Focus on contract law

Transcription

1 CHAPTER 11 Focus on contract law In this chapter we look at the nature of contract law and the way in which it protects the rights of individuals and we examine some specific contract examples. We will also investigate how the law of contract applies to everyday situations. After reading the chapter and undertaking the activities you should be able to demonstrate the following key knowledge: legal principles relevant to contract law a contemporary issue regarding contract law the capacity of the legal system to respond to demands for change the methods and institutions for resolving disputes arising under the law relating to contract law. Contract law Elements Capacity to contract Offer Acceptance Consideration Minors Terms Express Implied Conditions Warranties

2 Chapter 11 Focus on contract law 305 Key terms acceptance consideration contract infant/minor offer Agreement to an offer to form a contract Something of value exchanged as part of a contract A legally binding agreement In contract, a person under the age of 18 years A person s expression of willingness to enter into an agreement

3 306 The Legal Maze Contract law A contract is a legally enforceable agreement. A contract is an agreement that is legally enforceable. This means that it is possible for the parties to a contract to enforce their rights under the agreement in a court of law. If obligations agreed to under a contract are not carried out, the party who suffers may take legal action to obtain a remedy for any loss. People make contractual agreements daily. Simply going into a shop and making a purchase or leaving clothes to be dry-cleaned involves a contractual arrangement. Some agreements may include substantial sums of money while others may not be concerned with money at all. It is essential in most agreements that all parties abide by their part of the bargain. The law of contract is concerned with ensuring that people live up to their promises. For a contract to exist there must be a clear offer. Elements of a simple contract The law of contract has evolved over centuries through the operation of judge-made law. In more recent times, certain modifications have been made by Acts of Parliament. However, the underlying principles and rules are those developed by the courts. Not all agreements are legally enforceable and, therefore, not all agreements are contracts. Before a court will regard an agreement as a contract, it must contain certain qualities or elements. Offer For any contract to exist there must be an offer. This means that one of the parties must offer something of value to the other party. For example, Hugh might say to Adam, I want to sell you my car for $ In this situation, Hugh has made a clear offer. However, if Hugh said to Adam I want to sell my car for between $ and $15 000, this would not be considered an offer. In the first statement Hugh has made a precise statement to which Adam may agree. In the second statement, Hugh has indicated that he is prepared to sell his car but the precise cost of the car is not clear. The courts will only recognise clear and unambiguous statements as valid offers. The person making the offer is called the offeror. For a statement to be an offer it must be clearly communicated to the offeree.

4 Chapter 11 Focus on contract law 307 An invitation to enter into negotiations is not an offer. For a contract to exist the offer must be accepted. Invitation to treat Not all statements are offers. The law distinguishes between a clearly expressed offer and an invitation to others to enter into negotiations that may lead to the formation of a contract. Such an invitation is referred to as an invitation to treat and it does not constitute an offer. A product with a price attached in a shop window is such an example. This is not regarded by the courts as an offer but as an invitation to the customer to enter the shop and offer to buy the product at a particular price. Acceptance There must be acceptance. There can be no contract if an offer is not accepted. If Hugh offers to sell his car to Adam for $10 000, there can be no contract unless Adam accepts the offer by agreeing to buy the car at the specified price. If there is to be a valid acceptance, the offeree must agree to all terms of the offer. Counter-offer If the offeree changes the terms, the offer has not been accepted. For example, if Adam were to reply to Hugh that he will pay $8000 for the car, Adam is not accepting the offer. Adam is, in fact, making an offer in return (a counter-offer). In this situation the roles of offeree and offeror have been reversed. Communicating acceptance If courts are to recognise an acceptance, it must be communicated to the offeror. Acceptance may be a verbal statement, in writing or inferred by the actions of the parties. The courts regard acceptance by mail as having taken place at the time the letter of acceptance is posted rather than when it is received. An offeror may indicate a particular method of acceptance. For example, an offeror may insist that acceptance be made within a certain time or the offer will lapse (no longer be regarded as being open). In such situations, acceptance will generally have to be carried out in the specified manner, or the courts may not recognise it as a valid acceptance. For a contract to exist there must be consideration: something given, done or suffered in return for a promise. Consideration One of the more complicated requirements of a valid contract is that of consideration. Courts will not enforce an agreement when there is only a promise made and accepted. For example, if Hugh promises to give Adam his car and Adam accepts, the courts will not recognise the agreement as a contract. This is seen simply as an agreement between friends. For a contract to exist, there must be something given, done or suffered in return for a promise. This is referred to as consideration. It is what passes between the parties in return for the promise.

