INTRODUCTION TO CONTRACT LAW

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Vincent Potter
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1 Contract A INTRODUCTION TO CONTRACT LAW What is a contract? A contract may be defined as: An agreement or set of promises that the law will enforce. A contract is a legally binding agreement, and thus gives rise to obligations which the parties must perform. A breach of this agreement, or set of promises, will be remedied by the law. The understanding of the basic definition of a contract is simple. However, the nature of contract law and its place in law is far more complicated, and is explained via differing theories. Formation of a contract For an enforceable contract to come into existence, four essential elements must be satisfied: 1. Agreement i. Offer ii. Acceptance 2. Consideration 3. Intention 4. Certainty These four requirements indicate that the parties to the contract have come to a consensus, a bargain has been struck and promises exchanged, and intend to create legal relations. The contract is legally enforceable dependent only on circumstance (formalities) and contractual capacity. Before an agreement is made, the following terminology applies: i. Offeror the party that makes the offer ii. Offeree the party the whom the offer is made, and who is liable to accept/reject After an agreement is made, the following terminology applies: i. Promisor the party that has promised to do something in terms of the contract ii. Promisee the party seeking to enforce a promise 1

2 Internationalisation of contract law The purpose of the UN Convention on Contracts for the International Sale of Goods 1980 (Schedule to Goods Act 1958 (Vic)) ( CISG ) is to provide a modern, uniform and fair regime for contracts for the international sale of goods. Thus, the CISG contributes significantly to introducing certainty in commercial exchanges and decreasing transaction costs. Australia has ratified the CISG and it has force of law in Victoria (Goods Act 1958 (Vic), s 86) CISG Article 1 Applies to contracts of sale of goods between parties whose places of business are in different States Article 2 Does not apply to: o Domestic contracts o Contracts for services [or where the main part is labour/service (Article 3)] o Goods for personal, family or household use o Auctions o Stocks, shares, investments, money, etc. o Ships, vessels, hovercraft, aircraft o Electricity Article 4 Governs formation of contracts and the rights and obligations of parties Is not concerned with the validity of contract Article 6 The parties may exclude the application of the CISG Article 7 Interpreted with regard to its international character and the need to promote uniformity Types of contracts Bilateral contract: Formed between two parties. Both exchange a set of promises to be performed by the respective parties. The promises are executory the performance of the promise occurs after the contract is formed. Unilateral contract: Formed between two parties, however, only one party makes a promise. The offeror makes a promise which the offeree accepts by performing their side of the bargain. Once the offeree performs their side of the bargain, the contract is formed, and the offeror is obligated to fulfill their promise. Multilateral contract: Shares the features of a bilateral contract in most instances, however, there are more than two parties to the contract. 2

3 OFFER The traditional approach to establishing an agreement between two parties is to identify an offer made by one party and the acceptance of the offer by the other party (Gibson v Manchester City Council). According to classical contract theory, the offer and acceptance formula pinpoints the magical moment of formation where the parties are ad idem, and owe an obligation to each other. This theory has been softened by developments in the law. It is sometimes difficult to identify an offer or the acceptance of an offer, therefore the courts may artificially attach the labels offer and acceptance to particular actions. However, it is possible to form a contract without a clear offer or acceptance provided the parties have established mutual assent. In determining whether the offeror s outward manifestation constitutes an offer, the courts use an objective standard the view of a reasonable person in the offeree s position. An offer may be defined as: An expression of willingness to enter into a contract on specified terms. A proposal only amounts to an offer if the person making it indicates that an acceptance is invited and will conclude the agreement between the parties. Carlill v Carbolic Smoke Ball Co (1893) Issue: Was the advertisement a mere puff or was it an offer? Can an offer be made with the world at large? The Company produced the smoke ball designed to prevent users contracting influenza and other similar diseases The Company advertised that they would pay 100 to anyone who fell ill whilst using the product The advertisement also stated that the Company had deposited 1000 in the Alliance Bank as a sign of its sincerity Carlill purchased the smoke ball after seeing the advertisement and used it three times per day for approximately two months before she contracted the flu Carlill attempted to claim the reward of 100 The Company argued that the advertisement was not a serious offer, and it was too vague Held: Carlill was entitled to the reward as the advert constituted an offer of a unilateral contract, which she had accepted by performing the conditions stated in the offer. Ratio: The following principles arise from this case: i. It is possible to make an offer to the entire world ii. Conduct and actions distinguish a serious offer from a mere puff iii. In unilateral contracts there is no requirement that the offeree formally communicates acceptance, since acceptance is through full performance CISG Article 14 (1) A proposal for concluding a contract addressed to one or more specific persons constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. A proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price. 3

