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HI 6027 - Business and Corporations Law 1

Week 2

HI 6027

BUSINESS AND CORPORATIONS LAW

Introduction to Contract Law

And

Formation of a Contract

Contracts

‖Contracts are a fundamental part of

people‘s daily lives and form the

basis of commercial law.‖

Some basic examples:

 sales contracts – buying food

 employment contracts – going to

work

 rental contracts – leasing a flat

HI 6027 - Business and Corporations Law

Sources of contract law

The study of contract law involves an

examination of common law

principles and the extent to which

they have been affected by

legislation.

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HI 6027 - Business and Corporations Law 2

Contract v. Agreement

Contract & Agreement

distinguished

Terms ‗contract‘ and ‗agreement‘ are

often used to mean the same thing.

Traditional definition of contract is:

’a legally enforceable

agreement’

An agreement is NOT necessarily a

contract.

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The law of contracts

Legally Enforceable

 For legality, the agreement must

contain a promise and must have

been intended by the parties to be

legally enforceable in a court of

law .

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The law of contracts

Contract defined

A contract can be defined as:

―An agreement concerning promises made between

two or more parties with the intention of creating

certain legal rights and obligations upon the parties

to that agreement which shall be enforceable in a

court of law.‖

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Creation of a simple contract

Creation of an

Apparent Simple Contract

 Three elements required:

• Intention to contract,

• Agreement between the parties and

• Consideration.

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Creation of a simple contract

Essential elements:

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Creation of a simple contract

Steps for creation:

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HI 6027 - Business and Corporations Law 4

Creation of a simple contract

Steps for validity:

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Intention to Create Legal

Relations

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Intention to create legal relations

Step 1: Intention to create legal

relations

The fact that parties have reached

agreement does not necessarily

mean that a contract has been

formed.

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Intention to create legal relations

Step 1: Intention to create

legal relations

There must be clear intention

by the parties that the

agreement containing

their promises is intended to

be enforceable in law.

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Intention to create legal relations

Express intention

Consider terms that expressly

and clearly state the parties‘

intentions.

Almost invariably expressed in

the negative.

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Implied intention

The courts have to determine

objectively whether the parties

intended the agreement to be legally

enforceable

To assist, consider two categories:

 social, family, domestic, voluntary

 commercial or business

Intention to create legal relations

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HI 6027 - Business and Corporations Law 6

Implied intention

Traditionally:

 social, family, domestic, voluntary

• presumed no intention

 commercial or business

• presumed intention to be bound

Intention to create legal relations

HI 6027 - Business and Corporations Law

Implied intention

Traditionally:

 Apply the relevant presumption.

 The presumption could be rebutted by

evidence sufficient to satisfy the court.

Intention to create legal relations

HI 6027 - Business and Corporations Law

Implied intention

Intention to create legal relations

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HI 6027 - Business and Corporations Law 7

Intention to create legal relations

Non-commercial agreements

Three types:

 Social agreements - ones made between

friends or acquaintances;

 Domestic agreements - ones made

between family members and relatives;

and

 Voluntary agreements - where the

parties may volunteer their services.

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Non-commercial agreements

Under the ‗traditional‘ approach

no intention is presumed to exist,

though this is rebuttable by the

evidence produced by the plaintiff.

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9781442547766/Gibson &

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Non-commercial agreements

- Other domestic arrangements

In the case of other domestic

situations the courts may look at the

words and conduct of the parties as well

as the seriousness of the consequences:

Wakeling v Ripley (1951)

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HI 6027 - Business and Corporations Law 8

Commercial or business agreements

- General

In business and commercial

agreements the courts assume

that there is an intention to

create legal contractual

relations:

Edwards v Skyways Ltd

(1964)

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Statutory position

While the common law may

provide no remedy for misleading

advertising, because when it is

regarded as a puff or an

invitation to treat, and therefore

non-contractual, there may be

statutory remedies under the

provisions of the Australian

Consumer Law, which deals with

misleading or deceptive conduct

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Agreement between the Parties

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Agreement

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Agreement

Step 2: Is there agreement

between

the parties?

Generally characterised by an

‘offer’ by one party and an

‘acceptance’ by another.

Important in determining the time,

place and contents of the

agreement.

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Agreement

As ‗offer-acceptance‘ approach

does not always work, the

Courts have taken a ‘global

approach’ by examining the

acts and conduct of the

parties.

