CONTRACT LAW

CLASSIFICATION OF CONTRACTS Contracts can be classified according to formation, validity and performance. Formation Contracts classified according to formation can be express, implied or quasi contracts. 1. Express Contracts Contracts formed expressly are created by express words, either written or spoken. 2. Implied Contracts A contract created impliedly is created not by words, either written or spoken, but by the conduct or actions of the parties. The conduct of the parties leads to the implication that there is a contract. 3. Quasi Contracts Create it independently of the wishes of the parties by operation of law. Quasi contract refers to the remedy provided by the common law that compels payment of money form one person to another when justice requires. Example where money has been paid by a person under duress, a quasi contract will allow the person who has paid the money under duress to recover it. Validity Contracts classified according to validity can be void, voidable, unenforceable or illegal. 1. Void Contract is one that is of no legal effect. 2. A voidable contract is one that can be avoided (rescinded) by one party. 3. An unenforceable contract is one that cannot be enforced, due to a technical fault. 4. An illegal contract is one where the purpose or object of the contract is illegal or unlawful. Contracts are legal agreements that can be enforced by the law. The law of contract is the branch of civil law that is concerned with the enforcement of agreements. A contract can be defined as an agreement between 2 or more parties that creates rights and obligations that are enforceable by law. Not all the agreements you make in your life will be enforceable. To be valid a contract must meet three essential elements: 1. Intention to create a legal relationship 2. Agreement 3. Consideration Intention to create a legal relationship + Agreement+ Consideration = Contract

INTENTION TO CREATE A LEGAL RELATIONSHIP

The first element of a valid contract requires the parties to intend to create a legal relationship. To determine whether there is an intention to create legal relations, the law looks at the nature of the agreement. If the agreement is of a social or domestic nature, the law has created a presumption that such agreements do not have an intention to create legal relations. Social agreements Social agreements are made between friends and are made without the intention of being enforceable. Domestic agreements made between members of a family, for example, parents and children, also do not create a legal relationship. Example: AN agreement whereby the father agrees to load the dishwasher and the children to unload it constitutes a domestic agreement not a legal one. Balfour v Balfour [1919] 2KB 571 Todd v Nicol [1957] SASR 72 Business Agreements Agreements of a business or commercial nature are treated differently from social or domestic agreements by the law. Courts assume that business agreements are intended to create a legal relationship. This presumption can be rebutted if evidence is produced to show that there was clearly no intention to create a legally binding agreement. If an agreement is made in the course of business dealings, then in the absence of express words to the contrary, the courts will say that legal relations were intended. Edwards v Skyways [1964] 1 WLR 349 Jones v Vernon Pools Ltd [1938] 2 All ER 626 AGREEMENT The second element that must be present to create a valid contract is agreement. An offer is a proposal. When it is accepted, it creates a legally binding contract. Both parties must agree on the subject matter of the contract. A contractual agreement is formed when one party (the offeror) makes an offer to enter a contract and the other party (the offeree) accepts the terms of the proposal. Offer + Acceptance = Agreement Sometimes during negotiations, the parties may be at cross purposes and what is one partys mind is not communicated to the other person. But in the end a clear understanding of what has actually been agreed to should exist. This is referred to as the meeting of the minds/ However it is not always clear whether there has been a meeting of the minds and the court is asked to decide that the terms of the contract were.

OFFER The first stage in reaching an agreement occurs when an offer is made by the offeror to the offeree. An important element to be decided in considering the validity of a contract is whether or not there has been a valid offer. If there has been no valid offer there can be no acceptance, and hence no contract. Making an offer is the first step in reaching an agreement. An offer needs to be clearly communicated. It can be written, verbal or made by action. Exactly what is being offered should be clear enough so that the offeree can decide whether to accept or reject it. INVITATION TO TREAT An offer must be distinguished from an invitation to treat. The offer must be made with a definite intention to its terms. Sometimes what might appear to be an offer may only be an invitation to others to make offers. This is known as an invitation to treat. An invitation to treat invites people to make offers. The main difference between an offer and an invitation to treat is that a person making an offer intends to be bound, whereas a person making an invitation to treat does not intend to be bound. An offer that is accepted forms an agreement that is the basis of contract, and if all other essentials of contract are present, the agreement will be enforceable. The acceptance of an invitation to treat cannot give rise to an agreement as the invitation to treat is not an offer. Example: Marked prices on articles displayed for sale in shop windows are invitations to treat not offers to sell at the stated price. Consequently a shopkeeper is not obliged to sell an item on display nor is he obliged to sell it at the displayed price. Catalogues and advertisements that offer goods or services for sale, and timetables which offer transport at a particular time and place, are in most cases mere invitations to treat. However In Carlill v Carbolic Smoke Ball case, the court held that the advertisement in this case did constitute an offer. Therefore, caution needs to be taken to ensure the words used in the advertisement clearly indicate that it is not an offer or the party who advertised may find himself or herself defending a contract law case in court. RULES WITH RESPECT TO THE MAKING OF AN OFFER. The following rules apply to the making of an offer: An offer is not required to be in any particular form. It can be written, verbal or made by action.

