Topic 3(a) Formation of Contract

8/14/2019 Topic 3(a) Formation of Contract

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Topic 3(a) -Topic 3(a) -Formation of ContractFormation of Contract

-Offer and AcceptanceOffer and Acceptance-IntentionIntention

-ConsiderationConsideration-FormalitiesFormalities


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Law in Commerce/BTW1200 JO'Reilly & TLeLaw in Commerce/BTW1200 JO'Reilly & TLe 22

Overview of Contract lawOverview of Contract law

In analysing contract, consider:In analysing contract, consider:

Does a contract exist? Topic 3(a)Does a contract exist? Topic 3(a)

What does the contract say and has itWhat does the contract say and has itbeen breached? Topic 3(b)been breached? Topic 3(b)

Are there any reasons to allow escapeAre there any reasons to allow escapefrom the contract Topic 3(c)from the contract Topic 3(c)

What remedies are available to theWhat remedies are available to theinnocent party in contract cases? Topicinnocent party in contract cases? Topic

3(d).3(d).


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Essential elements of aEssential elements of a

contractcontract

An Offer

must be

made

An offer

must be

Accepted

The parties

must Intend

to be

bound

Consideration

Must be

provided

A contract is an agreement that the courts will

enforce.

Certain key elements must be present for a

contract to exist:


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Overview of agreementOverview of agreement

A contract is a legally enforceableA contract is a legally enforceableagreement.agreement.

AnAn agreementagreementinvolves aninvolves anofferofferwhichwhichhas beenhas beenaccepted.accepted.

Courts will look at the partiesCourts will look at the parties

statements and their conductstatements and their conductobjectivelyobjectivelyto determine whether ato determine whether a

reasonable person would have thoughtreasonable person would have thought

anan offerofferexisted which wasexisted which was acceptedaccepted..


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OffersOffers

An offer involves an indication that theAn offer involves an indication that theofferor wishes to enter into a bindingofferor wishes to enter into a bindingcontract with the offeree on certain terms.contract with the offeree on certain terms.

An offer must be distinguished fromAn offer must be distinguished from A questionA question Harvey v FaceyHarvey v Facey

A mere indication ofA mere indication ofpossiblepossible future conductfuture conductHarris v NickersonHarris v Nickerson

Preliminary negotiationsPreliminary negotiations

An invitation to treatAn invitation to treat


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Invitations to treatInvitations to treat

The following activities usually involveThe following activities usually involve

invitations to treat i.e. invitations to makeinvitations to treat i.e. invitations to make

offers:offers:

Goods on displayGoods on display Fisher v BellFisher v Bell;; Boots ChemistBoots Chemist CataloguesCatalogues Grainger vGrainger vGoughGough

AdvertisementsAdvertisements Partridge v CrittendenPartridge v Crittenden; cf; cf

Carlill v Carbolic SmokeballCarlill v Carbolic Smokeball AuctionAuction

Call for tendersCall for tenders


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Responses to an offerResponses to an offer

There are a variety of possibleThere are a variety of possibleresults following an offer:results following an offer:

Offer

Offeror may withdraw the offer

Offeree may reject the offer

Offeree ma acce t the offer = a reement

Offer may lapse due to death of offeror/offeree

Offer may lapse due to failure of a condition precedent.

Offer may lapse due to passing of time


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Rejecting the OfferRejecting the Offer

The offer may be rejected expressly orThe offer may be rejected expressly orby implicationby implication

Offerees conduct may indicate rejection;Offerees conduct may indicate rejection;

An offer is terminated on rejection andAn offer is terminated on rejection andcannot be later accepted;cannot be later accepted;

A counter offer acts as a rejection of theA counter offer acts as a rejection of theoriginal offeroriginal offer Hyde v WrenchHyde v Wrench Distinguish between a counter offer anDistinguish between a counter offer an

request for clarification.request for clarification.


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Is this a counter offer?Is this a counter offer?

B (by letter):B (by letter): Ill buy your car for $5,000Ill buy your car for $5,000S:S: Ill sell for $6,000Ill sell for $6,000

B:B: OK. $6,000 but can I pay in 30 days time? (byOK. $6,000 but can I pay in 30 days time? (bycheque)cheque)

S:S: No responseNo response

B:B: I enclose bank cheque for $6,000 in fullI enclose bank cheque for $6,000 in fullpayment.payment.

S refuses to proceed.S refuses to proceed.

What can B do?What can B do?


