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

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. CRICOS Provider Code 00301J

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 CRICOS Provider Code 00301J

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 CRICOS Provider Code 00301J

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 CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

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 CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

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 CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

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) CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

INTENTION TO CREATE LEGAL RELATIONS AGREEMENT CONSIDERATION INTENTION TO CREATE LEGAL RELATIONS AGREEMENT plus CONSIDERATION (informal contracts) plus CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

INTENTION TO CREATE LEGAL RELATIONS Expressed (rare) Implied Agreements Social Business CRICOS Provider Code 00301J

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 CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

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 CRICOS Provider Code 00301J

Esso Petroleum Ltd v Commissioners of Customs and Excise [1976] 1 All ER 117 CRICOS Provider Code 00301J

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 CRICOS Provider Code 00301J

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 CRICOS Provider Code 00301J

Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; (2002) 209 CLR 95 CRICOS Provider Code 00301J

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! CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

INTENTION TO CREATE LEGAL RELATIONS AGREEMENT CONSIDERATION INTENTION TO CREATE LEGAL RELATIONS AGREEMENT plus OFFER ACCEPTANCE plus CONSIDERATION (informal contracts) plus CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

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 CRICOS Provider Code 00301J

(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 CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

(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 CRICOS Provider Code 00301J

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 CRICOS Provider Code 00301J

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 CRICOS Provider Code 00301J

(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 CRICOS Provider Code 00301J

BOOTS CASH CHEMIST SHOP Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401 BOOTS CASH CHEMIST SHOP CRICOS Provider Code 00301J

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 CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

(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 CRICOS Provider Code 00301J

(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. CRICOS Provider Code 00301J

(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 CRICOS Provider Code 00301J

(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) CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

(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 CRICOS Provider Code 00301J

(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, 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 CRICOS Provider Code 00301J

(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 CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

INTENTION TO CREATE LEGAL RELATIONS AGREEMENT CONSIDERATION INTENTION TO CREATE LEGAL RELATIONS AGREEMENT plus OFFER ACCEPTANCE plus CONSIDERATION (informal contracts) plus CRICOS Provider Code 00301J

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) CRICOS Provider Code 00301J

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 CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

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 CRICOS Provider Code 00301J

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 CRICOS Provider Code 00301J

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 CRICOS Provider Code 00301J

Stylk v Myrick (1809) 2 Camp 317; 170 ER 1168 I offer you a higher price for the houses! CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

Stylk v Myrick (1809) 2 Camp 317; 170 ER 1168 I refuse to honour the captain’s promise! CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

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Case study Making a contract CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J

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. CRICOS Provider Code 00301J