Enterprise Law

Unit 700254

Topic 3: Contract Law

PART I

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Topic Outcomes

Following the completion of part I of this topic

students should be able to:
- Define a contract
- Distinguish between a simple contract and a
formal contract (made under a deed).
- Understand the essential elements of
intention to be legally bound and agreement
(consideration is next week)

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Contracts

”Contracts are a fundamental part of

people’s daily lives and form the basis of
commercial law.”

What are some common examples of

contracts that we encounter?

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Sources of Contract Law

The study of contract law involves an

examination of common law principles
and the extent to which they have been
affected by legislation.

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Contract v. Agreement
Contract & Agreement distinguished
Terms ‘contract’ and ‘agreement’ are
often used to mean the same thing.
A simple definition of contract is:
’a legally enforceable agreement’
An agreement is NOT necessarily a
contract.

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The Law of Contracts
Contract defined
A contract can be defined as:
“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.”

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Creation of a Simple Contract
◦ Three elements required for a valid ‘simple’
contract:
◦ 1. Intention to create legal relations
◦ 2. Agreement
◦ 3. Consideration

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The Law of Contracts
Simple Contracts
Can be made orally, implied by conduct
or in writing (not executed under seal).
Require consideration for enforceability.

Formal Contracts
A contract executed using a deed. No
requirement for consideration.

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Validity of a contract
The following also need to be considered
to determine the validity of a contract:
◦ 1. Legality
◦ 2. Consent
◦ 3. Capacity
◦ 4. Form

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Bringing an action
Statute of Limitations
◦ For an action in a simple contract in
NSW: 6 years
◦ For a contract under seal in NSW:
12 years

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1. Intention to Create
Legal Relations

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Intention to Create Legal Relations

There must be clear intention by the

parties that the agreement containing
their promises is intended to be
enforceable in law.

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Intention to Create Legal Relations

(i) Express intention

Consider terms that expressly and clearly state the
parties’ intentions. Almost invariably expressed in
the negative.
Eg. ‘Subject to contract’ clauses: document not in its
final form - subject to preparation of written
document
Masters v Cameron (1954)

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Masters v Cameron (1954) 91 CLR 353

The parties signed an agreement for Masters to buy a farm owned by

Cameron for £17,500. Masters paid a deposit of £1,750.
The memorandum of sale contained the following clause:
This agreement is made subject to the preparation of a formal
contract of sale which shall be acceptable to my (Cameron’s)
solicitors on the above terms and conditions.
The sale did not eventuate. It was held that the contract was
unenforceable as the agreement was not in its final form. The only
condition was that it was acceptable to Cameron’s solicitors, who
could have modified the terms in any way they saw fit.

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Intention to Create Legal Relations

(ii) Implied intention

The courts have to determine objectively
whether the parties intended the agreement to
be legally enforceable
To assist, consider two categories:
◦ social, family, domestic, voluntary
◦ commercial or business

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 Intention to Create Legal Relations

The court uses two ‘rebuttable presumptions’:

◦ Non-commercial relationship (social, family,
domestic, voluntary)
◦ presumed no intention
◦ Commercial or business relationship
◦ presumed intention to be bound

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 Intention to Create Legal Relations

Non-commercial agreements
Three types:
◦ Social agreements - ones made between friends or
acquaintances;
◦ Domestic agreements - ones made between family
members and relatives; Cohen v Cohen; Balfour v Balfour
◦ Voluntary agreements - where the parties may volunteer
their services.

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Cohen v Cohen (1929) 42 CLR 91
Before they were married Mr Cohen promised his future wife an
annual dress allowance of £100, payable in quarterly instalments.
The payments fell £275 in arrears and, when the couple finally
separated, Mrs Cohen sued for inter alia that sum, alleging that it
was contractually due and owing.
The High Court held that there was no contract to pay her the
money. The parties had done no more than discuss and agree
upon a proposal for a regular allowance which the future Mrs
Cohen considered appropriate to their circumstances at the time.
The pair had never intended to create legal relations and so Mrs
Cohen’s actions failed

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Balfour v Balfour [1919] 2 KB 571
The Balfours spent the first 15 years of their marriage in Ceylon.
In 1915 they went to England on leave and, when the husband
returned to Ceylon, his wife was too ill to accompany him. He
agreed to pay her a monthly allowance of £30 until she could
rejoin him – but she never did. The husband ceased payment and
so Mrs Balfour sued, alleging a contractual right to the money.
The King’s Bench disagreed, saying that their agreement was not
a contract, merely an ordinary domestic arrangement. They had
not intended to create legal relations and, therefore, no action lay
for any alleged breach.

