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

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Tyler Warren
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1 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 (for contracts of sale of land) What is a contract? A contract is a legally binding/enforceable promise or agreement - Contains right and obligations that parties promise to perform - If parties default, there is an automatic right to recover damages for breach (only remedy available in contract law) The person who makes a promise is termed the promisor ; the person to whom the promise is made is the promisee A contract exists when the basic elements are satisfied: - An agreement (usually compromised of an offer and the acceptance of the offer) - Consideration - An intention to create legal relations Formal contracts written Informal contracts unwritten Objective theory of contract law When determining whether a contract has been agreed, the law is concerned with an external manifestation of intention (rather than what each party believed = subjective). The external manifestation relates to what each party has led the other to believe. Freedom of contract Freedom of contract = proposition that parties to a contract should ideally be left to make bargains and have the utmost liberty of contracting with limited outside intervention Limits on freedom of contract - Who can form them (capacity) - presumption that everyone has capacity to form contracts; rebuttal may be full or partial 1

2 Minors Incapacity not absolute (contracts of minors normally only voidable in the sense that although they were themselves not bound, they could if they chose enforce any resulting rights against an adult party) Mentally disabled/intoxicated Must be shown that 1. The defendant was not of capacity to contract (i.e. could not understand what he/she is doing/understand the transaction when explained 2. Plaintiff knew this (or ought to have known) Corporations Decision to contract must be made by or through a person who has the authority to bind the corporation Crown Commonwealth s contracting power is not limited in the same way as its legislative power Bankrupts Bankruptcy does not affect capacity of a person to become contractually bound Married women Now have legal personality separate from husband - Content of contracts i.e. what they promise to do (cannot be enforced if in contravention of public policy/the law, are restraints of trade) If contracts infringe some types of public policy, the contract will be considered illegal (e.g. contract to commit a legal wrong), whereas other contracts or clauses will just be unenforceable or void (e.g. restraint in trade) - Requirement of voluntariness 2

3 PART 2 - AGREEMENT Seminar 2: offer and acceptance Note: Offer and acceptance is the way of determining whether parties have passed beyond the point of negotiation and have concluded an agreement/contract Do not need to do an offer/acceptance analysis if things are already agreed such as signed document Question is if document is enforceable (was there an intent to create legal relations etc.) Offer/acceptance analysis matters in the negotiation stage, when you re trying to decipher at what point the agreement crystallised However - no offer, no contract A. Offer Offer = an expression of willingness to contract on the terms stated in the offer (Australian Woollen Mills v Cth [wool subsidy]) Tested objectively courts consider objective manifestations of intent would reasonable person consider your conduct as indicating an intention to be legally bound without further negotiation? (Australian Woollen Mills; Carlill) Whether an offer has been made is a question of fact determined on case by case basis (Australian Woollen Mills) The fact that the word offer is used is not in itself conclusive (Seppelt & Sons v Commissioner for Main Roads [freeway]) It is not necessary for an offer to be made to a specific person or a class or group of people; an offer can be made to all the world, in which case the offeree is regarded as member of the general public (Carlill v Carbolic Smoke Ball Co) 1. Offer must be final Offeror must be prepared to be legally bound by terms he has proposed in order for offer to be capable of forming a contract (AWM) - If open to negotiation, does not have legal character of offer Terms of an offer must be final (Butler Machine Tool Co v Ex-Cell-O Corporation [battle of forms]) 2. Offeree must be free to reject offer An offer must take the form of a proposal which gives the offeree the opportunity to choose between acceptance and rejection (Brambles Holdings v Bathurst City Council) - City council had language of command rather than proposal which could be accepted 3