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Acceptance of the offerAcceptance of the offer

Only the offeree may acceptOnly the offeree may accept

Acceptance must be final and unqualifiedAcceptance must be final and unqualified

Masters v CameronMasters v Cameron,, Plastyne Products v GallPlastyne Products v GallEngineeringEngineering

battle of the forms problembattle of the forms problem

Acceptance must beAcceptance must be communicatedcommunicated totothe offeror,the offeror, unlessunless one of the exceptionsone of the exceptionsappliesapplies


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Communicating acceptanceCommunicating acceptance

Acceptance must be communicatedAcceptance must be communicated

Communicating acceptance over the internetCommunicating acceptance over the internet

Situations where express communication isSituations where express communication is notnotnecessarynecessary

Where regular past dealings exist allowing the conclusion thatWhere regular past dealings exist allowing the conclusion thata contract exists even without formal acceptance;a contract exists even without formal acceptance;

Where the offerors and the offerees industry involve aWhere the offerors and the offerees industry involve acustom that that formal acceptance is not necessary;custom that that formal acceptance is not necessary;

Acceptance may be indicated by conduct rather than words;Acceptance may be indicated by conduct rather than words;

In the case of unilateral contracts (egIn the case of unilateral contracts (eg SmokeballSmokeball case).case).

Acceptance by postAcceptance by post

The method of acceptance must conform with theThe method of acceptance must conform with theofferor's requirements.offeror's requirements.

Only the offeree or someone with actual authority to doOnly the offeree or someone with actual authority to doso can communicate acceptance.so can communicate acceptance.


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Acceptance by postAcceptance by post

Where an offer is accepted by post (orWhere an offer is accepted by post (orpublic telegraph/telex), the postalpublic telegraph/telex), the postal

acceptance rule MAY applyacceptance rule MAY apply Henthorn vHenthorn v

FraserFraser

This rule only applies where the offerorThis rule only applies where the offeror

had accepted post as the method ofhad accepted post as the method of

acceptanceacceptanceUnder the postal rule, acceptance

occurs when the letter is posted ,

even if the letter is lost in the

post.


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ProblemProblem

Fran sent an email to a regular customer, Paul, askingFran sent an email to a regular customer, Paul, askingwhether Paul would like to buy Frans corn crop thiswhether Paul would like to buy Frans corn crop this

year for $300 per tonne.year for $300 per tonne.

Paul posted a letter back agreeing to the purchase,Paul posted a letter back agreeing to the purchase,but in the meantime Fran sent a fax advising Paul thatbut in the meantime Fran sent a fax advising Paul that

she had sold her crop to another person.she had sold her crop to another person.

Paul is upset as he had already made plans to sell thePaul is upset as he had already made plans to sell the

corn for a profit to an international buyer. Advise thecorn for a profit to an international buyer. Advise theparties.parties.


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Planning an answer (ctd):Planning an answer (ctd): For each issue,For each issue,after explaining the relevant law, APPLYafter explaining the relevant law, APPLY

those legal rules to the facts, using thethose legal rules to the facts, using the

case(s) as comparisons of contrast to thecase(s) as comparisons of contrast to the

facts ...facts .......

....

Finish with your conclusion Finish with your conclusion youryour opinion onopinion on

whether there is a contract here.whether there is a contract here.


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Agreement must beAgreement must be

CertainCertain Generally the courts require certainty as to theGenerally the courts require certainty as to thepartiesparties,,thethe subject mattersubject matterof the contract and theof the contract and thepriceprice For sale of goods, if agreement exists but parties were silent onFor sale of goods, if agreement exists but parties were silent on

price, courts may imply agreement to pay a reasonable priceprice, courts may imply agreement to pay a reasonable price

The modern trend is to uphold contractsThe modern trend is to uphold contracts where possiblewhere possible,,particularly commercial agreementsparticularly commercial agreements ;;

An agreement to agree is uncertain and so not binding;An agreement to agree is uncertain and so not binding;

An agreement to negotiate is probably not binding;An agreement to negotiate is probably not binding;

Agreements subject to contract are presumed not to beAgreements subject to contract are presumed not to bebinding, but this presumption may be displaced bybinding, but this presumption may be displaced byevidence showing intention to be boundevidence showing intention to be bound Masters vMasters vCameronCameron

Binding agreements may contain conditions precedent (egBinding agreements may contain conditions precedent (egsubject to finance).subject to finance).


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Overview contracts require anOverview contracts require an

agreementagreementHas an offerbeen made?