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 Intention to Create Legal Relations

Commercial Agreements
In business and commercial agreements the courts
assume that there is an intention to create legal
contractual relations:
Edwards v Skyways Ltd (1964)
Ermogenous v Greek Orthodox Community of SA
[2002]

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 Edwards v Skyways Ltd [1964] 1 WLR 349
Edwards was employed as an aircraft pilot, and he was a member of the
defendant company’s contributory pension fund. Under the rules of the fund
he was entitled to a choice of two options when he left the company’s service:
1. to withdraw his contributions;
2. to take a pension, payable at the retirement age of 50.
He had no right to the company contribution if he left before retirement age.
In 1962 the company decided on a redundancy plan and agreed that pilots who
were declared redundant would be given an ex-gratia payment equivalent to
the company’s contribution. Edwards accepted redundancy in May and elected
to take his contribution and the ex-gratia payment. This was declined by the
company who alleged that the words ex-gratia implied that there was no
intention to be legally bound.
The court held that it was a commercial agreement and hence enforceable. If
the company asserted that it was not, they would have to bear the burden of
proof of the counter intention.

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 Ermogenous v Greek Orthodox
Community (2002) 209 CLR 95
Ermogenous had been the Archbishop of the Greek Orthodox
Church in Australia. When he resigned he asked to be paid out
for his unused annual and long service leave. The church refused
and he sued.
HCA held that the relationship between a minister of religion
and his church is pre-eminently spiritual, in the sense that he
serves God rather than the administrators of the church.
Regardless, aspects of that relationship can give rise to legally
enforceable rights. In this case, there was, in reality, an
employment relationship with clear economic entitlements. On
the facts, Ermogenous was entitled to recover.

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2. Agreement

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Agreement

Generally characterised by an ‘offer’ by one party

and an ‘acceptance’ by another.

Agreement = Offer + Acceptance

Important in determining the time, place and

contents of the agreement.

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Agreement

Legal Rules relating to Offers

(i) Intention or willingness to be bound
(ii) A firm promise
(iii) Communication of the offer (in
writing, orally or by conduct)

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Agreement

(iv) Invitation to Treat

An offer must be distinguished from an
invitation to treat.
This is an offer to consider offers and
cannot create an agreement if there is a
purported acceptance.

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 Agreement

Invitations to treat include:

◦ auctions;
◦ advertisements;
◦ catalogues / Internet;
◦ price lists;
◦ goods in shop windows and shelves
◦ Pharmaceutical Society of Great Britain v Boots
Cash Chemists (Southern) Ltd [1953]
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Pharmaceutical Society v Boots Cash Chemist
[1952] 2 QB 795
The Pharmacy and Poisons Act 1933 (UK) prohibited the sale of any listed
poison unless it was effected under the supervision of a registered pharmacist.
Boots was a retail pharmaceutical company and it had converted one of its
shops to self-service. Customers chose the products they wanted, took them to
a cash desk and paid for them. Near the cash desk was a registered pharmacist
who was authorised, if necessary, to stop the sale of any particular item.

Boots was charged with breaching the Act, as it was alleged that the display of
the products was an offer to sell them, with the agreement established at the
time the customer selected the goods.

Held that Boots was not in breach. The self-service arrangement resulted in
customers making an offer to buy the goods they had selected and it was up to
Boots whether to accept that offer or not. That decision was made at the cash
desk and was under the supervision of a registered pharmacist as required.

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Agreement

(v) Requests for Information

A request for information is not a firm promise

and so is not an offer. Nor does it destroy the
offer as it is only an attempt to elicit information.
Harvey v Facey [1893]

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 Harvey v Facey [1893] AC 552
Harvey telegrammed Facey with a question: Will you sell us Bumper Hall
Pen? Telegraph lowest price.
Facey replied: Lowest cash price for Bumper Hall Pen, £900.
Harvey answered: We agree to buy Bumper Hall Pen for £900 asked by
you. Please send us your title deeds in order that we may get early
possession.
Facey did not reply and refused to go through with the sale. Harvey sued.
Privy Council held that there was no contract. The second telegram was
not an offer to sell, merely supply of information about the lowest price
at which Facey would consider selling the property, which was land in
Jamaica also being sought by the City of Kingston

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 Agreement

(vi) Notice of the offer

The offer must be communicated to the offeree(s).

