Formation of a contract

1. Formation of a contract

2. A contract is an agreement that is enforceable at law.

3. Characteristics of a Contract 1. There will be a promise or promises. 2. They will be made by “parties to the contract”. 3. They will create an obligation. 4. That obligation will be enforceable at law. 5. Often found in negotiations, rather than a formal document.

4. OFFER/ACCEPTANCE ANALYSIS OFFER + = AGREEMENT ACCEPTANCE INTENTION CONSIDERATION CAPACITY

5. Offer “the indication by one person to another of his or her willingness to enter into a contract with that person on certain terms” Carter and Harland, “Contract Law in Australia” 4th edn p28

6. Essential features of an offer: • The offeror must intend to be bound by the offer • Distinguish from request for information or invitation to treat • The offer must be communicatedto the offeree • The offer may be made to one person, a class ofpersons, or the whole world • The offer must contain enough information (certainty) to allow a binding contract to come into existence

7. Intention to be bound An offer is not: • A request for the supply of information • Harvey v Facey[1893] AC 552 • An invitation to treat • Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd[1953] 1QB 401. • Gibson v Manchester City Council[1979] 1AllER 972 • Grainger & Son v Gough[1896] AC 325

8. Harvey v Facey “the mere statement of the lowest price at which the vendor would sell contains no implied contract to sell at the lowest price.” Lord Morris at 556

9. Grainger v Gough “transmission of such a price list does not amount to an offer to supply an unlimited quantity of the wine described at the price named, so that as soon as an order is given there is a binding contract to supply that quantity. If it were so, the merchant might find himself involved in any number of contractual obligations to supply wine of a particular description which he would be quite unable to carry out, his stock of wine of that description being necessarily limited.” Lord Herschell at 334

10. Examples of Invitations to Treat • advertisements/circulars • price lists • displays of goods in shops • calls for bids at auctions, and • calls for tenders.

13. Carlill v Carbolic Smoke Ball[1893] 1 QB 256 • Distinguish offer from invitation to treat by looking at intention of offeror • Offer can be made to world at large • Unilateral contract – communication of acceptance not required • Consideration can equal detriment/effort Text of ad: http://www.carbolicsmokeball.co.uk/

14. Communication • Offer must be communicated to offeree • ‘overheard’ offer or unintended communication is not an offer • Banks v Williams (1912) 12 SR (NSW) 382

15. Offeree may be a particular person or class of persons or the whole world “It is also said that the contract is made with all the world –that is, with everybody, and that you cannot contract with everybody. It is not a contract made with all the world. There is the fallacy of the argument. It is an offer made to all the world; and why should not an offer be made to all the world which is to ripen into a contract with anybody who comes forward and performs the condition? It is an offer to become liable to anyone who, before it is retracted, performs the condition, and although the offer is made to the world, the contract is made with that limited portion of the public who come forward and perform the condition on the faith of the advertisement.” Bowen LJ at 268, Carlill v Carbolic Smoke Ball

16. All an offer needs is a “yes” to make a contract

17. Termination of Offers • Acceptance • Revocation • Rejection • Condition in offer not fulfilled • Lapse of time • Death of a party

18. Revocation • Must be communicated • Prior to acceptance – Byrne v Van Tienhoven(1880) 5 CPD 344 • Communication can be by third party or conduct– Dickinson v Dodds(1876) 2 ChD 463 • Not bound by statement to keep offeropen for a specified time – Dickinson v Dodds • Unless option– Goldsborough Mort v Quinn [1910] 10 CLR 674

19. Options “An offer may be withdrawn at any time before acceptance. A mere promise to leave it open for a specified time makes no difference, because there is, as yet, no agreement and the promise, if made without some distinct consideration, is nudum pactum and not binding. But if there is (as in the present case) a consideration for the promise it is binding. This is often expressed by saying that an option given for value is not revocable.” Griffith CJ said at 678: Goldsborough Mort v Quin

