Contract Basic. Traditional elements for liability of breach of contract A claim for breach of contract will succeed if it is shown that:

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1 Previous course of dealing may verify a term: Hardwick Game Implied term test: BP Refiner, applied in Codelfa term implied in custom/trade usage test: Con-Stan Industries Exclusion clause: Darlington Futures --> Main rule: normal and ordinary meaning Doctrine of Privity: Dunlop Pneumatic Tyre (main rule) test of third party obtaining benefit of exclusion clause: Scruttons Ltd v Midland Silicons Breach gives rise to substantial damages: Holland v Wiltshire gives rise to nominal damages: Luna Park Breach of conditions: test of essentiality: Luna Park going to the root of the contract: Associated Newspapers v Bancks most trivial breach will entitle termination: Hong Kong Fir Breach of intermediate term: definition of intermediate term: Cehave sufficient serious breach will give rise to termination: Hong Kong Fir elements: suffering damages / reasonable foreseeable consequence Right to termination & affirm: Tropical Traders; Shevill v Builders termination affects future obligations: McDonald v Dennys affirm the contract instead of terminating: White & Carter Council elements of claim damages: White & Carter Council --> no cooperation; legitimate interest Test of frustration: Davis Contractor, approved in Codelfa limitation of frustration: frustration not provided by contract: Codelfa hardship/inconvenience not frustration: Davis Contractor without fault: Bank Line Contract Basic A contract is simply an agreement between two parties that is legally binding. The law of contract is concerned with: the making of the contract --- formation the enforceability and effect of the terms of the contract on the parties --- construction the performance and discharge of the contract --- termination rights and remedies available where the contract is breached --- remedy A contract exists when the basic elements are satisfied: an agreement (usually compromised of an offer and the acceptance of the offer) consideration an intention to create legal relations Objective approach The law is concerned with the interpretation which would be placed upon the words and actions of the parties by a reasonable person, other than upon their subjective intentions. Thus an offer must be normally interpreted in the sense in which it would reasonably be understood by an ordinary person, even though the offeror's actual meaning was otherwise: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd Traditional elements for liability of breach of contract A claim for breach of contract will succeed if it is shown that: 1

2 Offer The offer must be communicated by the offeror or an authorised agent of offeror to offeree: Henthorn v Fraser However, it is not necessary for an offer to be made to a specific person or a class or group of people. An offer can be made to "all the world", in which case the offeree is regarded as a member of the general public: Carlill v Carbolic Smoke Ball When an offer is made, the term of the proposed contract must be communicated to the offeree: Thornton v Shoe Lane Parking However, an offer can be made in general terms, leaving the precise terms of the contract to be settled later: Master v Cameron The fact that the word 'offer' is used is not itself conclusive: B Seppelt & Sons Ltd v Commissioner for Main Roads An offer must be distinguished from "an invitation to treat", which can be described as any part of the negotiation process that invites further bargaining, rather than acceptance: Pharmaceutical Society v Boots Cash Chemist Acceptance Communication of acceptance is generally required: Felhouse v Bindley, EXCEPTIONS are: Where an offeree with a reasonable opportunity to reject the offer of goods or services takes the benefit of them under circumstances which indicate that they were to be paid for in accordance with the offer: Empirnall Holdings v Machon Paull Partners Offer may dispense with the need of communication or acceptance takes the form of performance. Carlill v Carbolic Smoke Ball Co. Postal acceptance rule: Bressan v Squires The rule only applies when the parties contemplated that acceptance would be communicated by the post: Henthorn v Fraser Acceptance must correspondent with the offer, any departure from the offer will amount to a 'counter-offer': Butler Machine Tool Co Ltd v Ex-Cell-O Corporation (Eng) Ltd Acceptance must be in reliance on the offer. This means that all the time of acceptance, the offeree must know of the existence of the offer and the acceptance must be based on the offer made: R v Clarke Durance of an Offer Offer may be revoked before acceptance. The revocation does not necessarily by given by the offeror himself, and can be implied from words or conduct: Dickinson v Dodds However, if the promisee paid a consideration to keep the offer open or if the promise to keep it open has made by deed, the offeror will not be able to withdraw the offer: Goldsbrough Mort & Co Ltd v Quinn In terms of unilateral offer, no universal rule can be stated about whether an offer can be withdrawn after the offerees commenced the performance. In some situations, if the performance of the offer itself benefits the offerees, the revocation may be effective though the offeror may be liable in damages: Mobil Oil Australia Ltd v Lyndel Nominees Pty Ltd (1998) A mere inquiry is not a rejection to the offer: Stevenson, Jaques & Co v McLean Counter-offer kills the offer: Butler Machines Tool Co. Ltd v Ex-Cell-O Corporation Uncertainty and Incompleteness Generally, courts will try to, as far as possible to give effect to contract between the parties: Council of the Upper Hunter County District v Australian Chilling & Freezing Co Ltd Where the agreement has partly performed or has previous record, courts will be reluctant to hold it void for uncertainty: Hillas v Acros A contract is void if the term is uncertain and not severable: Whitlock v Brew Agreement 3

3 Agreement Agreement General The law of contract will enforce obligations where there has been agreement between the parties. Absent of agreement, there is no contract The courts are looking for consensus ad idem --- a meeting of the minds between the two parties. The traditional analysis is to ask: has there been an offer made by one party to be bound by terms of a contract which is accepted by another? Besides offer and acceptance, the necessary elements of an enforceable contract are an intention to create binding legal relations consideration Correct analysis of the agreement is essential to determine: when the contract was entered into a breach of obligations will often depend on when the obligation needed to be performed where the contract is formed to determine the jurisdiction and relevant applicable law what the terms of the contract are both express and implied Offer Offer is the indication by one person to another of his or her willingness to enter into a contract with that person on certain terms. The offer must indicate a willingness by the offeror to be bound without further negotiation as to the terms of the proposed contract. An offer can be made by words and/or conducts. The existence of an offer is ascertained by asking whether a reasonable third party would conclude an offer has been made. This objective test takes into account: The express conduct or words used by the parties rather than their subjective intentions. Whether the terms are sufficiently complete so that acceptance is enough to constitute a contract. 1. Goods displayed on the shelf of the self-serviced store. 2. Customer picked up goods, however, the purchase may be rejected by the authorised pharmacist. 1. Whether the offer comes into being? The display of the goods is an offer or merely an invitation to treat? 1. The plaintiff parked his car in an automatic car park owned by the defendant. 2. A notice headed with the price listed and a sentence All cars parked at owner s risk. 3. The tickets were sold by the self-service machine. 4. The plaintiff was severely injured when he returned to collect his car by an accident. Defendant failed to prove sufficient notice had been given to the plaintiff. (the sentence was not incorporated) Offer vs invitation to treat Advertisement Displays of goods in shops A reply to the invitation may possibly be an offer or merely an indication of willingness to negotiate. Pharmaceutical Society v Boots Cash Chemist [1953] The display of goods in a shop does not amount to an offer by the shopkeeper to sell, accordingly, the mere fact that a customer picks up a commodity from the displayed shelves does not amount to an acceptance of an offer to sell. It is an offer by the customer to buy and there is no sale effected until the buyer's offer to buy is accepted by the acceptance of the price. Although the display of goods for sale will not normally be regarded as constituting an offer for sale, the display of an automatic vending machine apparently constitute an offer which is accepted by those customers who insert their money into the machine. Thorn v Shoe Lane Parking Ltd (1971) 5

4 Agreement A contract of which there can be more than one possible meaning or which when construed can produce in its application more than one result is not void for uncertainty. Generally speaking, the concept of a cost of doing something is certain in the sense that it provides a criterion by reference to which the rights of the parties may ultimately and logically be worked out, if not by the parties then by the courts. 1. Hillas agreed to by and Arcos agreed to sell 22,000 standars of timber over the season Contract also provided an option to by 100,000 standards in 1931, but no provision in respect of the size or kind of that option. 3. The buyer sought to exercise the option but the sellers tried to renege, alleging that the option failed to define the various particulars so the option was not intended to bind either party, instead, it was only intended to provide a basis for future agreement. 