5 308 The Legal Maze In the majority of situations, the presence of consideration is clear because money passes between parties in return for some goods or services. However, money is not the only form of consideration. Physical labour might be consideration, or simply the promise to pay some amount or perform some task in the future. The courts do not insist that consideration be of equal value to the promise. As a general rule, it is assumed that when a bargain is struck, parties should be free to agree to whatever terms they please. This principle is known as freedom of contract. If a party agrees to sell a $ car for $10, the courts will recognise the consideration (on the assumption that the seller is free to make such strange arrangements if they so choose). For a contract to be binding there must be an intention to create a legal relationship. The parties to a contract must be clear about the terms of the contract. The parties must be legally capable of making a contract. Intention to create legal relations People often make arrangements with friends on social occasions where they do not intend that legal action might be taken if either party fails to carry out the terms of the agreement. For example, when friends agree to take a holiday together, and one person changes their mind, it would be unreasonable to make such an arrangement binding. The courts will not enforce agreements unless the parties intended the agreements to be legally binding. The problem is that parties seldom clearly state whether they intend to set up a legally enforceable relationship. For this reason the courts have established certain presumptions. First, agreements entered into between family members or on social occasions will not involve an intention to create legal relations (unless there is evidence to the contrary). Second, there will be an intention to create legal relations in agreements of a commercial nature (unless there is evidence to the contrary). Certainty of terms Before making any agreement it is important that all parties are absolutely clear about the terms of the contract and agree to be bound by them. When a contract is in writing, it is important for the parties to read the terms carefully and, if necessary, to seek advice. If in the future you are signing a contract, never do so unless you understand it fully and are prepared to abide by its terms. Capacity to contract Before an agreement will be regarded as a contract, it is necessary to show that all parties to the contract are capable of making a legally binding agreement. The common law has developed certain rules about groups within the community that have only a limited right to make contracts. These groups include people who are bankrupt and people with mental disorders. However, the most important group protected by this aspect of the law are referred to as minors or infants. These are people under 18 years of age. Contracts and young people There are special rules for minors in relation to contracts. Contracts involving minors will not be legally enforceable against them. Minors may enforce the contract against the other party or parties involved. These rules are designed to protect the interests of those whom the courts have regarded as being at risk in making contracts. There are certain exceptions to these rules and we will deal with the most important of these. People under the age of 18 can only make contracts for necessaries that are for their benefit. Necessaries Minors can enter into contracts relating to products that are necessary for them. If the object of the contract (the product) is not regarded as being necessary for the minor, it will not be possible to enforce the contract against them. Necessaries have been defined as products suitable to the condition in life of the minor, and to their requirements at the time the contract was made. What may be necessary for one minor may not be necessary for another. To decide what is a necessary, the court must look at each individual case.

