Contract Law: Essential Elements 1

1. Contract Law:Essential Elements 1 BUS107 Commercial Law Week 2 Lecture

2. Specific Criteria of a Contract To be enforceable by a court a contract must have: • offer and acceptance • intention to be legally bound • consideration • capacity of parties • reality of consent • legality of object

3. An offer … • must be a firm promise: see Harvey v Facey • must be communicated: see R v Clarke • may be withdrawn prior to acceptance: see Routledge v Grant • may be made to one person, a group of people, or the entire world: see Carlill v Carbolic Smoke Ball Co • may be terminated by a counter-offer: see Tinn v Hoffman & Co • is different from an invitation to treat: see Pharmaceutical Society v Boots

4. An acceptance … • must be absolute and unconditional: see Masters v Cameron • must be communicated: see Felthouse v Bindley • must be made in reliance of the offer: see R v Clarke • must be made in accordance with the terms of the offer: see Gilbert J McCaul Pty Ltd v Pitt Club Ltd • may be forwarded by post and is effective as soon as it is posted: see Adams v Lindsell

5. Intention to be legally bound • For a contract to be enforceable the parties must intend to be legally bound • The courts presume that parties to a social agreement do not intend to be legally bound see Balfour v Balfour • The courts presume that parties to a commercial agreement intend to be legally bound but this presumption can be rebutted by evidence to the contrary: see Rose & Frank Co v JR Crompton & Bros

6. Consideration • Consideration is necessary for a contract to be legally binding • Consideration given by purchasers to vendors is almost always money but does not have to be • Consideration must have legal value but need not be of adequate value: see Chappell & Co Ltd v Nestle Co Ltd

7. Consideration • Consideration must move from the promisee: see Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd • Consideration must not be past: see Roscorla v Thomas • Consideration must be sufficient: see Stylk v Myrick; Foakes v Beer

8. Promissory Estoppel • There are six requirements for promissory estoppel to apply: • Promisee assumed a legal relationship with promisor • Promisor was responsible for the assumption • Promisee relied on the assumption • Promisor intended for promisee to rely on the assumption • Promisee suffers detriment because of reliance • Promisor has failed to warn promisee

9. Capacity in Contracts • You can’t agree to be bound by a contract if the law deems you lack the capacity to agree • Minors, intoxicated people, and the mentally unsound are all deemed to lack capacity to enter contracts • Minors sometimes need to be able to enter contracts such as a contract of employment, so the law does provide some exceptions

10. Contracts binding on minors • Minors will be bound by contracts for necessaries under the common law: see Nash v Inman • Minorswill be bound by beneficial contracts of service: see De Francesco v Barnum • Legislation in NSW binds minors to contracts if they understand what they are doing and their contract is for their benefit: see ss.17-19 Minors (Property and Contracts) Act 1970 (NSW)

11. Capacity of corporations • A company is a legal person in the same way as a natural person is a person • When a company has the legal capacity to enter contracts: see s.124 Corporations Act 2001 (Cth)

12. Duress • A contract is unenforceable if it has been entered because of: • Duress: see Barton v Armstrong; Electricity Generation Corporation v Woodside Energy Ltd • Undue influence: see Allcard v Skinner

13. Unconscionable Conduct • You cannot take advantage of someone in a position of ‘special disadvantage’ when arranging contracts • People with a special disadvantage include the elderly and people with poor understanding of the English language • Contracts entered under these circumstances are unenforceable: see Commercial Bank of Australia v Amadio

14. Misrepresentation • A false statement made to induce somebody to enter a contract Misrepresentation can be: • fraudulent – where the statement is intentionally deceptive: see Derry v Peek • innocent – where the statement is not intentionally deceptive • negligent – where the statement is made recklessly: see Hedley Byrne & Co Ltd v Heller and Partners Ltd

15. Legality of Object • Some contracts, although possessing all the formal requirements of valid contracts, will be void because the object of the contract is one which is not allowed, or is discouraged by law: see Pham v Doan

16. Express vs Implied Terms • Contracts often contain multiple promises between the parties that we call terms • Some terms are express, that is they are explicitly written or spoken as being part of the contract by the parties themselves • Some terms are implied, that is they are not explicitly written or spoken but are put into the contract by legislation or sometimes by the conduct of the parties

17. Express Terms in Writing • The courts will presume that a written contract which appears complete on its face contains the whole agreement and will not permit a party to add to or vary or contradict the written agreement • This presumption can be rebutted if evidence clearly indicates the contract is not complete • This is called the parol evidence rule

18. Implied Terms • At common law there is a term implied into contracts for the sale of goods that the goods be of ‘merchantable’ quality, that is, they work • Legislation would also cover you with a statutory guarantee under the Australian Consumer Law