The offer may be directed to
◦ one person,
◦ a group of people
◦ the world at large: Carlill v Carbolic Smoke Ball Co.
(1893)

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Carlill v Carbolic Smoke Ball Co. [1893] 1 QB 256
Carbolic Smoke Ball Company manufactured and supplied the carbolic smoke ball, an
anti-cold and influenza preparation. It advertised a £100 reward for anyone who
contracted influenza or a cold after using the smoke ball according to printed
directions. The advertisement went on to state that £1,000 had been deposited in a
bank account to show the sincerity of the offer.
Mrs Carlill bought and used the smoke ball as directed but still caught influenza and
she claimed the £100. When her claim was rejected, she sued.
The company raised a number of defences, including that the offer had not been
made to a specific person, or class of persons. They argued that it would be
unreasonable to assume they had intended to pay £100 to anyone who caught a cold.
They claimed that the advertisement was only an inducement to customers, and an
advertising puff, not a true offer.
The Court found in favour of Mrs Carlill, holding that it was possible for an offer to be
made to the world at large if that was the advertiser’s intention. They did not contract
with every one in the world, only those members of the public that chose to accept
the offer. The intention of Carbolic Smoke Ball Company was also found to have been
clearly indicated by its deposit of £1,000 to cover contingent claims.

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Agreement

(vii) Terms of the Offer

Any terms contained in the offer must
be brought to the notice of the offeree.

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Agreement

(viii) Termination of Offer

An offer can be terminated (prior to acceptance) by:

- Revocation
- Rejection / Counter-offer
- Failure of condition precedent
- Lapse of time / Death

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Agreement

Revocation (Withdrawal)

◦ 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 v Leon Van Tienhoven (1880)

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Dickinson v Dodds (1876) 2 Ch D 463
On Wednesday Dodds offered to sell Dickinson some houses for
₤800. His letter stated that the offer was to be left over until
Friday, 9am. Despite this, Dodds sold the houses to a third party
on Thursday. Dickinson heard of this sale from a fourth person on
Thursday evening and, before 9am on Friday, purported to accept
Dodds’ offer by handing him a formal acceptance.
The court held that the acceptance was invalid. The offeror need
not give notice of revocation personally for it to be effective, and it
will suffice if the offeree becomes aware of it from a reliable
source

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Byrne & Co v Leon Van Tienhoven & Co
(1880) 5 CPD 344
On 1 October, the defendants wrote to the plaintiffs offering to sell them
a quantity of tin plate, and suggesting a reply by cable. When the
defendants had heard nothing back by 8 October, they wrote, revoking
their offer.
The plaintiffs had cabled an acceptance on 11 October, when they
received the original offer, and did not receive the revocation until 20
October. Was there a contract?
The court held that, whilst an offer may be revoked at any time prior to
acceptance, revocation is not effective until it is communicated to the
offeree, contrary to the postal acceptance rule which applies only to
acceptance.
As acceptance had predated the revocation the contract was enforceable.
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Agreement

Rejection or Counter-Offer
◦ Refusal by the offeree or a counter-offer
by the offeree will terminate the offer:
- Hyde v Wrench (1840)

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Hyde v Wrench (1840) 49 ER 132
On 6 June Wrench offered to sell his farm for ₤1,000. Hyde replied,
offering ₤950, which Wrench refused. Hyde then agreed to pay the
original ₤1,000. Wrench had not withdrawn his offer at this time but
neither assented nor declined this new offer, although he later refused
to effect the sale. Hyde sued for completion.
The court held that Hyde had made a counter-offer which effectively
rejected the original offer, meaning that it had ceased to exist at that
point. As such his agreement to pay the price quoted was not an
acceptance of Wrench’s original offer to sell but was actually a fresh
offer to buy. As this offer was not accepted, there was no contract
between the parties.

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Agreement

Failure of a condition precedent

◦ A condition precedent is where the agreement

does not become a contract until the happening
of a specific event.
◦ For example, if a ‘subject to finance’ clause is not
fulfilled, the offer will lapse.

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Agreement

Lapse of Time / Death of a Party

Non-acceptance within:
◦ a reasonable time
◦ a stipulated time
◦ or death of either party before acceptance
…can terminate the offer in many circumstances,
especially where the contract calls for personal
service.

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Agreement

Legal Rules relating to Acceptance

(i) Must be made in reliance of the offer
- R v Clarke (1927)

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R v Clarke (1927) 40 CLR 227
The WA government had offered a reward for information leading
to the arrest and conviction of the murderers of two police
officers. Clarke had been arrested, and although he had heard of
the reward, he gave the necessary information and evidence not
intending to claim it but to save himself from being charged with
the murder. He subsequently claimed the reward and sued when
his claim was rejected.
His action failed, with the court finding that he did not have the
offer in mind at the time of the supposed acceptance, meaning
that his actions were not a true acceptance.

