Topic 5: Contract law: Forming a Contract
Commercial Law
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1
Overview of this topic:
Contracts;
Agreement;
Intention;
Consideration;
Note: capacity, legality and consent is covered later
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Learning Outcomes:
What is a contract?
When does a contractual agreement come into existence? What is an offer? Is an advertisement an offer? What is an acceptance? When is it effective?
How do we know whether the parties to an agreement intended that it be legally enforceable?
A promise is only enforceable if it is ‘supported by consideration’. What does this mean? Why is it that consideration ‘need not be adequate’ but ‘must be sufficient’?
How can a promise be enforced in the absence of consideration?
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Reading materials
Chapter 7 (pages 220-243) of Nickolas James’s Business Law (Wiley, 5th ed, 2020)
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Contracts
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What is a contract?
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What is a contract?
A contract is a legally enforceable agreement.
Most contracts do not need to be in writing. Many contracts are made verbally, and some contracts are implied by the conduct of the parties.
Some contracts are formed and performed at the same time. With other contracts, one or both of the parties make a promise and therefore have an ongoing obligation once the agreement has been formed.
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What is a contract?
A contract is legally enforceable because it contains certain elements which make it so:
Offer
Acceptance
Intention
Consideration
Agreement (next)
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Requirement 1: Agreement
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AGREEMENT
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AGREEMENT: What is an agreement?
An agreement is a meeting of minds, and exists when two or more people share understanding and intention.
Many agreements are preceded by a period of negotiations.
Sometimes the existence of a finalised agreement can be deduced from the conduct of the parties.
At other times, the existence of a finalised agreement is less clear.
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AGREEMENT: What is an agreement?
To have an agreement or to agree on something, of and in itself, does NOT give rise to a contract.
Agreement, or to agree on something means that the first two elements of a contract are in play:
Offer and
Acceptance
ONLY.
If the other elements – Intention and Consideration – do not eventuate, then there is no contract.
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AGREEMENT: What is an agreement?
That means you can have an agreement or you can agree on something without that agreement eventuating into a contract.
Example:
Agreeing to have dinner at a friend’s house – you will bring the wine, they will cook the food.
The elements of Offer and Acceptance are present here.
There is even Consideration because each party is promising to do something [discussed later].
But the element of Intention is missing.
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AGREEMENT: What is an agreement?
Clearly, there is no intention to sue another, if one of the parties cannot fulfill his or her promise.
Thus, a contract does not exist.
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AGREEMENT: What is an agreement?
So practically speaking, the components of Agreement (Offer and Acceptance) must be dealt with separately.
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AGREEMENT: What is an agreement?
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ACCEPTANCE
OFFER
AGREEMENT
AGREEMENT: Offer
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AGREEMENT: Offer
OFFER
A person makes an offer when they express a willingness to immediately enter into a contract with the person to whom the offer is directed.
An offer is a definite statement, which if accepted, creates a contract, provided the other elements of intention and consideration are also present.
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AGREEMENT: Offer
An offer must be communicated to the offeree:
Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256
in which the advertisement (which is generally an invitation to treat) was held to be an offer in this case and it had been communicated to the offeree (here, it was the world at large).
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AGREEMENT: Offer
The offeree can be one person, a class of persons, or the world at large: Carlill v Carbolic Smoke Ball Co.
An offer can be made in writing, verbally or indicated through conduct.
An offer must be distinguished from an invitation to treat [to deal]:
Carlill v Carbolic Smoke Ball Co and
Fisher v Bell [1961] 1 QB 394
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AGREEMENT: Offer
Examples of Invitations to Treat:
Advertisements
Catalogues
Circulars
Auctions
The display of goods in a shop
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AGREEMENT: Offer
In relation the first 3 headings, the general rule is that
they constitute invitations to treat.
BUT the appropriate wording in any one of them, may
indicate an intention to make an offer:
Carlill v Carbolic Smoke Ball Co
Fisher v Bell
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AGREEMENT: Offer
Carlill v Carbolic Smoke Ball Co – Advertisements
The company advertised its smoke ball with the claim that anyone who uses that smoke ball in accordance with the company’s instructions will not contract influenza and that if they did, the company would pay them 100 pounds. It added that as evidence of its sincerity in the matter, the company had deposited the sum of 1000 pounds with a certain bank to make good on its promise.
Mrs Carlill bought the smoke ball, used it in accordance with the instructions, but still contracted influenza.
She sued the company for the payment of 100 pounds.
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AGREEMENT: Offer
The company sought to argue that the advertisement was an invitation to treat – a puff – an advertising gimmick to get people’s attention.
Held: The wording of the advertisement was evidence that the company had made an offer.
This finding constitutes an exception to the
general rule that advertisements are invitations to
treat.
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AGREEMENT: Offer
Fisher v Bell – display of goods in a shop
The defendant displayed a flick knife in his shop window.
Certain legislation provided that it is an offence to ‘sell’ such an object or to ‘offer’ it for sale.
It was argued that the defendant had breached this legislation and that by placing the object in the shop window, the defendant had ‘offered’ it for sale.
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AGREEMENT: Offer
Held: the display of goods in a shop constitutes an invitation to treat and not an offer and that accordingly, the defendant was not in breach of the relevant legislation.
See also: Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 2 WLR427
in which the court reached the same conclusion with regard to the display of items on a shelf in a chemist shop.
