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CML101Lecture 2 – Law of Contracts (Contract Law 1)Derya Siva

Email: Derya.Siva@cdu.edu.au

At the end of this topic you should know and this lecture will focus on:

• Definition of a Contract;

• Elements of a Contract;

• Classification of Contracts

• Offer + Acceptance and;

• Intention to Create Legal Relations

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What is a contract?

An agreement between two or more parties under which legal rights and obligations are created.

The law of contract is concerned with the principles applicable to the formation, performance, interpretation and breach of contracts.

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Essential Elements of a Contract

ENFORCEABLE CONTRACT

Offer and acceptance

Intention

Valuable consideration

Legal capacity

Consent

Legality

Classification of Contracts

Simple contractmay be oral, wholly or partly in writing, or implied by the conduct of the parties

some may be required by statutory provision to be in writing, or evidenced in writing

must be supported by consideration.

Classification of Contracts

Contracts under seal/formal contract

referred to as a deed

derives its validity from its particular form

must be in writing; signed, sealed and delivered

does not require consideration.

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Classification of Contracts

Express contractsusual type of contract

intentions of the parties are stated in explicit terms, (orally or in writing).

Implied contracts the terms of the contract are inferred from the conduct of the parties and the surrounding circumstances.

Classification of Contracts

Bilateral contracts an exchange of mutual promises, but the actual performance is to occur at some future time

“a promise for a promise”.

Classification of Contracts

Unilateral contracts

an offer is made inviting acceptance by actual performance rather than by a promise.

“One party promises to do something in return for acts performed by the other party, with the intention of being contractually bound if those acts are performed, and the other party accepts that promise by performing his or her side of the bargain”: Gippsreal Ltd v Registrar of Titles (2007).

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Classification of Contracts

Valid contractsall the essential elements are present.

enforceable against both parties.

The usual remedy for breach of the contract is a judgment for damages. Sometimes an equitable remedy such as specific performance may be available.

Classification of Contracts

Voidable contracts Allows a party to get out of the contract if that party wishes to do so.

Classification of Contracts

Void contracts

a “contract” that never existed in the eyes of the law

no legal effect between the parties

does not create legal rights or obligations.

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Classification of Contracts

Unenforceable contracts prima facie a valid contract but cannot be enforced because of some technical defect.

OFFER

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What is an offer?

A proposal by one party to enter into a legally binding contract with another

may be made in writing, orally or implied by conduct

can only exist if there is a firm promise to do or refrain from doing something

the person making the offer must intend that it can be converted into a binding obligation by acceptance.

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The Concept of an "invitation to treat"

An offer is not an invitation to treat

An “invitation to treat” is just an indication of willingness to deal or trade.

Shop displays, catalogues, advertisements

Auction sales

Tenders.

When can an offer be made?

An offer can be made to:a specific person or persons

a particular class of persons

to the world at large.

But it may only be accepted by the person or persons for whom it was intended.

See Carlill v Carbolic Smoke Ball Co[1893]

Communication of the Offer

The offer must be communicated.

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Revocation of an offer?

Revocation of the offerAn offer is revoked when the offeror formally withdraws the offer.

On revocation, the offer comes to an end and cannot subsequently be accepted.

The offeror can revoke the offer at any time before acceptance.

The revocation must be communicated to the offeree. Until the offeree becomes aware of the revocation, he or she can accept the offer and create a binding contract.

Revocation of an offer?

An offer can be revoked notwithstanding that at the time of making the offer, the offeror has said that the offer will remain open for a specified time. There is an apparent, although not real, exception to this rule in the case of offers supported by consideration, or made by deed, which are stated to be capable of acceptance within a specified period of time.

Goldsbrough, Mort & Co Ltd v Quinn (1910)

When will an offer lapse?

An offer will lapse if:

If it is not accepted within reasonable time;

It is not accepted within the time stated;

A counter offer is made;

One party dies before acceptance;

There is a loss of contractual capacity.

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ACCEPTANCE

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Acceptance

An acceptance occurs when the party to whom an offer is made agrees to the proposal of the offeror.

Acceptance may be made by word of mouth, in writing, or by conduct. Acceptance must be made in the manner indicated by the offeror.

Acceptance

The way acceptance is to be signified depends upon the terms of the offer. If no special manner is specified then it depends upon the circumstances.

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Communication of Acceptance

Acceptance must be communicated to the offeror.

Exceptions:where the offeror has made it clear that notification of acceptance is unnecessary

where acceptance is to take the form of performance of an act (as in Carlill v Carbolic Smoke Ball Co [1893]

where the postal acceptance rule applies.

Communication of Acceptance

In cases involving telephone, fax or email, the contract is concluded at the time when, and the place where, the acceptance is received.