- Integrated Computer Services

Pty Ltd v Digital Equipment Corp

(Aust) Pty Ltd (1988)

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Agreement

Agreement arising by conduct

Agreement may be established by

implication arising from conduct

of the parties:

- Clarke v Earl of Dunraven and

Mount-Earl [1897]

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Rules relating to offer

Rules as to offers

There must be:

 an intention or willingness to be bound;

 a firm promise; and

 communication of the offer

• (in writing, orally or by conduct)

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Rules relating to offer

Statements that are not

offers

An offer must be distinguished

from an invitation to treat:

 This is an offer to consider offers

and cannot create an agreement

if there is a purported

acceptance.

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Australia (a division of Pearson

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Rules relating to offer

Invitation to treat

Can include:

 auctions;

 advertisements;

 catalogues / Internet;

 price lists;

 goods in shop windows and shelves.

Look at intention of the parties.

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Rules relating to offer

Auctions

With a ‗reserve price‘:

 the auctioneer calling for bids is not

making an offer but is asking for

offers from prospective purchasers.

With no ‗reserve price‘:

 the auctioneer becomes the offeror

and must sell the goods to the

highest bidder.

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Rules relating to offer

Tenders

 Tenders are not normally offers unless

the tender states its exact needs, as

distinct from what it may only require.

Requests for Information

 A request for information is not a firm

promise and so is not an offer. Nor does

it destroy the offer as it is only an

attempt to elicit information.

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Australia (a division of Pearson

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9781442547766/Gibson &

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Rules relating to offer

Notice of the offer

The offer must be communicated to the

offeree/s.

The offer may be directed to

 one person,

 a group of people, or

 the world at large

- Carlill v Carbolic Smoke Ball Co. (1893)

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Rules relating to offer

Options

 To keep an offer open for a specified

time (an option), it must be

supported by consideration.

- Goldsborough Mort & Co Ltd v

Quinn (1910)

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Rules relating to offer

Terms in the Offer

 Any terms contained in the offer

must be brought to the notice of the

offeree.

 Any and all conditions must be

strictly followed.

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Australia (a division of Pearson

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Termination of offer

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Rules relating to acceptance

Acceptance be made in reliance

of the offer

 The offeree must intend to accept

the offer.

- R v Clarke (1927)

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Rules relating to acceptance

Acceptance must be strictly in

accordance with the terms of the

offer

 If the offeror specifies a method of

acceptance it must be followed:

- Gilbert J McCaul (Aust) Pty Ltd v

Pitt Club Ltd (1954)

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Australia (a division of Pearson

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Rules relating to acceptance

Acceptance must be

communicated

 Acceptance must be communicated

to the offeror, either by words or by

conduct.

 Mental acceptance, unless

communication has been waived by

the offeror, is insufficient.

- Felthouse v Bindley (1862)

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Rules relating to acceptance

Who can make an acceptance?

 Acceptance must be conveyed by

someone with authority.

- Powell v Lee (1908)

Cross-Offers

 Cross-offers do not give rise to an

agreement.

- Tinn v Hoffman & Co (1873)

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Rules relating to acceptance

Acceptance must be absolute

and unconditional

 Acceptance must be absolute and

unqualified or it may amount to a

counter-offer.

- Masters v Cameron (1954)

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Australia (a division of Pearson

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Rules relating to acceptance

The postal rule

Where the parties contemplate the

use of the post as a medium of

exchange of promises, the rules as

to the time of acceptance change as

follows:

 While an offer by letter is not

effective until received by the

offeree.

 Acceptance is effective as soon as it

is posted.

- Adams v Lindsell (1818)

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Rules relating to acceptance

The postal rule

If revocation of the offer is to be

effective,

it must be received by the offeree

before they post their letter of

acceptance.

- Byrne & Co v

Leon Van Tienhoven & Co

[1880]

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Rules relating to acceptance

Instantaneous communications

Where the communication of

acceptance is instantaneous, the

contract is effective when the

acceptance is received.

- Entores Ltd v Miles Far East Corp (1955)

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Rules relating to acceptance

Instantaneous communications

In cases of agreements

communicated by means of

telephone, fax or email, the contract

is formed when and where the

offeror hears or receives the

offeree‘s acceptance.

The Electronic Transaction Act 1999

(Cth) provides guidance on times for

receipt and dispatch.

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Consideration

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Consideration

Formal Contracts

 No need for consideration as the

contract is valid because of its form

— such as, deeds.

Simple Contracts

 Valuable consideration is required for

the ‗agreement‘ to become a

contract.

