CONTRACT LAW. What is a contract? A promise or set of promises that is legally binding. Why is contract so important? Contract forms the basis for

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1 CONTRACT LAW What is a contract? A promise or set of promises that is legally binding Why is contract so important? Contract forms the basis for - Commercial transactions - Consumer transactions; and o Every purchase you make involves a contract - The delivery of public services The nature of Contract Law 1. Composition - Judicial decisions - Statute (a) Contract Law is largely judge made Contract law is almost entirely composed of judge made law and is to be found primarily in judicial decisions accumulated over the years. Increasingly statutes are being passed which regulate areas of contract law. They include the Trade Practices Act 1974 (Cth), the Goods Act 1958 (Vic), the Fair Trading Act 1999 (Vic) and the Insurance Contracts Act 1984 (Cth). Modern contract law is thus a mix of case law and statute law, although the former is still the most important ingredient, especially in nonconsumer transactions. One problem with this mix is that the statutory modifications of the case law are not conveniently collated in a single source and are being added to all the time. As a result it is important to be alert for statutory modifications (in addition to developments in case law), even in the strangest places (eg. implied terms regarding the building of houses in the Local Government Act - Local Government (Builders' Liability) Act 1976!).

2 2. Contractual obligations are self-imposed - This contrasts with most other areas of law, e.g. criminal law - Generally parties are free to decide o Whether or not to enter into a contract; o The obligations they will undertake towards each other; and even o The consequences of the breach of their obligations (b) Contractual obligations are self-imposed In contrast to most other areas of law, the obligations dealt with by contract are self-imposed. In most cases parties are free to decide whether or not to enter into a contract and, if so, what obligations they will undertake towards each other. Finally, they are free to determine what the consequences of the breach of their obligations are to be - whether damages will be recoverable and if so, how much. There are limits to contractual freedom: - Illegality - Misleading conduct - Fraud - Unconscionable dealing - Statutory restrictions - Consumer protection o Implied terms, prohibition of unfair terms - Anti-discrimination legislation Contract law provides a framework for contractual dealings. There are of course limits to this freedom which affect one or both of the parties. In some cases we must enter into contracts as a matter of law (e.g. compulsory third party motor vehicle insurance); more commonly, there are some things that we cannot validly contract to do for example it is unlawful to contract to commit a crime. More common still, inequality in bargaining position often means in practice that if one party chooses to enter into a contract then he must do so on terms laid down by the other. By entering into the transaction, the weaker party is taken to have agreed to the dominant party's terms, even though there is no genuine assent to them. Conversely statutory rules have developed regarding fairness which may enable the weaker party to challenge certain terms which are considered unfair. As the obligations dealt with by contract law are self-imposed, the main role of contract law is to provide a framework within which people can create their own rights and obligations.

3 Agreement - First requirement of a contract is the existence of an agreement between two or more parties The first requirement of a contract is that an agreement must have been reached between the parties. In this topic we will consider: the nature of an agreement; the offer and acceptance process which the law uses in most (but not all) cases to determine whether an agreement has been reached and if so, when and where that occurred; Nature of an Agreement 1. An agreement involves a consensus - This is a meeting of the minds between two or more parties about a particular subject - Determined objectively i. Would a reasonable person think an agreement had been reached? ii. Consider Smith v Hughes - Old oats v new oats - Influenced motive but not term of contract - Hughes conducted himself as if he was assenting to the terms, even though he thought the oats were old An agreement is a consensus, or meeting of the minds, reached between two or more parties about a particular subject. It must be entered into voluntarily in the sense of not being the result of illegitimate pressure exerted by one party on the other. Although the concepts of consensus and free association lie at the heart of "agreement" in contract law, they are interpreted narrowly. In particular: Whether the parties have reached an agreement is determined objectively, not subjectively; Agreement is required only about entering into a contract and its terms, not about the desirability of doing so, or the motivation actuating its formation; An agreement can exist even though one, or both, of the parties believed that they were forced to enter into it because of their economic or personal circumstances; An agreement can exist even though one of the parties is not happy about its terms and has entered into it only reluctantly. Only where an agreement was induced by the use of "illegitimate" pressure (discussed in chapter 14) or is attributable to some other form of reprehensible conduct (discussed in chapters 15 and 16) is it possible to avoid a contract on the ground that that there was no real agreement between the parties.