19. Post Contractual Statements • As a general rule, contracts you sign are binding even if you did not read the contract: see L’Estrange v Graucob • But you cannot be bound by statements, promises or representations made after the contract has been formed: see Olley v Marlborough Court • These are called post contractual statements

20. Exemption Clauses • Sometimes a contract will include a term that limits or excludes the liability of one of the parties • These terms are called exemption clauses • The courts presume that parties do not intend to exclude liability for a fundamental breach of the contract

21. Conditions vs Warranties • A condition is an important term of the contract • A breach of condition gives the innocent party the right to terminate the contract and sue for damages • A warranty is a less important term of the contract • A breach of warranty give the innocent party the right to sue for damages, but not terminate the contract: see Bettini v Gye

22. How do contracts end? • Performance • Agreement • Frustration • Operation of law • Lapse of time • Breach of contract

23. Performance • A contract usually comes to an end when each party has performed the obligations imposed by the contract • Obligations under the contract must be performed exactly, usually near enough is not good enough: see In re Moore & Co Ltd and Landauer & Co

24. Agreement • Parties to a contract can agree to terminate the contract • One party may also waive performance of the contract by not insisting on strict compliance

25. Frustration • A contract can be terminated by frustration which means a supervening event beyond the control of the parties has made the contract incapable of performance: see Taylor v Caldwell • A contract will not be frustrated because a party regrets their commitment, or faces hardship, inconvenience, or material loss: see Davis Contractors Ltd v Fareham Urban District Council

26. Operation of law • Certain rules of law can also bring about the termination of a contract such as: • bankruptcy • death • material alteration • merger

27. Lapse of time • A contract may also be discharged by the passage of time • State legislation provides that a right to sue for breach of contract must be enforced within a fixed period or else it becomes statute barred

28. Breach of contract • If one party breaches the contract, the other party can “walk away” from the contract and treat their obligations under the contract as finished • A breach may be an actual breach or an anticipatory breach: see Foran v Wight

29. What remedies are available? • Rescission • Restitution • Damages • Specific performance • Injunction

30. Rescission • Rescission means the setting aside of the contract and restoring the parties to the positions they were in before the transaction took place • Rescission may be granted because of misrepresentation, undue influence, duress, or unconscionability

31. Restitution • Restitution is a remedy available where someone has benefited at the expense of someone else and where it would be unjust to allow that person to keep the benefit: see Pavey & Matthews Pty Ltd v Paul

32. Specific Performance • Specific performance is a court order requiring a person to fulfil their agreement under a contract • Specific performance is most commonly used where the vendor of land refuses subsequently to transfer title to the purchaser • Specific performance is not used to enforce contracts for personal service

33. Injunction • An injunction is a court order to stop a person breaching their contract • A contract for personal service is not normally subject to specific performance but may be enforced by injunction: see Lumley v Wagner

34. Punishment • Punishment is the imposition of a penalty as retribution for an offence • Punishment has five recognised purposes: deterrence, incapacitation, rehabilitation, retribution, and restitution • Punishment is administered by the government against criminals who have committed a criminal offence against the state

35. Compensation • Compensation is the award of money or something else in recognition of loss or injury • Compensation or damages for breach of contract are viewed as a ‘substitute’ for performance • The purpose of compensation is to put the plaintiff in the position they would have been in had the contract been performed properly

36. Punitive Damages • Punitive damages are monetary compensation awarded to punish the defendant for their actions • The objective of contract law is to compensate plaintiffs, not punish defendants • Punitive damages are not awarded by the courts in disputes involving breach of contract

37. Liquidated Damages • Contracting parties can insert a clause into the contract that specifies the amount of damages recoverable by one party if the other breaches the contract • This is called a liquidated damages clause • The amount specified must be a genuine estimate of loss or it will be regarded as a penalty clause and the court will not enforce it

38. Causation & Remoteness • Determining the cause of an event can be a difficult and problematic exercise • A plaintiff seeking compensation for breach of contract must prove that the breach caused their losses • The losses must also be so closely related to the breach that they cannot be said to be too remote: see Hadley v Baxendale

39. Losses Recoverable • There are two kinds of loss that a plaintiff may recover: • loss arising from the breach of contract in the usual or normal course of things; and • loss arising from special or exceptional circumstances where it can be shown that the defendant had actual knowledge of the plaintiffs special needs: see Hadley v Baxendale

40. Privity of Contract • Under the privity rule only a party to the contract has any rights under the contract • The contract imposes obligations only on the parties to the contract: see Beswick v Beswick