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Introduction to Business Law Lecture 4 Creation of Contracts. Outline. 3. Acceptance Definition Communication of acceptance 4. Intention Requirements Tests the courts use to determine intention 5. Consideration Definition Requirements Value of consideration 6. Summary.
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Outline • 3. Acceptance • Definition • Communication of acceptance • 4. Intention • Requirements • Tests the courts use to determine intention • 5. Consideration • Definition • Requirements • Value of consideration • 6. Summary • 1. Introduction to contracts • Definition of contract • Form of a contract • Elements of a contract • 2. Offer • Definition • Statements that are not offers • Communication of offer • Termination of offer
1. Introduction to contracts • All businesses engage in transactions. • Each business or person making the agreement is called a party to the agreement. Business agreements are sometimes called ‘deals’. • Some examples of transactions that are important to most businesses include: • Buying/selling goods, equipment or services • employing workers • borrowing or lending money.
Definition of ‘contract’ An agreement concerning promises made between two or more parties with the intention of creating certain legal rights and obligations upon the parties to that agreement which shall be enforceable in a court of law Which transactions are likely to be recognised by the courts as a contract?
Form of a contract • A contract may be created (and, if necessary, enforced by the courts) from any of the following transactions: • a written agreement to do something; • a verbal agreement to do something; or • some conduct by the parties which clearly indicates that a binding transaction has taken place (for example, the act of purchasing an item at a store).
An offer followed by acceptance results in an agreement If all of these elements can be demonstrated then there will be a contract Elements of a contract • In order for a transaction to be recognised as a contract, all of the following elements must be demonstrated: • offer • acceptance • intention • consideration.
2. Offer • An offer is an invitation to enter into a contractual arrangement. • The person making the offer is the offeror. The person to whom the offer is made is called the offeree. • Not every communication that relates to a transaction will be an offer (offer v invitation to treat). • An invitation to treat is NOT an offer. It is a statement made to another person inviting them to make an offer (Eg. Goods displayed in a shop window – Pharmaceutical Society of GB v Boots Cash [1953]). • An invitation to treat cannot be accepted. • A person who responds to an invitation to treat is in fact making an offer, which the other party can accept or reject.
An example: you (offeror) say to your friend James (offeree ): ‘I will sell my bicycle to you for $50’. • An offer has been made to James. • James can elect to accept or reject your offer, or may choose to say nothing. • If James rejects your offer or says nothing, there can be no contract. • If James accepts your offer, a contract is formed.
An offer may be made to : • An individual (this may be either a nature person or a business entity such as a company). • A distinct group of persons (real or corporate). For example: you display a notice on the staff noticeboard at your workplace offering your bike for sale for $50. • An indistinct group of persons (including the ‘world at large’). For example, you put up notices around your neighbourhood offering a reward of $50 for the return of your lost dog.
Statements that are not offers • A negotiation is a communication (or exchange of communications) between parties prior to a transaction. • A request for information is a communication made to ask for further details about some matter that will help a party decide whether it wants to proceed with a transaction. Continued
An advertisement appears to use the word “offer”. However, the courts usually regard advertisements not as offers but as invitations to treat. • For example, that if you responded to an advertisement stating that an item of clothing was on sale for half its normal price of $100, it is you who would be making the offer (to buy the item for $50). • An exception is made if the advertiser states that it has limited stock or availability and will sell at the discount until it exhausts its supply of goods or services. In such circumstances the courts will find that an offer has been made.
Pharmaceutical Society of GB v Boots Cash [1953] 1 QB 401 Facts: • An Act provided that certain goods could only be sold under the supervision of a licensed pharmacist. • These goods, with prices marked, were displayed on the shelves of the defendant’s self service chemist shop. • The procedure was that the customer would select an item from the shelves and take it to the cash register. A licensed pharmacist was at the cash register. • The defendant was prosecuted under the Act. • According to the prosecutor, the placement of the goods on the shelves constituted an offer which was accepted by the customer when he/she took them from the shelf. • So at that time the contract for the sale was completed (IE. The sale of these goods was unsupervised because the licensed pharmacist was at the cash register). Decision: • The court held that there was no offer by the shop keeper to sell the products. • The display of goods in store, with price marked, is an invitation to treat and NOT an offer to sell. • The offer takes place when the customer presents the goods to the cashier. This offer may be accepted/rejected by the shopkeeper.
Termination of offer An offer may end in one of the following three ways. • Rejection - the offeree communicates refusal of the offer. • Revocation - the offeror changes their mind and withdraws (cancels) their offer before it can be accepted. • The offer lapses (expires) after a period of time because no-one has accepted it. The period of time may be specified by the offeror in which case the offer lapses at the end of the period. Where no period is specified the courts must determine when the offer lapses.
Hyde v Wrench (1840) 3 Beav 334 Facts • Mr Wrench offered to sell his farm to Mr Hyde for £1000. • Mr Hyde responded by offering to buy the farm for £950, which Mr Wrench refused. • Mr Hyde then agreed to pay the original amount of £1000. • Mr Wrench did not reply. Legal issue • Was Mr Wrench obliged to sell his farm to Mr Hyde? In other words, had a contract for sale of the farm come into existence? Decision • The court decided that by making a counter-offer, Mr Hyde had rejected Mr Wrench’s original offer and could not revive this offer by later attempting to accept it. That is to say, there is no contract.