4 Smith v Hughes (1871) LR 6 QB 597 (Court of Queen's Bench) [Smith offered to sell oats to Hughes and showed him a sample of what was for sale. Believing that what he had been shown were old oats, Hughes agreed to purchase them at the price stated by Smith. When he later discovered that they were new oats, rather than old, Hughes declined to pay and sought to return them. Smith, who had known that the oats were new, refused to take them back sued for the contract price. At first instance the jury found for the defendant after having been directed by the judge that they should do so if they concluded that the plaintiff was aware of the defendant's mistake. On appeal] Cockburn CJ (at 606): It only remains to deal with an argument which was pressed upon us, that the defendant in the present case intended to buy old oats, and the plaintiff to sell new, so the two minds were not ad idem; and that consequently there was no contract. This argument proceeds on the fallacy of confounding what was merely a motive operating on the buyer to induce him to buy with one of the essential conditions of the contract. Both parties were agreed as to the sale and purchase of this particular parcel of oats. The defendant believed the oats to be old, and was thus induced to agree to buy them, but he omitted to make their age a condition of the contract. All that can be said is, that the two minds were not ad idem as to the age of the oats; they certainly were ad idem as to the sale and purchase of them. Blackburn J (at 607): If, whatever a man's real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into a contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party's terms. 2. Agreement must be voluntary - Must not be the result of illegitimate pressure - But does not require happiness! - And mere commercial pressure does not render the contract involuntary Only where an agreement was induced by the use of "illegitimate" pressure (discussed in chapter 14) or is attributable to some other form of reprehensible conduct (discussed in chapters 15 and 16) is it possible to avoid a contract on the ground that that there was no real agreement between the parties.

5 The offer and acceptance process - Agreement requires (generally at least) o Offer by one party o Acceptance by the other party - Identification of these events determines o Whether there is an agreement o If there is an agreement! Where it was formed! When it was formed! On what terms was it formed Traditionally, the courts have required that, for an agreement to be reached there must be an offer made by one party which is accepted by the other. Consequently, we examine agreement in terms of offer and acceptance even though the parties might not articulate their agreement in these terms. We will see that identifying the offer and the acceptance is important not only to determining whether an agreement has been formed but, if it is, for determining the time and place the agreement was reached. The nature of an offer What is an offer? - A communication - Amounting to a promise to do (or not do) something - If the person to whom it is communicated responds in a certain way o May be by return promise or; o By performing (or refraining from performing) a particular act In most (but not all) cases, an agreement is reached by one party communicating to the other an "offer" which the latter "accepts". In the absence of a stipulation to the contrary, any form of words or conduct can amount to an offer, or acceptance, so long as the intention of the party communicating it can be discerned. Therefore, when the existence of an agreement is in dispute, or there is a dispute about when or where an agreement was made, this will be resolved by analysing the dealings of the parties to determine whether one of them made an offer which the other accepted. What then is an offer? An offer is a communication amounting to a promise to do (or not to do) something if the person to whom it is addressed responds in a certain way; for example, by making a promise in return, or performing a specified task.

6 General and specific offers To whom can an offer be made? Carlill v Carbolic Smoke Ball Facts: - Carbolic Smoke Ball Co manufactured and sold The Carbolic Smoke Ball - Designed to prevent users catching cold or flu - Promotional advertisement stated o 100 pound reward o To any person who contracts cold or flu o After using the ball three times daily for two weeks o 1,000 pounds deposited with Bank showing sincerity o Carlill followed directions but still contracted the flu o She claimed reward o Company refused to pay FACTS The Carbolic Smoke Ball Company manufactured and sold a medical preparation called "The Carbolic Smoke Ball" designed to prevent users contracting a cold or influenza. To promote this product the company inserted an advertisement in the Pall Mall Gazette part of which read: 100 pounds reward will be paid by the Carbolic Smoke Ball Company to any person who contracts the increasing epidemic influenza, colds, or any disease caused by taking cold, after having used the ball three times daily for two weeks according to the printed directions supplied with each ball. 1,000 pounds is deposited with the Alliance Bank, Regent Street, showing our sincerity in the matter. In response, Mrs Carlill bought one of the balls and used it as directed. She subsequently caught the flu and claimed the reward. The company refused to pay and Mrs Carlill sued. She succeeded at first instance. The company appealed] Held: On the issue of whether there was a valid offer: The appellants argued that the promise was not made to anyone in particular. Bowen LJ made clear that this was not a contract with the world, as the Company had claimed, but simply an offer to the world that could become a contract with anyone performing the conditions stipulated. The Company had also argued that the advertisement was merely a puff and not an offer (in other words, that it was not intended to be promissory in nature). The Court rejected this argument, pointing in particular to the reference in the advertisement to the deposit of 1,000 in a bank to show the Company s sincerity.