1. Contract of sale of land contains a provision that the lease was to be upon such reasonable terms as commonly govern such a lease. 2. The purchaser later declined to complete the purchase and the vendor, in pursuance of his right under the contract terminate the contract and kept the deposit. 3. The purchaser brought an action to recover the deposit on the ground that the contract was void for uncertainty. 1. A documents called Heads of agreement provided the two companies would proceed in good faith to consult together upon the formulation of a more comprehensive and detailed Joint Venture agreement. 2. Later the negotiation broke out and the Coal Cliff did not want to cooperate with Sijehama. 3. Sijehama sued for breach of the contract. 1. The underlying contract (to design and build rolling stock for a rail network) contained a clause which required the parties, in the event of a dispute, to meet and undertake genuine and good faith negotiation. 2. Further provided that if the dispute could not be resolved by negotiation, then mediation and arbitration. 3. United Group Rail Service argued that the clause requiring good faith negotiation was uncertain, and consequently, void and unenforceable. Hillas v Arcos Ltd (1932) Where an agreement has been partly performed, the courts are particularly reluctant to hold it void for uncertainty. The language used had to be interpreted in the light of the prior course of dealings and usual practice in the timber industry that equivalent timber would be supplied. Accordingly, there was no uncertainty; the court could objectively ascertain the parties intentions. Severance of unenforceable clause Severance is only available where doing so does not alter the essential agreement made by the parties. Where severance is not possible, because the clause in question is essential to the contract, then the whole contract must fall. The courts will try to ascertain whether the parties intended to be bound by the contract even if the clause in question were served. Whitlock v Brew (1968) A contract is void if the term is uncertain and not severable. Severability is determined by the intention of the parties as disclosed by the contract into which they have entered. A term is severable where a vague, uncertain or meaningless clause in a contract may simply be ignored; or it is a clause inserted solely for the benefit of one of the parties and capable of being waived by him. Agreement to negotiate Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) An agreement to negotiate in the future on some fundamental matter, in the context of the overall arrangement, is too illusory or too vague and uncertain to be enforceable. United Group Rail Service Ltd v Rail Corporation NSW [2009] A contract to negotiate, if made in good faith, may be enforceable depending on its terms and construction. Although the law regarding the place of good faith in the law of contract is not settled, the clause here was not vague, illusory and uncertain. The parties had clearly agreed on a process --- to attempt to settle disputes by making an honest and genuine assessment of their rights and obligations and then to negotiate by reference to that assessment. That was a real obligation with real and identifiable content and it was properly enforceable. Conditional Promises A 'subject to' contract is when an agreement occurs between the parties, but they decide to record it in a written document. The question is whether the parties are bound by the informal agreement or the written document. Whether the parties intend to be bound and when they intend to be bound is ascertained by an objective test: Masters v Cameron 1. Cameron and Masters signed a sales and purchase contract containing a subject to contract clause. 2. The clause read this agreement is made subject to the preparation of a formal contract of sale which shall be acceptable to vendor s solicitor on the above terms and conditions. 3. Later Masters encountered financial difficulties and denied that the parties were legally bound to the contract. 4. Master sought to recover the deposit. Masters v Cameron (1954) The expressions "subject to contract", "subject to the preparation of a formal contract", and others of similar import, prima facie create an overriding condition so that what has been agreed upon must be regarded as the intended basis for a future contract and not as constituting a contract. Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three classes 11

