Formation of a
contract
A contract is an
agreement that is
enforceable at
law.
Characteristics of a Contract
1. There will be a promise or promises.
2. They will be made by “parties to the
contract”.
3. They will create an obligation.
4. That obligation will be enforceable
at law.
5. Often found in negotiations, rather
than a formal document.
OFFER/ACCEPTANCE
ANALYSIS
OFFER
+
ACCEPTANCE
=
AGREEMENT
INTENTION
CONSIDERATION
CAPACITY
INTENTION TO CREATE LEGAL
RELATIONS
“To
create a contract there
must be a common intention
of the parties to enter into
legal obligations, mutually
communicated expressly or
impliedly”
Atkin LJ in Rose & Frank Co v JR Crompton & Bros Ltd [1923] 2 KB 261 at 293
Rebuttable presumptions

In social and domestic agreements there is a
presumption against legal obligations




Balfour v Balfour [1919] 2 KB 571
Cohen v Cohen (1929) 42 CLR 91
Jones v Padavatton [1969] 1 WLR 328
The presumption is rebuttable


Merritt v Merritt [1970] 1 WLR 1211
Wakeling v Ripley (1951) 51 SR (NSW) 183
Balfour v Balfour
“There are agreements between parties which do not
result in contracts within the meaning of that term in
our law. The ordinary example is where two parties
agree to take a walk together, or where there is an
offer and acceptance of hospitality. Nobody would
suggest in ordinary circumstances that those
agreements result in what we know as a contract,
and one of the most usual forms of agreement which
does not constitute a contract appear to me to be the
arrangements which are made between husband and
wife…they are not contracts because the parties did
not intend that they should be attended by legal
consequences.”
Atkin LJ at 578
Rebuttable presumptions

In business or commercial
agreements, there is a rebuttable
presumption that the parties did intend
to create legal obligations


Carlill v Carbolic Smoke Ball
Rose & Frank Co v Crompton & Bros Ltd
445

Honour clause
[1925] AC
Presumptions




Ermogenous v Greek Orthodox Community
of SA Inc (2002) 209 CLR 95
Use of presumptions of limited value
Intention to create legal relations is
always a matter to be proved
Objective test
OFFER/ACCEPTANCE
ANALYSIS
OFFER
+
ACCEPTANCE
=
AGREEMENT
INTENTION
CONSIDERATION
CAPACITY
Offer
“the indication by one person
to another of his or her
willingness to enter into a
contract with that person on
certain terms”
Carter and Harland, “Contract Law in Australia” 4th edn p28
Essential features of an offer:

The offeror must intend to be bound by the offer




Distinguish from request for information or invitation
to treat
The offer must be communicated to the offeree
The offer may be made to one person, a class of
persons, or the whole world
The offer must contain enough information
(certainty) to allow a binding contract to come
into existence
Intention to be bound
An offer is not:
 A request for the supply of information
 Harvey v Facey [1893] AC 552

An invitation to treat
 Pharmaceutical Society of Great Britain v
Boots Cash Chemists (Southern) Ltd [1953] 1QB
401.
 Gibson
v Manchester City Council
 Grainger & Son v Gough [1896] AC 325
[1979] 1AllER 972
Harvey v Facey
“the mere statement of the lowest
price at which the vendor would sell
contains no implied contract to sell at
the lowest price.”
Lord Morris at 556
Grainger v Gough
“transmission of such a price list does not amount
to an offer to supply an unlimited quantity of the
wine described at the price named, so that as
soon as an order is given there is a binding
contract to supply that quantity. If it were so, the
merchant might find himself involved in any
number of contractual obligations to supply wine
of a particular description which he would be
quite unable to carry out, his stock of wine of that
description being necessarily limited.”
Lord Herschell at 334
Examples of
Invitations to Treat
advertisements/circulars
 price lists

 displays
of goods in shops
 calls for bids at auctions, and
 calls for tenders.
Carlill v Carbolic Smoke Ball
[1893] 1 QB 256
Distinguish offer from invitation to
treat by looking at intention of offeror
 Offer can be made to world at large
 Unilateral contract – communication
of acceptance not required
 Consideration can equal
detriment/effort

Text of ad: http://www.carbolicsmokeball.co.uk/
Communication


Offer must be communicated to offeree
‘overheard’ offer or unintended
communication is not an offer

Banks v Williams (1912) 12 SR (NSW) 382
Offeree may be a particular
person or class of persons or
the whole world
“It is also said that the contract is made with all
the world –that is, with everybody, and that you
cannot contract with everybody. It is not a
contract made with all the world. There is the
fallacy of the argument. It is an offer made to all
the world; and why should not an offer be made
to all the world which is to ripen into a contract
with anybody who comes forward and performs
the condition? It is an offer to become liable to
anyone who, before it is retracted, performs the
condition, and although the offer is made to the
world, the contract is made with that limited
portion of the public who come forward and
perform the condition on the faith of the
advertisement.” Bowen LJ at 268, Carlill v Carbolic Smoke Ball
All an offer
needs is a “yes”
to make a
contract
Termination of Offers
1.
2.
3.
4.
5.
6.
Acceptance
Revocation
Rejection
Condition in offer not fulfilled
Lapse of time
Death of a party
Revocation