20. Communication of revocation • Actual communication required – although presume good business practices • Telex deemed received during office hours –Brinkibon case [1983] 2 AC 34 • or next business day if received after hours – The Pamela [1995] 2 Lloyd’s Rep 249). • Unless, actual circumstances mean no communication - Entores v Miles FarEastCorporation[1955] QB 327 at 332 • Email governed by legislation - Electronic Transactions Act 2000 (NSW) s13

21. Rejection • Rejection terminates an offer • Counter offer is a rejection • Hyde v Wrench (1840) 49 ER 132 • Response is not always counter offer/rejection • May be clarification or request for information • Stevenson Jacques & Co v McLean(1880) 5 QBD 346

22. Stevenson Jacques v McLean “The form of the telegram is one of inquiry. It is not …[like] Hyde v Wrench…where the negotiation was at an end by the refusal of the [offeree’s] counter proposal. Here there is no counter proposal….There is nothing specific by way of offer or rejection, but a mere inquiry, which should have been answered and not treated as a rejection of the offer.” Lush J at 350

23. ACCEPTANCE A FINAL and UNQUALIFIED assent to the terms of an offer made in the manner specified or indicated by the offeror The “yes” which ends negotiations

24. Acceptance • Must respond to the offer • Must be communicated • Subject to exceptions - Postal Acceptance Rule • Must not be conditional

25. Acceptance must respond to the offer • So, only those persons: • to whom the offer was made; and • who have the offer in mind at the point of “acceptance” may accept • R v Clarke(1927) 40 CLR 227

26. R v Clarke “it is not an absolute proposition of law that one who, having the offer before him, acts as one would naturally be induced to act, is deemed to have acted on the faith of or in reliance upon that offer. It is an inference of fact and may be excluded by contraryevidence.” Starke J at 244

27. What Can Be Accepted? • Only what was offered (without any additions, deletions or conditions) • Must end negotiations • Must be unqualified • Battle of the forms (cf counter offer) • Butler Machine Tool Co Ltd v Ex-cell-O Corp (England) Ltd[1979] 1 All ER 965

28. Acceptance must be communicated • Silence is not sufficient • Felthouse v Bindley(1862) 11 CB(NS) 869 • Conduct may communicate acceptance • Brogden v Metropolitan Railways (1877) 2 App Cas 666 • Empirnall Holdings v Machon Paul (1988) 14 NSWLR 523

29. Communication by conduct “where an offeree with a reasonable opportunity to reject the offer of goods or services takes the benefit of them under circumstances which indicate that they were to be paid for in accordance with the offer, it is open to the tribunal of fact to hold that the offer was accepted according to its terms.” McHugh JA at 535 in Empirnall Holdings v Machon Paull

30. Exceptions to communication Postal Acceptance Rule • Lord Herschell said in Henthorn v Fraser [1892] 2 Ch 27 at 33: “Where the circumstances are such that it must have been within the contemplation of the parties that, according to the ordinary usages of mankind, the post might be used as a means of communicating the acceptance of an offer, the acceptance is complete as soon as it is posted.” • So: • Acceptance complete on posting (constructive vs actual communication) • Within the reasonable contemplation of the parties • Adams v Lindsell(1818) 1 B & Ald 681

31. Postal acceptance rule will not apply: • Contentious matters - Tallerman & Co Pty Ltdv Nathan’s Merchandise (Vic) Pty Ltd(1957) 98 CLR 93 • If actual notice requested - Bressan v Squires[1974] 2 NSWLR 460

32. Conditional acceptance • Can you accept ‘with strings attached’? • “subject to” some reservation. NO - BECAUSE there is no “final and unqualified assent to the terms of the offer.”

33. Intention of the parties to be bound? • Have the parties finally agreed on the terms which will bind them • or can the condition result in the contract either not proceeding at all (eg if it is expressed to be subject to finance, or subject to planning approval) • or in the initially agreed terms being altered.