Did offeror intend

to revoke

the offer?

Did the offeror

communicate

revocation?

Has acceptance been

received by the offeroreither express ly or by

conduct?

Was acceptance made

under the postal rule?

Has the offer lapsed by death

rejection or time or because

of a condition precedent

No contract

Agreement

exists

Yes Yes

Yes

Yes

Yes

No

No

No

No

No

No

Yes

Source: Sweeney &

OReilly, Law in

Commerce, LexisNexis:

Sydney 2004, p 120.


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Essential elements of aEssential elements of a

contractcontract For a contract to exist, there mustFor a contract to exist, there must

not only be agreement, but alsonot only be agreement, but also

intention to be legally bound; andintention to be legally bound; and considerationconsideration

An Agreement

must exist(offer and

acceptance)

The parties

must Intendto be bound

Consideration

must beprovided


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Intention to be legallyIntention to be legally

boundbound

Wh i i t ti l tWh i i t ti l t


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Why is intention an elementWhy is intention an element

ofof

contract law?contract law? Without an intention to be legally bound by theWithout an intention to be legally bound by the

agreement, a party can only rely on the socialagreement, a party can only rely on the socialor moral pressure to encourage the other partyor moral pressure to encourage the other party

to comply with the terms of the agreement.to comply with the terms of the agreement. Parties mayParties may expresslyexpresslydeclare theirdeclare their

intentionintentionoror

The courts mayThe courts may implyimplythe intention of thethe intention of the

parties from the surrounding facts.parties from the surrounding facts.


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Presumptions in implyingPresumptions in implying

intentionintention For social or domestic agreements, courts begin with theFor social or domestic agreements, courts begin with thepresumption that the parties did not intend to contract.presumption that the parties did not intend to contract.

For commercial agreements, the courts begin with theFor commercial agreements, the courts begin with the

presumption that the parties intended their agreement topresumption that the parties intended their agreement tobe legally enforceable.be legally enforceable.

Each presumption is rebuttable if there is evidenceEach presumption is rebuttable if there is evidenceindicating a contrary intention.indicating a contrary intention. The ultimate questionThe ultimate question

is:is:Whether a reasonable person present at the timeWhether a reasonable person present at the timewould have concluded that the arrangement waswould have concluded that the arrangement wascontractual?contractual?


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Matters to consider inMatters to consider in

determining intentiondetermining intention what the parties said (either orally and/or inwhat the parties said (either orally and/or in

writing) to each other;writing) to each other;

the context in which the statements were made;the context in which the statements were made;

the conduct of the parties;the conduct of the parties;

how grave the consequences would be to thehow grave the consequences would be to theinnocent party if the promise(s) made is (are)innocent party if the promise(s) made is (are)

broken.broken.

Source: D Khoury & YS Yamouni, Understanding Contract Law, Lexis Nexis Butterworths, Sydney, 2003, p 127.Source: D Khoury & YS Yamouni, Understanding Contract Law, Lexis Nexis Butterworths, Sydney, 2003, p 127.


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ProblemProblem

Fraser invites Daphne to the moviesFraser invites Daphne to the moviesand Daphne accepts.and Daphne accepts.

Can Fraser sue Daphne for breach ofCan Fraser sue Daphne for breach ofcontract if Daphne did not attend?contract if Daphne did not attend?


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ProblemProblem

A wealthy man wrote to his nephew who resided inA wealthy man wrote to his nephew who resided inScotland with his wife, a university lecturer, requestingScotland with his wife, a university lecturer, requestingthem to come to Australia to look after him. In return,them to come to Australia to look after him. In return,he agreed to provide them with a home and to leave hishe agreed to provide them with a home and to leave his

property to them on his death. On the basis of theseproperty to them on his death. On the basis of theseassurances, the nephew and his wife sold their houseassurances, the nephew and his wife sold their houseand left their jobs and migrated to Australia.and left their jobs and migrated to Australia.

Can the nephew sue his uncle for breach of contract ifCan the nephew sue his uncle for breach of contract ifhis uncle refuses to uphold his end of the bargain?his uncle refuses to uphold his end of the bargain?


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ConsiderationConsideration


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What is consideration?What is consideration?

Consideration is NOT that you haveConsideration is NOT that you have thoughtthoughtabout theabout thematter.matter.

It requires the person seeking to enforce a promise to haveIt requires the person seeking to enforce a promise to havegivengiven something of valuesomething of value in exchange for that promise.in exchange for that promise.

