LAWS1100 Business Law

Teaching Week 5

TOPIC: Contracts 1
 Definition of “Contract”?
• A legally binding promise or agreement.

• A promise or undertaking in respect of which

a legal, contractual obligation has been
assumed by means which the law recognizes
as effective for that purpose.

• An agreement between two or more people

which is legally enforceable.
 What is a Contract?
Contract Law falls into 2 main categories.
Contracts can be classified as simple or formal.

• Simple contract: can be made verbally or in writing, or

implied by the conduct of the parties.
- Most common form of contract;
- Eg.) Buying lunch, purchasing an item of clothing, etc.

• Formal contract: requires legal formalities and is valid only

when made according to the form required by the law.
- Set down by law, it has to be in writing (not verbal);
- Eg.) Contract for land, deeds, etc.
 Sources of Contract Law in Australia?
The main sources of Contract Law in Australia:

Is the bulk of contract law Statute or Common Law based?

 Elements of a valid simple contract

Ciro, Goldwasser, Verma Law and Business 4th ed. Oxford, 2014
 Formation of a Contract
3 Essential Elements to a basic contract:

1. Agreement
2. Intention to enter a legal relationship;
3. Consideration.
Requirement 1 – ‘Agreement’
An “agreement” involves a
meeting of the minds (or consensus)
between 2 or more parties…
 What is an ‘Agreement’?
An “agreement” is a straight forward legal term.

Most simply put…

AGREEMENT = OFFER + ACCEPTANCE
 What is an Offer?
Offer: a proposal made by one party to another
to enter into a legally binding contract.

• Offers can be written or spoken.

• Offers may be implied from the conduct of the offeror.

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

‘the world at large’.
- What are examples of this?
 What is an Offer?
• Courts use the objective test – ask whether a reasonable
person standing in the shoes of the recipient would believe
the statement/conduct to be a promise in the form of an
offer (the reasonable person test).

Look at the words/conduct of the person making the offer.

• ASK YOURSELF:
- Was the offer firm?
- Was the offer certain?
- Was the offer communicated to the offeree?
- Was there an intention/willingness to enter into a legally
binding contract?
 Offers in a ‘commercial’ context?
• Many commercial contexts may suggest an intention
to enter into a legally binding contract.

• However, would all commercial behaviour be

considered an offer?

- Would inquiring about something be an offer?

- What about when goods are displayed for sale?
 What is an “Invitation to treat”?
• An initial approach to others inviting them to deal or
to instigate dealings on certain specified terms.
(Basically, this is an invitation for potential customers
to consider something.)

• Most advertising is an
invitation to treat.
 Examples of “Invitations to treat”

EXAMPLES:
- Advertisements
- Goods displayed in shops
See: Pharmaceutical Society of Great Britain v Boots
- Auction Sales
- Tenders, shares and debentures
- Price lists
Invitation to treat

• Are all advertisements

invitations to treat?

• Can an invitation to treat

transform into an offer?

• See: Carlill v Carbolic Smoke

Ball Company [1893] 1 QB 256.
 The Carbolic Smoke Ball
• The product looked like this:
 Carlill v Carbolic Smoke Ball
FACTS:
• Advertisement by Carbolic Smoke Ball Co.
• Advertisement promised that product would ‘positively cure’
a long range of ailments: coughs, colds, asthma, influenza etc,
headache, whooping cough etc.
• It further promised a 100 pound reward will be paid by the
CSBC to any person who contracts the epidemic after having
used the ball 3 times daily for 2 weeks according to the
printed directions supplied with the ball.
• 1000 pounds deposited with Bank – to show their sincerity.
• Mrs Carlill used the product and caught the flu.
• Mrs Carlill tried to claim the 100 pound reward.
• The Court had to consider whether a contract existed.
 Carlill v Carbolic Smoke Ball
The wording of the Advertisement:

“A 100 pound reward will be paid by the CSBC to any

person who contracts the increasing epidemic
influenza, colds, or any diseases caused by taking
cold, after having used the ball three times daily for
two weeks according to the printed directions
supplied with each ball. 1,000 pounds is deposited
with the Alliance Bank, Regent Street, showing our
sincerity in the matter...”
 Carlill v Carbolic Smoke Ball
HELD:
• In determining whether there was an agreement, the
Court decided that the advertisement was more than
a mere invitation to treat.
• The advertisement by Carbolic was an offer to all the
world (offer to the world at large).
• The wording of the advertisement showed a
willingness on behalf of CSBC to immediately enter
into a contract/legal relations with any person to
whom it is directed and who accepted the offer of
the reward and the conditions for performance.
 What can happen to a valid offer?

