Contracts Final Exam Notes Formation of a contract What is a contract MUST Offer REASONABLE PERSON Acceptance

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1 Contracts Final Exam Notes Formation of a contract What is a contract - Binding promise between two or more parties, reliant upon several important factors - Offer - Acceptance - Consideration - Certainty - Intention, and - Capacity - All 6 of the above factors MUST be present Offer - Bilateral contracts; where offer is made to a specific person/s. - Unilateral contracts; where offer is made to the public. (Carlill v Carbolic Smoke Ball Co [1892] EWCA) and (Mobil Oil Australia v Wellcome International [1998] 81 FCR 475). - Invitations to treat; an invitation for others to make offers or enter negotiations is different to an offer. Seen similarly in tenders and auctions, treated as invitations to treat. (Pharmaceutical Society of Great Britain v Boots Cash Chemists Ltd [1953] 1 QB 401). - Puffery; statement of absolute exaggeration for promotional statements and claims, so absurd that no REASONABLE PERSON would take literally (Carlill v Carbolic Smoke Ball Co [1892] EWCA). - Counter offer; where an offeree sends an amended offer to the original offeror. (Butler Machine Tool Co Ltd v Ex-Cell-O Corp [1977] EWCA). - Supply of information; not an offer, examples are websites, brochures and advertisements. - Termination of the offer; offers may be revoked before it is accepted so long as it is brought to the attention of the offeree. (Dickinson v Dodds [1876] 2 Ch D 463) and (Goldsborough Mort and Co Ltd v Quinn [1910] 10 CLR 674). Acceptance - An offer only becomes a contract when accepted unconditionally (without amendment to the original offer). - Acceptance can be in writing, oral or implied by conduct. - A valid acceptance must be unconditional and correspond to the offer i.e. no deletions, additions or qualifications. - There is often negotiation between the parties!be careful to work out who has made the final offer to see whose terms were accepted. - This will affect when the contract was made and on what terms. (Butler Machine Tool Co Ltd v Ex-Cell-O Corp [1977] EWCA). Page 1 of 87

2 - Generally an offer can only be accepted by those persons to whom it is made. - An offeree must be aware of the existence and the terms of the offer when acceptance occurs, otherwise there is no acceptance. (R v Clarke [1927] 40 CLR 227). - Acceptance must be communicated to the offeror prior to termination of the offer. - The method of communication is a matter for the parties and the offeror may prescribe a particular mode of acceptance. (Manchester Diocesan Council for Education v Commercial and General Investments Ltd [1970] 1 WLR 241). - Acceptance must be communicated to the offeror except where the reasonable bystander can infer from the conduct of the offeree that they do in fact have knowledge of the terms and conditions of the contract and have continued to take the benefits of the offer under those terms and conditions. (Empirnall Holdings v Machon Paul Partners [1988]). Postal Acceptance Rule - The postal acceptance rule is an exception to the rule that acceptance must first be communicated to the offeror to be effective. - Where the parties contemplate acceptance by post, the acceptance will be complete as soon as the letter is properly posted. - This is so even if the letter is not delivered (provided offeree can prove it was actually posted). (Brinkibon Ltd v Stahag Stahl [1983] 2 AC 34). Electronic Transmissions - The Electronic Transactions Act 2000 (NSW) applies to communications generally and has an impact upon issues concerning writing, signature and time and place of and dispatch and receipt of the . Certainty - Although there may appear to be offer and acceptance, there might in fact be no concluded agreement capable of being enforced when: - The terms are uncertain, - The agreement is incomplete or a - Contractual promise illusory. - However, a contract will only be invalid where the courts cannot reasonably ascertain what the parties intended - Meehan v Jones (1982) 149 CLR When interpreting the meaning of a contract it is important to distinguish between obscurity and lack of meaning. - The language has to be capable of some meaning that indicates the contractual intention to the parties - Meehan v Jones (1982) 149 CLR Even if the language is obscure, the agreement id valid IF the court can interpret the words to discern contractual intention. Page 2 of 87