7 Claim: - On what grounds did the defendant deny liability? o No offer o No communication of acceptance o No consideration Held: - Was there an offer here? o Yes offer to pay 100 pounds to anyone using the ball as directed and contracting a cold or flu - To whom was that offer made? o To the world at large (including Mrs Carlill - Who could accept the offer? o Anyone using the balls as directed and contracting cold or flu Offers v Invitations to Deal What is the difference between an offer and an invitation to deal? - Offer intent is that affirmative response will give rise to a final agreement - Invitation to deal no intent for affirmative response to constitute agreement merely further negotiation For a communication to constitute an offer the party making it must intend that an affirmative response will give rise to a final agreement, rather than merely further negotiation. A communication intended to have the latter effect is known as an invitation to deal. The distinction between the two is important because whereas an affirmative response to an offer will create an agreement, an affirmative response to an invitation to deal will amount only to an offer which may be accepted or rejected. Pharmaceutical Society of GB (Great Britain) v Boots Facts: - Boots operated self-service store including pharmacy - Customers selected items from shelves and took them to cashier s desk to pay - With drugs, sale was supervised by pharmacist Pharmacy and Poisons Act 1933 required sale of certain drugs to be supervised - Pharmaceutical Society argued that this method of sale contravened the legislation [Boots operated a self-service store which contained a pharmacy department. Customers wishing to purchase items, selected them from the shelves and took them to a cashier's desk

8 at one of the exits where they were paid for. When a drug was involved, the sale was supervised by the pharmacist in control of the pharmacy department. The Pharmaceutical Society alleged that by operating in this manner, Boots infringed the Pharmacy and Poisons Act, 1933 which required the sale of certain drugs to be supervised by a registered pharmacist. In a case stated, the Chief Justice found that Boots had not infringed the Act. The Society appealed] Held: - Was displaying gods on shelf an offer or invitation to deal? o Invitation to deal - Why? o Commercial convenience (look at objective intent) i.e. anyone who picked up anything off a shelf would then be obliged to buy it, as they have accepted the offer. They would not be able to put it back on the shelf. - What constitutes an offer in a self-serve store? o Customer offers to buy when takes goods to checkout - When is contract concluded o When shop accepts offer at checkout - What was the result here? o Contract formed at sales desk o No contravention of legislation Held: The Society had argued that a drug sale was completed when the customer took an item from the self and put it in their cart/basket. The result of such analysis, as Somervell LJ observed, would be that that when the customer came to the sales desk the pharmacist would not be able to say that the drug could not be sold to that customer Somervell LJ looked at the legal implications of analysing the contract as concluded when the drugs were put in the basket or whether the contract was concluded when payment was made. His Lordship considered that in relation to an ordinary shop, although goods are displayed and it is intended that customers should go and choose what they want, the contract is not completed until, the customer having indicated the articles which he needs, the shopkeeper, or someone on his behalf, accepts that offer. Then the contract is completed. His Lordship considered the same rule should apply in relation to this case. He noted that if the Society s argument was accepted then customers, once placing an item in their basket, would have no right to substitute a different article which she/he preferred. As a consequence the Society s case failed because, at the appropriate time, the sale was supervised as required by legislation.