The person who makes the offer is called the offeror; the person to whom the offer is made is the offeree An offer can be made to one or more persons, even to the whole world.

TERMINATION OF AN OFFER There are several ways in which an offer can be terminated: An offer may be terminated due to: Lapse of an offer Revocation of an offer Rejection of an offer Death of the offeree or offeror Non occurrence of a condition Lapse of an Offer An offer will lapse or disappear if certain events occur: If acceptance is not made within the time stated Where no time is stated, if the acceptance is not made within a reasonable time If a counter offer is made The meaning of reasonable time will be considered objectively. Hyde v Wrench (1840) 3 Beav 334, 49 ER 132 ACCEPTANCE Acceptance of an offer is the second stage of an agreement and to be effective it must be clearly communicated to the offeror. An acceptance occurs when the offeree agrees to the proposal of the offeror on the terms required by the offeror. For acceptance to occur it must conform to any conditions set by the offeror. For instance, the offer may specify that acceptance must be in writing and meet a specified date and time. Communication of Acceptance Acceptance must be clearly communicated to the offeror. It may be verbal or in writing. Acceptance of an offer can only be communicated to the offeror by the offeree or by the offerees authorized agent. Silence does not constitute acceptance. Felthouse v Bindley (1862) 11 CB (NS) 869; 142 ER 1037 Example Paul writes to Robert stating you can have my 4WD for $15,000 and if I do not hear from you by the end of the week, I will assume you have accepted the offer. Paul cannot rely on Pauls silence to mean acceptance. Postal Rule The courts have developed special rules where an offer and acceptance is made through the post. These rules were developed at a time when there

were no methods of instantaneous communication such as fax machines or email. An acceptance that is made through the post is effective when the letter of acceptance is placed in the postbox. Provided the letter has had its postage fees paid and is addressed correctly, acceptance occurs on posting. This is the case even if the letter is mislaid and never reaches the offeror. The postal rule applies only if the postal system is contemplated as a mode of acceptance of an offer. This will usually be the case if the offer itself was posted. Under the rules an offer made through the post is not effective until it has been received by the offeree. Acceptance on the other hand is made effective as soon as the letter is posted. The following example illustrates the postal rules: 1 September Mike posts a letter to Richard offering to sell his motor bike for $800. 3 September Richard receives the letter (offer is now effective) 4 September Richard posts a letter accepting Mikes offer (acceptance now effective) 6 September Richard receives acceptance letter. Acceptance of an offer is taken to be when the contract was posted not received. The offeree must accept without qualification all terms of the offer. Any attempt to impose a conditional acceptance will amount to a counter offer and constitute a rejection of the offer. It is also possible to exclude the operation of the postal rule. The offeror can specify that acceptance will not take place until actual receipt of the notification of acceptance occurs. The postal rule only applies to acceptances, not to offers. An offer made through the post will not be effective until it is received and read by the offeree. Instantaneous Communication The postal rule does not apply to means of communication that are virtually instantaneous (eg: telephone, fax machines or email). Unless there is actual communication no contract will be created. The postal rule does apply to telegrams, which are treated as letters and not as instantaneous communications. Byrne & Co v Leon Van Tienhoven & Co (1880) 5 CPD 344 Acceptance must be in reliance of an offer To create a valid contract, an offer must be accepted without qualifications. If acceptance is qualified, the law will generally regard it as a counter offer. Conditional Acceptance A conditional acceptance is not effective acceptance unless the offeror agrees to the condition. A common condition is for the acceptance to be

subject to finance. If finance is subsequently arranged, the condition will be satisified and a contract will be created. Acceptance must comply with any special conditions stated in an offer. Acceptance can only be made by a party to the contract. An offer can be accepted only by those persons to whom the offer was made. Once an offer has been made accepted, it may only be revoked with the consent of the offeror. Revocation of Acceptance It is possible for an offer made by the post to be revoked by the offeror. However, revocation will be ineffective unless it is communicated to the offeree before the letter of acceptance is posted. Time Any acceptance of an offer outside the time stipulated in the offer will be ineffective. If an offer, for example, specifies that acceptance is required within three days, then any attempt at offering an acceptance after five days will be invalid. If no time is prescribed, then the offer may be accepted within a reasonable time.