34. The Three Possibilities fromMasters v Cameron(1954) 91 CLR 353. 1. The parties had reached FINALITY, intended to be bound immediately, but wanted the terms set out in a MORE PRECISE but NOT MATERIALLYDIFFERENTform. 2. The parties had reached finality, intended NO DEPARTURE from the terms of the agreement but made PERFORMANCEof one or more of the terms conditional on execution of a formal document. 3. The parties did not intend to make a CONCLUDEDBARGAINunless or until a formal contract was drawn up.

35. INTENTION TO CREATE LEGAL RELATIONS “To create a contract there must be a common intention of the parties to enter into legal obligations, mutually communicated expressly or impliedly” Atkin LJ in Rose & Frank Co v JR Crompton & Bros Ltd [1923] 2 KB 261 at 293

36. Rebuttable presumptions • In social and domestic agreements there is a presumption against legal obligations • Balfour v Balfour[1919] 2 KB 571 • Cohen v Cohen(1929) 42 CLR 91 • Jones v Padavatton[1969] 1 WLR 328 • The presumption is rebuttable • Merritt v Merritt[1970] 1 WLR 1211 • Wakeling v Ripley(1951) 51 SR (NSW) 183

37. Balfour v Balfour “There are agreements between parties which do not result in contracts within the meaning of that term in our law. The ordinary example is where two parties agree to take a walk together, or where there is an offer and acceptance of hospitality. Nobody would suggest in ordinary circumstances that those agreements result in what we know as a contract, and one of the most usual forms of agreement which does not constitute a contract appear to me to be the arrangements which are made between husband and wife…they are not contracts because the parties did not intend that they should be attended by legal consequences.” Atkin LJ at 578

38. Rebuttable presumptions • In business or commercial agreements, there is a rebuttable presumption that the parties did intend to create legal obligations • Carlill v Carbolic Smoke Ball • Rose & Frank Co v Crompton & Bros Ltd[1925] AC 445 • Honour clause

39. Presumptions • Ermogenous v Greek Orthodox Communityof SA Inc(2002) 209 CLR 95 • Use of presumptions of limited value • Intention to create legal relations is always a matter to be proved • Objective test

40. Flooring: Mavis is a keen cook and has just renovated her kitchen to meet her cooking needs. She was particularly interested in flooring as she had difficulties keeping her slate tiles clean. She searched for low maintenance flooring and after extensive shopping decided on single sheet vinyl flooring. She saw just the thing at Discount Lino Barn, close to Kylie’s home. Kylie indicated that she didn’t share her mother’s preference for vinyl flooring as it was cold underfoot and had suggested kitchen carpet. Kylie and Mavis spoke to Mike at Discount Lino Barn who suggested under-floor heating could address Kylie’s temperature issues. Kylie provided details of the under floor heating options while her mother left the conference room to offer slices of her coffee cake to the other staff….

41. She is also angry about the flooring she has had installed. Despite Kylie’s protests she went with the single sheet vinyl, and did not have under floor heating installed. The vinyl, while easier to clean than the slate, is marking and scuffing badly however. She has only had it down 6 months, and already there are a number of wear marks. Her cupcake classes – which she runs 5 times a week and more often in school holidays – are now so popular that she has at least 20 students per class. Because of her renovations she has room for them all around her lovely new island bench, but the vinyl around the island bench almost looks like a race track. It is as if her students have worn a path around the bench – and in only 6 months. The vinyl was quite expensive – as she had heavy grade domestic installed – but Mavis is very unhappy. She hasn’t yet paid the bill for the vinyl as she has been arguing with the company. They are, according to Mavis, now getting nasty, and want their $45,000 immediately.

42. Fridge She also advised that her mother was having problems with Whitegoods World from which she had bought her fridge. Kylie advised that her mother required a “French door” fridge with freezer drawers underneath to accommodate the large baking trays she used for her cakes. She had ordered the fridge she needed from Whitegoods World but had experienced delivery problems.

