T1, 2021 business law lecture 2 - contracts 1

2105 AFE: Lecture 2
INTRODUCTION TO THE LAW OF
CONTRACT

Objectives
Describe how contracts can
be classified.
• Distinguish formal contracts
from simple contracts.
• List the essential elements
required to make a valid contract.
• Explain how the law determines whether parties to a
contract intend to create a legal relationship.
• Define the term offer and distinguish it from an
invitation to treat.
• List the rules with respect to offer and acceptance

3
WHAT IS A CONTRACT?
• A contract can be defined as:
“An agreement between two or more parties containing promises with
the intention of creating certain legal rights and obligations and which
shall be enforceable in a court of law.” (p.192)
– Two sources of Contract = Common law and Legislation
There is some debate concerning the precise definition of a legal
contract, however, for our purposes a contract is:
“an agreement between two or more persons intended to be
binding and which is enforceable at law”
In short – an agreement that the courts will enforce.
Contracts may take many forms, written, oral or may even be made by
conduct.

What is a Contract?
• The law of contract in Australia is largely based on
British and common law with very little by way of
statute.
• A contract is an agreement containing promises
made between two or more parties and enforceable
in a court of law. Contracts can be:
– written
– oral
– non-verbal

WHY STUDY CONTRACT LAW?
– Contract is the central concept
of commercial law
– Contract law establishes the
certainty to enable business
transactions to proceed
– Almost all modern political
theorists argue that establishing
an effective system of contracts
is one of the central tasks of
government

Contract law is derived
from Common Law (aka Case law)
• The principles of contract (K) law are derived from
common law (aka judge-made law or case law).
• K law deals with disputes between citizens and so is civil
in nature (not criminal, not public).
In K matters the standard of proof is the civil one – on
the balance of probability.
Often the objective test is ‘what would a reasonable
person assume or do in these circumstances?

Contract v Agreement
– An agreement is NOT
necessarily a contract because
it may lack one of the principles
governing contractual relations,
such as intention,
consideration, legality
– In short, a contract is an
agreement that the
courts will enforce.
Contracts may take many forms,
written (express), oral, or they may
even be made by conduct
(implied).

Types of Contract
(1) Formal contracts are agreements in writing that do not require
consideration on the part of the promisee.
A gratuitous promise and a deed of gift are formal contracts.
(2) Simple contracts are written, spoken or a combination of both
and require consideration on the part of both parties to the
simple contract.
Simple Contracts
Written or Spoken Consideration
Writing No consideration
Formal Contracts

Types of Contract
• Executory Contract: An executory contract occurs
when one or more parties are yet to perform the contract.
E.g I agree to mow your lawn for $50 next Tuesday
(in this situation there is a contract, however both parties
are yet to perform the contract).
Executed contract: An executed contract is said to
take place when the contract has been performed.
E.g. I mow your lawn for $50. When I have mowed the
lawn and you have paid me the $50 – the contract is
said to be performed or executed.

Elements of a Contract
• In order to enforce a contract the courts will look for certain essential elements.
(1) Intention: An intention by the parties to the contract, that is the persons
making the agreement, that they intend to enter into a binding agreement.
(2) Agreement: The parties must be in agreement as to fundamental terms.
The most usual way of establishing that the parties are in agreement is
by the technique of offer and acceptance.
(3) Consideration: In a simple contract, as opposed to a formal contract,
each party must provide consideration. This means that each party must
do or promise to do something towards the contract.
(4) Capacity: Each of the parties must be capable of entering into a contract
and the law restricts the right of some persons to make contracts.
(5) Consent: The contract must be a genuine expression of the intentions of
the parties (ie, What did the parties actually agree to?)
(6) Legality: The objects of the contract must be legal in that the courts will
not enforce a contract that is for the performance of something that is
illegal.

11
Element 1 - Intention
• Intention to create legal relations
Intention to Create
Legal Relations
Social, domestic and
voluntary agreements
(Parties do not intend
legal relations)
Business or
commercial agreements
(Presumption – parties
intend to create legal
relations)
Social agreements - made between friends or
acquaintances;
Domestic agreements - made between family
members and relatives; and
Voluntary agreements - where the parties
may volunteer their services

1. Intention to create legal relations
It must be shown that the parties to the agreement intended to be
legally bound by the agreement.
The law will only recognise contracts where there is an intention
to create legal relations. It is presumed that:
(i) If a contract has a domestic or social nature, the parties do
not intend to create legal obligations.
(ii) If a contract has a commercial or business nature, the
parties do intend to create legal obligations.