4 Ticket cases These scenarios pose problems in the process for identifying an offer or acceptance. However, the usual approach is that the ticket is an offer that the passenger/patron can accept or reject after he or she has had reasonable opportunity to accept or reject. MacRobertson Miller Airline Services v Commissioner of State Taxation (WA) (1975) Issue: Is an airline ticket an agreement? The airline s passengers reserve a seat on flight, pay fare, and receive a ticket Ticket contained conditions giving the airline the right to cancel a flight or a booking without incurring any liability Held: No contract and therefore no incurrence of stamp duty. The ticket did not record terms of an agreement, but rather that of an offer that could be accepted or rejected by conduct (passenger boarding their flight or demanding return of their fare). Two opinions on this decisions: i. (Barwick J) The ticket is a receipt of payment. The ticket specifies that the airline may be willing to carry the passenger and the passenger makes an offer by presenting at the airport. The airline accepts the offer by carrying the passenger ii. (Stephen J) Conventional analysis. The ticket was an offer by the airline that the passenger could accept or reject given reasonable opportunity to do so. The traditional approach applies as the passenger had reasonable time to ascertain the conditions of the ticket and choose to either accept or reject it. Ratio: Contractually, the ticket represents an offer that the passenger may choose to accept or reject given reasonable time to read the conditions. The formation of contract could not precede notification of special conditions. Invitation to treat As opposed to a formal offer, an invitation to treat invites other parties to make an offer in order to enter into negotiations. It is merely an indication that the party may be willing to create a contract and should not be labeled as an offer Gibson v Manchester City Council (1979) Issue: Did the correspondence amount to an offer and subsequent acceptance of the offer? MCC adopted a policy to allow tenants of council housing to purchase their homes Sent letter stating they may be prepared to sell the house Gibson completed and submitted the application form as requested Before a contract existed, elections were held and control of the council changed Council denied existence of a contract, however, trial judge held there was offer and acceptance Court of Appeal held in favour of Gibson. No offer/acceptance was found, but the correspondence was looked at as a whole Held: House of Lords Appeal Allowed. No reason to depart from method of identifying offer/acceptance. Given the language of the letter sent to Gibson ( may be prepared to sell the house ) was fatal and cannot be construed as an offer. Thus, without MCC accepting to sell the house, no binding contract existed. The process of negotiation must be distinguished from agreement (Lord Diplock). Ratio: The language was not that of a definitive offer. An invitation to treat is not an offer. It is merely a notice inviting offers, which the party inviting the offer may accept or reject. 4

5 Offers distinguished from invitation to treat Although there are no firm rules about whether particular types of conduct necessarily do or do not amount to an offer, the courts tend to take a consistent approach to the identification of when and where an offer has been made in everyday transactions. Shop sales The display of goods for sale, whether in a shop window or on the shelves, is ordinarily treated as an invitation to treat and not as an offer. Pharmaceutical Society of Great Britain v Boots Cash Chemists (1953) Issue: Was the display of goods an offer? Did the customer picking up the item amount to acceptance? Boots operated a self-service shop where goods were displayed on shelves As required by legislation, this part of the store was under control of a registered pharmacist When the customer selected the goods, they were taken to the cash register and the pharmacist would supervise that part of the transaction The Pharmaceutical Society sued Boots for selling drugs in an unauthorised fashion Held: Selection of the items off the shelf does not amount to acceptance, otherwise the customer would not be able to put the item back on the shelf. As such the offer takes place when the customer takes the goods to the cash register, and the transaction is completed when the cashier accepts by allowing the purchase. Ratio: Items in a store are an invitation to treat. When a customer selects an item and subsequently presents it for purchase, they are providing an offer. The shopkeeper accepts by allowing the sale to proceed. Electronic Transactions Act 2000 (Vic) 14B (1) A proposal to form a contract made through one or more electronic communications that (a) Is not addressed to one or more specific parties; and (b) Is generally accessible to parties making use of information systems is to be considered as an invitation to make offers, unless it clearly indicates the intention of the party making the proposal to be bound in case of acceptance. (2) Subsection (1) extends to proposals that make use of interactive applications for the placement of orders through information systems. 5