9 Lefkowitz v Great Minneapolis Surplus Store Facts: Great Minneapolis advertised in a newspaper as follows: - Saturday, 9 AM Sharp. 3 brand new fur coats worth to $ First served $1 each - Lefkowitz was the first to arrive but GMSS refused to sell him a coat Held: Where the offer is clear, definite and explicit, and leaves nothing open to negotiation, it constitutes an offer, acceptance of which will complete the contract. Each case will depend on the legal intention of the parties and the surrounding circumstance. In this case there was a clear offer by GMSS which was clear, definite and explicit, and left nothing open for negotiation. There was a contract and GMSS was in breach. Offers v Invitations to treat Whether a statement amounts to an offer or merely an invitation to deal depends on the intention of the person making it, determined objectively. There are no firm rules but the following factors are relevant: " If a communication clearly indicates a person does not intend to be bound by the recipients assent it will not be an offer; " Mere use of the words offer or acceptance are not decisive but will be relevant; " If it would be commercially inconvenient for a communication to constitute an offer it is more likely it will be regarded as an invitation to deal; " If further discussion is required between the parties before an agreement can be concluded the communication is likely to be regarded as an invitation to deal; " Communications inviting submission of tenders are generally invitations to deal. Bait advertising: What is bait advertising? - Advertising cheap products to entice customers into a store What is the effect of s. 35 of the CCA? - Ensures bait advertising is only used where the product advertised is available in reasonable quantities and/or for reasonable periods of time Bait advertising Bait advertising or door buster sales are used by suppliers to attract customers to a store for a heavily discounted item. Suppliers can do this without risking financial ruin because, as the advertisement is classified as an invitation to deal rather than an offer, a customer cannot insist on the product being sold at that price (or sold at all if stocks have run out). To prevent

10 suppliers abusing this distinction legislation has developed to regulate such sales. For example, s 56 of the Trade Practices Act 1974 (Cth) and state fair trading legislation makes it an offence for a supplier to advertise goods or services for sale at a particular price when they have reason to believe they will not be able to supply them in reasonable quantities, or for a reasonable time. Auctions: summary - Auctioneer invites offers - Bids constitute offers - These may be accepted or rejected by seller - Note: a separate contract may exist between the bidder and the auctioneer Auctions In AGC (Advances) Ltd v McWhirter the court analysed an auction as involving the auctioneer inviting offers (an invitation to deal) which they may accept or reject. This is the case even where the auction is without reserve. However, where an auction is without reserve then while the owner/vender remains free to refuse to accept the bidder s offer, there may be a contract between the auctioneer and the highest bidder enabling the highest bidder to recover damages if the seller refused to accept the offer. This is because when an auction is advertised as being without reserve the auctioneer is offering to knock down the property to the highest bidder. Tenders: Types of tender: - Standing offer involves several separate contracts o Contract only formed when order made - Tender for specific item or service is analysed in the same way as auctions Tenders There are two types of tenders: " A standing offer in which tenders are invited for the supply of goods or services when required over a period of time; even if a tender is accepted the party inviting the tender is not bound to use their services a contract will only be formed if and when an order is made " Where the tender relates to a fixed quantity of goods or a specific supply of services (such as a single building project) then the provision of a tender constitutes an offer which may be accepted or rejected by the person inviting the tender these sorts of tenders are treated in the same way as auctions.

11 Blackpool & Flyde Aero Club v Blackpool Borough Council Facts: - Council invited Club to tender for flights - Tenders due by certain date - Club submitted by due date but Council, in error, recorded it as being late - Council did not consider Club s tender - Club claimed breach of contract promise to consider tenders Held: There was a contract involving a promise to consider tenders submitted on time. Facts: Blackpool Borough Council (the Council) invited the Aero Club and other to tender for certain flights. Tenders were to be submitted in an envelope provided by the Council and would not be considered if not received by a stipulated date. The Aero Club submitted by the due date, but an error by the Council recorded it as having been received late. Consequently it was not considered. The Aero Club alleged breach of contract, claiming the Council had promised to consider all tenders submitted by the due date. Held (Bingham LJ): Noted that the invitee in cases like this may be put to considerable labour and expense in preparing a tender at considerable risk that it may not be accepted. As such, where invitations to tender are provided to selected parties with clear procedures indicated (as was the case here) then, if the invitee submits a conforming tender before the deadline he is entitled to be sure that his tender will be opened and considered. To this extent, in this case the invitation to tender was an offer and the Club s timely submission an acceptance. Offers v Requests for Information What is the difference and why is it important? # Offer intention that affirmative response will give rise to agreement (and possibly a contract) # Request for further information o Not intended to have legal consequences o Affirmative response will not give rise to a contract Offers, requests for information, and statements of possible terms It is important to distinguish offers from requests for further information or statements of possible terms. An affirmative response to request for information or statement of possible terms will not give rise to an agreement; on the other hand an affirmative response to an offer will.

