Formation: Before parties can be regarded as having entered into a binding legal contract, there must be agreement.

Size: px

Start display at page:

Download "Formation: Before parties can be regarded as having entered into a binding legal contract, there must be agreement."

Christine Conley
5 years ago
Views:

1 Formation: A contract is an agreement or set of promises the law will enforce. 7 Essential Elements: 1. Offer there must be an offer 2. Acceptance the offer must be accepted 3. Consideration - There must be consideration 4. Intention to create legal relations the parties must intend to be legally bound 5. Mutuality the parties must be agreeing to the same thing 6. Capacity the parties must be legally able to enter into the contract 7. Legality the contract/activity agreed upon must be legal Before parties can be regarded as having entered into a binding legal contract, there must be agreement. Offer Basic principles: General Rule: Whether an offer exists is determined by whether a reasonable person would objectively consider that an offer was made. - Carlill An offer must contain all essential terms, be communicated expressly or impliedly either in writing or orally. Contracts are of 2 general categories: o Bilateral 2 parties have an obligation to act in some way o Unilateral Only 1 party has an obligation to act (e.g. rewards cases)! A promise in return for performance of an act rather than a counter-promise.! Only the offeror is bound and breach of contract is irrelevant to the offeree.! Australian courts have considered unilateral contracts unscientific. Instead Australian Woollen Mills Pty Ltd v Cth (1954) 92 CLR 424 held that the consideration on the part of the offeree is completed by the doing of the act which constitutes acceptance. Offers distinguished from mere puffs : General Rule: A mere puff is statement so clearly far-fetched or fanciful that no reasonable person would regard it as a legally binding offer. - Mitchell The higher the degree to which a statement can be quantified, the more likely it is a representation (offer). - Mitchell Where proof of sincerity sis demonstrated, statement is more likely an accurate representation/offer. - Carlill Mitchell v Valherie (2005) 93 SASR 76 Facts: P wanted to buy a house after witnessing D s advertisement which defined the house as cosy and immaculate. After taking possession of the house, P found the house neither cosy nor immaculate. The court held it was mere puffery and not an accurate representation. Ratio: The court held that the statement was a mere puff, since it was not intended to be an accurate representation. Carlill v Carbolic Smoke Ball Co. [1893] 1 QB 256 Facts: D manufactured a device called Carbolic Smoke Ball designed to prevent colds and flu, and advertised that any member of the public who used the product for 2 weeks and still contracted the flu would receive a reward of 100. As a sign of good faith and their intentions the company noted they had deposited 1000 in a bank. P used the device and still contracted the flu. One issue 1

2 Offers distinguished from invitations to treat : General Rule: An invitation to treat is merely an invitation to make an offer. Displayed goods are an invitation to treat the contract is complete when the cashier accepts the money (offer). Pharmaceutical Society of Great Britain v Boots Cash Chemists Ltd [1953] 1 QB 401 Facts: Pharmaceutical Society alleged Boots was breaching thes.18 of Pharmacy and Poisons Act 1933 (UK) by not having a pharmacist supervise the purchase of certain drugs. The drugs were carried from the shelf to the register by the customer. The issue was whether offer was made when objects were placed on the shelf, or when taken to the register. Ratio: Court held they were merely an invitation to treat. Offers to the world at large : General Rule: An offer can be made to the world at large, and will ripen into contract with anyone who performs the stipulated conditions. - Carlill Carlill v Carbolic Smoke Ball Co. [1893] 1 QB 256 Facts: The relevant issue was whether an offer could be made to the world at large, since it was argued that the offer was ambiguous and not made to anyone in particular. Ratio: The court held that as with other reward offers, the offer was to anyone performing the conditions of the offer, and hence the argument that the offer was not made with anyone in particular is invalid. Tenders, Offers at Auctions and over the Internet (Ebay): Tenders: request for tender is an invitation to treat, the tender is an offer. Physical auctions : o Calling for bids by the auctioneer is an invitation to treat, bidding is an offer. The item is not automatically sold to the highest bidder, it must be accepted. A bid/offer can be withdrawn at any moment before the hammer falls. A counter bid nullifies the previous offer. o The fall of the auctioneer s gavel represents acceptance of the bidder s offer. Ebay: o An online auction mimics a physical one. Display of goods is an invitation to treat (to bid). Online bids constitute offers. The bid must be accepted by the owner. o Rein AJ: The existence of a contract between vendor and auctioneer can sit together with a contract between the vendor and purchaser. The terms and conditions of the auction site create a framework for the auction. - Smythe v Thomas 2