Domestic/Social Nature
Balfour v Balfour (1919)
Facts
This case involved a husband and wife. The husband was due to
return to Ceylon where he had employment, but the wife, on medical
advice was to remain in England. The husband promised to pay the
wife £30 per month until she was able to join him in Ceylon. Later
the parties separated and were divorced. The wife brought this action
for the money her husband had promised to pay to her but had failed
to do so.
Held: There was no binding promise. Because, “the parties, in the
inception of the arrangement, never intended that they should be
sued upon.” Therefore the wife’s claim for breach of contract
failed.
Agreements made between husbands and wives who have not
legally separated are less likely to create legal obligations.

14
• Where the husband and wife are separated at the time of the
agreement, intention may exist (Merritt v. Merritt (1970)) –
• In the case of domestic situations the courts may look to the
seriousness of the consequences (Wakeling v. Ripley
(1951))
• A social arrangement may result in an intention to contract
where it is clear from the facts that it is what the parties
would have intended Trevey v. Grubb (1982) –lotteries –
• In cases of voluntary agreements, such as where a person
volunteers their services, the parties do not normally intend
to create legal relations (Teen Ranch Pty Ltd v. Brown
(1995))
Intention - Social, Domestic
and Voluntary Agreements

continued
This presumption can be rebutted if there is enough evidence against it.
Wakeling v Ripley (1951)
In this case, a couple were convinced to come from England to
Australia to live in a home provided by the wealthy brother who
promised them his property in his will. The brother and the couple then
had a serious argument. He sold his home and altered his will to
remove their rights to the property, and the couple sued for breach of
contract. The Court held that the consequences were so serious for the
plaintiffs that intention existed in the agreement.
Simpkins v Pays (1955)
Three people lived together in a house and jointly took part in a
competition organised by a newspaper. The entries were made in one
name only. One entry won a prize and the defendant, in whose name
the entry was submitted, refused to share it with the other two
contributors claiming there was not intention to create legal relations.
The court held that it was a joint enterprise to which each contributed
in the expectation of sharing any prize that was won.

Carlill v. Carbolic Smoke Ball Co.
(1893)

Commercial Nature / Unilateral Contract
• Courts will presume that business and commercial agreements
are intended to be legally enforceable.
Carlill v Carbolic Smoke Ball Co (1893)
The Carbolic Smoke Ball Company (CSB)made a product called a smoke
ball that it claimed could protect the user from contracting influenza.
CSB published advertisements claiming that it would pay £100 to
anyone who got sick with influenza after using its product according to
the instructions set out in the advertisement. Furthermore, weight was
placed on the £1000 bank deposit that claimed to 'show’ their sincerity
in the matter' in showing that the advertisement was not just a puff.
The Court held that the offer from Carbolic constituted a unilateral
contract and as such the company (CSB) was bound by the promise.

continued
The presumption can be rebutted.
Rose & Frank Co v Crompton & Brothers Ltd (1925)
• Facts: The relationship between the two parties broke down as
J.R. Crompton refused to supply some of the plaintiff’s orders.
Rose and Frank Co. sued to enforce the agreement the firms
had negotiated. One clause stated, "This agreement 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".
• Issue: Was there a legally enforceable contract between the
parties?
• Held: The 'honour clause' made it expressly clear that there
was no intention for the parties to be legally bound. Rather they
had restricted their intentions to be bound 'in honour' only.

2. Agreement
• In order to have a valid contract at law there must be agreement
between the alleged parties to it.
• The way in which the courts establish agreement is by looking
for an offer and an acceptance.
Offeror
Offerees
The person who makes the offer.
The person/s who accepts
the offer.

20
Agreement
– Generally characterised by an ‘offer’ by one
party and an ‘acceptance’ by another
– Important in determining the time and place of
the agreement
– Useful in determining the contents of the
Agreement.
– For the agreement to stand there must be a
‘meeting of the parties’ minds’
– One must ask whether there has been a firm
offer and acceptance of that offer in this light

21
Agreement
The nature of an offer
 An offer must be communicated
 It must have clear terms which are brought to the
attention of the offeree
 Whether a statement amounts to an offer depends
on whether the person to whom it is addressed
would reasonably interpret it as an offer
 A statement alleged to be an offer must indicate a
willingness by the offeror to be bound without
further negotiation

What is an offer?
An offer is a clear expression of terms under which a
person is prepared to enter into a contract with another
person and be bound by their acceptance on those
terms.
•Offeror
- the person who makes the offer.
•Offeree
- the person who accepts the offer.