6 Auctions The holding of a public auction is regarded an invitation to treat. It is well accepted that the auctioneer does not make an offer to sell, but rather invites offers from those present at the auction. Each bid is an offer and the auctioneer communicates acceptance of the final bid by the fall of the hammer (Payne v Cave). Thus, no contractual claim may arise if the auction is cancelled. AGC (Advances) v McWhirter (1977) Issue: Is there an offer to sell to the highest bid? Does a reserve change this? A block of land was put up for auction The highest bid of $70,000 fell bellow the reserve, and the reserve was then withdrawn A higher bid was then made, however the auctioneer accepted the original bid due to fears regarding the highest bidder s ability to pay Held: (Holland J) There is no reason to distinguish between sale by auction whether with or without reserve as the auction remains an invitation to treat. Ratio: Every bid is no more than an offer, therefore no contract exists until that bid is accepted. The auctioneer may accept the bid they are instructed to and not necessarily the highest. Tenders The tender process involves each interested party submitting a single bid without knowing what other bids have been made. A call for written tenders usually constitutes an invitation to treat. However, exceptions do exist: Harvela Investments v Royal Trust Co of Canada (1986) Issue: Was the call for tenders an offer in this case? Was the referential bid allowed? Royal Trust Co owned shares in a company and invited bids Harvela bid $2.175 million and Outerbridge bid $2.1 million or $101,000 greater than highest Letter sent by the vendors state they were bound to accept the highest bid Held: The House of Lords decided the vendors were bound to accept the highest single, fixed bid. Whether the contract was made with Harvela or Outerbridge depended on whether the referential bid was excluded. The referential bid was inconsistent with the terms of the tender. Harvela successful. Ratio: Promise to accept highest bid was the offer. Highest bid dependent on terms of tender. Hughes Aircraft Systems International v Airservices Australia (1997) Issue: Did the CAA have an obligation to evaluate the tenders in accordance with stipulated criteria? CAA announced it would conduct tender in accordance with detailed criteria/procedures Prospective tenderers were to sign a letter to signify acceptance of terns Hughes brought action against the CAA claiming the successful tendered failed to comply Held: The request to follow the detailed procedure/criteria was a binding statement. Tenders were to be evaluated accordingly. The tender process agreement gave rise to contractual rights. Ratio: Bound to accept highest legal tender, otherwise it is a breach of contract. 6

7 Termination of an offer Revocation An offer may be revoked at any time prior to acceptance. The withdrawal of the offer is effective when it is communicated to the offeree. Options: A promise to hold an offer open is binding at common law if consideration has been given in return for that promise. This arrangement is described as an option. An option is an agreement between an option holder and grantor under which the option holder is entitled to enter into a contract with the grantor on specified terms, either at a specified time or within a specified period. The option holder is then free to exercise that option. Issue: Could the offer be revoked? Goldsbrough Mort v Quinn (1910) G paid Q, who had interest in land, for the right to purchase land for a specified price within a set period of time Q attempted to revoke the offer alleging it was a mistake, however, G accepted the offer with in the set period of time unaware of the revocation. Held: G successful. Withdrawal of the offer was ineffective. The distinction between the following judgments is important in determining remedy: (Griffith CJ and O Connor J) Regarded an option to purchase a property as a contract for the sale of that property, conditional upon the option being exercised within the specified period. (Isaacs J) Regarded an option as a preliminary contract to hold open an offer, with the exercise of that option giving rise to a separate contract of sale. Ratio: A promise to keep an offer open for a specific time period which is supported by consideration (an option) cannot be revoked or withdrawn within the agreed upon time period. If the offer is accepted within this time period, the offeror is bound under contract. Unilateral contract: In bilateral contracts where both party s promises are executory, it is easy to establish an option to prevent an offer from being revoked. However, in unilateral contracts, acceptance is by full performance. As such, a difficulty arises in ascertaining whether acceptance has been provided when the offeree has commenced, but not completed the performance, and subsequently, whether the offer can be revoked under such circumstances. As a general rule, an offer made in exchange for full performance becomes irrevocable once part performance has commenced. However, there is no universal proposition that that an offeror is not at liberty to revoke an offer once the offeree has embarked on performance it depends on the case at hand (Mobil Oil Australia v Welcome International): Whether there is an implied promise not to revoke an offer after commencement Whether the offeree knew that the offer may be revoked Whether the offeror knew that the offeree had begun performance Whether detriment has been suffered as a result. 7