6 Chapter 11 Focus on contract law 309 It is because of this rule of contract law that businesses will not enter into credit arrangements with young people. Minors are not able to obtain a credit card in their own name or to enter into delayed payment relationships without having their parents act as guarantors. If parents do this, it is they who are legally bound rather than the minors. Contracts for the benefit of the minor A contract for the benefit of a minor can be enforced by a court. A contract for the benefit of a minor would include contracts for education and training, such as an apprenticeship. If the court is of the view that the contract is of benefit to the minor, then it may be enforced against them. A contract is not legally binding if the object of the contract is illegal. Legality To be legally binding the object of the contract must be legal. For instance, an agreement with a hit man to kill a rival would not be enforced by a court because the object of the contract (to murder someone) is against the law. Terms of a contract The terms of a contract set out the object of the agreement and what is required from each party. The most important element of any contract is the part of it that sets out the object of the agreement and what is required of each party. If it is a contract for the purchase of goods, the most important issues will be the nature of the goods, their delivery and the price paid. These are known as the terms of the contract. In other words, the terms of a contract are those matters about which the parties have agreed. When parties are mistaken about the terms or the meaning of the terms, the extent to which the contract may be enforced will depend on the nature of the mistake, who made the mistake, and for what reason the mistake was made. Bad feng shui over graves goes to court FENG shui is the Chinese practice of channelling the flow of positive energy through building design. A special section of Springvale Botanical Cemetery known as Song He Yaun is built with feng shui principles, according to the cemetery s website. However, two graves in this part of the cemetery are the subject of bad feng shui according to the owners of the graves who have claimed breach of contract. They sought undisclosed damages from the Necropolis Springvale for allowing construction of a giant mausoleum, which they claimed affected the feng shui of their respective parents graves. One grave owner, Mr Lee Tang, of Rowville, alleged that the 4.5 metre monument deprived his father of the special protection offered by a 1.8 metre high statue of the Buddha put there to watch over and protect the dead. He claimed the cemetery management knew or should have known that for the Buddha statute to protect people, there had to be an unobstructed line of sight between the grave site and the statue. The other plaintiff, Mr William Shao of Croydon, bought a grave for his mother. The cemetery management claimed that an obstruction between the Buddha and the graves is desirable, according to a proper application of feng shui principles. Failing mediation, the County Court will hear the two cases together. Note: This is an author-written article False information given by one party that persuades or influences the other party to enter a contract is called a misrepresentation. Misrepresentations There is a possibility that information passing between the parties before making an agreement is false. Such false information may be given deliberately in order to cheat the other party into entering the agreement or it may be given innocently. False information given by one party that persuades or influences the other party to enter the contract is called a misrepresentation. The misrepresentation may not form part of the terms of the contract, but it will affect the extent to which the terms of the contract will be enforceable by the courts.

7 310 The Legal Maze Express terms are stated at the time the contract is formed. Implied terms are part of a contract even though they are not stated. Express and implied terms The terms of a contract may be either express or implied. Express terms are those terms that are clearly stated orally or in writing by the parties to the contract at the time the contract is formed. Implied terms are terms that make up part of the contract even though they may not be specifically mentioned. For example, if someone buys a meat pie the price of the pie would be an express term of the contract, but the fact that the pie is suitable for consumption is implied. The fact that goods sold are suitable for the purposes for which they are sold is an implied term of a contract. Guarantees and warranties It is rare to find a seller expressly stating in a contract that the goods will perform particular functions for a particular length of time. Sometimes guarantees and warranties are given in writing, but the fine print in these guarantees may fail to adequately protect the consumer. On many occasions, purchasers may find these guarantees in the box with the goods. It may be difficult to prove that such guarantees form part of the contract because they are found after the contract has been made. Alternatively, consumers may have difficulty in enforcing guarantees given by the manufacturer, with whom the consumer may not have a contract. Another problem with such guarantees is that they rely on the consumer sending a document to the manufacturer something many consumers fail to do. For these reasons, parliaments, at both the federal and state levels, have passed legislation insisting that contracts for the sale of goods and services include certain terms. In many cases, these implied terms provide greater protection than those given in written guarantees. These terms relate to merchantable quality and specify that the goods must be fit for the purpose intended. Check your understanding 1 In simple terms, explain what capacity to contract means, including in your answer the special rules and exceptions the law has developed in regard to an infant s capacity to contract. If you were a judge and could possibly change this law, do you think that these special conditions should relate to all young people under 18 (infants) today? Explain your answer fully with reasons and examples. 2 Outline the main elements of a contract. Apply your understanding Case study Musical offering Read the case below, then complete the tasks that follow. Sam saw an advertisement in Up for Grabs magazine offering Molly s grand piano for a sale price of $4000. Sam wrote to Molly responding to the advertisement stating that he would take the instrument at your price. On 1 May, Molly wrote back to Sam stating that she now wanted $5000 for the grand piano but would keep her offer open for another week. Sam received Molly s letter on 4 May and immediately wrote back to Molly stating he agreed to pay the $5000 at your convenience. Unfortunately, this letter was delayed in the postal system and did not arrive until 11 May.