Must be communicated
Prior to acceptance – Byrne v Van
Tienhoven (1880) 5 CPD 344


Communication can be by third party or
conduct – Dickinson v Dodds (1876) 2 ChD 463
Not bound by statement to keep offer
open for a specified time – Dickinson v
Dodds

Unless option – Goldsborough Mort v Quinn
[1910] 10 CLR 674
Rejection




Rejection terminates an offer
Counter offer is a rejection
 Hyde v Wrench (1840) 49 ER 132
Response is not always counter
offer/rejection
May be clarification or request for
information
 Stevenson Jacques & Co v McLean
5 QBD 346
(1880)
Stevenson Jacques v McLean
“The form of the telegram is one of
inquiry. It is not …[like] Hyde v
Wrench…where the negotiation was
at an end by the refusal of the
[offeree’s] counter proposal. Here
there is no counter proposal….There
is nothing specific by way of offer or
rejection, but a mere inquiry, which
should have been answered and not
treated as a rejection of the offer.”
Lush J at 350
ACCEPTANCE
A FINAL and UNQUALIFIED
assent to the terms of an offer
made in the manner specified or
indicated by the offeror
The “yes” which ends
negotiations
Acceptance



Must respond to the offer
Must be communicated
 Subject to exceptions - Postal
Acceptance Rule
Must not be conditional
Acceptance must respond to the
offer


So, only those persons:
 to whom the offer was made; and
 who have the offer in mind at the
point of “acceptance” may accept
R v Clarke
(1927) 40 CLR 227
R v Clarke
“it is not an absolute proposition of
law that one who, having the offer
before him, acts as one would
naturally be induced to act, is
deemed to have acted on the faith of
or in reliance upon that offer. It is an
inference of fact and may be
excluded by contrary evidence.”
Starke J at 244
What Can Be Accepted?




Only what was offered (without
any additions, deletions or
conditions)
Must end negotiations
Must be unqualified
Battle of the forms (cf counter
offer)
 Butler
Machine Tool Co Ltd v Ex-cell-O
Corp (England) Ltd [1979] 1 All ER 965
Acceptance must be
communicated

Silence is not sufficient


Felthouse v Bindley (1862) 11 CB(NS) 869
Conduct may communicate acceptance


Brogden v Metropolitan Railways (1877) 2 App Cas 666
Empirnall Holdings v Machon Paul (1988) 14 NSWLR 523
Communication by conduct
“where an offeree with a reasonable
opportunity to reject the offer of
goods or services takes the benefit of
them under circumstances which
indicate that they were to be paid for
in accordance with the offer, it is
open to the tribunal of fact to hold
that the offer was accepted
according to its terms.”
McHugh JA at 535 in Empirnall Holdings v Machon Paull
Exceptions to communication
Postal Acceptance Rule

Lord Herschell said in Henthorn v Fraser [1892] 2 Ch
27 at 33:
“Where the circumstances are such that it must
have been within the contemplation of the
parties that, according to the ordinary usages
of mankind, the post might be used as a means
of communicating the acceptance of an offer,
the acceptance is complete as soon as it is
posted.”

So:
 Acceptance complete on posting (constructive vs
actual communication)
 Within the reasonable contemplation of the parties
 Adams v Lindsell (1818) 1 B & Ald 681
Postal acceptance rule will not
apply:


Contentious matters - Tallerman & Co
Pty Ltd v Nathan’s Merchandise (Vic) Pty
Ltd (1957) 98 CLR 93
If actual notice requested - Bressan v
Squires [1974] 2 NSWLR 460
Wedding cake
As well, Mavis is being threatened with legal
action by Chrissie Saranrap. Chrissie was
married a month ago and was expecting Mavis
to provide her specialty – the “nouveau
doveau” - a tiered tower of cupcakes, iced in
white and arranged to resemble the wings of
doves – as the centrepiece cake for her
wedding reception. Mavis loves doing cakes for
weddings – in fact she now makes more money
from doing wedding cakes than she does from
her regular cooking classes.
Chrissie saw information about Mavis’ cake
services after an article in the local paper, and
called round to see Mavis, and look at the
different cakes she could make. They discussed
possibilities and pricing and Chrissie left with a
price list. Apparently, Chrissie called and left
Mavis a message on the answering machine
ordering the “nouveau doveau” for her wedding,
to be delivered on 2nd May at the wedding
reception, for $2,000 COD. In her message,
Chrissie had said: “If I don’t hear to the contrary,
I’ll assume everything is OK. Call me if there is a
problem – otherwise I will see you on the 2nd.
Looking forward to your lovely creation.”
Unfortunately, because of all the work
being done to the kitchen and problems
with electrical work and electrical supply,
Mavis had experienced a number of black
outs which had interrupted her answering
machine. Mavis – never received the
message from Chrissie, and so of course,
had not provided the cake. Chrissie is very
angry and claims her wedding was ruined
without the cake. She has threatened to
sue Mavis.