4 3. Offer must be communicated to offeree to become legally effective (Dickinson v Dodds [house, third party]) Offer is ineffective until it is communicated to the offeree An offer may be withdrawn at any time prior to acceptance if this is communicated to the offeree - Don t need personal communication to revoke an offer/no special form of words is needed (Dickinson v Dodds) What is not an offer? Invitation to treat An invitation to trade or negotiate; not an offer but a request/invitation to someone else to make an offer to you Advertisements generally invitations to treat they are invitations to do business, not offers, as they invite a bargaining response rather than acceptance - However, in Carbolic, an advertisement guaranteed the company would be liable to anyone who performed certain conditions involving buying and using a smoke ball product alleged to cure certain ailments is if a certain result did not eventuate, namely the curing of those ailments this was held to constitute a unilateral offer to the world, and thus acceptance falls immediately on those who perform stipulated conditions Puffery = sale-speak, hyperbolic, over-the-top; unlikely to be capable of a legal offer, clearly intent of seller not to be bound by advertisement - However, puffery can become an offer - look at whole communication in its entirety - Carbolic: depositing 1000 pounds in bank to demonstrate sincerity made puff an offer Evidence that they intended to be legally bound Example of an inducement (i.e. you get sick, we pay you money) - Reasonable person would perceive level of sincerity Displayed goods in shop generally seen as invitations to treat (Pharmaceutical Society of Great Britain v Boots Cash Chemists [self-serve]) - When goods are placed on shelves (allowing customers to freely choose them, before being paid at the exist counter), the actual offer is made by the customer (i.e. an offer to purchase for stated price) to the cashier at the register - The register may accept and the sale is completed thus the display of goods on shelves only an invitation to treat Declaration/statement of intention to follow course of action Not an offer as it does not contain a promise Statement of intent to purchase land not an offer - Seppelt v Commission of Main Roads Statement of price Does not constitute an offer is a provision of information 4

5 Statements of policy Australian Woollen Mills: - Letters held to contain merely a statement of govt policy as to a proposed subsidy scheme for manufacturers, rather than an offer capable of acceptance by plaintiff manufacturer - Principle: if communication includes a request to do something/invitation/inducement to do something, that is a reasonable basis to conclude that there is a legal offer B. Acceptance Acceptance is an unqualified assent to terms of an offer offeree is saying yes and cannot introduce new terms 1. Communication Communication is generally required although performance of some act by the offeree indicating an intention to accept will suffice to bind him/her (Empirnall Holdings [director]) Offer offer is communicated offeree decides to accept notice of acceptance acceptance becomes legally valid To identify acceptance, look for two key elements: 1. Identity of the person who accepts the offer - Offer may only be accepted by the offeree, someone authorised to act on offeree s behalf when making arrangements with offeror (not a third party) 2. Notification - Offeror must be notified of acceptance by offeree unless offeror chooses to dispense with notification - Notice required for bilateral contracts in offer/acceptance stage Bilateral contract = exchange of promise is sufficient to constitute a valid contract e.g. one person (offeror) makes promise to do something, other party (offeree) promises to pay for it Offer by offeror (promise made to offeree) offer accepted, reciprocal promise made to offeror performed - Notice for unilateral contracts after performance stage (Carbolic Smoke Ball) Unilateral contract = no exchange of reciprocal promises; one person promises to do something and the other person acts on it Usually cases of offers to the world The offeror has impliedly dispensed with the need for notice of acceptance No express acceptance is required, but when the offeree starts performance, the offeree can be taken to have impliedly promised to complete the performance Offer someone sees it perform act requested (= performance AND acceptance) notification of performance after event 5

6 - Offer can be revoked prior to notification of acceptance (timing thus very important) Silence? An offeror cannot specify silence as a method of acceptance Cannot ever assume just silence as acceptance to an offer - A contract cannot be forced on the offeree simply by stating that unless the offeror hears something to the contrary it will be take the offer as accepted (Felthouse v Bindley [horse]) - Rule qualified in Empirnall Holdings Agreement inferred from conduct Their performance = fulfilling of terms of contract Subsequent conduct of offeree in performing the acts contemplated in the offer indicates an intention to accept (Empirnall Holdings Pty Ltd v Machon Paul Partners Pty Ltd) - When the offeree takes the benefit of services which he knows are in accordance to the offer, and had reasonable time to reject the offer, it signals acceptance (Empirnall Holdings) Not signing is like silence but if you have continued to perform and performance is consistent with accepting contract, this resembles acceptance 2. Correspondence Acceptance must precisely correspond with the offer (Butler Machine Tool Co v Ex-Cell-O Corp) i.e. parties must be of one mind to have an agreement, and language used must clearly convey a decision by offeree to be bound by terms of offer - Any departure from the offer will result in purported acceptance as being ineffective Whatever actual language of acceptance used, conduct has to indicated that offeree is saying yes to those terms (R v Clarke [poster]) Counter-offers As soon as terms change, it is not an acceptance of the offer but a COUNTER-OFFER (Butler Machine Tool Co Ltd v Ex-Cell-O Corporation) When a series of offers are put, and rejected and replaced by counter proposals, matter of pure chance as to which of parties is offeror and offeree Battle of the forms derived from standard form contracts Buyer and seller may each use their own printed forms in negotiations for sale setting out the terms on which they propose to deal, yet each party s form will be drafted to protect its own interests, so the forms will inevitably conflict - If buyer accepts a seller s form with a specific clause acting as a counter-offer which the buyer accepted, he is bound to the seller s terms and must accept conduct (Butler Machine Tool) - There is a contract as soon as the last of the form is sent and received without objection being taken to it (Butler Machine Tool) 6