5 To distinguish between consideration and a mere gift, ask whether the stipulated event was the price of the promise or merely a condition precedent on fulfilment of which the promise, still gratuitous, would operate. Agreement Referable It is not enough that a promise is made to the person relying on that promise --- there needs to be a reciprocal act or promise emanating from the promisee: The promise made by one party is supported by something moving from the other party What was provided by the other party constitutes good consideration at law In bilateral contracts, consideration is executory, while in unilateral contracts, there is only one executory promise. Australian Woolen Mills v Commonwealth 1. A contract prepared without professional assistance headed Agreement between Coulls and the O company provided that C would grant to the company the right to quarry and remove stone from a property owned by C. 2. In return, the company agreed to pay at a certain rate per ton for all the stones quarried, and a fixed minimum royalty per week for a minimum of ten years with an option of another ten years. 3. Later, C agreed to extend the period for the additional ten years and also authorised the company to pay all the money connected with the agreement to his wife as joint tenants. 4. The agreement was signed by C, the O company and C s wife. After C died, the issue was whether C s wife was entitled to the royalties? Whether she was a party to the contract or merely a third party to the agreement? Concept of joint-promisor: exceptions to doctrine of privity 1. As a promotion gimmick, Nestle offered to sell records of the Rocking Shoes for 1s 6d plus three Nestle chocolate bar wrappers. 2. Chappell & Co. owned the copyright of the song and Nestle had not obtained their permission to use it. 3. Chappell sued Nestle not only for the royalty prescribed in the relevant legislation as to the 1s 6d, but also to the price of the three chocolate wrappers. 4. Nestle argued that the wrappers were not party of the consideration because they were valueless --- and Nestle, in fact, threw them away. Wife rent the house for $1 per annum according to her husband s will after her husband died. Consideration must move from the promisee, but not necessarily to the promisor There is no requirement that the promisor must receive the benefit of the consideration. This requirement is tempered by the privity of contract rule: Only parties to the contract can enforce it. Thus, a party not to a contract cannot bring an action to enforce the contract. In some instances, the rule causes some inconvenience. Exceptions may apply in insurance cases: Trident General Insurance Co Ltd v McNiece Bros Pty Ltd Coulls v Bagot's Executor and Trustee Co Ltd (1967) The consideration of an agreement need not necessarily to the promisor, it may be assigned to a third party. Since no promise was made to Coulls' wife, she was not privity to the agreement, and hence cannot enforce it. Whether a contract is made with two or more persons jointly, it must, of course, be supported by consideration, but that does not mean by consideration furnished by them separately. It means a consideration given on behalf of them all, and therefore moving from all of them. In such a case, the promise of the promisor is not gratuitous, and as between him and the joint promises, it matters not how they were able to provide the price of his promise to them. Consideration must be sufficient, but need not be adequate The sufficiency rule holds that once consideration is held out and reaches a legal threshold, the court will make no enquiry as to whether its value is (commercially) adequate, however, not necessarily need to be something of great value: Chappell & Co Ltd v Nestle & Co Ltd. This is based on the assumption that parties are free to determine the value of what they are contracting for: Thomas v Thomas Chappell & Co Ltd v Nestle & Co Ltd [1960] Since Nestle's purpose was to increase sales of its chocolate, the supply of the three wrappers, constituting evidence of such sales, formed part of the consideration. Consideration can be nominal. Thomas v Thomas Consideration means something which is of some value in the eye of the law, moving from the plaintiff, despite the fact that one party appears to be gaining much more than the other from the agreement. Past consideration not good consideration The general rule is that past consideration --- where a promise is made after the act or performance --- is not good consideration. 13

6 Agreement 1. Franklins intended to enter into a lease with Austotel for the purpose of opening a supermarket. 2. Due to Franklins own concerns, no contract had been made: 1) intend to postpone the completion of the contract until other projects were finished. 2) price of the lease had not been agreed. 3. Austotel finally discontinued with the negotiation and leased the premise to another party. 4. Franklins sought an order for specific performance. 5. Evidence showed that Franklins did incur substantial costs and had communicated commercially significant information to Austotel about the setting up of a supermarket. 1. The plaintiff and the defendant lived together in a lesbian relationship for several years. 2. During the course of the relationship, the plaintiff conceived and gave birth to two children through a process of artificial insemination, in which the defendant agreed and assisted. 3. Later the plaintiff and the defendant departed. 