Powerpoints for week_4

Foundations of Business Law

Week 4

Forming Business Contracts

Part 1

Before we look at contactsFrom last week …

How to answer legal questions:

How to answer a legal problem

1. Identify the legal

issue

2. Identify what the

plaintiff will want to

establish and what the

defendant will want to establish

3. Argue each point from both positions

based upon any

relevant case or statute

4. Reach a conclusion:

who is more likely to win (and

what remedies can they expect)?

The Law of Contract

Formation Part 1

Chapter 12: Introduction to Contract

Chapter 13: Agreement between the parties

Chapter 14: Intention to create legal relations

Some preliminary points:

‘Contract’ & ‘Agreement’ distinguished

• Terms ‘contract’ and ‘agreement’ are often used to mean the same thing.

• Traditional definition of contract is: ‘a legally enforceable agreement’. So an agreement is NOT necessarily a contract. It only becomes a contract when it is legally enforceable.

• The law of contract is all about determining which promises the law will enforce.

Contract law is found in both the common law and statute law

Common law: cases where parties have had their contractual disputes (civil cases) settled by the courts (and these become precedents)

Legislation imposes standards of conduct on certain contracts (for example, consumer contracts in so far that they should not be unfair, not sell things which are broken or dangerous, and some contracts must be in writing such as credit contracts)

Creation of a simple contract

Steps for creation:

Creation of a simple contract

Chapter 12 gives us an overview:

Creation of an Apparent Simple Contract

• Three elements required:

• Intention to contract

• Agreement between the parties

• Consideration.

Validity of a simple contract

There are 4 elements required for validity (hence, enforceability):

• The parties have legal capacity, • The parties have consented, • There no illegality of purpose and • Any form requirements have been

satisfied.

Classification of contracts

Contracts classified by formation:• Express Contracts - wholly in writing, wholly oral or combination of the two; all the terms are agreed upon.

• Implied Contracts - look at the circumstances surrounding the acts or conduct of the parties. A person prunes your roses every year without any formalities.

• Quasi-contracts - an obligation imposed by law on a person, for example, a promise to consider a tender for a contract.

Classification of contracts

Formal or simple contract?

Classification of contracts

Statute of Limitations

• The time limit within which a legal action to enforce a formal contract ‘under seal’ can be brought before it becomes ‘statute barred’ varies between states (e.g. SA: 15 years).

• It is much shorter for an action to enforce a simple contract (e.g. SA/NSW/Qld/Tas/ACT: 6 years).

Classification of contracts

Some contracts are void unless they are in writing

• bills of exchange and promissory notes;• cheques and payment orders;• ‘hire purchase’ and credit contracts under

the Uniform National Credit Code; and• real estate contracts.

Classification of contracts

• There are some contracts which must be evidenced in writing if they are to be enforceable.

• This is simply a requirement of proof which dates back to the Statute of Frauds 1677 (Imp).

Lee Road v Catanzariti [2005] SADC 64

Offer and acceptance of terms of a real estate sale was by exchange of a number of faxes which confirmed a number of terms. Later the seller refused to sign the formal contract saying nothing had been agreed in writing.

Held: the faxes (read together) were sufficient.

Contracts and e-commerce

• The Electronic Transactions Acts provide a legal framework to encourage businesses and consumers to use electronic commerce by providing that the law shall treat electronic and paper-based commerce equally.

• Electronic Transactions Act 2000 (SA)

A buyer can accept an offer by clicking on “BUY”. An automated message system can indicate acceptance of a contract.

Contracts and e-commerce

• Other features of the Electronic Transactions Acts include:• A transaction is not invalid because it took place wholly

or partly electronically;• A requirement to give information in writing can be

satisfied electronically;• Electronic signatures are acceptable;• Electronic form is equivalent to hard copy;• Recording of information in electronic form is equivalent

to hard copy;• Time and place of despatch can be electronically

recorded.

Chapter 13: For a contract to be made there must have been agreement.

Agreement

Agreement by conduct alone

Brambles Holdings v Bathurst CC [2001] NSWCA 61 (2001) 53 NSWLR 153

Brambles took liquid waste from BCC for a fee. BCC wrote to Brambles offering a higher fee if they kept some aside for a waste treatment plant. Brambles didn’t want to do that but charged and received the higher fee anyway.Held: There was a contract on the terms as set out by BCC. Brambles’ conduct indicated implied acceptance. They now needed to repay the sum they should have set aside.

Only if there is a valid offer followed by a valid acceptance

• Offer: promise by offeror to do something (or not do something) if the offeree responds in a stipulated manner

(e.g. Stating a willingness to sell goods or supply services in exchange for a stipulated price)

Is there an agreement?

Offer

Offers can be:• In writing • Verbal The offer must be communicated

to the offeree.

Distinguish advertising exaggerations

A contract will not be held to be enforceable if the offer was not intended to be taken seriously

• Exaggerated ‘offers’ are called “puffs”

Puffs

Leonard v Pepsico Inc 88 F Supp 2d USA• Pepsi advertised that 7,000,000 points qualified

a consumer to win a Harrier jet• The form indicated that additional points could

be purchased for ten cents each. Leonard raised $700,000 in order to purchase the points needed to acquire the jet (which was worth $33.8 million).

