Chapter 1: the nature and importance of law What is a contract? • A contract is a promise (or a set of promises) that is legally binding; by legally binding we mean that the law will compel the person making the promise.

The importance of contract law • Contract law is important because it underpins our society, especially in developed countries such as Australia as most goods and services are created and distributed through markets and markets have at their heart a contract The Justification for Contract Law • Virtually all societies have evolved laws for the enforcement of , and this is why the law of contract is justifiable • Two kinds of justifications are typically given for contract law, these being ‘economic’ and ‘utilitarian’ approaches to law, these justifying contact law on the basis that it facilitates mutually beneficial exchanges, and so promotes overall social welfare or social ‘wealth’. • Both parties emerge from the exchange better off (in one sense) than they were before, and since society’s wealth is made up of the total wealth of its members, even a simple exchange of this kind can improve social wealth. Economic theory • The fundamental role of contract law, in the economic theory, is to facilitate the making and performing of deferred exchanges • Contract laws essential purpose is to secure cooperation in human behaviour (particularly in exchange) • Contract law ultimately provides the backing needed to support the whole institution of credit (trust) Individualist theory • The individualist or ‘moral’ justification focuses not on the social benefits of contracting, but on the rights and duties of individual contracting parties • The payment of damages reflects the idea that the defendant has wronged the claimant, and so must repair the harmful consequences of that wrong • Damages corrects the injustice to the individual claimant caused by the breach

The nature of contract law Contract law is largely judge-made law • Contract law is largely judge-made law and as such is primarily to be found in judicial decisions • Increasingly, statuses are being passed which regulate or have an impact upon, substantial areas of contract law, an example of this being the Competition and Consumer Act 2010 (Cth) which has revolutionised contract law in the areas such as misrepresentation, implied terms, manufacturers’ liability and unconscionable conduct • Australian contract law is now a complex mix of judge-made law and statute law Contractual obligations are largely self-imposed • In Baltic Shipping Co v Dillon Brennan J expressed this defining characteristic of a contract succinctly when he said that it was an institution ‘by which parties are empowered to create a charter of their rights and obligations inter se’ • As a result of contract being of this nature, people can decide… -What the nature and content their respective rights and obligations will be; and -What the consequences will be of those obligations not being honoured, or rights infringed The law of contract not contracts • Anglo-Australian recognises a general law of contract that applies equally to all types of agreements; in other words, that there is a law of contract, rather than a law contracts Relationship with other branches of law • Contract and other branches of law are not mutually exclusive Chapter 2: Agreement The nature of an agreement • An agreement is an understanding between two parties that one of them will do something, or will promise to do so, in return for the other doing something, or promising to do so • There are two elements, the meeting of the minds (consensus ad idem) and at least one promise • It is also essential that the agreement is entered into voluntarily • Consensus and free association lie at the heart of agreement; they are interpreted narrowly, in particular… -Whether the parties have reached an agreement is determined objectively, not subjectively -An agreement can exist even though one, or both, of the parties believes that they were obligated to enter into it because of their economic or personal circumstances -An agreement can exist even though one of the parties is not happy about its terms and has entered into it only reluctantly

Name of case Facts Principles established Smith v Hughes [1871] LR 6 QB Smith offered to sell oats to “If, whatever a man’s real 597 Hughes and showed him a intention may be, he so sample. Believing that what he conducts himself that a had been shown were old oats, reasonable man would believe Hughes agreed to purchase that he was assenting to the them at the price that Smith terms proposed by the other stated. It was later discovered party, and that other party that they were new oats and upon that belief enters into a Hughes sought to return them contract with him, the man and receive a refund. Smith thus conducting himself would who knew that the oats were be equally bound as if he had new, refused to take them intended to agree to the other back and sued Hughes for party’s terms” (at 607 per breach of contract for the Blackburn J, emphasis added) contract price The intention must be clearly established

Offer and acceptance • An offer is a promise by one person (the ‘offeror’) to do something, or not to do something, if the person to whom it is addressed (the ‘offeree’) responds in a stipulated manner • Examples include: • -Stating a willingness to sell goods etc. in exchange for a stipulated price -Advertising that a reward etc. will be paid to anyone providing certain information, or acting in a certain way -Making a bid at an auction

Accepting an offer as an affirmative response • An acceptance is an affirmative response to an offer by the offeree, the clearest way of accepting an offer being by oral or written acceptance. • The general rule of acceptance is that an agreement is reached when and where the offeree’s acceptance is communicated to the offeror

The nature and duration of offers An offer can be made to a particular person, to a group or to the whole world

Case name Facts Principles established Carlill v Carbolic Smoke Ball CSBC placed an ad which said it Was it an offer or a mere sales Company [1893] 1 QB 256 would give any person who puff? used the smoke ball as Could an offer be made to the directed and contracted world at large? influenza £100. Mrs Carlill An offer could be made to the followed the directions, whole world and a contract contracted influenza and CSBC would be formed only with refused to give her £100. those who came forward and complied with the terms of acceptance.