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Agreement

(ii) Must be strictly in accordance with the terms of

the offer
◦ If the offeror specifies a method of acceptance
it must be followed:
◦ Gilbert J McCaul Pty Ltd v Pitt Club Ltd (1954)

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Gilbert J McCaul (Aust) Pty Ltd v Pitt
Club Ltd [1957] 59 SR (NSW) 122
In a five-year lease there was a clause giving the tenant an option to renew
for a further five years, subject to two conditions:
1. 3 months’ notice of intention to exercise the option
2. Punctual payment of rent and due performance of all related
covenants during the term of the original lease.
During the first five years the tenant frequently failed to pay rent on time,
however he did give the requisite three months’ notice.
The court held that the punctual payment of rent was a condition
precedent on the right to exercise the option, and that the fact that the
landlord had never complained was not a waiver of that condition. The
tenant could not demand a renewal.

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Agreement

(iii) Acceptance must be communicated

◦ Acceptance must be communicated to the

offeror, either by words or by conduct.

Felthouse v Bindley (1862)

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Felthouse v Bindley (1962) 142 ER
1037
Paul Felthouse wrote to his nephew John on 2 February offering to
buy his horse for ₤30 15s, adding If I hear no more about him I
consider the horse mine at that price. John did not reply to his
uncle but he did tell the auctioneer that the horse was to be kept
out of the sale. The auctioneer inadvertently sold the horse and
the uncle sued him in conversion.
The action failed as the nephew had not accepted his uncle’s offer.
His silence could not be said to constitute acceptance, and,
although he had told auctioneer Bindley to keep the horse back
from the sale, that fact had not been communicated to his uncle
and was not an acceptance. As there was no sale to Paul Felthouse
he had no title to ground an action in conversion
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Agreement

(iv) Acceptance must be conveyed by

someone with authority
Powell v Lee (1908)

(v) Cross-offers do not give rise to an

agreement
Tinn v Hoffman & Co (1873)

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 Powell v Lee (1908) 99 LT 284
Powell had applied for a headmastership. By a narrow majority,
the school managers decided to appoint him, and one of the
majority, without any authority, sent him a telegram telling him he
had been appointed.
The managers met again later, rescinded their original decision
and appointed someone else. Powell sued for breach of contract.
He failed. Acceptance is not effective unless it is communicated by
the acceptor or authorised agent. Here, the communication was
by someone not duly authorised and so there was no acceptance.

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Tinn v Hoffman & Co (1873)
29 LT 271
The parties wrote to each other on the same day, with Tinn
offering to buy 800 tons of coal at 69s per ton, and Hoffman
& Co offering to sell the same quantity at the same price.
Tinn sought to enforce what he considered to be the
resultant contract.
The court determined that there was no contract as neither
letter amounted to an acceptance because both had been
ignorant of the other party’s offer, and so could not have
been said to have accepted it

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Agreement

(vi) Acceptance must be absolute and

unconditional
◦ Acceptance must be absolute and
unqualified or it may amount to a
counter-offer.
- Masters v Cameron (1954)

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Agreement

(vii) The Postal Acceptance Rule

Where the parties contemplate the use of
the post as a method of acceptance, the
acceptance will be effective as soon as it is
posted

Adams v Lindsell (1818)

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Adams v Lindsell (1818) 1 B & Ald 681
Adams were woollen manufacturers in Bromsgrove, and Lindsell were wool
dealers in St Ives. On 2 September 1817 Lindsell wrote to Adams offering to
sell them a quantity of wool and requiring an answer in the course of the post.
The letter was misdirected and it did not reach Adams until the evening of 5
September. That same night they posted their acceptance and it was delivered
on 9 September.

If the original letter had been properly addressed, a reply would have been
received by 7 September and, because they had not received a reply by then,
Lindsell sold the wool elsewhere on 8 September. Adams sued for breach of
contract.

The court held that Lindsell were liable as the parties both contemplated post
as the means of communicating acceptance. As such the acceptance was
deemed to have been received on 5 September and a contract was formed. As
Lindsell were unable to supply the wool they were in breach of the contract.

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 Agreement

(viii) Instantaneous communications

Where the communication of acceptance is
instantaneous (telephone, fax or email), the
contract is effective when the acceptance is
received.
Entores Ltd v Miles Far East Corp (1955)
The Electronic Transaction Act 1999 (Cth) provides
guidance on times for receipt and dispatch.

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Entores Ltd v Miles Far East Corp
[1955] EWCA Civ 3
Entores, a London company, telexed an offer to the defendants in
Amsterdam. They accepted it, also by telex. Far East Corp then allegedly
breached the contract and Entores wanted to sue, but needed to
determine which court had jurisdiction. Under the principles of private
international law, action for breach of contract can only take place in the
State in which the contract was formed. If the postal acceptance rule
applied, this would be Holland, where the acceptance was telexed from;
otherwise English law would prevail.
The Queen’s Bench held that the contract had been formed at the time
of communication of acceptance, that is, the receipt of the telex in
London and so Entores could sue in the English courts using English law.
It was held that the postal acceptance rule did not apply to telex or any
other form of instantaneous or near-instantaneous communication.
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