A promise not supported by consideration cannot beA promise not supported by consideration cannot beenforced in contract law unless it was made in a formalenforced in contract law unless it was made in a formalcontract (by deed). However, promissory estoppel maycontract (by deed). However, promissory estoppel mayapply (see later).apply (see later).


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Which contracts needWhich contracts need

consideration?consideration?

Formal contracts (eg deeds) do notFormal contracts (eg deeds) do notrequire consideration.require consideration.

Simple contracts requireSimple contracts requireconsideration to be binding underconsideration to be binding under

contract law.contract law.


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Examples of considerationExamples of considerationConsideration may be:Consideration may be:

a promisea promise totododo something. In this case, consideration is saidsomething. In this case, consideration is saidto be executory (that is, the consideration has not yet beento be executory (that is, the consideration has not yet beenperformed).performed).

a promisea promise notnotto doto do something. This is also called executory.something. This is also called executory.

doing something. Eg indoing something. Eg in Carlill v Carbolic Smoke Ball CoCarlill v Carbolic Smoke Ball Co,, MrsMrs

Carlill provided consideration by following the instructions ofCarlill provided consideration by following the instructions ofthe advertisement.the advertisement.

refraining from doing something (Ill give you $10 if you stoprefraining from doing something (Ill give you $10 if you stopsinging).singing).

Consideration may be:Consideration may be:

a benefit flowing to the promisor; ora benefit flowing to the promisor; or

a benefit flowing to a third person at the promisors direction;a benefit flowing to a third person at the promisors direction;oror

a detriment to the promisee.a detriment to the promisee.


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Rules on considerationRules on consideration

Consideration must move from the promiseeConsideration must move from the promisee If a promise is made to two or more personsIf a promise is made to two or more personsjointly, only one of those persons need providejointly, only one of those persons need provideconsideration (joint promisee rule)consideration (joint promisee rule)

Consideration may not be past (see next slide)Consideration may not be past (see next slide) Consideration doesnt have to be adequateConsideration doesnt have to be adequate

Consideration must be sufficientConsideration must be sufficient

Consideration must not be illegal or unlawfulConsideration must not be illegal or unlawful


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consideration must beconsideration must be

sufficientsufficient Illusory promises are not considerationIllusory promises are not consideration White v BluettWhite v Bluett Settling disputes giving up a legal claim may be considerationSettling disputes giving up a legal claim may be consideration

Wigan v EdwardsWigan v Edwards

Renegotiating contracts promising to perform an existingRenegotiating contracts promising to perform an existingcontract may not be valid considerationcontract may not be valid consideration Stilk v MyrickStilk v Myrick

Renegotiating a debt - consideration may be lackingRenegotiating a debt - consideration may be lackingPinnels CasePinnels Case;;Foakes v BeerFoakes v Beer

If creditor requests and receives payment in different time,If creditor requests and receives payment in different time,manner or place, this difference in payment is the considerationmanner or place, this difference in payment is the considerationfor promise to reduce debtfor promise to reduce debt

Exceptions to rule inExceptions to rule in Foakes v BeerFoakes v Beer::

Part payment by third partyPart payment by third party

Composition with creditorsComposition with creditors Hirachand & Punamchand v TempleHirachand & Punamchand v Temple

A promise to perform a contractual duty, already owing by theA promise to perform a contractual duty, already owing by the

promisee to apromisee to a third partythird party, will be good consideration, will be good consideration EurymedonEurymedon A promise to perform an existing public duty will not be goodA promise to perform an existing public duty will not be good

consideration unless the promisee provides something in additionconsideration unless the promisee provides something in additionto the dutyto the duty Collins v GodefroyCollins v Godefroy


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ProblemProblem

Andy promised all employees a 10%Andy promised all employees a 10%bonus if they perform their jobsbonus if they perform their jobs

properly during the forthcoming yearproperly during the forthcoming year

Is this promise binding on Andy?Is this promise binding on Andy?


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ProblemProblem

In 1998 Sue leased cattle station to Jerry for 8 years at $20,000In 1998 Sue leased cattle station to Jerry for 8 years at $20,000p.a.p.a. In 2001 cattle numbers declined as a result of a drought.In 2001 cattle numbers declined as a result of a drought. Jerry realised he cannot continue to pay $20,000 in rent unlessJerry realised he cannot continue to pay $20,000 in rent unless

condition improved.condition improved.

Sue said she would reduce the annual rent to $15,000 until theSue said she would reduce the annual rent to $15,000 until thecondition improved. Sue signed a document to this effect.condition improved. Sue signed a document to this effect.

