contract law in aystralia for business students by rick sarre

1. Foundations of Business Law
Week 4
Forming Business Contracts
Part 1

2. Before we look at contacts
From last week …
How to answer legal questions:

3. How to answer a legal problem
1. Identify
the legal
issue
2. Identify
what the
plaintiff will
want to
establish and
what the
defendant
will want to
establish
3. Argue
each point
from both
positions
based upon
any
relevant
case or
statute
4. Reach a
conclusion:
who is
more likely
to win (and
what
remedies
can they
expect)?

4. The Law of Contract
Formation Part 1
Chapter 12: Introduction to Contract
Chapter 13: Agreement between the parties
Chapter 14: Intention to create legal relations

5. Some preliminary points:
‘Contract’ & ‘Agreement’ distinguished
• Terms „contract‟ and „agreement‟ are often used to
mean the same thing.
• Traditional definition of contract is: „a legally
enforceable agreement‟. So an agreement is NOT
necessarily a contract. It only becomes a contract
when it is legally enforceable.
• The law of contract is all about determining which
promises the law will enforce.

6. Contract law is found in both the common law
and statute law
Common law: cases where parties have had their
contractual disputes (civil cases) settled by the
courts (and these become precedents)
Legislation imposes standards of conduct on certain
contracts (for example, consumer contracts in so far
that they should not be unfair, not sell things which
are broken or dangerous, and some contracts must
be in writing such as credit contracts)

7. Creation of a simple contract
Steps for creation:

8. Creation of a simple contract
Chapter 12 gives us an overview:
Creation of an
Apparent Simple Contract
• Three elements required:
• Intention to contract
• Agreement between the parties
• Consideration.

9. Validity of a simple contract
There are 4 elements required for validity
(hence, enforceability):
• The parties have legal capacity,
• The parties have consented,
• There no illegality of purpose and
• Any form requirements have been
satisfied.

10. Classification of contracts
Contracts classified by formation:
• Express Contracts - wholly in writing, wholly oral
or combination of the two; all the terms are agreed
upon.
• Implied Contracts - look at the circumstances
surrounding the acts or conduct of the parties. A
person prunes your roses every year without any
formalities.
• Quasi-contracts - an obligation imposed by law on
a person, for example, a promise to consider a
tender for a contract.

11. Classification of contracts
Formal or simple contract?

12. Classification of contracts
Statute of Limitations
• The time limit within which a legal action
to enforce a formal contract „under seal‟
can be brought before it becomes
„statute barred‟ varies between states
(e.g. SA: 15 years).
• It is much shorter for an action to
enforce a simple contract (e.g.
SA/NSW/Qld/Tas/ACT: 6 years).

13. Classification of contracts
Some contracts are void unless they are in
writing
• bills of exchange and promissory notes;
• cheques and payment orders;
• „hire purchase‟ and credit contracts under
the Uniform National Credit Code; and
• real estate contracts.

14. Classification of contracts
• There are some contracts which must be
evidenced in writing if they are to be enforceable.
• This is simply a requirement of proof which dates
back to the Statute of Frauds 1677 (Imp).
Lee Road v Catanzariti [2005] SADC 64
Offer and acceptance of terms of a real estate sale
was by exchange of a number of faxes which
confirmed a number of terms. Later the seller
refused to sign the formal contract saying nothing
had been agreed in writing.
Held: the faxes (read together) were sufficient.

15. Contracts and e-commerce
• The Electronic Transactions Acts provide a legal
framework to encourage businesses and
consumers to use electronic commerce by
providing that the law shall treat electronic and
paper-based commerce equally.
• Electronic Transactions Act 2000 (SA)
A buyer can accept an offer by clicking on “BUY”.
An automated message system can indicate
acceptance of a contract.

16. Contracts and e-commerce
• Other features of the Electronic Transactions
Acts include:
• A transaction is not invalid because it took place wholly
or partly electronically;
• A requirement to give information in writing can be
satisfied electronically;
• Electronic signatures are acceptable;
• Electronic form is equivalent to hard copy;
• Recording of information in electronic form is
equivalent to hard copy;
• Time and place of despatch can be electronically
recorded.