8 Chapter 11 Focus on contract law 311 The next day (5 May), Molly had lunch with her sister Jennifer. They discussed the piano and agreed that Jennifer could buy the piano for $3500 if she also looked after Molly s children on Saturday nights. On 6 May, the piano was delivered to Jennifer s house. 1 Is Molly s advertisement in the magazine an offer or an invitation to treat? Give reasons for your answer. 2 Would a court consider Sam s letter to Molly an offer? Why or why not? 3 Explain the term counter-offer. 4 Has Molly made a valid counter-offer to Sam? Explain your reasons. 5 Sam s acceptance of Molly s offer to sell him the piano has been delayed in the post. Does that make his acceptance invalid or valid? Explain your answer. 6 As a class, discuss whether Molly has breached her contract with Sam. Case study Postal offer Consider the case below. Will Ann succeed? Give reasons for your answer. Ann sent a CD to Terry with a note saying, If you don t give me a call within the week, I will assume you like the CD and wish to keep it at the price stated. After no such call was received, Ann waited for payment, which was not forthcoming. Ann wants to sue Terry. Case study Minor contract Consider the case below. What legal advice would you give Aysun in this situation? Aysun is 17 years old and enters into a finance contract for the purchase of a car. After having the car sitting in the garage for six months, Aysun decides that she has made a mistake, stops making the payments and is sued by the finance company. Multimedia report or poster Elements of a contract Prepare either a Microsoft PowerPoint presentation or a set of A4 posters illustrating the essential elements of a valid contract. Case study Offer and acceptance Read the case on the following page, then complete the tasks that follow.

9 312 The Legal Maze Offer and acceptance The defendant owned a chemist shop. The products in the shop were displayed on shelves and customers served themselves. Under the United Kingdom s Pharmacy and Poisons Act, special rules applied to the sale of dangerous drugs listed in the Act. Some of these drugs were displayed on the shelves in the chemist shop. The Act stated that these dangerous drugs could only be purchased under the supervision of a registered pharmacist. The defendant employed a pharmacist to supervise the sale of products and the pharmacist was stationed at the checkout counter. Two customers purchased drugs included in the poisons list. The customers sued the defendant, arguing that the purchase of the drugs had not been supervised in accordance with the Act. They based their case on the argument that the supervision by the pharmacist at the checkout counter was unsatisfactory because the contract for the sale of the products had already been made by the time the customer took the goods to the checkout. The plaintiff argued that an offer of sale had been made by placing the dangerous products on the shelf with prices attached and that acceptance took place when the customer removed the goods from the shelf. At this point of time the contract was complete and it had been made without supervision. Source: Pharmaceutical Society of Great Britain v. Boots Cash Chemist [1953] 1 QB The case hinged on when the offer and acceptance took place. Did it take place at the time the goods were removed from the shelf (unsupervised) or at the time the goods were paid for (supervised)? Explain. 2 Summarise the main issues relating to offer and acceptance in the above case. 3 Provide a current example of where this situation could occur. Case study Intention to create legal relations Read the case below, then complete the tasks that follow. The defendant was required by his employer to work in Ceylon. In 1915 he returned to England and stayed with his wife until 1916, when he returned to Ceylon. For medical reasons his wife remained in England. An agreement was made between the defendant and his wife that he would pay her 30 per month so that she could maintain herself in his absence.

10 Chapter 11 Focus on contract law 313 Some time later, the husband wrote suggesting they remain permanently separated. The payments then ceased. The plaintiff argued that she had given consideration by consenting to the original agreement and therefore sued for continued payment. Source: Balfour v Balfour [1919] 2 KB Is this a legally enforceable agreement? Explain. 2 Give two other examples to illustrate situations where agreements are made, but not with an intention to create a legal contract. 3 Why is it important for the law to distinguish between situations in terms of the intention of the parties to create legal relationships? 4 This case is a good example of how the law has changed in line with changing community values. Today, Mrs Balfour could bring her case to the Family Court under the Family Law Act 1975 (Cwith), though the outcome of this case would not be certain. It would depend on the particular circumstances of both parties. What do you think the outcome of the Balfour case could be today? Case studies Contractual situations Read the cases below, then complete the tasks that follow. Case A Hugh offers to sell Adam his mountain bike. Adam agrees to Hugh s asking price of $320 but wants Hugh to include his special riding jacket. Hugh tells Adam that he will think about it and tell him tomorrow if he agrees. In the meantime he sells the bike to Sara instead. Case B Ahmed goes to the local video store and finds a latest release DVD marked at $ Latest release DVDs are usually much more expensive so he takes the DVD to the counter to purchase it. The shop refuses to sell the DVD at the marked price. Case C Grant owns a restaurant. The restaurant is always very busy on Christmas Day. To encourage all the staff to work on Christmas Day he offers to pay them triple time. They all agree to work on Christmas Day. However, when the staff members receive their pay they discover that they have only been paid double time for the day s work. They complain to Grant. He replies: But the union said I only had to pay double time for working Christmas Day so you have been paid the correct amount.