3 Smythe v Thomas [2007] NSWSC 844 Facts: D owned an antique aircraft and placed it for auction on Ebay with a notation of minimum bid $150,000. P, another ebay user, made a bid in accordance with the rules for $150,000. Both parties received notification from ebay that P had won the aircraft. Notwithstanding that both parties had agreed to Ebay s conditions, D denied any contractual obligation to sell on the basis that the contract only existed between himself and ebay, not the bidder (P). D also alleged that the advertisement for sale on ebay was merely an invitation to treat and not an offer. Ratio: Court held that an agreement was formed. Termination of the offer: I. Revocation by offeror: General Rule: An offer can be revoked at any time before acceptance by the offeror, provided communication (words or conduct) of the revocation is provided. o Offeror needn t be the person communicating the revocation - Dickinson However, if consideration is provided to keep the offer open, this forms a new and binding agreement. - Goldsborough Revocation of offers to the all the world can be revoked in the same way the offer was made and will be effective, regardless of whether the person purporting acceptance has witnessed it - Shuey Goldsborough Mort & Co Ltd v Quinn (1910) 10 CLR 674 Facts: For the sum of $5 Quinn extended to Goldsborough the option to buy his property at a price to be decided within a 2 week period from the agreement. Before the 2 weeks had expired Quinn changed his mind and tried to retract the offer to wait for 2 weeks. Goldsborough sued for specific performance for the agreement to purchase land. Ratio: Court held consideration was provided, and thus the offer could not be retracted. Dickinson v Dodds [1876] 2 ChD 463 Facts: Dodds offered to sell a house to Dickinson who was notified that the offer would be left open until Friday 9am. However Dodds sold the house to a 3 rd party on Thursday. Dickinson heard about this via another external party so approached Dodds prior to 9am Friday purporting to accept the offer. He then sued for breach of offer. Ratio: Held that because the revocation was communicated, it was effective. Stevenson, Jacques & Co v McLean (1880) 5 QBD 346 This case is authority for the following means of terminating an offer: II. Rejection by offeree: 3

4 Once rejected, the offer is terminated - If the offeree rejects an offer they cannot later change their mind and accept the offer. o However later acceptance may function as a new offer. o This rejection must be communicated to the offeror. Inquiry does not amount to rejection of the original offer. III. Non-occurrence of a Condition: Where an offer is made subject to a condition being fulfilled, and that condition is not fulfilled, the offer lapses. IV. Lapse of Time: Where an offer contains a time-limit (Dickinson v Dodds), or time is implied by circumstance, the offer is terminated. If no time-limit is specified then the offer must be accepted within a reasonable time. Reasonableness can be determined by nature of the goods subject to the contract (perishable, transient?) or the manner of communication between parties (urgency , phone?). V. Death: The death of a party will terminate the offer. If the offeree is not aware of the offeror s death, then the deceased offeror s estate must perform his/her obligations. The death of the offeree terminates the offer in most circumstances. VI. MISC : Supervening incapacity: where there is a change in the status of the offeror before the offer is accepted o Example: loss of contractual capacity by becoming a prisoner Change of circumstances: Where an offer was made in an existing circumstance necessary for offer to occur: o Example: subject matter of offer is stolen or destroyed The Offeree s options: When an offer is made, an offeree may do one of the following things o Reject the offer! This nullifies the offer and hence the contract o Make a counter offer! Variation of an offer is a counter offer. o Mere inquiry ask for more information! Mere inquiry constitutes neither acceptance nor rejection it leave open offer. o Nothing - time will lapse (above). o Acceptance Acceptance: General Principle: 1. The offeree must accept the terms of the offer and communicate it to the offeror themselves (or by their agent) 1. Accepting terms of the offer: 4