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Australia (a division of Pearson

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Consideration

For simple contracts,

Step 3: Is consideration

present?

Consideration is what each

contracting party bargains for and

gives in exchange for the return

promise or performance of the other

party.

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Consideration

The aim in defining

consideration is to enable a

distinction to be drawn

between promises of a

gratuitous nature and given

freely — such as gifts, and

those which are onerous or

‗paid for‘ by the incurring of

some obligation.

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Consideration defined

Consideration is the price you pay to

buy the other person‘s promise.

It is this concept of ‗price paid‘

which was adopted by Sir

Frederick Pollock in Dunlop

Pneumatic Tyre Co Ltd v Selfridge

& Co Ltd (1915):

An act or forbearance of one party, or the promise

thereof, is the price for which the promise of the

other is bought; and the promise thus given for

value is enforceable.

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Australia (a division of Pearson

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Consideration defined

The promisor is the person

undertaking the promise.

The promisee is the person who is

receiving, or the recipient of, the

promise.

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Rules for consideration

1. Consideration is essential to

the validity of every simple

contract

It may be:

 something the promisee gives the

promisor;

 the carrying out of some act; or

 refraining from doing something that

the promisee had a legal right to do.

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Rules for consideration

2. Consideration must not be past

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Rules for consideration

2. Consideration must not be past

Consideration must be:

 Present (executed) consideration which is

an act done in return for a promise.

 Future (executory) consideration where

the parties exchange promises. Each

promise being the consideration for the

other.

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Rules for consideration

2. Consideration must not be

past

Past consideration occurs where a promise is given

after an act has been performed.

 This is viewed as past consideration

and is generally not enforceable.

 The act must de done in reliance of

the promise.

Roscorla v Thomas [1842]

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Rules for consideration

2. Consideration must not be

past

The rule that past consideration is no consideration

sometimes means that a promise, made seriously,

generally cannot be enforced by the promisee if it

relates to PAST acts.

However, if the promise also pertains to the future,

that part of the promise will be enforceable: Anderson

v Glass [1869]

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Australia (a division of Pearson

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Rules for consideration

2. Consideration must not be

past

Past consideration can be good consideration if it was

provided at the request of the promisor and can show

that:

 the act was done at the promisor‘s request and

 the parties understood that the act would be

remunerated and

 the promise would have be enforceable if it had

been promised in advance of the act.

Lampleigh v Braithwait (1615)

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Rules for consideration

3. Consideration must move from

the promisee

 BUT it need not move to the

promisor:

Dunlop Pneumatic Tyre Co Ltd v

Selfridge & Co. Ltd (1915)

 Where there are joint promisees and

only one has given consideration, the

other can still enforce the promise:

Coulls v Bagot’s Executor and

Trustee Co Ltd (1967)

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Rules for consideration

4. Consideration must have

value

but need not be adequate

 Consideration must have value but

need not be adequate as this is

something only the parties to the

contract can decide:

Chappell & Co Ltd v Nestlé Co Ltd

(1960)

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Rules for consideration

5. Consideration must be

sufficient

This means that it must have some

legal value.

If not, it may be considered

insufficient and no consideration at

all.

As long as consideration exists, the

courts will not be concerned about

its adequacy.

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Rules for consideration

Examples of insufficient

consideration

Repeating an existing duty imposed

by the law: Glasbrook Bros Ltd v

Glamorgan City Council (1925)

Repeating an existing duty owed to

the promisor: Stilk v Myrick (1809)

but compare:

Hartley v Ponsonby (1871);

Williams v Roffey Bros & Nicolls

(Contractors)

Ltd (1990)

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Rules for consideration

Performing an existing legal

duty for a

third party can be sufficient

consideration:

Scotson v Pegg (1861)

Part-payment of a debt on its

own is insufficient

consideration:

Foakes v Beer (1884)

Part-payment by a third party

is sufficient consideration:

Hirachand Punamchand v

Temple [1911]

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Rules for consideration

Forbearance to sue can be sufficient

consideration:

Hercules Motors Pty Ltd v. Schubert

(1953)

Composition between a debtor and

their creditors under the Bankruptcy

Act 1966 (Cth) is sufficient to

discharge the debt.

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Rules for consideration

Moral obligations

 Moral obligations as well as natural

love and affection will not convert a

promise into good consideration:

Eastwood v Kenyon (1840)

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Rules for consideration

6. Consideration must be possible

of performance.

7. Consideration must be definite.

8. Consideration must be legal.

9. Consideration must be

referable to the other party’s

promise.

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