Topic 3(a) -

Formation of Contract
-Offer and Acceptance
-Intention
-Consideration
-Formalities
 Overview of Contract law
In analysing contract, consider:
• Does a contract exist? – Topic 3(a)
• What does the contract say and has it
been breached? – Topic 3(b)
• Are there any reasons to allow ‘escape’
from the contract – Topic 3(c)
• What remedies are available to the
innocent party in contract cases? – Topic
3(d).
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 Essential elements of a
contract
• A contract is an agreement that the courts will
enforce.
• Certain key elements must be present for a
contract to exist:

An Offer An offer The parties Consideration

must be must be must Intend Must be
made Accepted to be provided
bound

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 Overview of agreement
• A contract is a legally enforceable
agreement.

• An agreement involves an offer which

has been accepted.

• Courts will look at the parties’

statements and their conduct
objectively to determine whether a
reasonable person would have thought
an offer existed which was accepted.
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 Offers
• An offer involves an indication that the
offeror wishes to enter into a binding
contract with the offeree on certain terms.

• An offer must be distinguished from

– A question Harvey v Facey
– A mere indication of possible future conduct
Harris v Nickerson
– Preliminary negotiations
– An invitation to treat

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 Invitations to treat
The following activities usually involve
invitations to treat i.e. invitations to make
offers:
• Goods on display Fisher v Bell; Boots Chemist
• Catalogues Grainger v Gough
• Advertisements Partridge v Crittenden; cf
Carlill v Carbolic Smokeball
• Auction
• Call for tenders
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 Responses to an offer
• There are a variety of possible
results following an offer:
Offeror may withdraw the offer

Offeree may accept the offer = agreement

Offeree may reject the offer
Offer
Offer may lapse due to passing of time
Offer may lapse due to death of offeror/offeree
Offer may lapse due to failure of a condition precedent.

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 Withdrawing the Offer
• Can an offer be revoked after acceptance?
• Revocation of an offer must happen before
acceptance Byrne v Van Tienhoven
– Routledge v Grant
– For unilateral offers where the offeree has acted on
the offer, the offeree must be given a reasonable
chance to complete
– An option is an irrevocable offer - Goldsborough Mort
v Quinn
• Is it necessary to tell the offeree about the
revocation?
• Who must tell the offeree that the offer has been
revoked?
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 Rejecting the Offer
• The offer may be rejected expressly or
by implication
– Offeree’s conduct may indicate rejection;

• An offer is terminated on rejection and

cannot be later accepted;
• A counter offer acts as a rejection of the
original offer Hyde v Wrench
– Distinguish between a counter offer an
request for clarification.

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 Is this a counter offer?
B (by letter): I’ll buy your car for $5,000
S: I’ll sell for $6,000
B: OK. $6,000 but can I pay in 30 day’s time? (by
cheque)
S: No response
B: I enclose bank cheque for $6,000 in full
payment.

S refuses to proceed.
What can B do?

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 Acceptance of the offer

• Only the offeree may accept

• Acceptance must be final and unqualified
– Masters v Cameron, Plastyne Products v Gall
Engineering
– ‘battle of the forms’ problem

• Acceptance must be communicated to

the offeror, unless one of the exceptions
applies

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 Communicating acceptance
• Acceptance must be communicated
– Communicating acceptance over the internet
– Situations where express communication is not necessary
• Where regular past dealings exist allowing the conclusion that
a contract exists even without formal acceptance;
• Where the offeror’s and the offeree’s industry involve a
custom that that formal acceptance is not necessary;
• Acceptance may be indicated by conduct rather than words;
• In the case of unilateral contracts (eg Smokeball case).
– Acceptance by post
• The method of acceptance must conform with the
offeror's requirements.
• Only the offeree or someone with actual authority to do
so can communicate acceptance.

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 Acceptance by post
• Where an offer is accepted by post (or
public telegraph/telex), the postal
acceptance rule MAY apply Henthorn v
Fraser
– This rule only applies where the offeror
had accepted post as the method of
acceptance
Under the postal rule, acceptance
occurs when the letter is posted ,
even if the letter is lost in the
post .
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 Problem
• Fran sent an email to a regular customer, Paul, asking
whether Paul would like to buy Fran’s corn crop this
year for $300 per tonne.
• Paul posted a letter back agreeing to the purchase,
but in the meantime Fran sent a fax advising Paul that
she had sold her crop to another person.
• Paul is upset as he had already made plans to sell the
corn for a profit to an international buyer. Advise the
parties.

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Answer plan…
Planning an answer to Problem 2
• Background: What is known?
– -an offer was made by … to …

• What are the issues?

– Was Fran’s fax a valid revocation?
– Did Paul accept the offer, in time?
• For each issue, explain and apply the relevant law,
using cases here.

