1. Making a contract CRICOS Provider Code 00301J Curtin Business School
CRICOS Provider Code © 2013 Reed International Books Australia Pty Ltd trading as LexisNexis
CRICOS Provider Code 00301J Curtin Business School

2. 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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3. 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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4. 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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5. 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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6. 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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7. 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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8. 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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9. 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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10. 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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11. 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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12. 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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13. 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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14. The elements of a contract
INTENTION
AGREEMENT
CONSIDERATION
The elements of a contract
For a contract to come into existence the following three elements must be established:
Intention to be legally bound
Agreement
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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15. INTENTION TO CREATE LEGAL RELATIONS
AGREEMENT
CONSIDERATION
INTENTION TO CREATE LEGAL RELATIONS
AGREEMENT
plus
CONSIDERATION
(informal contracts)
plus
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16. A. The element of intention to be bound
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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17. A. The element of intention to be bound
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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18. Factors as to intention in a social or domestic 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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19. INTENTION TO CREATE LEGAL RELATIONS
Expressed
(rare)
Implied
Agreements
Social
Business
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20. A. Domestic arrangements and Social agreements
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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21. 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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22. 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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23. 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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24. 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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25. A. Commercial or business agreements
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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26. Esso Petroleum Ltd v Commissioners of Customs and Excise [1976] 1 All ER 117
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27. 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 petrol?
The free coins are produced in quantity for general sale and are therefore subject to the purchase tax.
ESSO
PETROLEUM
ESSO
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28. 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
bound.
ESSO
PETROLEUM
ESSO
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29. Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; (2002) 209 CLR 95
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30. 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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31. 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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32. INTENTION TO CREATE LEGAL RELATIONS
AGREEMENT
CONSIDERATION
INTENTION TO CREATE LEGAL RELATIONS
AGREEMENT
plus
OFFER
ACCEPTANCE
plus
CONSIDERATION
(informal contracts)
plus
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33. B. The element of agreement
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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34. A statement or action assenting to the terms of the offer.
INTENTION
AGREEMENT
CONSIDERATION
OFFER
ACCEPTANCE
INTENTION
AGREEMENT
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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35. The person / party who receives the offer
INTENTION
AGREEMENT
CONSIDERATION
OFFER
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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36. (i) Requirements of an ‘offer’
INTENTION
AGREEMENT
CONSIDERATION
OFFER
ACCEPTANCE
(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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37. Harvey v Facey [1893] AC 552 Facts:
Harvey sent Facey a telegram stating “Will you sell us Bumper Hall Pen? Telegraph lowest cash price- answer 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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38. 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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39. (i) Requirements of an ‘offer’
INTENTION
AGREEMENT
CONSIDERATION
OFFER
ACCEPTANCE
(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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40. Partridge v Crittenden [1968] 2 All ER 421
Bramblefinch
cocks and
hens, 25/-each
Partridge , the RSPCA is prosecuting you for the statutory offence of unlawfully offering wild birds for sale.
RSPCA
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41. 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.
Bramblefinch
cocks and
hens, 25/-each
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42. (i) Requirements of an ‘offer’
INTENTION
AGREEMENT
CONSIDERATION
OFFER
ACCEPTANCE
(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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43. BOOTS CASH CHEMIST SHOP
Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401
BOOTS CASH CHEMIST SHOP
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44. BOOTS CASH CHEMIST SHOP
Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401
BOOTS CASH CHEMIST SHOP
These regulated drugs are being sold without supervision of a registered pharmacist!
PSGB
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45. 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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46. (i) Requirements of an ‘offer’
INTENTION
AGREEMENT
CONSIDERATION
OFFER
ACCEPTANCE
(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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47. (i) Requirements of an ‘offer’
INTENTION
AGREEMENT
CONSIDERATION
OFFER
ACCEPTANCE
(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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48. (ii) Requirements of an ‘acceptance’
INTENTION
AGREEMENT
CONSIDERATION
OFFER
ACCEPTANCE
(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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49. (ii) When acceptance is effective
INTENTION
AGREEMENT
CONSIDERATION
OFFER
ACCEPTANCE
(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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50. 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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51. 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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52. (ii) When acceptance is effective
INTENTION
AGREEMENT
CONSIDERATION
OFFER
ACCEPTANCE
(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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53. (ii) When acceptance is effective
INTENTION
AGREEMENT
CONSIDERATION
OFFER
ACCEPTANCE
(ii) When acceptance is effective
The postal acceptance rule does not apply to instantaneous methods of communication such as telephone, 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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54. (ii) When acceptance is effective
INTENTION
AGREEMENT
CONSIDERATION
OFFER
ACCEPTANCE
(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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55. Tenders A call for tenders is an invitation to treat
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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56. 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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57. 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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58. INTENTION TO CREATE LEGAL RELATIONS
AGREEMENT
CONSIDERATION
INTENTION TO CREATE LEGAL RELATIONS
AGREEMENT
plus
OFFER
ACCEPTANCE
plus
CONSIDERATION
(informal contracts)
plus
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59. C. Consideration Consideration amounts to an exchange of promises
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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60. C. What can consideration validly consist of?
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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61. Thomas v Thomas (1842) QB 851
If my wife survive me, she should be allowed to live in my house until her death.
Following the wishes of Mr Thomas, you may occupy the house in return for a payment of 1 pound per year.
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62. 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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63. C. What can consideration validly consist of?
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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64. C. What can consideration validly consist of?
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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65. Stylk v Myrick (1809) 2 Camp 317; 170 ER 1168
I offer you a higher price for the houses!
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66. 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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67. Stylk v Myrick (1809) 2 Camp 317; 170 ER 1168
I refuse to honour the captain’s promise!
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68. 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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69. CRICOS Provider Code 00301J

70. Case study
Making a contract
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71. 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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72. 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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73. 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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