Puffs

Held: that it was clear that no serious offer for a Harrier jet was made. An objective reasonable person would find that the offer was in jest.

An ‘invitation to treat’ is not an offer

Catalogues, price lists most adverts are ‘invitations to treat’, not offers

Offer versus invitations to treat

Pharmaceutical Society v Boots [1953] 1 QB 401

Was the chemist “selling” drugs without a pharmacist present? Held: Displays in shops, even with prices marked on them, are just ‘invitations to treat’. Remember Fisher v Bell? Both of these cases involved criminal prosecutions … resolved by reference to contract principles.

This means that a customer in a self-serve shop makes the offer to purchase at the cashier; the contract is made when the cashier accepts the offer (to purchase the item) and takes the cash.

Tenders and auctions

• A call for tenders is an ‘invitation to treat’.

The tender is the offer that can then be accepted by the person who put out the call for tenders.

• Auctions

The bid is the offer, which is then accepted with the fall of the hammer.

Provision of information is not an offer

Harvey v Facey [1893] AC 552• The plaintiffs asked the defendants at what price

they would be willing to sell some land. The defendants replied with a figure, which the plaintiffs treated as an offer and said “we accept!” Was there a contract?

• Held: No. The defendants’ reply, rather than being an offer, was merely a statement of the minimum price at which they would be willing to sell. The discussion was still at the negotiation stage.

An advertisement is usually not an offer. Instead, it is an invitation to treat – an invitation to another person to make an offer. However an advertisement may, in some cases, show an intention to be bound and would therefore be construed as an offer.Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256.

Some advertisements are enforceable

• The Carbolic ‘smoke ball’ was designed to prevent users contracting a cold

• £100 was to be provided by Carbolic to any person who had used the ball three times daily for two weeks according to the printed directions supplied with each ball, and still contracted the flu

• £1000 pounds was deposited in a bank to show their business sincerity

Carlill v Carbolic Smokeball Co

The advertisement from 1893 looked like this:

Carlill v Carbolic Smoke Ball Company

• Mrs Carlill used the Smokeball as required but still got the flu.

• When contacted, the Carbolic company denied they were legally liable to pay. They said it was not an offer; just a ‘puff’. Mrs Carlill sued the company for the reward saying there was a contract.

Carlill v Carbolic Smoke Ball Company

Held: the advert was more than a mere puff; it was a clear legal offer because the wording of the advert indicated a clear intention of Carbolic to enter into legal relations with anyone who ‘accepted’ the offer by fulfilling the conditions.

The ratio decidendi of Carlill:

• An offer can be made to the world at large

• It is accepted when the persons to whom it is directed do what is required

• Gives rise to what we sometimes refer to as a unilateral contract.

One final matter: Options

Goldsborough Mort v Quinn (1910) 10 CLR 674

• An option is a contract to keep an offer open

• The deposit is sometimes called an ‘option’ … it ‘seals’ the promise to keep the offer open.

Termination of offer

Termination of offer

Revocation (Withdrawal)• A withdrawal of offer revokes the offer. But

to be effective, withdrawal by the offeror must be brought to the notice of the offeree before acceptance

• If the offeree learns of the withdrawal indirectly they cannot then try to accept it: Dickinson v Dodds [1876] 2 Ch D 463Byrne v Van Tienhoven & Co (1880) LR 5 CPD 344

Termination of offer

Rejection or Counter-Offer

Refusal by the offeree or a counter-offer by the offeree will terminate the offer.

Termination of offer

Lapse of Time

Non-acceptance within: • a reasonable time• a stipulated time • or death of either party before

acceptance will terminate the offer.

Termination of offer

Lapse by failure of a condition• If the offer is subject to a condition and

the condition is not fulfilled, the offer will lapse.

• If there is a condition precedent, it must be satisfied before the agreement can ripen into a contract.

Acceptance

There are rules related to acceptance too.

Acceptance be made in reliance of the offer

• The offeree must intend to accept the offer.

-R v Clarke (1927) 40 CLR 227

Clarke gave information to clear his name, not because of the offer.

Rules relating to acceptance

Acceptance must be strictly in accordance with the terms of the offer: For example, if the offeror specifies a method of acceptance, it must be followed:

Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1954) 76 WN (NSW) 72

Lessee failed to pay rent on time, then sought to renew the lease. Held: could not be renewed as he had failed a condition precedent (even though the landlord did not appear to object to the irregular payments.)

Rules relating to acceptance

Acceptance must be conveyed by someone with authority.

- Powell v Lee (1908) 99 LT 284The ‘acceptance’ of an offer

regarding employment had not come from a person in authority so it was not binding acceptance.

Rules relating to acceptance

Silence cannot be acceptance.Felthouse v Bindley (1862) 142 ER 1037Offeror said to the offeree“If I hear nothing I will consider the horse

sold”Held: no contract

Rules relating to acceptance

Acceptance must be absolute and unconditional

• Acceptance must be absolute and unqualified or it may amount to a counter-offer.