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• Planning an answer (ctd) : relevant law
Once an offer is accepted, the offer cannot
be withdrawn Routledge v Grant

– If postal rule applies, acceptance occurs as

soon as the acceptance letter is posted
Henthorn v Fraser

– If Postal rule does not apply, acceptance

occurs only when it is actually communicated
to offeror (ie received) Felthouse v Bindley

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• Planning an answer (ctd): For each issue,
after explaining the relevant law, APPLY
those legal rules to the facts, using the
case(s) as comparisons of contrast to the
facts ...
………..
………..
• Finish with your conclusion – your opinion on
whether there is a contract here.

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 Lapse of offer

• As a general rule, the death of the

offeror/ offeree terminates the offer;
• An offer may lapse after a set time,
or it will lapse after a reasonable
time;
• An offer will lapse if it was subject to
a condition precedent that failed.

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 Agreement must be
‘Certain’
• Generally the courts require certainty as to the parties,
the subject matter of the contract and the price
– For sale of goods, if agreement exists but parties were silent on
price, courts may imply agreement to pay a ‘reasonable price’
– The modern trend is to uphold contracts where possible,
particularly commercial agreements ;
• An agreement to agree is uncertain and so not binding;
• An agreement to negotiate is probably not binding;
• Agreements ‘subject to contract’ are presumed not to be
binding, but this presumption may be displaced by
evidence showing intention to be bound Masters v
Cameron
• Binding agreements may contain conditions precedent (eg
‘subject to finance’).

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Overview – contracts require an
agreement
Has an offer
No
been made? No contract

Ye s

Did offeror intend Did the offeror

to revoke Yes communicate Ye s
the offer? revocation?

No

No
Has the offer lapsed by death
rejection or time or because Yes
of a condition precedent

No

Has acceptance been

received by the offeror
Yes
either expressly or by
conduct? Source: Sweeney &
O’Reilly, Law in
No
Commerce, LexisNexis:
Agreement Was acceptance made Sydney 2004, p 120.
No
exists Ye s
under the postal rule?

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 Essential elements of a
contract
• For a contract to exist, there must
not only be agreement, but also
– intention to be legally bound; and
– consideration

An Agreement The parties Consideration

must exist must Intend must be
(offer and to be bound provided
acceptance)

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Intention to be legally
bound
Why is intention an element
of
contract law?
• Without an intention to be legally bound by the
agreement, a party can only rely on the social
or moral pressure to encourage the other party
to comply with the terms of the agreement.
• Parties may expressly declare their
intention…or
• The courts may imply the intention of the
parties from the surrounding facts.

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 Presumptions in implying
intention
• For social or domestic agreements, courts begin with the
presumption that the parties did not intend to contract.

• For commercial agreements, the courts begin with the

presumption that the parties intended their agreement to
be legally enforceable.

• Each presumption is rebuttable if there is evidence

indicating a contrary intention. The ultimate question
is:
Whether a reasonable person present at the time
would have concluded that the arrangement was
contractual?

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 Matters to consider in
determining intention
• what the parties said (either orally and/or in
writing) to each other;
• the context in which the statements were made;
• the conduct of the parties;
• how grave the consequences would be to the
innocent party if the promise(s) made is (are)
broken.

• Source: D Khoury & YS Yamouni, Understanding Contract Law, Lexis Nexis Butterworths, Sydney, 2003, p 127.

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 Problem

• Fraser invites Daphne to the movies

and Daphne accepts.

• Can Fraser sue Daphne for breach of

contract if Daphne did not attend?

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 Problem
• A wealthy man wrote to his nephew who resided in
Scotland with his wife, a university lecturer, requesting
them to come to Australia to look after him. In return,
he agreed to provide them with a home and to leave his
property to them on his death. On the basis of these
assurances, the nephew and his wife sold their house
and left their jobs and migrated to Australia.

• Can the nephew sue his uncle for breach of contract if

his uncle refuses to uphold his end of the bargain?

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Consideration
 What is ‘consideration’?
• ‘Consideration’ is NOT that you have thought about the
matter.

• It requires the person seeking to enforce a promise to have

given something of value in exchange for that promise.

• A promise not supported by consideration cannot be

enforced in contract law unless it was made in a formal
contract (by deed). However, promissory estoppel may
apply (see later).

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 Which contracts need
consideration?
• Formal contracts (eg deeds) do not
require consideration.

• Simple contracts require

consideration to be binding under
contract law.

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 Examples of consideration
Consideration may be:
• a promise to do something. In this case, consideration is said
to be executory (that is, the consideration has not yet been
performed).
• a promise not to do something. This is also called executory.
• doing something. Eg in Carlill v Carbolic Smoke Ball Co, Mrs
Carlill provided consideration by following the instructions of
the advertisement.
• refraining from doing something (‘I’ll give you $10 if you stop
singing’).