Offers distinguished from invitations to deal • A communication will be characterised as an offer if the party making it intended that an affirmative response would immediately give rise to an agreement • If the communication was intended to merely initiate negotiation, it will be characterised as an ‘invitation to deal’ • If a communication is characterised as an offer, an affirmative response will create an agreement, whereas if it is characterised as an invitation to deal, such a response can only be an offer which the party issuing the invitation may accept or reject

Displaying goods • The display of goods in a self-service store, or in a shop window, is usually regarded as merely an invitation to deal, rather than an offer to sell…

Case name Facts Principles established Pharmaceutical Society of Boots operated a self-serve When did the sale take place Great Britain v Boots Cash chemist except if customers (ie when was the offer made? Chemists (Southern) Ltd [1953] purchased a drug. In this When was it accepted?) 1 QB 401 instance, the transaction at the “the contract is not completed cashier’s desk was supervised until, the customer having by a pharmacist indicated the articles which he Pharmacy and Poisons Act needs, the shopkeeper, or 1933 (UK) required the sale of someone on his behalf, accepts certain drugs to be supervised that offer. Then the contract is by registered pharmacists completed.” (at 405 per Somerville LJ)

Auctions • An auction refers to a process involving an auctioneer, vendor and bidders. Auctions can have reserves; which indicate what price the property/land will be sold for. • A bid is viewed upon as an offer and no contract is formed until it is accepted by the auctioneer. • A contract is formed when the auctioneer accepts the offer made by the bidder. This is represented with the bang of the hammer. • An auction requires a reserve price. If no one bids up to the reserve price, no offers will be considered

Case name Facts Principles established AGC (Advances) Ltd v AGC held a mortgage over land Did the absence of a reserve McWhirter (1977) 1 BPR 9454 owned by a company alter the rule that an auction is (McWhirter was a director of regarded as an invitation to that company). When the treat? company was in default, AGC Per Holland J at 9456: sold the land by auction. The -An auction is an invitation to reserve price was withdrawn, treat M bid the highest price but bid -Each bidder at an auction is an was not accepted and the land offeror was knocked down to another -No contract can come into bidder at a lower price. M existence until the offer is placed a caveat on the title accepted – by the fall of the (which alerted the new owner hammer to his interest in the land) -Until then, vendor (seller) can withdraw the property from sale or decline to accept a bid -The absence of a reserve price doesn’t alter this position

Advertisements • Advertisements are always invitations to deal • However it is not always the advertisers intention to merely create an …

Case name Facts Principles established Lefkowitz v Great Minneapolis 3 coats advertised to be sold The court said where ‘the offer Surplus Store (1957) for $1 each to first served is clear, definite and explicit, and leaves nothing open to negotiation, it constitutes an offer, acceptance of which will complete the contract.’ Each case will depend on the ‘legal intention of the parties and the surrounding circumstance’

Bait advertising • The distinction between an offer and an invitation to deal facilitates ‘bait advertising’ by retail stores. This is the practice of advertising certain goods at extremely low prices to attract customers to the store with the intention of selling them other goods, at normal prices, rather than, or in addition to, those advertised. • Section 56 of the TPA has prohibited the conduct of bait advertising

The Australian Consumer Law • Section 35(1): A person must not, in trade or commerce, advertise goods or services for supply at a specified price if: a) There are reasonable grounds for believing that the person will not be able to offer for supply those goods or services at that price for the period that is, and in the quantities that are, reasonable having regard to: (i) the nature of the market in which the person carries on business and (ii) the nature of the advertisement; and b) the person is aware or ought to be aware of those grounds

Calls for tender • Tenders refer to the process whereby one party asks for tenders from other parties. Tenders can either be standing offers (which are not binding, the person who is invited to tender doesn’t have to accept all or any part of the goods/services) or fixed quantities (similar to auctions in regards to contract formation) • A call for tenders will usually be regarded as merely an invitation to make an offer • A call for tender may contain an undertaking to treat the tender in a specified manner which the law will characterize as an offer