23
**Slide Then Break** Summary: The Rules of
Offer
• Rule 1: Offers must be distinguished from an invitation to treat
• Rule 2: It must be a firm promise or it may be a request for further
information
• Rule 3: An offer must be communicated to the offeree
• Rule 4: An offer may be made to a particular person, to a class of
persons or to the whole world
• Rule 5: It must be supported by consideration
• Rule 6: All terms must be brought to the notice of the offeree and
followed exactly
• Rule 7: An offer may be revoked at any time prior to its acceptance
• An offer may be made to an individual, a class of people or in fact the
whole world – Carlill v Carbolic

Invitation to Treat
• An ‘invitation to treat’ is considered to be
a request to others to make an offer with a
K in mind.
• An ‘invitation to treat’ is not an ‘offer’
and is not legally binding.
Question: Who offers and who accepts to buy
in a supermarket?

Invitation to Treat
Courts have decided the shopper is offering to
buy and it is up to the shopkeeper to accept the
offer
Pharmaceutical Society of GB v Boots
Chemists [1953].
Exception- However the statute said that
certain goods could only be sold under
supervision of pharmacist – goods were on
display on shelves and pharmacist was at
register

26
Rules Relating to Offer
• Terms in the offer- - Any terms contained in the offer must be
brought to the notice of the offeree
- Any and all conditions must be strictly followed.

27
Rules relating to Offer- text p.283
• Lapse of Time - termination of offer
– Non-acceptance within a reasonable time
(Ramsgate Victoria Hotel Co Ltd v.
Montefiore (1866))
• Stipulated Time – termination of offer
– Expiry of a stipulated time, or death of either
party before acceptance will terminate the
offer (Carter v. Hyde (1923))

28
Rules Relating to Offer
• Revocation (Withdrawal) - termination of offer
– To be effective, withdrawal by the offeror must be
brought to the notice of the offeree before acceptance,
although the offeree can learn of the withdrawal directly
or indirectly
(Dickinson v. Dodds (1876)
(Byrne & Co v. Leon Van Tienhoven & Co (1880)
• Rejection or Counter-Offer - termination of offer
– Refusal by the offeree or a counter-offer by the offeree
will terminate the offer
(Hyde v. Wrench (1840)

Termination of an offer
• An offer will lapse in the following ways:
(1) Revocation
Notice of revocation must reach the offeree prior to acceptance of
the offer.
Dickinson v Dodds (1876)
10 June Written offer to sell certain houses to Dickinson by Dodds,
offer to be left open until 9 am 12 June
11 June Dodds sold the houses to another party.
11 June Dickinson was advised of the sale that evening by a
gentlemen named Berry, an agent of Dodds.
12 June
Dickinson purported to accept Dodd’s 9 June offer by
handing Dodds letter of acceptance before 9 am.

30
Rules Relating to Acceptance
• Rule 1: Acceptance must be made in reliance of an offer
• Rule 2: Acceptance must be strictly in accordance with the terms of
the offer
• Rule 3: Acceptance must be communicated to the offeror
• Rule 4: Acceptance cannot be a cross-offer
• Rule 5: Acceptance can only be accepted by the party to whom the
offer was made
• Rule 6: Acceptance must be absolute and unqualified
• Rule 7: Acceptance cannot be revoked without the assent of offeror

31
Rules about Acceptance- text p.227
• Acceptance be made in reliance of the Offer
– The offeree must intend to accept the offer
(R v. Clarke (1927)).
• Acceptance must be strictly in accordance
with the terms of the Offer
– If the offeror specifies a method of acceptance it must
be followed.

Acceptance
To make a valid acceptance:
(1) Unless stated otherwise, acceptance must be communicated to
the offeror.
Silence is not a valid method of acceptance:
Felthouse v Bindley (1862)
Felthouse wrote to his nephew and offered to buy his horse, stating, ‘if I
hear no more about him I shall consider the horse mine at £30 15
shillings”. The nephew decided to sell the horse to Felthouse but did
not reply to the letter. Bindley sold the horse by mistake and was sued
by Felthouse for conversion of his property.
The court held that the nephew had failed to communicate his intention
to accept Felthouse’s offer.