43. Her oven purchase was much more successful than her fridge which, on the very day it was due to be delivered – not only did not arrive, but the shop called her to advise that delivery was delayed for one month. Mavis said to the shop keeper: “Well that’s no good to me. I ordered that fridge for today. I need that fridge today. I told you when I needed the fridge. The only reason I ordered from you was that you told me I could have it today. If you can’t give it to me today, you can just keep your fridge!! I don’t want it anymore.” Mavis then rang Quick Fridge and ordered and received another fridge that afternoon– suitable for her requirements. However, one month later, Whitegoods World delivered the fridge originally ordered and demanded payment. Mavis told them she no longer wanted the fridge and had cancelled the order. Whitegoods World denied the order was cancelled – as their policy is no cancellations after an order has been placed. They are threatening to sue Mavis for the price of the fridge - $5,500.

44. Oven Mavis returned to the conference room. She advised that she had had to make a large coffee cake that morning, even though her preference would have been to make cup-cakes. In fact, one of her legal problems was her cup-cake oven. Cake Cookers is a specialist retailer which sells products designed for those who like to cook cakes. It retails a number of specialist pans and other baking utensils – many imported from America and not readily available in Australia, as well as a special range of cake ovens. They are located in Broome – and Mavis lives in NSW, but Cake Cookers sells throughout Australia by catalogue. Mavis wanted a special cake oven in her new kitchen. She saw an oven that looked perfect for her in their catalogue – the picture showed 8 slide out patty pan trays instead of oven trays – exactly what she wanted.

45. She rang the store and spoke to Cathy. She told Cathy all about her cupcakes, her favourite recipes, and her interest in the patty pan oven in their catalogue. Cathy told her that the patty pan oven had eight slide out patty pan holders – instead of oven racks – and that each patty pan holder would take one dozen patty pans. Even better, they came with self cleaning silicone inserts. Mavis was delighted about the self cleaning but concerned that each tray would only take one dozen patty pans. Although after discussion with Cathy, she was convinced that the overall capacity of the oven was appropriate, and so she placed an order…. Mavis advised that even if she had known about the cake order she would have had difficulty fulfilling it because of problems with her newly installed cake oven. When the oven arrived she saw that instead of Australian sized delicate patty pan holders, the cake trays were American size muffin holders – and two trays were even jumbo sized Texas muffin size holders. This is not what Mavis wanted at all.

46. Mavis rang Cathy and told her the oven was not what she had wanted at all, and not suitable for the cakes in which she specialised. Cathy said she was sorry that Mavis was disappointed, but there is nothing that they can do about it. Mavis wants to know if she still has to pay the $8,000 for the special cake oven.

47. Wedding cake As well, Mavis is being threatened with legal action by Chrissie Saranrap. Chrissie was married a month ago and was expecting Mavis to provide her specialty – the “nouveau doveau” - a tiered tower of cupcakes, iced in white and arranged to resemble the wings of doves – as the centrepiece cake for her wedding reception. Mavis loves doing cakes for weddings – in fact she now makes more money from doing wedding cakes than she does from her regular cooking classes. Chrissie saw information about Mavis’ cake services after an article in the local paper, and called round to see Mavis, and look at the different cakes she could make. They discussed possibilities and pricing and Chrissie left with a price list. Apparently, Chrissie called and left Mavis a message on the answering machine ordering the “nouveau doveau” for her wedding, to be delivered on 2nd May at the wedding reception, for $2,000 COD. In her message, Chrissie had said: “If I don’t hear to the contrary, I’ll assume everything is OK. Call me if there is a problem – otherwise I will see you on the 2nd. Looking forward to your lovely creation.”

48. Unfortunately, because of all the work being done to the kitchen and problems with electrical work and electrical supply, Mavis had experienced a number of black outs which had interrupted her answering machine. Mavis – never received the message from Chrissie, and so of course, had not provided the cake. Chrissie is very angry and claims her wedding was ruined without the cake. She has threatened to sue Mavis.