11 314 The Legal Maze Case D Martina is a keen Kangaroos supporter. Her mother follows the Demons. The Kangaroos and Demons have made it to the Grand Final. Martina and her mother have a bet about which team will win. When the Demons win, Martina refuses to pay. Case E Andy has been offered an apprenticeship with a builder. He told the builder that he may have trouble getting to worksites because he doesn t drive. The builder said: Not a problem, I will pick you up and make sure that you can get to work. However, after a couple of weeks, the builder gets tired of picking up Andy and insists that Andy make his own way to work or he will not have a job. Case F Bree walks out of a pub late one afternoon and into the store next door. Although she does not appear to be drunk, she has been drinking most of the day. At the store she sees a deluxe wide-screen television. After speaking to a salesperson she signs a contract to buy the television. The next morning Bree wakes up and realises what she has done. She rings the store and explains that she was drunk and cannot afford the television. The salesperson says, You looked all right to me. You signed the contract, it s yours. Case G A man wanting to commit suicide is frightened that he will not succeed. He makes an agreement with two hit men to pay them $ to finish him off if his attempt at suicide is not successful. Just as the man predicted, his suicide attempt was unsuccessful. He wakes up in hospital. The two hit men had not fulfilled their part of the agreement. For each of the cases above: a Explain the key elements necessary to prove that a contract exists. b Discuss whether a contract has been breached. c Suggest any defences that may be available. Case study Lottery win or loss? Read the extract on the following page, then complete the tasks that follow.

12 Chapter 11 Focus on contract law 315 Logan Hospital colleagues fight over frozen lotto win IT should have been a rags to riches story after the lottery numbers of a Logan work syndicate came up but four months later, they haven t seen the money. The syndicate of Logan Hospital cleaners and wardsmen won more than half a million dollars in June. However, four months later none of them have seen any of the money. If you don t pay and when you win, you want a share, where is the justice? she said. Why should we pay someone who doesn t pay? With lawyers now involved, the group s winnings worth $ have been put in Ms Hodgson s solicitor s trust account. Ms Hodgson said the money could not be distributed to herself and the other six deserving syndicate members until the legal dispute with their colleague was settled. That has exacerbated tensions among them, with Ms Hodgson complaining she was being harassed. Ms Hodgson who was injured in the 2005 Bali bombings and who was a volunteer caring for tsunami victims in Indonesia said the escalating Lotto dispute was now so upsetting, she was on stress leave from her job. She said she wished she had never set up the yndicate, named 8 Angels, in honour of the nickname she was given for her work with children in Banda Aceh and Fiji. I m very angry, she said. I m an international volunteer worker, but now my reputation, my name, has been ruined. Ms Hodgson said she was waiting for the dispute to go to mediation and once it was settled, she planned to give her share of the money to charity. Source: Courier-Mail, 19 October Outline the elements of a contract. Do they apply in this situation? 2 What do you think will be the outcome of this case? Why do you believe this? Thinking critically and creatively about the chapter Chapter 11 Low-order thinking to higher order thinking Remembering Understanding Applying Analysing Evaluating Creating The following activities have been designed to develop a broad range of analytical, critical and creative thinking skills and abilities. Minors cannot make contracts for credit. Give five reasons for this. Using what you have learned about contract law, summarise your understanding of the term contract. Develop a mnemonic to identify the different elements of a contract. Discuss the benefits of the following statement: An invitation to enter into negotiations is not an offer. Evaluate the different ways contracts can be made. Use BAR to improve the use of contracts. B = make something bigger A = add something R = remove or replace something