7 - An objective assessment of the documents as a whole should determine whose terms prevail (Butler Machine Tool) Seminar 3 3. Postal acceptance rule General rule = offer offer arrives acceptance (from moment acceptance is communicated to offer, it is valid; offeror has to receive notification) binding contract Exception/postal acceptance rule: acceptance is effective from moment letter is sent, contract is legally valid/enforceable - Acceptance is immediately when a properly pre-paid and addressed letter is posted contract is formed on posting even if the offeror is then ignorant of that fact, and even though the letter is delayed in transmission, or may be lost in the post and never delivered - A contract is formed at the place where the final act regarded as completing the contract occurred, so where the postal acceptance rule applies, Aus courts regard the contract as having been made in the place whether the acceptance was posted Rule only applies to acceptance, not revocations of offers or acceptances Bressan v Squires [option in writing]: 1. Must be correctly stamped/address 2. Method of acceptance has to have been previously contemplated (Henthorn v Fraser [option]) 3. Usual rule of offers and acceptance apply (e.g. has to be consensus as to the terms) In most cases the parties will be ignorant of the rule and the relevant question is whether it can reasonably be inferred that the parties contemplated the legal effect of such a method of acceptance that the contract is concluded by the action of posting (Bressan v Squires) In situations where for some reason the acceptance is held not to have been effective on posting, even it is contemplated that acceptance will be by post, it may well be that an acceptance will nonetheless take effect on delivery to offeror s address even if not read until later (Holwell Securities Ltd v Hughes) Rule protects the offeree against risk of delay/loss in transmission of a letter (Household Fire and Carriage Accident Insurance Co v Grant) and against revocation of an offer once acceptance has been posted In the case of communication by mechanical means (telephone/fax/telex), communication is for practical purposes instantaneous, acceptance is to be assimilated to cases where parties are negotiating in each other s presence (Brinkibon v Stahag Stahl [telex]) 4. Knowledge of offer required for acceptance? 7

8 Acceptance cannot occur if offeree is ignorant of offer Where an offer is made for a reward to be paid in return for the performance of some act (i.e. a unilateral contract), the mere fact that a person by chance happens to perform that act while ignorant of the offer will not result in a binding contract (R v Clarke) - Unilateral contract will be made only when the acts required for acceptance are performed on the faith of/in reliance of the offer (R v Clarke) Cannot be for another motive Duration of offers how offers die Acceptance must take place within the period of duration of the power of acceptance created by the offeror in making the offer Revocation An offer may be withdrawn at any time by the offeror prior to acceptance if it is communicated to the offerree (Dickinson v Dodds). - This is even if it is expressly stated to be open for a certain period which has not, at the time of revocation, expired (Stevenson Jacques & Co v McLean [goods at cash price]) No particular form of revocation is required all that is required is that the offeror in some way conveys (directly or indirectly) to the offeree that he/she had changed his/her mind about the offer - Not essential that the communication/notification of revocation by made by the offeror; can be made by third party - so long as offeree becomes aware of revocation (Dickinson v Dodds) Where the postal acceptance rule applies, an acceptance will be effective on posting even though before that time the offeror has sent a letter revoking the offer (Stevenson Jacques & Co v McLean) - There can be no contract if the offeree has received the letter of revocation before posting an acceptance Option contracts When can t an offer be revoked? Option offers must be kept open for the agreed time if consideration has been paid to keep offer open (Goldsborough Mort & Co v Quinn [rode out to lands on horse]) - If option is part of one contract with the other offer, then breaching the option breaches that contract if the other party accepts (Goldsborough Mort & Co v Quinn) Unilateral contracts An offer made in return for performance of an act is, like any other offer, revocable at any time (Mobil Oil Australia v Lyndel Nominees [9-for-6]) 8

FORMATION OFFER: (2) Elements: Sufficiently clear and promissory (Gibson v Manchester) More than a mere puff (Carbolic Smoke Ball)

FORMATION OFFER: (2) Elements: Sufficiently clear and promissory (Gibson v Manchester) More than a mere puff (Carbolic Smoke Ball) FORMATION [A] will argue that a binding contract exists, and seeks to enforce [B] s promise of. In this case, the elements of and are likely uncontentious, but [A] will have to make out and _. OFFER: [A]