3. Acceptance • An offer is accepted when the offeree agrees to the offer. A contract comes into existence at the moment of acceptance and will be enforceable as long as the remaining two elements of the contract (intention and consideration) are satisfied. • Acceptance must be unqualified. • Only the offeree may accept the offer. • Implied acceptance.
Requirement to communicate acceptance • For an acceptance to be valid, the acceptance needs to be effectively communicated to the offeror. The different ways in which acceptance may be communicated include: • verbally, by face-to-face communication • verbally, by telephone • in writing, in person • In writing, via facsimile • in writing, via electronic communication (email, text message, etc.). • in writing, via ordinary post. • The offeror is entitled to specify the means by which acceptance must be communicated.
When does acceptance take effect? It is important to know when acceptance takes effect as this will also be the moment at which the contract is formed. • If acceptance is communicated by instantaneous means (that is, in person, by telephone or by facsimile machine), the acceptance takes effect immediately. • If acceptance is communicated by means of a letter posted in the ordinary mail, acceptance occurs at the time the letter is posted (not at the time the letter is received by the offeror). This is known as the ‘postal acceptance rule’. (continued)
If acceptance is communicated by electronic means (email or text message), acceptance occurs at the time that the communication is ‘received’ by the recipient. However the law for email communication of acceptance has recently been reformed and is encapsulated in Electronic Transactions Act 2000 (NSW). In particular the following sections are relevant: • Section 13 (1) - If an electronic communication enters an information system then the dispatch of the communication occurs when it enters that system. • Section 13(2) - If an electronic communication enters 2 or more information systems then the dispatch of the communication occurs when it enters that system. • Section 13(3) - If a person has designated an address for receiving electronic communications, then unless otherwise agreed, the time of receipt is the time when the electronic communication enters that information system. • Section 13(4) - If a person has not designated an electronic address for receiving electronic communications, then the time of receipt is the time when the electronic communication comes to the attention of the person. • Section 13(5) - Unless otherwise agreed, an electronic communication is taken to have been dispatched and received at a person’s place of business.
Business focus: silent acceptance? • In order to form an agreement, the person who receives an offer (the offeree) must accept the offer and communicate this acceptance to the person who made the offer (the offeror). • If the offeree does not communicate acceptance but stays silent, the usual rule is that there is no agreement: the offeree’s silence cannot be taken as acceptance. • This rule also extends to written contracts: if the parties have agreed to be bound only by a written document signed by both parties, and one party fails to sign, there will normally be no binding agreement. • However, there may be cases in which an offeree’s conduct will amount to acceptance, even if the offeree has refused to complete one or more of the formalities of acceptance.
Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) Facts • Empirnall, a property developer, hired Machon Paull, a firm of architects, to draw up plans and act as project managers for a property redevelopment. • Machon commenced work and requested Empirnall to make a progress payment and sign a contract. • Empirnall made a progress payment to Machon but at no stage provided a signed copy of the contract. • Machon continued work and wrote to Empirnall stating that they were ‘proceeding on the understanding that the conditions of the contract are accepted by you …’. • Empirnall later refused to proceed with the agreement and Machon sued for damages.
Legal issue • Did Empirnall's refusal to sign the written agreement produce the result that there was no contract between the parties? Decision • Although Empirnall had not signed the contract as requested, it had taken the benefit of the services provided by Machon. Empirnall was provided with a reasonable opportunity to reject Machon's offer of services but did not do so. • The court concluded that, in these circumstances, Empirnall's conduct amounted to acceptance of Machon's offer. As there was a contract between the parties, Empirnall had breached its obligations under the contract. • The court ordered Empirnall to pay damages to Machon.
4. Intention • In purely social or domestic agreements it is presumed that the parties did not intend to create a legally enforceable agreement – Balfour v Balfour [1919] • With business or commercial agreements it is presumed that parties did intend to enter into legal relations. • Both presumptions are rebuttable - Jones v Vernon Pools Ltd (1951) • The onus of proving contrary intention rests with the party seeking to rebut. He/she must prove his/her contrary intention by reference to: • The circumstances surrounding the agreement; and/or • The express terms of the agreement • See Wakeling v Ripley [1951] and Rose & Frank v Crompton [1923] • If intention is found to be lacking the agreement is void ab initio. So no rights/obligations are created as no contract ever existed.
Balfour v Balfour [1919] 2 KB 571 Facts: • A husband agreed to pay a monthly allowance to his wife while he was overseas. • The money was not paid and his wife sued her husband for arrears. Decision: • There was no valid contract because this was a domestic agreement. • Arrangements/agreements made between husband and wife are not contracts because the parties did not intend that they should be attended by legal consequences. Wakeling v Ripley [1951] SR (NSW) 183 Facts: • An old man promised relatives that if they looked after him, he would make them a gift of property. • They relied on his promise, left their employment in England, sold their house and came to Australia to look after him. • There was an argument between the parties, the old man then sold his house and changed his will. • The relatives sued for breach of contract. • The old man argued that as the agreement was of a domestic nature so there was no intention to enter into a legal relationship Decision: • This was a family agreement but there was enough evidence to rebut the presumption that there was no legal intention. • The promise to give the property was binding.