17. Chapter 13: For a contract to be
made there must have been
agreement.

18. Agreement

19. Agreement by conduct alone
Brambles Holdings v Bathurst CC [2001]
NSWCA 61 (2001) 53 NSWLR 153
Brambles took liquid waste from BCC for a fee. BCC
wrote to Brambles offering a higher fee if they kept
some aside for a waste treatment plant. Brambles
didn‟t want to do that but charged and received the
higher fee anyway.
Held: There was a contract on the terms as set out by
BCC. Brambles‟ conduct indicated implied
acceptance. They now needed to repay the sum they
should have set aside.

20. Only if there is a valid offer followed by a
valid acceptance
• Offer: promise by offeror to do something
(or not do something) if the offeree
responds in a stipulated manner
(e.g. Stating a willingness to sell goods or
supply services in exchange for a
stipulated price)
Is there an agreement?

21. Offer
Offers can be:
• In writing
• Verbal
The offer must be communicated
to the offeree.

22. Distinguish advertising exaggerations
A contract will not be held to be
enforceable if the offer was not
intended to be taken seriously
• Exaggerated „offers‟ are called “puffs”

23. Puffs
Leonard v Pepsico Inc 88 F Supp 2d USA
• Pepsi advertised that 7,000,000 points qualified
a consumer to win a Harrier jet
• The form indicated that additional points could
be purchased for ten cents each. Leonard raised
$700,000 in order to purchase the points needed
to acquire the jet (which was worth $33.8
million).

24. Puffs
Held: that it was clear that no serious
offer for a Harrier jet was made. An
objective reasonable person would find
that the offer was in jest.

25. An „invitation to treat‟ is not an offer
Catalogues,
price lists most
adverts are
„invitations to
treat‟, not offers

26. Offer versus invitations to treat
Pharmaceutical Society v Boots [1953] 1 QB 401
Was the chemist “selling” drugs without a
pharmacist present? Held: Displays in shops, even
with prices marked on them, are just „invitations to
treat‟. Remember Fisher v Bell? Both of these cases
involved criminal prosecutions … resolved by
reference to contract principles.
This means that a customer in a self-serve shop
makes the offer to purchase at the cashier; the
contract is made when the cashier accepts the offer
(to purchase the item) and takes the cash.

27. Tenders and auctions
• A call for tenders is an „invitation to treat‟.
The tender is the offer that can then be
accepted by the person who put out the
call for tenders.
• Auctions
The bid is the offer, which is then accepted
with the fall of the hammer.

28. Provision of information is not an offer
Harvey v Facey [1893] AC 552
• The plaintiffs asked the defendants at what price
they would be willing to sell some land. The
defendants replied with a figure, which the
plaintiffs treated as an offer and said “we
accept!” Was there a contract?
• Held: No. The defendants‟ reply, rather than
being an offer, was merely a statement of the
minimum price at which they would be willing to
sell. The discussion was still at the negotiation
stage.

29. An advertisement is usually not an offer.
Instead, it is an invitation to treat – an
invitation to another person to make an
offer.
However an advertisement may, in some
cases, show an intention to be bound and
would therefore be construed as an offer.
Carlill v Carbolic Smoke Ball Co [1893] 1 QB
256.
Some advertisements are
enforceable

30. • The Carbolic „smoke ball‟ was designed to
prevent users contracting a cold
• £100 was to be provided by Carbolic to any
person who had used the ball three times daily
for two weeks according to the printed directions
supplied with each ball, and still contracted the
flu
• £1000 pounds was deposited in a bank to show
their business sincerity

31. Carlill v Carbolic
Smokeball Co
The advertisement
from 1893 looked
like this:

32. Carlill v Carbolic Smoke Ball Company
• Mrs Carlill used the Smokeball as required
but still got the flu.
• When contacted, the Carbolic company
denied they were legally liable to pay.
They said it was not an offer; just a „puff‟.
Mrs Carlill sued the company for the
reward saying there was a contract.