12 Example: a request of a vendor about the lowest price at which he might be prepared to sell his house is not an offer to purchase at that price but merely a request for information (see Harvey v Facey [1893] AC 552) Relevant factors to consider in classifying a communication include: # The inherent likelihood of the communication being an offer # The terms of the communication involved # Whether parties contemplated involvement of lawyers # Subsequent events Termination of offers Why is it important to know whether an offer has been terminated? $ Once terminated an offer can no longer be accepted What events terminate an offer? 1. Revocation 2. Rejection 3. Failure to accept on time 4. Death 5. Failure of a condition Revocation: What is revocation? # Withdrawal of an offer Which party revokes? # The offeror What time limits are there on revocation? # Must occur before acceptance When is revocation effective? # When communicated to the offeree

13 Dickinson v Dodds (1876) 2 Ch D 46 Facts (1) On 10 June Dodds (Defendant) signed and delivered a note to the Plaintiff saying "I agree to sell Dickinson my house etc. for 800; this offer to remain open until 9.00am on 12 June". (2) The Plaintiff decided to accept this offer on the morning of 11 June but did not advise the Defendant because he believed that he had until 12 June to accept. (3) Later, on the 11th, Plaintiff was advised by a 3rd party that the Defendant had been offering or selling the property to another person. (4) Dickinson sought to accept but the Defendant replied that it was too late, he had already sold the property. (5) Plaintiff sought specific performance of the contract he alleged was made on 10 June, and an order restraining the transfer of the property to the third person. Dickinson v Dodds (1876) What is required for revocation? $ Does not require express actual withdrawal of offer $ Offeror must in some way let offeree know he has changed his mind Was there revocation here? $ Yes P knew D had changed his mind before communication of acceptance Why was promise to keep offer open not effective? $ No consideration provided for promise Plaintiff Argued The only way the Defendant could revoke his offer was by actually and distinctly saying to the Plaintiff "Now I withdraw my offer". James L.J. (1) To revoke an offer, it is not necessary that there be an express and actual withdrawal of it. However, it is necessary for the offeror in some way or other to let the offeree know that he had changed his mind regarding the offer.

14 (2) Here, beyond all question, the Plaintiff knew that the Defendant was no longer prepared to sell as plainly as if he had said so expressly. And he knew this before he attempted to accept no contract. (3) The Defendant's promise to keep the offer open was not binding because it was a mere nudum pactum i.e. there was no consideration given for it. Key points from Dickinson v Dodds (1876) % An offer can be revoked any time before it is accepted and acceptance after that time is ineffective % Revocation need not be direct or express; it will be effective if the offeree is made aware of the offeror's change of mind. A communication via a 3rd party is effective - at least where authorised or where it results from, the offeror. It is sufficient that offeree is aware of the offeror s change of mind % A promise not to revoke is only effective if supported by consideration Byrne v van Tienhoven (1880) Byrne v. Van Tienhoven (1880) LR 5 CPD 344 Facts (1) The defendants, by letter, offered to sell goods on 1 October. But on 8 October, before it was accepted, they posted a letter revoking the offer which was received by the plaintiff on 20 October.

15 (2) In the meantime, the plaintiff received the letter of offer and telegraphed acceptance on 11 October; this was confirmed by letter on 15 October. What did the defendants claim? - Can be no acceptance after revocation even if not communicated - Argued no consent meeting of the minds Did they succeed? No. What was the argument for saying there was no contract? There can be no contract if the offer is revoked before it is accepted even though this is not communicated. The reason is that there is no consent by both parties as is essential to constitute a contract between them. % What were the Court s findings? $ Revocation must be communicated to be effective % What is the postal rule? $ Where post is used for acceptance contract is completed when letter is posted (if post contemplated) % Does the postal rule apply to revocation? $ No should it? % What was the result? $ Contract came into existence on 11 October Lindley J (1) Revocation has to be communicated to be effective; until communicated there is, for all practical purposes and in point of law, no revocation at all. (2) If the post is used to communicate offers and acceptances, the contract is completed when the letter of acceptance is posted, even though it never reaches its destination. This is based on the offeror's assent to a posted letter being sufficient acceptance and notification to him; the post office is considered his agent to receive acceptance. (3) This postal rule principle is inapplicable to the revocation of an offer.