Consideration may be:

• a benefit flowing to the promisor; or
• a benefit flowing to a third person at the promisor’s direction;
or
• a detriment to the promisee.

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 Rules on consideration
• Consideration must move from the promisee
– If a promise is made to two or more persons
jointly, only one of those persons need provide
consideration (‘joint promisee rule’)
• Consideration may not be past (see next slide)
• Consideration doesn’t have to be adequate
• Consideration must be sufficient
• Consideration must not be illegal or unlawful

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 ‘consideration may not be
past’
The consideration must be provided contemporaneously with
•
the promise sought to be enforced & cannot be past Roscorla v
Thomas
An exception to the rule is:

• Where acts are performed at the request of the promisor, in

circumstances that raise an understanding that they would be
remunerated for, then performance of the acts by the
promisee will constitute good consideration for subsequent
promise to renumerate for them. Re Casey’s Patents

- Eg George was requested by his employer to work an extra

weekend shift. George performed and his employer
subsequently promised to pay for them. George has provided
good consideration for the subsequent promise.

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 ‘consideration must be
sufficient’
• Illusory promises are not consideration White v Bluett
• Settling disputes — giving up a legal claim may be consideration
Wigan v Edwards
• Renegotiating contracts — promising to perform an existing
contract may not be valid consideration Stilk v Myrick
• Renegotiating a debt - consideration may be lacking Pinnel’s Case ;
Foakes v Beer
– If creditor requests and receives payment in different time,
manner or place, this difference in payment is the consideration
for promise to reduce debt
– Exceptions to rule in Foakes v Beer:
• Part payment by third party
• Composition with creditors Hirachand & Punamchand v Temple
• A promise to perform a contractual duty, already owing by the
promisee to a third party, will be good consideration Eurymedon
• A promise to perform an existing public duty will not be good
consideration unless the promisee provides something in addition
to the duty Collins v Godefroy

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 Problem

• Andy promised all employees a 10%

bonus if they perform their jobs
properly during the forthcoming year

• Is this promise binding on Andy?

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 Problem
• In 1998 Sue leased cattle station to Jerry for 8 years at $20,000
p.a.
• In 2001 cattle numbers declined as a result of a drought.
• Jerry realised he cannot continue to pay $20,000 in rent unless
condition improved.
• Sue said she would reduce the annual rent to $15,000 until the
condition improved. Sue signed a document to this effect.
• In 2003 the drought ended and Sue is able to resume paying
$20,000 p.a.
• Sue advised Jerry that he would also have to pay the $10,000
forgone by Sue in the previous two years.

• Advise Jerry.

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 Promissory Estoppel

Central London v High Trees

• Promissory estoppel is important where
no contract exists i.e:

– no consideration exists, particularly in the

context of renegotiated agreements Je
Maintiendrai Pty Ltd v Quaglia
OR
– the formalities of making a contract have
not been satisfied Waltons Stores v Maher

• Promissory estoppel may be a way to

prevent a promise being broken (or
obtain remedies for its breach) despite
the lack of a contract existing.
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 Elements of promissory
estoppel
• An assumption by the promisee:
– the promisee reasonably assumed that a particular
legal relationship existed (Quaglia’s case) or would exist
(Waltons Stores)

• for which the promisor was responsible:

– The promisor induced the promisee’s assumption; or
– The promisor was aware that the promisee had made
the assumption, and deliberately remained silent;

• Reliance by the promisee on that assumption

• Detriment :
– the promisee will suffer a detriment if the promisor is
permitted to renege on the promise.
– Detriment will not arise if the promisee will receive a
benefit or gain.

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 Formalities
• Does a contract need to be in writing?
– Contracts creating interests in land
usually need to be evidenced in writing
– Contracts for guarantee usually need to
be written
– Most other agreements may be oral or
written or partly written & partly oral.
• It will always be easier to prove what was
discussed/agreed if that is in writing.

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 Capacity of Parties
• One or more parties to an agreement may
lack the capacity to create a contract, in the
eyes of the law
– eg minors (with some exceptions)
– Eg mentally incapacitated/ intoxicated persons

• This is discussed in Topic 3(c) – Vitiating

factors, as lack of capacity may allow a party
to avoid the contract.

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 … next
• Having established that a contract EXISTS (Topic 3(a)),
…the next steps are to ascertain
• What are the terms of that contract? (Topic 3(b))
– Express terms (Chapter 6)
– Implied terms (Chapter 7 and 8)

• If the terms have been breached, is any exemption

clauses effective? (within Topic 3(b))

• Are there any circumstances allowing the contract to

be avoided? (Topic 3(c))

• Otherwise, for any breach not protected by exemption

clauses(s), what remedies are available? (Topic 3(d))
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