4. The plaintiff sued the defendant for child support. (2) The defendant had induced the plaintiff to adopt that assumption or expectation (must be clear and unambiguous promise or representation); (3) The plaintiff made an act or omission in reliance on that assumption or expectation; (4) The defendant knew or intended him to do so; (5) This will lead to detriment for the plaintiff if the defendant does not fulfil the assumption or expectation; (6) The defendant fails to act to avoid the detriment whether by fulfilling the assumption or expectation or otherwise When estoppel not allowed? Austotel v Franklins (1989) Promissory estoppel is not allowed to operate in clear contradiction to the intention of the parties. In present case, Franklins consciously refrained from entering into the lease for good commercial reasons, and thus, estoppel not allowed. Estoppel can be used as a 'sword' rather than merely a 'shield': W. v G. (1996) Promissory estoppel can now gives rise to a cause of action, rather than merely a defence. In reliance on the promise assumption given by he defendant, the plaintiff conceived. The defendant knew or intended that the plaintiff would act in reliance on the assumption; and the plaintiff s action in so relying will occasion detriment if the assumption or expectation is not fulfilled, in that the plaintiff will be left to bear the costs of providing for the material welfare of both children until they reaches adulthood, and otherwise the plaintiff will suffer detriment in the form of income and opportunity foregone by virtue of her pregnancies, and also by virtue of the obligation she bears towards both children in terms of parenting and the provision of care. The defendant had failed to act to avoid the detriment, her action was unconscionable, and it was appropriate for the court to give effect to the resulting estoppel by ordering payment of an appropriate lump sum by the defendant to the plaintiff in respect of the child support... Intention to create legal relations Intention to create legal relations is an essential element of a contract. Thus, even if the parties have a valid agreement with consideration, there must be evidence that the parties intended their agreement to be legally binding. The intention of the offerer is determined his/her words and/or conduct; the context in which the offer was made, and asking whether an ordinary and reasonable person would regard it as an offer Intention is ascertained by an objective test: Ermogenous v Greek Orthodox Community Rebuttable presumptions lie in three situations: Domestic and family situations: presumption that family members do not intend to create legal relations Commercial contracts: a strong presumption that intention to create legal relations exists Government schemes: presumption that government schemes do not create legal relations 1. Before the couples married, Mr. Cohen promised his future wife an annual dress allowance of $100, payable in quarterly instalments. 2. The payments fell $275 into arrears. 3. When the couple finally separated, Mrs. Cohen sued for that sum, alleging that it was contractual due and owing. 1. The couple spent first 15 years in Ceylon and then went to England. 2. Later, when they wanted to go back to Ceylon, the wife was too ill to accompany the husband back. 3. The husband agreed to pay her a monthly allowance of $30 until he could rejoin him, but she never did. 4. The husband ceased to pay and she claimed by alleging a contractual right to the money. Domestic arrangements The presumption of no intention applies in domestic contexts involving family members or friends. However, this presumption can be rebutted easily. Cohen v Cohen (1929) Generally speaking, no intention to create legal relations between family members. Balfour v Balfour [1919] 17

7 1. Mother asked her daughter to leave from US to England to read for Bar and agreed to provide her with maintenance at rate of $200 per month. 2. In doing so, the daughter had to give up her decent job and family in US. 3. Actually what the mother provided, due to the difference in the exchange rate, was different from what the daughter had supposed. 4. Later the arrangement was changed, under which the mother provided a house in which the daughter could reside. 5. A dispute arose between the parties concerning the occupancy of the house and the mother took out a summons in the county court claiming possession of the house after having given her daughter a notice to quit. 1. The appellant served as an Archbishop of he autocephalous Greek Orthodox Church in SA for more than 23 years. 2. After he resigned from the position, he claimed that the respondent owed him certain sums of money in respect of accumulated annual leave and long service leave entitlements. 3. He could only succeed in the claim if there was a contractual relationship between him and the church. 4. Evidence showed the respondent organised cultural, sporting and social activities, built churches and recruited and paid consecrated clergy. 