Ebenezer Mining v Seppanen [2003] QSC 62

Negotiations for the purchase of minerals had never amounted to a final, unconditional acceptance.

Rules relating to acceptance

The postal rule

• Where the parties contemplate the use of the post as a medium of exchange of promises, the rules as to the time of acceptance change as follows:

• An offer by letter is not effective until received by the offeree.

• But acceptance is effective as soon as it is posted.- Adams v Lindsell (1818) 106 ER 250

Rules relating to acceptance

The postal rule

• If revocation of an offer is to be effective, it must be received by the offeree before he or she posts their letter of acceptance.

Byrne & Co v Leon Van Tienhoven & Co [1880]

Rules relating to acceptance

Instantaneous communications

• What happens where the communication of acceptance is instantaneous?

• Entores Ltd v Miles Far East Corp [1955] 2 QB 327

Held: the ‘postal rule’ didn’t apply to the contract with the Dutch company. The acceptance happened when the telex arrived back in the UK, and that’s where the contract was formed.

Rules relating to acceptance

Instantaneous communications• In cases of agreements communicated by means

of telephone, fax or email, the contract is formed when and where the offeror hears or receives the offeree’s acceptance.

• Electronic Transaction Act 1999 (Cth) provides guidance on times for receipt and despatch. Act infers that acceptance could be when the offeree pushes the ‘send’ button.

Rules relating to acceptance

Email: safest legal position is that it is accepted when it comes to the attention of the addressee (offeror) or is “accepted by information system” outside of the sender’s control.

Intention to contract

Chapter 14: The parties to the agreement must intend the agreement to be legally enforceable. If there is no intention there is no contract.The courts will apply objective tests to decide whether an intention to create legal relations was present at the time.

• ‘Subject to contract’ clauses

• document is not in its final form and/or is subject to preparation of written document therefore there cannot be an intention to conclude the contract:

Masters v Cameron (1954) 91 CLR 353No contract…the parties were still getting the

final form ready.

Intention to create contract

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

Intention to create contract

Implied intention

• Traditionally:

• social, family, domestic, voluntary• presumed no intention to create a contract

• commercial or business• presumed intention to be bound by a contract

Intention to create contract

Implied intention

Intention to create contract

Intention to create contract

Non-commercial agreements• Three types:

• Social agreements - ones made between friends or acquaintances;

• Domestic agreements - ones made between family members and relatives; and

• Voluntary agreements - where the parties may volunteer their services.

Non-commercial agreements

Lotteries and competitions

A social arrangement may nevetheless 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) 44 ALR 20

3 people won a lottery…the person whose name it was in refused to share it even though there was a regular contribution by all 3. Held: commercial.

Non-commercial agreements

Agreements between intimate partners

Traditionally in domestic situations:

• Husband and wife yet promise made while engaged, no intention that the dress allowance was binding: Cohen v Cohen (1929) 42 CLR 91

• Where the parties are in a de facto (secret) relationship, very unlikely to find a contract that is binding:

• Ashton v Pratt [2012] NSWSC 3

Mistress relationship was purely social so $2.5 million trust fund + $500,000 annual allowance was not binding on the estate of the billionaire.

Non-commercial agreements

Other domestic arrangements

In the case of some domestic situations the courts will look at the words and conduct of the parties as well as the seriousness of the consequences:

Wakeling v Ripley (1951) 51 SR (NSW) 183

Wealthy old man promised sister and husband a home and an estate upon his death if they moved to Australia. Later quarrel. Was the promise binding? Held: Yes.

Non-commercial agreements

Voluntary agreements

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) 38 AILR 5-036

Was a volunteer covered by workers’ compensation? Held: No evidence of an intention to create legal relations. For example, there was no wage.

Intention to create legal relations

Ermogenous v Greek Orthodox Community of SA Inc (2001) 209 CLR 95

Simply applying ‘presumptions’ may no longer be the appropriate test for intention.

Nevertheless …

Held (HC): that while there was a non-commercial relationship, E had established that there was a legally enforceable contract in this case. Clear that this was not a precedent for all churches in the future.

Commercial or business agreements

General

In business and commercial agreements the courts assume that there is an intention to create legal contractual relations:

Intention to create legal relations

Commercial relationships:Pirt v Pirtferm Ltd [2001] WASCA 96

Professor Pirt held IP in his inventions. Investors had informal talks. Had there been an agreement? Presumption that the men were intending commercial relationship.

Held: no contract. No intention on the part of Prof Pirt to part with IP without a lot more settled terms and agreement.

Commercial or business agreements

AdvertisementsCarlill v Carbolic Smoke Ball Co [1893]

Remember that the court there said that the presence of the deposit of money indicated a strong intention to be bound by legal contract.

Next week...

Law of Contract

Formation Part 2 – Chapter 15: Consideration

Chapter 16: Capacity of the parties to contract

Chapter 17: Genuine consent