3 - An incomplete agreement is one where essential terms have been omitted. - The courts will not in effect draft a contract where the parties have failed to stipulate the terms - Whitlock v Brew (1968) 118 CLR 445. Illusory Promises - A contractual promise is illusory where the performance required by the promise is at the discretion of the promisor. - Such a promise is not enforceable promises of this character are treated!not as vague and uncertain promises!for their meaning is only too clear!but as illusory promises!!- Placer Development Ltd v Commonwealth (1969) 121 CLR 353 at per Taylor and Owen JJ, see [5.19] and [6.53C]. - Where a term is incomplete, uncertain or illusory it may be possible to sever the offending term or part so that the remainder will be binding. - Where an uncertain, incomplete or illusory provision has been inserted for the benefit of one party, it may be possible to waive compliance with the offending term and enforce the remainder of the contract. Agreement to Agree - For example, X agrees to supply Y with 100 text books at a price that will be agreed between the parties after the contract is signed. - Courts will not enforce agreements where the parties agree to reach agreement in the future on a certain term. - This is to be distinguished from agreements which are silent as to a particular term. - Note: Courts less likely to find an agreement incomplete where it has been wholly or partly performed - F&G Sykes (Wessex) Ltd v Fine Fare Ltd [1967] 1 Lloydʼs Rep 53 at Parties may make a valid contract that defers agreement on an essential term if they provide an effective mechanism for supplying the term in the event they fail to reach agreement. - For example, a lease may provide an option for renewal of rent to be agreed between the parties or, failing agreement, a specified valuer. - Parties may also agree on a formula for settling a term of their agreement, which can be applied by the court in the event of a dispute. Consideration General Rules - The doctrine of consideration requires that something be given in return for a promise in order to make it binding. - If the promisee wants to enforce the promise made by the promisor, the promisee must be able to demonstrate that he or she has paid for the promise!i.e. given something in exchange for the promise. Classical theory. Can anyone think of an agreement that lacks consideration? Page 3 of 87

4 - Without consideration, an agreement is said to be nadum pactum (a naked agreement). - Rules have been developed which establish what may amount to consideration. However there are many exceptions to these rules! Common consideration - Consideration may involve; - exchange of things (e.g. money for goods); - exchange of a thing for a promise (e.g. money for some future service); and - exchange of a promise for a promise. - In Dunlop Pneumatic Tyre Co Ltd v Seifridge & Co Ltd [1915] AC 847 at 885, Lord Dunedin defined consideration as the 'price' for which a promise is purchased. - The 'price' may be an act or another promise, and can constitute a detriment to one party or a benefit to the other. - A valuable consideration, in the sense of the 1aw, may consist either in some right, interest, profit, or benefit accruing to the one party; or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other - Currie v Misa (1875) LR 10 Ex 153 at 162. Referability - In Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR, the court introduced the bargain element, which says that ʻBetween the statement or announcement, which is put forward as an offer capable of acceptance by the doing of an act, and the act which is put forward as the executed consideration for the alleged promise, there must subsist, so to speak the relation of a quid pro quoʼ - This bargain requirement means that there must be sufficient connection between the consideration and the promise which it is said to support. - As a result of this case law there are two threshold requirements for consideration to be valid: - The first aspect of valuable consideration is that it must consist of a detriment to the promisee or a benefit to the promisor - The second aspect of the doctrine of consideration is that the benefit conferred on the promisor or the detriment suffered by the promisee must be given in return for the promise, that is, quid pro quo. - Executory vs Executed Consideration - As weʼve seen, the mere making of a promise may be regarded as consideration although the promise has yet to be fulfilled. This is called executory consideration. - Dan and Virginia enter into an agreement whereby Virginia is to paint Dan's fence and Dan will pay her $75 for doing so when the jobs done. - Where the promise has been fulfilled (i.e. money paid) or the consideration is an act that has taken place then the consideration is said to be executed. Page 4 of 87

5 - If Dan pays the money but Virginia is still to paint the fence then Danʼs consideration is executed and hers executory. - The concept of bargain is differentiated from an act performed in reliance on a promise, which is not sufficient consideration - Kirby P in Beaton v McDivitt (1987). - For a contract to exist, acts must simply not be performed in reliance on a promise, rather they must be done in return for a promise to constitute a quid pro quo consideration. It has to be a two sided deal. - Example: - Your parents offer to pay for a holiday in Bali if you finish the law degree which you have already started and would have finished in any case! Reliance Page 5 of 87