5 Simply fulfilling the terms of an offer not known about is not acceptance. Fitch Acceptance of offer must be in reliance upon the offer if subject intent was for another dominant motive, acceptance is not valid. Crown v Clarke Fitch v Snedaker Facts: Fitch (P) offered information leading to conviction of a murder. Police had posted a reward for such information. However Fitch was not aware of this prize. Soon after he learned of the reward and demanded the money. Ratio: The court held that because P was not aware of the offer, he could not claim the reward. Crown v Clarke (1927) 40 CLR 227 Facts: A 1000 reward was offered for information leading to the arrest and conviction of a person who murdered 2 police officers. Clarke was subsequently arrested in connection with the murders, and gave evidence leading to the arrest, charging and conviction of those responsible for the murders. After being released from custody, Clarke sought to recover the reward for his information. Clarke had admitted that whilst he had seen the reward offer, he gave information to reduce his sentence, rather than with the intention of claiming the reward. Ratio: The presumption that acceptance creates agreement was rebutted since Clarke accepted on other motives not related to the offer. 2. Communication of Acceptance: An agreement is not complete until acceptance is communicated to the offeror, either expressly or impliedly. - Empirnall Means of communication is up to the parties - an offeror may specify a particular form of acceptance - Carlill v Carbolic Smoke Ball Co Mere silence does not constitute acceptance (unless acceptance is implied by conduct) - Felthouse Felthouse v Bindley (1862) 142 ER 1037 Facts: Felthouse wrote to his nephew offering to buy a horse for a certain sum, adding to the offer that if I hear nothing more about him, I shall consider him mine. The nephew did not reply, but told the auctioneer, Bindley, that the horse was sold. The auctioneer accidentally sold the horse. Felthouse then sued the auctioneer claiming the horse was his property. Ratio: Silence did not constitute acceptance. Empirnall Holdings Pty Ltd v Machon Paull Partners (1988) 14 NSW LR 523 Facts: Machon Paull Partners, an architect, was engaged by Empirnall holdings, to undertake a property development. The architect forwarded a printed contract to the developer. However, the developer did not like to sign contracts, and the architect knew this. Nevertheless, building proceeded and a number of progress claims were paid to the architect. However in a claim for outstanding fees, the property developer denied its existence and refused to pay. Ratio: The court held that despite signature, a contract existed between the parties. Although the architect indicated that signature would effect the contract, the conduct of the offeree indicated acceptance of the offer. 5