5. Evidence also showed the respondent recruited the appellant to the position of Archbishop, paid him a salary or stipend during his period for service and treated him as an employee, reserving the right to control the way in which he discharged his duties. Since the relationship between the minister and the church is pre-eminently or even entirely spiritual, whether there was a legally recognised contractual relationship between the Archbishop and the community, or there was only a relationship between the Archbishop and the church, which could not be recognised by law? 1. A promotional scheme offered for free a specially made World Cup Coin to any motorist who purchased four gallons of petrol. 2. The Customs & Excise Commissioners alleged that the coins were goods chargeable according to the relevant legislation and claimed tax accordingly. Whether the parties were legally bound to give six months notice? 1. The plaintiff, an American company had dealt with the defendant company for some years and then entered into an agreement to continue dealing for another 3 years, subject to termination on six months notice. 2. Agreement contained the following honourable clause: [t]his arrangement is not entered into, nor is this memorandum written, as a formal or legal agreement, and shall not be subject to legal jurisdiction in the law courts either in the US or England, but is only a definite expression and record of the purpose and intention of the parties concerned, to which they each honourably pledge themselves...that it will be carried through... with mutual loyalty and friendly cooperation. 3. A dispute arose and the English company terminated the arrangement without notice. 4. The US company sued for breach of the contract. There are agreements between parties which do not result in contracts within the meaning of that term in our law. The ordinary example is where two parties agree to take a walk together, or where there is an offer an acceptance of hospitality. Nobody would suggest in ordinary circumstances that those agreements result in what we know as a contract, and one of the most usual forms of agreement which does not constitute a contract appears to me to be the arrangement which are made between husband and wife... they are not contract because the parties did not intent that they should be attended by legal consequences. Jones v Padavatton [1969] Principle in Balfour v Balfour applied. Although members of a family might enter into legally binding contracts in regard to family affairs there was a presumption against such intention, and that on the facts the arrangement in relation to the house were made without contractual intent and were family arrangements; accordingly, the daughter had no defence to the mother s claim for possession of the house. Burden of proof In domestic arrangements, burden of proof lies on the party who alleges there was a contract. Ermogenous v Greek Orthodox Community of South Australia (2002) Because the search for the "intention to create contractual relations" requires an objective assessment of the state of affairs between the parties. The burdens of proof lies on the person who alleges there was a contract. Archbishop may still be an employee of the community, though he serves the God. Commercial situations General presumption is that commercial transaction attracts intention to create legal relations. Much harder to rebut then in case of family relationships: Esso Petroleum Ltd v Commissioners of Customs & Excise Where there is dispute as to intention, the onus rests upon the party contending that there is no intention. For the presumption to be rebutted, there must be very clear and explicit statement made by the parties about this, i.e., words used must be clear and unambiguous: Rose and Frank Co v JR Crompton & Bros Ltd Esso Petroleum Ltd v Commissioners of Customs & Excise [1976] Intention to be bound to gain commercial advantages. Chappell & Co. Ltd v Nestle Co. Ltd considered in this case. The coin was legally supplied to the customers who purchased petrol and thus taxable. Honour Clause: An statement declares that an agreement is not to be legally binding, with the result that the agreement is 'binding in honour only'. Such clauses are not often encountered. They might be used where the parties are prepared to rely on non-legal sanctions, for example, their ongoing commercial dealings with each other, as an inducement to performance. Rose and Frank Co v JR Crompton & Bros Ltd [1923] "Honour clauses" make the agreement unenforceable at law. The arrangement was not a legally binding contract. The honourable pledge clause showed that it was intended to be binding in honour only and not intended to create legal obligations. Accordingly, the English company was not bound to give the notice and their termination was valid and effective. Letters of comfort In commercial contexts, 'letters of comfort' are often used where a parent company does not want to attract a contingent liability (i.e. ostensibly does not have intention to create legal relations) but nevertheless wishes to demonstrate the existence of a policy of guaranteeing the liabilities of a subsidiary company. Agreement 18