Summary of rules of Offer and Acceptance OFFER Must be communica ted to offeree Can be made to an individual, group or whole world Must be distinguish ed from an invitation to treat Can be revoked any time before acceptanc ACCEPTANCE Must be communicated to the offeror or agent Must be in reliance of the offer. Can only be made by the offeree or their authorized agent Must be unqualified Must comply with conditions of an offer If acceptance by post, effective at time of posting Communication may be dispensed with Must take place within a prescribed time or within a reasonable time

A G R E E M E N T

CONSIDERATION The third element of a valid contract is consideration. This refers to the price paid in exchange for the promises both parties made. For an agreement to be regarded as a contract, it must either be supported by consideration or be a formal contract. The terms promisor and promisee are used to describe the parties to a contract in which consideration is present. The promisor is the person undertaking to perform the consideration; the promisee is the recipient of the consideration. In contracts where both parties provide consideration each party will be both a promisor and a promisee. Consideration that is still to be performed is termed executory. Consideraton that has already been performed is said to be executed. The element of consideration is essential in any valid contract. It is this element that turns a mere promise into a contract that the law will enforce. Every contract contains at least one promise, and consideration is something given or done in return for the promise. In most cases, consideration is in the form of giving money in return for goods or services. The following are examples of consideration: Martin agrees to mow Joes lawn and Joe agrees to pay Martin $10.00 Bob agrees to fix Jacks car if Jack services his lawnmower. Contract law makes a distinction between a valid contract and promises that are made where no consideration is given. If your husband promises you a diamond for your birthday this amounts to a gratuitious promise a gift that is freely given. If your parents break their promise you cannot enforce it. The significance of the distinction between formal and simple contracts If a contract is in particular form, consideration is not required. Formal contracts do not require consideration. Formal contracts take 2 forms: contracts of record and contracts under seal (deeds). An example of a contract of record is a judgment of a court. Contracts under seal must be in writing. A deed is a formal written contract that does not require consideration. Simple contracts are all those contracts that are neither under seal nor contracts of record. Simple contracts may take any form verbal, written or implied but they must have consideration to be valid. Rules with respect to consideration Consideration is essential to every simple contract. There are a number of rules with respect to consideration. Consideration: Can be present or future, but not past Must be of some value but need not be adequate Must be definite, not vague Must be capable of being performed

Must not be illegal or unlawful Must be more than a person is already required to do Must move from the promise Cannot be satisfied by part payment of a debt

Consideration can be present or future, but not past Present consideration exists where the promise or act that is the consideration is performed when the contract is made. Future consideration exists where the act that is the consideration is to be performed at a time after the contract was made. Past consideration exists where the act that is the consideration was performed before the contract was made. It is not possible to rely on an act or promise that has already been performed. Example: Lee agrees to sell his bicycle to Mario, who agrees to pay $150.00. If Mario pays the money in return for the bicycle at the time the contract is made, then this is present consideration. If the payment and the transfer of possession of the bicycle are to take place at a time after the contract is made, then the consideration is future consideration. If Mario is to purchase Lees bike for $150 and Lee is to rely on work that Mario performed for Lee last week, then consideration is past consideration. The act that is the consideration is already past. The nature of the consideration must be definite, not vague If the consideration is too vague there will be no contract. Shields v Drysdale (1880) 6VLR Eq 126 A daughter promised to look after her elderly mother and father for as long as they lived. In consideration for the daughters promise, the father promised to transfer to her his interest in some of his property. Held: The court held that this agreement was void because the consideration was not definite. No particular property was indicated in the agreement and therefore it was too vague and not legally enforceable. Consideration must be capable of being performed It is not possible to enforce a promise that cannot be performed. Example: Angela agrees to sell a car to Peter but she is not the owner of the car. Consideration must not be illegal or unlawful Consideration is not valid if the act that is the consideration is in any way illegal or unlawful. Consideration also must not involve a breach of the civil law or public duty. Example: An agreement to pay a person to commit a robbery would not be valid consideration.