33. Carlill v Carbolic Smoke Ball Company
Held: the advert was more than a mere puff;
it was a clear legal offer because the
wording of the advert indicated a clear
intention of Carbolic to enter into legal
relations with anyone who „accepted‟ the
offer by fulfilling the conditions.

34. The ratio decidendi of Carlill:
• An offer can be made to the world at
large
• It is accepted when the persons to
whom it is directed do what is
required
• Gives rise to what we sometimes
refer to as a unilateral contract.

35. One final matter: Options
Goldsborough Mort v Quinn (1910) 10
CLR 674
• An option is a contract to keep an
offer open
• The deposit is sometimes called an
„option‟ … it „seals‟ the promise to
keep the offer open.

36. Termination of offer

37. Termination of offer
Revocation (Withdrawal)
• A withdrawal of offer revokes the offer. But
to be effective, withdrawal by the offeror
must be brought to the notice of the offeree
before acceptance
• If the offeree learns of the withdrawal
indirectly they cannot then try to accept it:
Dickinson v Dodds [1876] 2 Ch D 463
Byrne v Van Tienhoven & Co (1880) LR 5
CPD 344

38. Termination of offer
Rejection or Counter-Offer
Refusal by the offeree or a counter-offer by
the offeree will terminate the offer.

39. Termination of offer
Lapse of Time
Non-acceptance within:
• a reasonable time
• a stipulated time
• or death of either party before
acceptance
will terminate the offer.

40. Termination of offer
Lapse by failure of a condition
• If the offer is subject to a condition and
the condition is not fulfilled, the offer will
lapse.
• If there is a condition precedent, it must
be satisfied before the agreement can
ripen into a contract.

41. Acceptance
There are rules related to acceptance too.
Acceptance be made in reliance of the offer
• The offeree must intend to accept the offer.
-R v Clarke (1927) 40 CLR 227
Clarke gave information to clear his name, not
because of the offer.

42. Rules relating to acceptance
Acceptance must be strictly in accordance with
the terms of the offer: For example, if the offeror
specifies a method of acceptance, it must be
followed:
Gilbert J McCaul (Aust) Pty Ltd v
Pitt Club Ltd (1954) 76 WN (NSW) 72
Lessee failed to pay rent on time, then sought to
renew the lease. Held: could not be renewed as
he had failed a condition precedent (even though
the landlord did not appear to object to the
irregular payments.)

43. Rules relating to acceptance
Acceptance must be conveyed by
someone with authority.
- Powell v Lee (1908) 99 LT 284
The „acceptance‟ of an offer
regarding employment had not
come from a person in authority so
it was not binding acceptance.

44. Rules relating to acceptance
Silence cannot be acceptance.
Felthouse v Bindley (1862) 142 ER 1037
Offeror said to the offeree
“If I hear nothing I will consider the horse
sold”
Held: no contract

45. Rules relating to acceptance
Acceptance must be absolute and
unconditional
• Acceptance must be absolute and
unqualified or it may amount to a counter-
offer.
Ebenezer Mining v Seppanen [2003] QSC 62
Negotiations for the purchase of minerals had
never amounted to a final, unconditional
acceptance.

46. 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:
• An offer by letter is not effective until received by the
offeree.
• But acceptance is effective as soon as it is posted.
- Adams v Lindsell (1818) 106 ER 250

47. Rules relating to acceptance
The postal rule
• If revocation of an offer is to be effective,
it must be received by the offeree before he or
she posts their letter of acceptance.
Byrne & Co v
Leon Van Tienhoven & Co [1880]

48. Rules relating to acceptance
Instantaneous communications
• What happens where the communication of
acceptance is instantaneous?
• Entores Ltd v Miles Far East Corp [1955] 2 QB
327
Held: the „postal rule‟ didn‟t apply to the contract
with the Dutch company. The acceptance
happened when the telex arrived back in the UK,
and that‟s where the contract was formed.