8 Mobil Oil Australia v Wellcome International (1998) Issue: Can a unilateral offer be revoked after performance has commenced? Mobil created an incentive scheme to improve franchise performance, offering a nine year renewal without cost Several franchises spent time and money to score highly in the Circle of Excellence program Mobil abandoned the scheme after four years Held: Mobil successful. Ratio: An offer made in return for performance is revocable at any time before full performance, unless there is an implied contract not to withdraw or there is an estoppel. CISG Article 16 (1) Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before he has dispatched an acceptance. (2) However, an offer cannot be revoked (a) If it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or (b) If it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer. Failure of condition and changed circumstance An offer can be subject to an express or implied condition that must be fulfilled before the offer can be accepted. Alternatively, an offer may be made subject to an express or implied condition that it should lapse upon the occurrence of a certain event. In terms of circumstance, it must be obvious to the objective observer that the offer was made on the basis of certain circumstances. Only a fundamental change in circumstance will cause an offer to be terminated. Dysart Timbers v Neilson (2009) Issue: Did the offer remain open after the change of circumstance? D obtained judgment against N for almost $315,000 under a guarantee given by N for the debts of their company N disputed liability and applied for leave to appeal the decision The day after, N offered a settlement of $250,000 Three hours later, the parties were told that leave to appeal had been granted Faced with risk of the appeal being successful, D accepted the offer Held: Although the judges decided a change of circumstance could terminate the offer, there was no way of applying that reasoning in this case. Ratio: A fundamental change in circumstance will terminate the offer. 8

9 Lapse An offer which is expressed to be available for a particular amount of time will lapse at the end of that period. If no time is stipulated, the offer will lapse once reasonable time has passed, either on the basis of an implied term in the contract, or the offeree s failure to accept infers rejection. Death The death of the offeror, or the offeree for that matter, will terminate the offer. Fong v Cilli (1968) Issue: Is the offer valid following the death of the offeror? Fong owned a parcel of land which he offered to the Cilli brothers One of the brothers accepted the offer after Fong s death Fong s estate refused claimed the offer was no longer valid Held: Offeree knew of offeror s death. No longer valid. Ratio: The offer is terminated upon notice of death Comment: The implication of this decision is that an offer might be accepted after death, but prior to notice of the death. Laybutt v Amoco Australia (1974) Issue: Does an option cease following the death of the grantor? Amoco held an option to purchase land from Laybutt Option specified payment of the deposit was to be given to me (Laybutt) Amoco attempted to exercise the option by depositing 10% to Laybutt s solicitor Held: The option stipulated how it was to be exercised. Amoco did not exercise it accordingly. Ratio: Option contracts remain enforceable against the deceased s estate unless personal services of deceased are required or intent of option was that it not be exercisable after death. 9

LAW2101 CONTRACT A - CASE SUMMARIES AND KEY POINTS

LAW2101 CONTRACT A - CASE SUMMARIES AND KEY POINTS TOPIC 1: OFFER Offer is an indication by one person to another of his or her willingness to enter into a contract with that other person on certain terms TYPES OF CONTRACT Unilateral Contract Bilateral