Consideration must be more than a person is already obliged to do A person who is already obliged to perform an act or duty will not be able to rely on that act or duty as appropriate consideration to support a contract. A person may already be under an obligation to perform an act by virtue of an existing contractual term. Such an act cannot support a new contract, as there is no new consideration. Stilk v Myrick (1809) 2 Camp 317; 170 ER 1168 The plaintiff (sailors) contracted to crew a ship on a voyage for a fixed amount of money. During the voyage, two crew members deserted. The captain of the ship promised to divide the deserters wages among the remaining crew if they completed the voyage. On the completion of the voyage, the captain refused to pay the additional money to the remaining crew. Held: The court agreed with the captains decision. The reason the remaining crew were not entitled to extra money was because when the crew initially contracted for their wages, they agreed to complete the journey, even if others deserted. The promise by the captain to pay additional money was not supported by consideration. The sailors were doing nothing more than they were already obliged to do pursuant to their contract. A person cannot seek to rely on an act as consideration for a contract if they are already under a legal duty to perform that act. Consideration must move from the promisee The promisor is the person making the promise. The promisee is the person to whom the promise is made. The promise of the promisor will not be supported by consideration and be legally enforceable unless supported by consideration from the promisee. For a promise to be enforceable, it must be paid for. A promise can be made to two or more persons jointly, with only one of them providing consideration. The party not providing the consideration can still enforce the agreement. Part payment of a debt will not be adequate consideration. Generally, part payment of a debt will not be adequate consideration to discharge a debt. The law has created several exceptions to this rule. They are: Payment of a smaller sum along with something else (agreement to perform labour) will exchange the debt. Payment of a smaller sum before the debt is due will be enforceable Payment of a smaller sum at different place or in a different currency can operate as a legally enforceable discharge of a debt Signing a deed of release may discharge the debt. Payment may be made by a third party who is not bound by the contract Agreeing to perform any other act that the debtor is not bound by the contract to perform any result in a legally enforceable discharge

By relying on the defence of promissory estoppel, in some circumstances a contract can be altered despite a lack of consideration being provided for the altered promise. This is due to the doctrine of promissory estoppel that requires several elements to be satisfied: 1. the promise has altered their position in reliance on a new promise 2. It would be impossible for the promisee to return to their original position without detriment 3. It would be unfair for the promisor to renege.

Promisory Estoppel Where one party to a contract, by its behaviour, leads the other party to the contract to believe a certain state of affairs exists between them, the courts will support that state of affairs rather than the terms of the contract. It is not possible at a later time for one party to seek to deny the state of affairs. Waltons Stores (interstate) Ltd v Maher (1988) 164 CLR 387 Commonwealth v Verwayen (1990) 95 ALR 321

ACTIVITIES 1. David offered to sell his estate to Peter for $900,000. Peter wrote back and offered $600,000. David refused to sell at this price. Later Peter agreed to the original price. Is David obliged to sell his estate to Peter. Give reasons. 2. Damian offers to sell Poppy his car for $15,000, provided she accepts the offer before July 3. On July 9, Poppy replies accepting Damians offer. Is Damian obliged to sell his car to Poppy. Give reasons 3. Peter sends Darren a copy of a new motor magazine he has published. A covering letter states that if Darren does not return the book within seven days it will be assumed that he wishes to purchase it. Four weeks later when Darren has not returned the book, Peter sends him an account for $300, the price of the subscription to the magazine. Is Darren compelled to pay. Give reasons. 4. Steve wrote to Tony offering to sell him a horse for $900. Tony replied that he would accept the offer. After Tony had posted his reply, he received an email from Steve that stated the offer was revoked. The email had been dispatched before Tony had posted the letter accepting the offer. Advice Steve and Tony as to their legal position. 5. Jerry offers some goods to Peter stating that he wants a written acceptance. Peter telephones his acceptance. Jerry withdraws his offer. Advice Peter. 6. Dave made a written offer to Paul for the purchase of some equipment. He had heard nothing from Paul for six months, then in the mail he received a letter indicating that Paul has accepted the offer. Dave refused to accept the equipment. Advice Paul.

7. For each of the following situations decide whether or not an intention

to create a legal relationship exists: Zac agrees with his mother that he will mow the lawn every 2 weeks Louise agrees with the estate agent that she will rent the new apartment Four of Carls friends agree that they will go to his house to share a meal. Carl spent a lot of money on the food but the friends did not turn up. Alec offers the job of sales assistant to Jillian