See Mendelson-Zeller Co Inc v T & C ProvidoresPty Ltd [1981]

See Olivaylle Pty Ltd v Flottweg AG (No 4) (2009)

General Rules which apply to Acceptance

The Acceptance may be by word of mouth, writing or conduct:

Silence is not acceptance: Felthouse v Bindley;

Acceptance which is to take the form of an act does not require communication to the offeror unless the terms of the offer require it: Carlill

Acceptance must be unconditional.

Acceptance must follow the conditions stated in the offer.

The way acceptance is to be signified depends upon the terms of the offer. If no special manner is specified then it depends upon the circumstances.

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General Rules which apply to Acceptance

Acceptance can be made only by the party to whom the offer was made.

Acceptance can be revoked provided it is communicated before the acceptance is received.

Acceptance must be made within the time prescribed or within a reasonable time.

The offeree must know that the offer exists.

Communication of acceptance must be made in a regular and authorised manner.

Postal Acceptance Rule

Where acceptance by post is contemplated by the parties, acceptance is complete as soon as the letter of acceptance is properly posted: Henthorn v Fraser [1892]

The acceptance is not affected if the letter is delayed or lost in the post.

The postal rule is excluded where the offeror requires actual communication of the acceptance.

When Postal Acceptance rule applies and when it doesn't

If Postal acceptance rule applies: the offeror cannot revoke the offer once a letter of acceptance has been posted by the offeree, even though the acceptance has not yet reached the offeror.

If Postal acceptance rule does not apply: an acceptance can be revoked provided the fact of revocation is communicated to the offeror before acceptance is received.

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INTENTION TO CREATE LEGAL

RELATIONS

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Intention to Create Legal Relations

The court applies an objective test of intention:

“[T]he court does not try to discover the intention by looking into the minds of the parties. It looks at the situation in which they were placed and asks itself: Would reasonable people regard the agreement as intended to be binding?”:

Merritt v Merritt [1970]

Social and Domestic Agreements

There is a presumption of fact that social and domestic agreements are not intended to give rise to legal relations.

However, this presumption may be readily rebutted if the evidence discloses a contrary intention.

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Agreements Between Husband and Wife

Normally agreements between husband and wife(Balfour v Balfour [1919]), and between people in de facto relationships (Shortall v White [2007]) are viewed by the courts as not intended to give rise to legal relations.

Agreements falling outside normal domestic arrangements will be enforceable:

eg, a couple’s relationship under a partnership (Milliner v Milliner (1908))

Disposition of property where the marriage has broken down.

Other Family Agreements

Other kinds of family arrangements are not generally regarded as intended to give rise to enforceable rights and obligations.

The circumstances may indicate that the parties intended to be legally bound.

The court is more inclined to find an intention to create legal relations where one of the parties has significantly changed their position in reliance on the agreement: Riches v Hogben [1986]

Agreements to Participate in Lotteries and Competitions

Courts view most social arrangements as too insubstantial to be intended to give rise to legal rights and obligations, but agreements to participate in a competition or lottery have been held to be enforceable:

SeeTrevey v Grubb (1982)

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Intention and Commercial Agreements

Where an agreement is reached in the course of business dealings there is a presumption that the parties intended to create legal relations.

“The whole thrust of the law today is to attempt to give proper effect to commercial transactions”: Banque Brussels Lambert SA v Australian National Industries Ltd [1989]

Intention and Commercial AgreementsOrdinarily, where a business or land is

sold, a contract will not be created until a formal contract has been signed. However, in such a situation a contract can arise even without the signing of a formal contract if the parties intended to be immediately bound:

Souter v Shyamba Pty Ltd (2002)

Express Exclusion of Intention

Where the agreement includes an express stipulation that it is not intended to give rise to legally enforceable obligations, the courts will give effect to such a provision. The agreement will not be enforceable at law:

Rose & Frank Co v J R Crompton & Bros Ltd [1925]

It is common to insert in competition, lottery and pools forms a stipulation to the effect that entry into the competition is not intended to give rise to legally enforceable obligations.

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Letters of Comfort

• Are usually written by a parent company to a lender giving “comfort” to the lender about a loan to be made by the lender to a subsidiary of the parent company.

• eg, given where the parent company is unwilling to act as a guarantor to the lender for the loan to its subsidiary.

Letters of Comfort

Usually phrased in general terms and may include: an acknowledgment that the parent company is aware of the proposed loan and approves of it;

a commitment to maintain its shareholding in the borrowing company so long as the loan is outstanding; and

some statement of support to the lender, couched in terms such as: “It is our policy to ensure that the business of [the borrowing company] is at all times in a position to meet its liabilities to you”.

Letters of Comfort

In Norman v FEA Plantation Ltd FEA wrote a “letter of commitment” stating that it would provide FEAP with sufficient cash to meet its ongoing obligations. As a holder of a financial services licence FEAP was subject to a “cash needs requirement”.

The Full Federal Court held that the letter bound FEA in view of its terms and the circumstances in which it was given. The word “commitment” connoted obligation, especially when read in the regulatory context of the cash needs requirement.