Formation of a contract
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Formation of a contract. A contract is an agreement that is enforceable at law. 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.

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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.

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“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

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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

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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

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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

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  • 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

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Offer l.jpg

“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

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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

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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

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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

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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

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Examples of Invitations to Treat

  • advertisements/circulars

  • price lists

  • displays of goods in shops

  • calls for bids at auctions, and

  • calls for tenders.

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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:

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  • Offer must be communicated to offeree

  • ‘overheard’ offer or unintended communication is not an offer

    • Banks v Williams (1912) 12 SR (NSW) 382

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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

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Termination of Offers the whole world

  • Acceptance

  • Revocation

  • Rejection

  • Condition in offer not fulfilled

  • Lapse of time

  • Death of a party

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Revocation the whole world

  • 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

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Rejection the whole world

  • 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

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Stevenson Jacques the whole world 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

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ACCEPTANCE the whole world

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

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Acceptance the whole world

  • Must respond to the offer

  • Must be communicated

    • Subject to exceptions - Postal Acceptance Rule

  • Must not be conditional

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Acceptance must the whole worldrespond 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

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R the whole world 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

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What Can Be Accepted? the whole world

  • 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

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Acceptance must be communicated the whole world

  • 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

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Communication by conduct the whole world

“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

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Exceptions to communication the whole world

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

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Postal acceptance rule will not apply: the whole world

  • 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

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Wedding cake the whole world

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.

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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.”

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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.