(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
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INTENTION
AGREEMENT
OFFER
ACCEPTANCE
CONSIDERATION
(ii) When acceptance is effective
The 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
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INTENTION
AGREEMENT
OFFER
ACCEPTANCE
CONSIDERATION
(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
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INTENTION
AGREEMENT
CONSIDERATION
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.
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INTENTION
AGREEMENT
CONSIDERATION
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.
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INTENTION
AGREEMENT
CONSIDERATION
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.
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INTENTION
AGREEMENT
CONSIDERATION
INTENTION TO CREATE
LEGAL RELATIONS
plus
OFFER
AGREEMENT
plus
plus
ACCEPTANCE
CONSIDERATION
(informal contracts)
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INTENTION
AGREEMENT
CONSIDERATION
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)
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INTENTION
AGREEMENT
CONSIDERATION
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
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Thomas v Thomas (1842) QB 851
Following the wishes of
If my wife survive me,
Mr Thomas, you may
she should be allowed
occupy the house in
to live in my house until
return for a payment of 1
her death.
pound per year.
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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
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INTENTION
AGREEMENT
CONSIDERATION
C. What can consideration validly consist of?
• 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
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INTENTION
AGREEMENT
CONSIDERATION
C. What can consideration validly consist of?
• A promise to perform an existing obligation to the promisor
is not valid consideration.
Stylk v Myrick (1809) 2 Camp 317; 170 ER 1168
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Stylk v Myrick (1809) 2 Camp 317; 170 ER 1168
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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.
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Stylk v Myrick (1809) 2 Camp 317; 170 ER 1168
I refuse to honour the
captain’s promise!
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Stylk v Myrick (1809) 2 Camp 317; 170 ER 1168
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.
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Case study
Making a contract
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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.
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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.
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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.
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