Rose & Frank v Crompton [1923] 2 KB 261 Facts: • Rose & Frank were an American company who were paper merchants. • Cromptons were an English company who manufactured carbonized paper. • The parties made a commercial agreement. • The agreement stated that the parties agreed that the agreement was not to be legally binding. • One party sued for breach of contract. Decision: • The agreement was not enforceable because there was no valid agreement. • The parties had expressly agreed that their promises would not be legally binding. • Bankes LJ, stated at 283, “the intention clearly expressed in the document was merely an honourable pledge and that all legal consequences and remedies were excluded from it.” • Atkin LJ, stated at 293, “I have never seen such a clause before, but I see nothing absurd in business people seeking to regulate their business relations by mutual promises that fall short of legal obligations”.
5. Consideration • Each party to an agreement must promise to do something. The thing that is promised is known as the consideration. • It is the price you pay to buy the other person’s promise. • In order for an agreement to be a legally enforceable contract, consideration must be either provided or promised by each party to the agreement. • An agreement in which one party fails to provide consideration is not a valid contract and will not be enforced by the courts.
Consideration may be anything of legally recognisable value Some examples include: • money • goods • services • a promise to perform some specific action • a promise not to perform some specific action.
Rules for Consideration • The value of the consideration does not need to be large; the consideration does not need to be fair. • Consideration has to be sufficient, but need not to be adequate. • Consideration • Should be present or future, NOT past; • Must have some value; • Must be something more than an existing obligation; • Must be possible of performance; • Must be definite & legal
Roscorla v Thomas (1842) Facts • Mr Roscorla bought a horse from Mr Thomas. • After the sale was made, Mr Thomas promised to Mr Roscorla that the horse was ‘sound and free from vice’. • However, the horse was vicious. Legal issue • Did Mr Thomas breach the contract by providing a horse that did not meet his promise? Decision • Mr Thomas’ promise regarding the horse’s temperament was not legally enforceable because Mr Roscorla had not provided sufficient consideration for the promise. As payment for the horse was made prior to Mr Thomas’ promise, the payment was past consideration and therefore not sufficient to support the promise.
Promissory Estoppel • Allows a promise to be enforced even though no consideration. • Where it would be inequitable, or unconscionable, for the promisor not to be held to their promise. • This doctrine is a means of enforcing promises unsupported by consideration where it would be unfair for the promisor to deny later that it was legally binding, because another person had relied on it.
Promissory Estoppel • Can be used as a shield (to defend an action) (Central London Property Trust v High Trees House Ltd (1947)) or as a sword (to commence an action) (Waltons Stores (Interstate) Ltd v Maher (1988)) and can apply • The rule is simply this, ‘Promisors will be estopped (prevented) from reneging on their promises where it would be unconscionable to allow them to do so’
Facts: • Waltons Stores and Terence and Patricia Maher entered negotiations for Waltons to lease the Maher’s property in Nowra. • The Mahers proposed to demolish the existing buildings on the site and build new buildings, suitable for Waltons to occupy. • Waltons lawyers sent a standard form lease to the Maher’s lawyers. • Maher’s solicitors advised Walton’s solicitors that the Mahers had begun to demolish the old part of the building. • Waltons had second thoughts about the lease and instructed its lawyers to “go slow”. • More than three months after Waltons had initially approached the Mahers, Waltons advised the Mahers that they no longer wished to proceed with the lease. • The Mahers sued claiming a valid contract
Decision: • The High Court found in favour of the Mahers on the basis that despite the fact that there was no binding agreement because Waltons had not signed the lease, Waltons was estopped from denying that it was bound to the agreement. • Mason CJ, Wilson, Brennan and Deane JJ, Waltons was estopped because it knew that the Mahers were exposing themselves to detriment by acting on the basis of a false assumption created by Waltons and it would be unconscionable for Waltons to adopt a course of inaction which encouraged the Mahers in the course they had adopted. • Significance: • The court set up a test to establish when promissory estoppel would succeed: • (i) Pre-existing legal relationship must exist (can be pre-contractual); • (ii) A promise that raises an expectation in the other party; • (iii) A reliance by the other party on the promise that translates into behaviour induced by the expectation; • (iv) An element of detriment because of the reliance on the promise; and • (v) An element of unconscionability.
6. Summary Creating a contract A contract can only be created if all of the following steps are taken: • an agreement is reached between two or more parties, consisting of: • an offer, and • acceptance of that offer; • the parties intend to create legal relations by the agreement; and • consideration has been provided by each party.
Next time … Next week’s lecture looks into defects of a contract, how contracts are interpreted, how they are carried out (‘performed’), and what can happen when the agreement doesn’t work out as planned.