33
• Who may Accept?
– Only the person to whom an offer has been
made may accept
(Tinn v. Hoffman & Co (1873)).
• Acceptance must be Absolute and
Unqualified
– Acceptance must be absolute and
unqualified…
(Masters v. Cameron (1954)) …or it may
amount to a counter-offer.
Rules Relating to Acceptance

continued
(2) Acceptance must be unqualified: conditional assent is not
acceptance - No Counter Offer
• Counter offer is not a valid acceptance.
A counter-offer is a change to the original offer that constitutes a
rejection of the original offer. In this situation there is no valid
acceptance.
Hyde v Wrench (1840)
• Wrench offered to sell a estate to Hyde for £1200.
• Hyde rejected the offer.
• Wrench offered to sell it for £1000.
• Hyde asked whether he could have it for £950(Counter offer).
• Wrench rejected that offer.
• Hyde attempted to accept it for £1000.
There was no acceptance, therefore no contract.

continued
(3) The Offeree must respond to and rely on a specific offer.
The offeree must be aware of the offer if they wish to accept it.
e.g:
If you return a lost dog to its owner without knowing she has offered a
large reward, you do not have any contractual right to that money. You
did not respond to and rely on her offer.
(4) Acceptance must take place within a time stated by the offeror (i.e. a
prescribed time). If no time is prescribed, then acceptance must take
place within a reasonable time.
(5) Acceptance can only be communicated by the offeree or someone
who has authority to do so.

36
Summary-Termination of an
Offer
An offer will lapse in the following ways:
1. Upon the making of a counter offer (Hyde v Wrench)
2. Where the offeror revokes the offer (Dickenson v Dodds)
3. When rejected by the offeree (Hyde v Wrench)
4. Through the passing of a specified time or, if no time is
specified, after a reasonable time
(Ramsgate Victoria Hotel Co. Ltd v Montefiore)
5. By failure of a condition
6. Generally upon death of the offeree or offeror
(Carter v Hyde)

37
Essentials of Contract
Capacity (of the Parties)
Definition: Capacity
The power, ability or competence of a person or
body to act with legally binding authority.
Do the parties have capacity to contract?
• Under the common law (and under some states’ statute
law) there are classes of people who are treated as NOT
having full contractual capacity which affects the
validity of any K’s entered into by those persons.

38
Capacity - Infants (or minors)
• Generally speaking minors (persons under the age of 18
years of age) do not have the capacity to enter into contracts.
The two reasons for this are;
• That due to inexperience, minors may lack judgment in
business matters and may need protection from making
foolish bargains.
• The possible hardship that would ensue for adults who deal
with minors where a K may be set aside

Valid Contracts with Infants
• Valid Contracts can be created by the infant
paying cash or entering into contracts for
necessaries and beneficial contracts of
service
• Paying Cash – when a minor is paying cash
they are bound by the terms of the contract
regardless of whether it is for necessities or for
a beneficial service.
39

40
Valid Contracts with Minors
Necessaries:
• Includes articles and services necessary for the
reasonable comfort of the infant, as well as basic
items of food, clothing and shelter
The plaintiff must establish that:
– The goods or services could be necessaries
• This is a question of law:
 Bojczuk v Gregorcewicz (1961)- text p.282
– The goods or services were necessaries at the
time of sale or delivery
• This is a question of fact:
 Scarborough v Sturzaker (1905) text p.283

41
Valid Contracts with Minors
Beneficial Contracts of Service
• Examples include: contracts of employment,
apprenticeships training or education
• To determine whether such a contract is valid the
courts examine the contract as a whole:
Check the beneficial terms outweigh the onerous
terms:
McLaughlin v Darcy (1918)- text p.283
Decide whether there is benefit to the infant:
Hamilton v. Lethbridge (1912); cf Mercantile
Union Guarantee Corp Ltd v Ball (1937) – text 285

42
Capacity
Mentally Unsound and Intoxicated
Persons
• If the contract is for the supply of necessaries,
the person who is mentally unsound or
intoxicated must pay a reasonable amount for
them
• If the goods are not for necessaries, and if, at
the time of making a contract the person is
mentally unsound or intoxicated she/he may be
able to repudiate the contract when they are
again of sound mind or sober.
- Therefore the contract is voidable

Capacity
Mentally Unsound and Intoxicated
Persons
• To void a contract a mentally unsound or
intoxicated person will need to prove that at
the time the contract was entered into (due to
their mental state or drunkenness), they were
unable to understand the nature of the
contract; and that this was known, or ought
to have been known, to the other party
O’Connor v Hart [1985]
43

T1, 2021 business law lecture 2 - contracts 1

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