6 Correspondence with offer: Offer and acceptance must exactly correspond. Any modification of the terms constitutes a counter-offer. - Butler Butler Machine Tool Co Ltd v Ex-cell-o Corporation (England) Ltd [1979] 1 WLR 401 Facts: Butler (P) sold machinery using a standard price form which contained a clause entitling him to vary the price. The buyer (Ex-cell-o: Plaintiff) placed an order for the machinery using their own separate order form which contained separate conditions. P acknowledged the sale by returning the acknowledgment section from D s form. P brought an action alleging the contract they had engaged in allowed him to vary the price. Ratio: The defendant s order form constituted a counter-offer in law, and a rejection of the initial offer. Postal Acceptance Rule: Postal acceptance rule is an exception to the general rule is that a contract is formed when acceptance is communicated to the offeror. General Rule: where the parties have contemplated post as a means of communication, and offer is legally accepted as soon as such communication is posted, not once it is received by the offeror. -Adams v Lindsell 2 conditions: 1. The parties must anticipate post as a means of communicating acceptance 2. The postal acceptance rule will not apply where it would produce manifest absurdity. - Adams v Lindsell Instantaneous communication: In cases involving instantaneous methods of communication (fax, telephone, , in person etc), the contract is formed when and where the offeror receives communication of the acceptance. o The rule for instantaneous communication covers all distances. - Brinkibon Brinkibon Ltd v Stahag Stahl un Stahlwarenhandelsgesellschaft mbh [1983] 2 AC 34 Facts: Dispute over which jurisdiction the contract was made in. A counter-offer was sent by D by way of telex from Vienna. Acceptance was sent from London by P via telex (an old type of fax). Ratio: Jurisdiction determined by where the offer was accepted since there is where the contract formed. Olivaylle Pty Ltd v Flottweg AG (No 4) (2009) 225 ALR 632 Facts: Olivaylle was a producer of olive oil who contracted Flottweg to manufacture a production line. The issue was, as above, the jurisdiction in which the contract was created and thus where acceptance had occurred, considering communication was via . Ratio: It was determined to be in Victoria, as this was where the had been received. Hence acceptance of an offer by occurs when it is received, not sent. 6

7 Certainty and Completeness: There is a direct correlation between intention and certainty, since without sufficient clarity a court is unable to perceive the intentions of the parties from an objective assessment of the contract itself. - G Scammell General Rule: A court will only enforce a contract if its terms are certain and complete G Scammell Certainty: the parties must set out their obligations with sufficient clarity (no vague terms) so that the courts can determine precisely what the parties have agreed to (consensus ad idem). - G Scammell Completeness: the contract must embody the entire agreement between the parties. All essential terms of the contract must be included. Where the parties have not agreed to all essential terms of the agreement, the contract will similarly be unenforceable. G Scammell and Nephew Ltd v HC and JG Ouston [1941] AC 251 Facts: The parties agreed on the sale of a van on the understanding that the balance of the purchase price (money to be paid after deposit) would be based on hire-purchase terms over a period of 2 years. The issue was whether this term and the contract was sufficiently certain that the court could enforce it. Ratio: The court held that this term was practically meaningless, since these terms differ between companies. Consequences of Uncertainty: Severance or contract void Severance: If the term is uncertain, and cannot be severed, the contract will be void. If severable, the contract will remain enforceable. Whitlock o To be severable: If it is clear that the parties intended their agreement to subsist even if the relevant provisions (those deemed uncertain) should fail, then the clause is severable and the contract remains enforceable. =Fitzgerald v Masters o Unseverable: Where the offending clause forms a pivotal part of the contract, so that the parties would not have intended to be bound in its absence, severance is not possible and the contract will be void. - Whitlock v Brew If the contract is divisible, the void section or term may be separated from rest of the contract without affecting its validity. - Life Insurance v Philips Whitlock v Brew (1968) 118 CLR 445 Facts: Parties entered a contract for the sale of land. On a section of the land a petrol service station business was being conducted. The contract required the purchaser of land to grant a lease of a portion of the land sold to Shell: to the Shell Co of Australia Ltd upon terms that the said land leased as aforesaid be sued by Shell or their sub-tenant or licensee for the sale of [Shell] products and upon such reasonable terms as commonly govern such a lease. Brew sued for return of deposit, by showing the contract was void. Ratio: o High Court held that the clause was uncertain, as it did not prescribe two essential terms - the duration of the lease or the rent. o Moreover, the provision for arbitration did not authorise the arbitrator to fix either of these problems. 7

Contracts PART 1 - INTRODUCTION. Seminar 1: Introduction. Freedom of contract LAWS5002

LAWS5002 Contracts PART 1 - INTRODUCTION Seminar 1: Introduction Key elements of a contract A. Offer B. Acceptance C. Consideration (bargain) D. Intention to create legal relations E. Writing requirement