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CML101
Lecture 2 – Law of Contracts
(Contract Law 1)
Derya Siva
Email:
[email protected]
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At the end of this topic you should
know and this lecture will focus on:
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Definition of a Contract;
Elements of a Contract;
Classification of Contracts
Offer + Acceptance and;
Intention to Create Legal Relations
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What is a contract?
An agreement between two or more
parties under which legal rights and
obligations are created.
The law of contract is concerned with
the principles applicable to the
formation, performance, interpretation
and breach of contracts.
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Essential Elements of a
Contract
Offer and
acceptance
Legality
Intention
ENFORCEABLE
CONTRACT
Valuable
consideration
Consent
Legal
capacity
Classification of Contracts
Simple contract
may be oral, wholly or partly in writing, or
implied by the conduct of the parties
some may be required by statutory
provision to be in writing, or evidenced in
writing
must be supported by consideration.
Classification of Contracts
Contracts under seal/formal
contract
referred to as a deed
derives its validity from its particular form
must be in writing; signed, sealed and
delivered
does not require consideration.
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Classification of Contracts
Express contracts
usual type of contract
intentions of the parties are stated in
explicit terms, (orally or in writing).
Implied contracts
the terms of the contract are inferred
from the conduct of the parties and the
surrounding circumstances.
Classification of Contracts
Bilateral contracts
an exchange of mutual promises, but the actual performance
is to occur at some future time
“a promise for a promise”.
Classification of Contracts
Unilateral contracts
an offer is made inviting acceptance by actual
performance rather than by a promise.
“One party promises to do something in return for acts
performed by the other party, with the intention of being
contractually bound if those acts are performed, and the
other party accepts that promise by performing his or her
side of the bargain”: Gippsreal Ltd v Registrar of Titles
(2007).
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Classification of Contracts
Valid contracts
all the essential elements are present.
enforceable against both parties.
The usual remedy for breach of the
contract is a judgment for damages.
Sometimes an equitable remedy such
as specific performance may be
available.
Classification of Contracts
Voidable contracts
Allows a party to get out of the contract if
that party wishes to do so.
Classification of Contracts
Void contracts
a “contract” that never existed in the eyes of
the law
no legal effect between the parties
does not create legal rights or obligations.
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Classification of Contracts
Unenforceable contracts
prima facie a valid contract but cannot
be enforced because of some technical
defect.
OFFER
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What is an offer?
A proposal by one party to enter into a legally
binding contract with another
may be made in writing, orally or implied by
conduct
can only exist if there is a firm promise to do or
refrain from doing something
the person making the offer must intend that it
can be converted into a binding obligation by
acceptance.
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The Concept of an "invitation to
treat"
An offer is not an invitation to treat
An “invitation to treat” is just an
indication of willingness to deal or
trade.
Shop displays, catalogues,
advertisements
Auction sales
Tenders.
When can an offer be made?
An offer can be made to:
a specific person or persons
a particular class of persons
to the world at large.
But it may only be accepted by the
person or persons for whom it was
intended.
See Carlill v Carbolic Smoke Ball Co
[1893]
Communication of the Offer
The offer must be communicated.
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Revocation of an offer?
Revocation of the offer
An offer is revoked when the offeror formally withdraws the
offer.
On revocation, the offer comes to an end and
cannot subsequently be accepted.
The offeror can revoke the offer at any time
before acceptance.
The revocation must be communicated to the
offeree. Until the offeree becomes aware of the
revocation, he or she can accept the offer and
create a binding contract.
Revocation of an offer?
An offer can be revoked notwithstanding that at the
time of making the offer, the offeror has said that the
offer will remain open for a specified time. There is an
apparent, although not real, exception to this rule in the
case of offers supported by consideration, or made by
deed, which are stated to be capable of acceptance
within a specified period of time.
Goldsbrough, Mort & Co Ltd v Quinn (1910)
When will an offer lapse?
An offer will lapse if:
If it is not accepted within reasonable time;
It is not accepted within the time stated;
A counter offer is made;
One party dies before acceptance;
There is a loss of contractual capacity.
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ACCEPTANCE
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Acceptance
An acceptance occurs when the party
to whom an offer is made agrees to the
proposal of the offeror.
Acceptance may be made by word of
mouth, in writing, or by conduct.
Acceptance must be made in the
manner indicated by the offeror.
Acceptance
The way acceptance is to be signified
depends upon the terms of the offer. If
no special manner is specified then it
depends upon the circumstances.
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Communication of Acceptance
Acceptance must be communicated to the offeror.
Exceptions:
where the offeror has made it clear that notification of
acceptance is unnecessary
where acceptance is to take the form of
performance of an act (as in Carlill v Carbolic
Smoke Ball Co [1893]
where the postal acceptance rule applies.
Communication of Acceptance
In cases involving telephone, fax or
email, the contract is concluded at the
time when, and the place where, the
acceptance is received.