49. 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.
• Electronic Transaction Act 1999 (Cth) provides
guidance on times for receipt and despatch. Act
infers that acceptance could be when the offeree
pushes the „send‟ button.

50. Rules relating to acceptance
Email: safest legal position is that it is
accepted when it comes to the
attention of the addressee (offeror) or
is “accepted by information system”
outside of the sender‟s control.

51. Intention to contract
Chapter 14: The parties to the
agreement must intend the
agreement to be legally enforceable.
If there is no intention there is no
contract.
The courts will apply objective tests
to decide whether an intention to
create legal relations was present at
the time.

52. • „Subject to contract‟ clauses
• document is not in its final form and/or is
subject to preparation of written document
therefore there cannot be an intention to
conclude the contract:
Masters v Cameron (1954) 91 CLR 353
No contract…the parties were still getting the
final form ready.
Intention to create contract

53. 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 contract

54. Implied intention
• Traditionally:
• social, family, domestic, voluntary
• presumed no intention to create a contract
• commercial or business
• presumed intention to be bound by a contract
Intention to create contract

55. Implied intention
Intention to create contract

56. Intention to create contract
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.

57. Non-commercial agreements
Lotteries and competitions
A social arrangement may nevetheless result
in an intention to contract where it is clear
from the facts that it is what the parties would
have intended:
Trevey v Grubb (1982) 44 ALR 20
3 people won a lottery…the person whose name it
was in refused to share it even though there was
a regular contribution by all 3. Held: commercial.

58. Non-commercial agreements
Agreements between intimate partners
Traditionally in domestic situations:
• Husband and wife yet promise made while engaged, no
intention that the dress allowance was binding:
Cohen v Cohen (1929) 42 CLR 91
• Where the parties are in a de facto (secret) relationship, very
unlikely to find a contract that is binding:
• Ashton v Pratt [2012] NSWSC 3
Mistress relationship was purely social so $2.5 million trust fund +
$500,000 annual allowance was not binding on the estate of the
billionaire.

59. Non-commercial agreements
Other domestic arrangements
In the case of some domestic situations the courts will
look at the words and conduct of the parties as well as
the seriousness of the consequences:
Wakeling v Ripley (1951) 51 SR (NSW) 183
Wealthy old man promised sister and husband a home
and an estate upon his death if they moved to
Australia. Later quarrel. Was the promise binding?
Held: Yes.

60. Non-commercial agreements
Voluntary agreements
In cases of voluntary agreements, such as where a
person volunteers their services, the parties do not
normally intend to create legal relations:
Teen Ranch Pty Ltd v Brown (1995) 38 AILR 5-036
Was a volunteer covered by workers‟ compensation?
Held: No evidence of an intention to create legal
relations. For example, there was no wage.

61. Intention to create legal relations
Ermogenous v Greek Orthodox Community of
SA Inc (2001) 209 CLR 95
Simply applying ‘presumptions’ may no longer be
the appropriate test for intention.
Nevertheless …
Held (HC): that while there was a non-
commercial relationship, E had established that
there was a legally enforceable contract in this
case. Clear that this was not a precedent for all
churches in the future.

62. Commercial or business agreements
General
In business and commercial agreements the courts
assume that there is an intention to create legal
contractual relations:

63. Intention to create legal relations
Commercial relationships:
Pirt v Pirtferm Ltd [2001] WASCA 96
Professor Pirt held IP in his inventions. Investors
had informal talks. Had there been an
agreement? Presumption that the men were
intending commercial relationship.
Held: no contract. No intention on the part of Prof
Pirt to part with IP without a lot more settled
terms and agreement.

64. Commercial or business agreements
Advertisements
Carlill v Carbolic Smoke Ball Co [1893]
Remember that the court there said that
the presence of the deposit of money
indicated a strong intention to be bound
by legal contract.

65. Next week...
Law of Contract
Formation Part 2 –
Chapter 15: Consideration
Chapter 16: Capacity of the parties to contract
Chapter 17: Genuine consent