Lecture 4 Topic 4

Contract Law 1
 Learning objectives

L/O 4
• Review the legal principles governing contracts and
discuss the relevancy of these principles to the
operation and duration of contracts
 Outline

• Contracts
• Requirement 1: Agreement
• Requirement 2: Intention
• requirement 3: Consideration
• Formalities
• Capacity to Contract
• Legality
 Reminders

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• Closes on Thursday 04th August @6pm

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Contracts
 What is a contract?

• A contract is a legally enforceable agreement.

• Most contracts do not need to be in writing. Many

contracts are made verbally, and some contracts are
implied by the conduct of the parties.

• Some contracts are formed and performed at the same

time. With other contracts, one or both of the parties
make a promise and therefore have an ongoing
obligation once the agreement has been formed.
Requirement 1: agreement
 What is an agreement?

• An agreement is a meeting of minds, and exists when two or

more people share understanding and intention.

• Many agreements are preceded by a period of negotiations.

• Sometimes the existence of a finalised agreement can be

deduced from the conduct of the parties.

• At other times, the existence of a finalised agreement is less

clear.
 What is an agreement?

AGREEMENT OFFER ACCEPTANCE

 Offer

• A person makes an offer when they express a

willingness to immediately enter into a contract with
the person to whom the offer is directed.

• An offer can be made to one person, many people, or

‘the world at large’.

• An offer can be made in writing, verbally or indicated

through conduct.
 Offer

• An offer can be:

• accepted by the offeree
• rejected by the offeree or
• revoked by the offeror.

• The offeror is entitled to revoke their offer even if they

have promised to keep the offer open for a particular
period, unless the offeree has paid for the promise to
keep the offer open, for example by paying a deposit.
 Offer

• An advertisement is usually not an offer; instead, it is an

invitation to treat.
• Carlill v Carbolic Smoke Ball Co (1893)

• It is important to distinguish between that making of an

offer and:
• mere request for information
• advertisements
• auctions.
 Acceptance

• When the offeree indicates by words or by action that they are

willing to immediately enter into a legally enforceable contract
with the offeror on the terms offered, they are said to accept the
offer.

• Only the offeree can accept the offer.

• Acceptance must be unqualified, otherwise it is a counter-offer.

• YOU — ‘Will you buy my car for $10 000?’
• YOUR FRIEND — ‘Yes, but I will only pay $9000.’
 Acceptance

• Acceptance must be communicated to the offeror.

• The offeror can waive the requirement that
communication be accepted, but they cannot
insist that a failure to respond is acceptance.
• If the offer is accepted, an agreement (and
possibly a contract) comes into existence from that
moment.
• If the offer has not been accepted or rejected, the
offeror is entitled to revoke their offer.
 Acceptance

Exceptions to the rule that acceptance must be

communicated to the offeror:
• ongoing commercial agreement between the
parties
• unilateral contracts
• contractual negotiations through the post
(increasingly less relevant nowadays
Requirement 2: intention
 Intention

• The parties to the agreement must intend the

agreement to be legally enforceable.
• In deciding whether or not the second requirement is
satisfied, the court looks at the conduct of the parties
from the perspective of an objective observer and asks
whether the parties were behaving in a way that
indicated that they intended the agreement to be
legally enforceable.
• In applying the objective test, the courts have
traditionally made two important presumptions.
 Presumptions

•If the agreement was made in a

social or domestic context, the
court will presume that the
agreement was not intended to be
legally enforceable:
•Balfour v Balfour (1919)
 Presumptions

• If the agreement is made in a commercial or business

context, the court will presume that it was intended to
be legally enforceable.

• A ‘mere puff’ is a promise made to customers in a

business context and will not be enforceable if the
promisor can show that the promise was clearly not
intended to be taken seriously by customers.
• Mere puffs will not have the required intention.
Requirement 3:
consideration
 Consideration

• An agreement is not a contract unless

both parties to the agreement have
paid, or promised to pay, a price, called
consideration.
 Consideration

• Consideration can take the form of:

• the payment of money

• the provision of goods
• the provision of a service
• refraining from doing something (e.g. agreeing not to
sue) or
• a promise to do any of these things.
 Consideration

• Consideration need not be adequate.

• Consideration must be sufficient, and not:

• a vague promise
• past consideration or
• performance of a prior legal obligation.
Formalities
 Written contracts

• Legislation requires certain contracts to be in writing

and signed in order to be effective and enforceable,
including:
• arbitration agreements
• cheques
• consumer credit contracts
• real estate contracts
• transfers of shares.
 Written contracts

• Even when a contract is not required by law to be in

writing or signed by the parties, such formalities may
still be desirable:
• to encourage deliberation and reflection and to
emphasise that the transaction has significant legal
consequences
• to ensure the availability of reliable evidence about
the existence of the contract
 Written contracts

• to ensure the availability of reliable evidence about

the terms of the contract
• to indicate that the agreement was intended to be
legally enforceable.
Capacity to contract
 Capacity

• A contract will only be enforceable if both parties have

the legal capacity to enter into contracts.

• As a general rule, a party will not have legal capacity to

contract if they are:
• a minor or
• a person lacking intellectual capacity.
 Minors

• The three types of contract that may be enforceable

against minors are:
• contracts for necessaries:
• beneficial contracts of service: Hamilton v Lethbridge
(1912)
• contracts where the minor acquires a continuing
interest or undertakes a continuing obligation.
 Persons lacking intellectual capacity

• If a party lacks intellectual capacity and purchases goods

that are necessaries, they can be compelled to pay a
reasonable price for those goods.
• If the contract is not for the sale necessaries, the contract
will still be enforceable against a person lacking intellectual
capacity unless:
• the person was not capable of understanding the nature
of the agreement they were entering into
• the other party knew or should have known of their lack
of capacity.
Legality
 Illegality under common law

• Certain contracts are categorised by the common law as

illegal and unenforceable, including:
• contracts to commit a crime or a tort
• contracts that promote corruption in public office
• contracts intended to evade the payment of tax
• contracts that prevent or delay the administration of
justice.
 REFLECT

• What is a contract?
• What are the three essential elements of a contract?
• What is an agreement, and why is it important to know exactly when an agreement was reached?
• What is an offer, and how can an offer be made?
• Explain the distinctions between acceptance, rejection and revocation of an offer.
• How do the courts decide whether or not the parties to an agreement intended that the agreement be legally
binding?
• What is ‘puffery’ or ‘mere puff’?
• What is consideration?
• What does it mean to say that consideration need not be ‘adequate’ but must be ‘sufficient’?
• What types of contracts are required to be in writing and signed in order to be legally enforceable?
• When will a party to a contract lack legal capacity?
• What is a contract for necessaries?
• What is a beneficial contract of service?
• What types of contracts are illegal under common law?
Next
Contract Law 2 – Continuation