Ciro, Goldwasser, Verma Law and Business 4th ed. Oxford, 2014
 Termination of an offer
Revocation – common method of terminating an offer;
• The offeror is entitled to revoke their offer at any time
before acceptance is made, even if they have promised
to keep the offer open for a particular period, provided
that acceptance does not occur first.
• However, if the offeree has paid for a promise to keep
the offer open for a period (Eg. a deposit) the offeror
cannot revoke until the agreed time period expires.
See: Goldsborough Mort v Quinn (1910)
• Other Methods: Rejection; Counter-offer; Lapse of time;
Non-occurrence of an event; Death.
 Rules of Acceptance

Ciro, Goldwasser, Verma Law and Business 4th ed. Oxford, 2014
 What is Acceptance?
A final and unqualified assent to all terms of the offer

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

willing to immediately enter into a legally enforceable
contract with the offeror on the terms offered, this equates
to an acceptance of the offer.
• Whether or not there has been an acceptance will be
decided objectively by reference to the words or actions of
the offeree, not by their thoughts.
• Acceptance must be communicated to the offeror;
- However, the offeror can waive communication:
• See: Carlill v Carbolic (1893).
 What is Acceptance?
• Only the offeree can accept the offer;
• Acceptance must be unqualified, otherwise it will be
considered a counter-offer;
• Acceptance must be within a reasonable period of
time. See: Ramsgate v Montefiore (1866).
- Montefiore made an offer to Ramsgate to
purchase shares in that company.
- 5 months later, the Hotel wrote back accepting offer.
- Held: There was no contract as there was no agreement.
- Offer had lapsed because reasonable time had lapsed.
 How can acceptance be made?

Ciro, Goldwasser, Verma Law and Business 4th ed. Oxford, 2014
 No Acceptance
• Ignoring the offer constitutes no acceptance.
• Silence is not acceptance:
- The words: ‘If I do not hear from you to the
contrary, I will take it you have accepted my
offer’ is no acceptance.

• Acceptance is a deliberate act and silence is not.

Therefore the offeror can not impose silence as an
acceptance.
- See: Felthouse v Bindley (1862) 142 ER 1037
 Requirement 2 – ‘Intention’

Ciro, Goldwasser, Verma Law and Business 4th ed. Oxford, 2014
 Requirement 2 – ‘Intention’
Intention to Create Legal Relations
• For a contract to exist the parties to an agreement
must intend to create legal relations.
• Usually, the presence of consideration (the 3rd
element) will provide evidence of this, but this is not
always the case. Therefore, this requirement must be
separately established in each case.
• The onus is on the party seeking to prove the
contract to demonstrate intention and the nature of
the relationship between the parties.
 Intention – Presumption 1
Commercial agreements: There is a presumption that
parties have an intention to enter into legal relations.
• This presumption can be rebutted by presenting
evidence to the contrary.
• In commercial agreements, parties can expressly intend
not to be bound by the agreement. Examples:
- ‘This agreement is not intended to be legally binding’;
- ‘This agreement is binding in honour only’;
See: Rose & Frank v JR Crompton (1925).
- ‘This is a conditional agreement’;
- ‘This agreement is subject to a formal agreement’.
 Intention – Presumption 2
Social or Domestic Agreements

NOT intended to be legally enforceable unless the

presumption is rebutted by evidence to the
contrary.

CONTRASTING CASE LAW:

–Balfour v Balfour (1919)
–Wakeling v Ripley (1951)
 ‘Puffery’
Puffery (or a ‘mere puff’).

• Often called a ‘sales puff’.

• A puff is a promise clearly not
intended to be taken seriously
by the buyer/receiver.
• Often found in advertising campaigns.
- Eg.) “Red Bull gives you wings to fly”.
• See: Carlill v Carbolic (1893).
 Requirement 3 – ‘Consideration’
• Consideration: an agreement is not a contract unless both
parties to the agreement have paid, or promised to pay, a
price for each-other’s promise;
• Promisor: the one making the promise.
• Consideration is the price that is asked by the promisor (to the
Promisee) in exchange for their promise.
• The common law requires that, for an agreement to be
binding, the promisee must provide consideration (payment of
some kind) for the promise they have received.
• Generally, a person who sues another for a broken promise
under a contract should prove that they paid the price.
• Consideration is an essential element in every simple contract.
• Applies to all contracts other than contracts under seal (deed).
 Consideration
Consideration can take the form of:

• The payment of money;

• The provision of goods;
• The provision of a service;
• The undertaking of an onerous obligation;
• Refraining from doing something; or
• A promise to do any of these things.

See: Carlill v Carbolic Smoke Ball (1893)

- Carbolic Smoke Ball Company: their final argument
was that no consideration was paid to them.
 Consideration
• Consideration need not be adequate or fair, only a price of
some legal value. See: Thomas v Thomas (1842)

• Consideration must be sufficient, and not:

- A vague promise. See: White v Bluett (1853)
- Past consideration. See: Roscorla v Thomas (1842); or
- Performance of a prior legal obligation – performing
existing contractual obligations does not amount to
good consideration. See: Stilk v Myrick [1809].

• However, where the promisor receives something extra

in exchange for his/her additional promise, that promise
may be enforced or where the promisor receives a
benefit or avoids a detriment. See: Musumeci v
Winadell (1994)
Coming up next week...

Contract Law 2