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AGREEMENT: Offer
An offer can be:
Accepted by the offeree,
Rejected by the offeree, or
Revoked by the offeror.
Acceptance [by the offeree] must be absolute and unconditional [discussed later]. So to say ‘yes’ – only – to an offer, is to accept it absolutely.
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AGREEMENT: Offer
Rejection. To say ‘no’ to an offer is to reject the offer. If the offer is rejected, then it no longer exists and the offeree may not subsequently change his/her mind and purport to accept the offer which has been rejected. If it is to be accepted, the offer must be made again and accepted absolutely.
An offer is rejected by the offeree.
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AGREEMENT: Offer
Revocation. The revocation of an offer is something done by the offeror. To revoke an offer is to say that it no longer exists. After the revocation, there is nothing to accept:
Harvey v Facey [1893] AC 553
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AGREEMENT: Offer
An offer may be revoked by the offeror or a reliable third party at any time prior to acceptance by the offeree, unless an option contract has been created:
Harvey v Facey
Dickinson v Dodds (1876) 2 Ch D 463
Goldsborough Mort & Co Ltd v Quinn (1910) 10 CLR 674
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AGREEMENT: Offer
The offeror is entitled to revoke his/her offer even if the offeror has promised to keep the offer open for a particular period unless the offeree has paid for the promise of the offeror to keep the offer open [option contract]. For example, paying money to the offeror to keep the offer open for a certain time.
Goldsborough Mort & Co Ltd v Quinn
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AGREEMENT: Offer
An option contract is one which is separate from the main contract. It is a contract pursuant to which the offeree pays the offeror an amount of money for the offeror to keep the offer open for a specified time.
In this context, it is a contract to buy ‘time’. Nothing else.
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AGREEMENT: Acceptance
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AGREEMENT: Acceptance
ACCEPTANCE
When the offeree indicates by words or by action that he/she is willing to immediately enter into a legally enforceable contract with the offeror on the terms offered, the offeree is said to accept the offer.
Acceptance must be absolute and unqualified, otherwise it is a counter-offer: Hyde v Wrench [1840] Eng R 1054
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AGREEMENT: Acceptance
If the offer is accepted, an agreement (and possibly a contract) comes into existence from that moment.
If the offer has not been accepted or rejected, the offeror is entitled to revoke his/her offer.
Harvey v Facey.
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AGREEMENT: Acceptance
Acceptance must be communicated to the offeror: Powell v Lee (1908) 99 LT 284
The offeror can waive the requirement that acceptance be communicated:
This occurs in what are known as unilateral contracts where one party is promising to do something in return for the doing of an act:
Example:
The reward cases where one party promises to pay a specified amount in return for the finding and return of that party’s dog (the doing of something.)
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AGREEMENT: Acceptance
But they cannot insist that a failure to respond to the offer constitutes an acceptance:
Felthouse v Bindley [1862] EWHC CP J35
Acceptance may be communicated in one of two ways:
Postal acceptance rule: Adams v Lindsell (1818) 106 ER 250
Instantaneous communication rule: Entores Ltd v Miles Far East Corporation [1955] 2 ALL ER 493
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AGREEMENT: Acceptance
The result in the application of these rules is different in effect as to the place and time where the contract is concluded.
The postal rule provides that where the parties intend that the post is to be used as the means of communicating offer and acceptance, then acceptance of the offer occurs at the place and time the letter is posted: Adams v Lindsell
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AGREEMENT: Acceptance
It is irrelevant if the letter of acceptance is lost. The offeror is still bound by the acceptance even if the acceptance letter is never received.
This is so because the law takes the view that the offeror is in the position of dictating the terms of the offer and if the offeror does not want the postal rule to apply, then he/she may make this requirement a term of the offer.
If the offeror does not protect him/herself in this way, then the postal rule will apply as a matter of commercial convenience.
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AGREEMENT: Acceptance
The instantaneous communications rule: If this applies, the acceptance is completed at the time and place where it is received: Entores’ case.
Example:
Face-to-face communications, discussions on the
phone and texts may be considered instantaneous in
nature.
If A is in Melbourne and B is in Queensland and A makes an offer to B which B accepts, the acceptance is completed in Melbourne at the time B hears the acceptance (the place it is received.)
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Requirement 2: Intention
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Intention
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Intention: Presumptions
INTENTION
The parties to the agreement must intend the agreement to be legally enforceable.
In deciding whether or not this requirement is satisfied, the court looks at the conduct of the parties from the perspective of an objective observer and asks whether the parties were behaving in a way that would indicate to a reasonable person that they intended the agreement to be legally enforceable.
In applying the objective test, the courts have traditionally made two important presumptions.
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Intention: Presumptions
If the agreement was made in a social or domestic context, the court will presume that the agreement was not intended to be legally enforceable: Balfour v Balfour (1919) 2 KB 571
This is a presumption only and may be rebutted (proven to be inapplicable) in the appropriate circumstances: Wakeling v Ripley (1951) 51 SR (NSW) 183
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Intention: Presumptions
If the agreement is made in a commercial or business context, the court will presume that it was intended to be legally enforceable.
Edwards v Skyways Ltd (1964) 1 ALL ER 494
But, a promise made to customers in a business context will not be enforceable if the promisor can show that the promise was clearly not intended to be taken seriously by customers.
Example: Mere puff.