See Mendelson-Zeller Co Inc v T & C
Providores
Pty Ltd [1981]
See Olivaylle Pty Ltd v Flottweg AG
(No 4) (2009)
General Rules which apply to
Acceptance
The Acceptance may be by word of mouth, writing or
conduct:
Silence is not acceptance: Felthouse v Bindley;
Acceptance which is to take the form of an act does
not require communication to the offeror unless the
terms of the offer require it: Carlill
Acceptance must be unconditional.
Acceptance must follow the conditions stated in the
offer.
The way acceptance is to be signified depends upon
the terms of the offer. If no special manner is
specified then it depends upon the circumstances.
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General Rules which apply to
Acceptance
Acceptance can be made only by the party to whom
the offer was made.
Acceptance can be revoked provided it is
communicated before the acceptance is received.
Acceptance must be made within the time prescribed
or within a reasonable time.
The offeree must know that the offer exists.
Communication of acceptance must be made in a
regular and authorised manner.
Postal Acceptance Rule
Where acceptance by post is
contemplated by the parties, acceptance is
complete as soon as the letter of
acceptance is properly posted: Henthorn v
Fraser [1892]
The acceptance is not affected if the letter
is delayed or lost in the post.
The postal rule is excluded where the
offeror requires actual communication of the
acceptance.
When Postal Acceptance rule
applies and when it doesn't
If Postal acceptance rule applies: the offeror
cannot revoke the offer once a letter of acceptance
has been posted by the offeree, even though the
acceptance has not yet reached the offeror.
If Postal acceptance rule does not apply: an
acceptance can be revoked provided the fact of
revocation is communicated to the offeror before
acceptance is received.
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INTENTION TO
CREATE LEGAL
RELATIONS
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Intention to Create Legal
Relations
The court applies an objective test of
intention:
“[T]he court does not try to discover
the intention by looking into the minds of
the parties. It looks at the situation in
which they were placed and asks itself:
Would reasonable people regard the
agreement as intended to be binding?”:
Merritt v Merritt [1970]
Social and Domestic
Agreements
There is a presumption of fact that
social and domestic agreements are
not intended to give rise to legal
relations.
However, this presumption may be
readily rebutted if the evidence
discloses a contrary intention.
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Agreements Between Husband
and Wife
Normally agreements between husband and wife
(Balfour v Balfour [1919]), and between people in de
facto relationships (Shortall v White [2007]) are
viewed by the courts as not intended to give rise to
legal relations.
Agreements falling outside normal domestic
arrangements will be enforceable:
eg, a couple’s relationship under a partnership (Milliner v
Milliner (1908))
Disposition of property where the marriage has
broken down.
Other Family Agreements
Other kinds of family arrangements are not generally
regarded as intended to give rise to enforceable rights
and obligations.
The circumstances may indicate that the parties
intended to be legally bound.
The court is more inclined to find an intention to create
legal relations where one of the parties has significantly
changed their position in reliance on the agreement:
Riches v Hogben [1986]
Agreements to Participate in
Lotteries and Competitions
Courts view most social arrangements
as too insubstantial to be intended to
give rise to legal rights and obligations,
but agreements to participate in a
competition or lottery have been held to
be enforceable:
SeeTrevey v Grubb (1982)
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Intention and Commercial
Agreements
Where an agreement is reached in the
course of business dealings there is a
presumption that the parties intended to
create legal relations.
“The whole thrust of the law today is
to attempt to give proper effect to
commercial transactions”: Banque
Brussels Lambert SA v Australian
National Industries Ltd [1989]
Intention and Commercial
Agreements
Ordinarily, where a business or land is
sold, a contract will not be created until
a formal contract has been signed.
However, in such a situation a contract
can arise even without the signing of a
formal contract if the parties intended to
be immediately bound:
Souter v Shyamba Pty Ltd (2002)
Express Exclusion of Intention
Where the agreement includes an express stipulation
that it is not intended to give rise to legally enforceable
obligations, the courts will give effect to such a
provision. The agreement will not be enforceable at
law:
Rose & Frank Co v J R Crompton & Bros Ltd [1925]
It is common to insert in competition, lottery and pools
forms a stipulation to the effect that entry into the
competition is not intended to give rise to legally
enforceable obligations.
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Letters of Comfort
• Are usually written by a parent
company to a lender giving “comfort”
to the lender about a loan to be made
by the lender to a subsidiary of the
parent company.
• eg, given where the parent company
is unwilling to act as a guarantor to
the lender for the loan to its
subsidiary.
Letters of Comfort
Usually phrased in general terms and may include:
an acknowledgment that the parent company is aware of
the proposed loan and approves of it;
a commitment to maintain its shareholding in the borrowing
company so long as the loan is outstanding; and
some statement of support to the lender, couched in terms
such as: “It is our policy to ensure that the business of [the
borrowing company] is at all times in a position to meet its
liabilities to you”.
Letters of Comfort
In Norman v FEA Plantation Ltd FEA wrote a “letter of
commitment” stating that it would provide FEAP with
sufficient cash to meet its ongoing obligations. As a
holder of a financial services licence FEAP was subject
to a “cash needs requirement”.
The Full Federal Court held that the letter bound FEA
in view of its terms and the circumstances in which it
was given. The word “commitment” connoted
obligation, especially when read in the regulatory
context of the cash needs requirement.
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