In 2003 the drought ended and Sue is able to resume payingIn 2003 the drought ended and Sue is able to resume paying$20,000 p.a.$20,000 p.a.

Sue advised Jerry that he wouldSue advised Jerry that he would alsoalso have to pay the $10,000have to pay the $10,000forgone by Sue in the previous two years.forgone by Sue in the previous two years.

Advise Jerry.Advise Jerry.


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Promissory EstoppelPromissory Estoppel

Central London v High TreesCentral London v High Trees


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Promissory estoppel is important wherePromissory estoppel is important whereno contract exists i.e:no contract exists i.e:

no consideration exists, particularly in theno consideration exists, particularly in thecontext of renegotiated agreementscontext of renegotiated agreements JeJe

Maintiendrai Pty Ltd v QuagliaMaintiendrai Pty Ltd v QuagliaOROR the formalities of making a contract havethe formalities of making a contract have

not been satisfiednot been satisfied Waltons Stores v MaherWaltons Stores v Maher

Promissory estoppel may be a way toPromissory estoppel may be a way toprevent a promise being broken (orprevent a promise being broken (orobtain remedies for its breach) despiteobtain remedies for its breach) despitethe lack of a contract existing.the lack of a contract existing.


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Elements of promissoryElements of promissory

estoppelestoppel An assumption by the promisee:An assumption by the promisee:

the promisee reasonably assumed that a particularthe promisee reasonably assumed that a particularlegal relationship existed (legal relationship existed (QuagliasQuagliascase) or would existcase) or would exist((Waltons StoresWaltons Stores))

for which the promisor was responsible:for which the promisor was responsible:

The promisor induced the promisees assumption; orThe promisor induced the promisees assumption; or The promisor was aware that the promisee had madeThe promisor was aware that the promisee had made

the assumption, and deliberately remained silent;the assumption, and deliberately remained silent;

Reliance by the promisee on that assumptionReliance by the promisee on that assumption

DetrimentDetriment :: the promisee will suffer a detriment if the promisor isthe promisee will suffer a detriment if the promisor is

permitted to renege on the promise.permitted to renege on the promise. Detriment will not arise if the promisee will receive aDetriment will not arise if the promisee will receive a

benefit or gain.benefit or gain.


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FormalitiesFormalities

Does a contract need to be in writing?Does a contract need to be in writing? Contracts creating interests in landContracts creating interests in land

usually need to be evidenced in writingusually need to be evidenced in writing

Contracts for guarantee usually need toContracts for guarantee usually need tobe writtenbe written

Most other agreements may be oral orMost other agreements may be oral orwritten or partly written & partly oral.written or partly written & partly oral.

It will always be easier toIt will always be easier toproveprove what waswhat wasdiscussed/agreed if that is in writing.discussed/agreed if that is in writing.


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Capacity of PartiesCapacity of Parties

One or more parties to an agreement mayOne or more parties to an agreement maylack thelack the capacitycapacity to create a contract, in theto create a contract, in theeyes of the laweyes of the law

eg minors (with some exceptions)eg minors (with some exceptions) Eg mentally incapacitated/ intoxicated personsEg mentally incapacitated/ intoxicated persons

This is discussed in Topic 3(c) VitiatingThis is discussed in Topic 3(c) Vitiatingfactors, as lack of capacity may allow a partyfactors, as lack of capacity may allow a partyto avoid the contract.to avoid the contract.


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nextnext

Having established that a contract EXISTS (Topic 3(a)),Having established that a contract EXISTS (Topic 3(a)),

the next steps are to ascertainthe next steps are to ascertain

What are the terms of that contract? (Topic 3(b))What are the terms of that contract? (Topic 3(b)) Express terms (Chapter 6)Express terms (Chapter 6) Implied terms (Chapter 7 and 8)Implied terms (Chapter 7 and 8)

If the terms have been breached, is any exemptionIf the terms have been breached, is any exemptionclauses effective? (within Topic 3(b))clauses effective? (within Topic 3(b))

Are there any circumstances allowing the contract toAre there any circumstances allowing the contract tobe avoided? (Topic 3(c))be avoided? (Topic 3(c))

Otherwise, for any breach not protected by exemptionOtherwise, for any breach not protected by exemptionclauses(s), what remedies are available? (Topic 3(d))clauses(s), what remedies are available? (Topic 3(d))

Topic 3(a) Formation of Contract

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