Case name Facts Principles established Blackpool and Fylde Aero Club The council invited Aero Club The court found that the Ltd v Blackpool Borough and others to tender for invitation to tender was an Council [1990] 3 All ER 25 certain flights, imposing a time offer and the Club’s timely restraint. Aero Club submitted submission to be an a tender on time, but on the acceptance fault of the council, it was The appeal was dismissed, the recorded as being late Aero Club won

Counter Offers, Requests for Information, and Statement of Possible Terms • A request for further information is the process of asking questions in relation to the possible contract. Answers and responses to such requests are not forms of acceptance • A statement of possible terms is where a person states on which terms they may be willing to contract upon. A statement of possible terms is not an offer • Counter offers are different to both requests for further information and statements of possible terms, in that they cancel the original offer. The original offeror becomes the offeree and can accept or decline the counteroffer. Requests for further information and statements of possible terms do not accept or cancel offers

Termination of offers • An offer may be terminated in several ways. Once this has happened, it can no longer be accepted and thereby give rise to an agreement

Revocation: Revocation refers to an offer being withdrawn. An offer must be revoked before acceptance occurs. To be effective, the offeror must communicate this to the offeree. Revocation cannot occur if the offeror has granted the offeree an option covering it. The postal rule does not apply to revocation.

Case name Facts Principles established Dickinson v Dodds (1876) 2 Ch 10th of June, Dodds offer to sell The court found that D 463 his house to Dickinson, stating revocation need not be direct that the offer is open until 9am of express, it is effective if 12th June. Dickinson accepted found out through a third party the offer on the 11th of June, A promise not to revoke is only but did not tell Dodds because effective if supported by he knew he had until the 12th of June. Dickinson was then advised by a third party that Dodds had sold the property to someone else. Dickinson tried to accept but Dodds said that it was too late. Dickinson sued for specific performance.

Case name Facts Principles established Byrne v Van Tienhoven (1880) On the 1st of October, Van The court found that the postal LR 5 CPD 334 Tienhoven offers to sell goods rule did not apply to to Byrne. Before it was revocation, therefore the accepted, VT sent a letter of acceptance occurred before revocation on the 8th of the revocation, meaning that a October. On the 11th of contract existed. October, Byrne telegraphs his There must be communication acceptance of the offer. On of revocation for it to be the 20th of October, Byrne effective received the letter of Judgment was ordered for the revocation. Byrne sought to plaintiffs recover damages for non- delivery

Option: An option refers to a promise made by the offeror not to revoke the offer, made in exchange for consideration provided by the offeree. Therefore, consideration is required to create an option

Rejection: Rejection refers to the communication of saying no to an offer. The offer is therefore terminated and can no longer be accepted.

Case name Facts Principles established Hyde v Wrench The defendant offered to sell The claim failed. The court land to the plaintiff for 1000 held that the plaintiff’s offer to pounds, the plaintiff replied buy for 950 pounds amounted offering to buy the land for 950 to a rejection of the pounds. The defendant defendant’s offer and that this refused to sell at this price had the effect of terminating it whereupon the plaintiff said that he would pay 1000 pounds, as the defendant had originally offered. The defendant refused and the plaintiff commenced proceedings seeking specific performance

Counter offer: A counter offer is a communication by the offeree indicating that the offer is acceptable in substance, but seeking to vary the terms of the proposed contract, this terminates the original offer.

Lapse lf time: Lapse of time will terminate an offer when the offer specifies a time for acceptance. The offer is therefore ineffective; except in situations where the offeror agrees to waive the stipulation. If there are no set time limits on an offer, it will cease to exist after a reasonable amount of time had passed.

Death: Death will generally terminate an offer if the offeror has died, meaning that it can no longer be accepted. Two exceptions to this general rule include: -If the offeree doesn’t know of the offerors death, acceptance is still possible if the circumstances permit, eg service performed -If the offeree doesn’t know of the death, but the offer could be performed by the offeror’s estate

The failure of a condition: The failure of a condition will terminate an offer, when the offer itself is made conditional upon the occurrence or non-occurrence of an event

Acceptance • Acceptance can be defined as an affirmative response to an offer. A key element of this definition is that the offeree’s conduct occurs in response to the offer; merely doing what the offeror asks is not sufficient • Crown v Clarke looks at the relationship between

Case name Facts Principles established Crown v Clarke (1927) 40 CLR The WA government (Crown) The court found that Clarke 227, issued a $1000 reward for was giving information to free information in regards to the himself, not to accept the offer murders of two policemen. of the reward. Clarke had been arrested and To be effective, the through his statement was information needed to be released and had the given in exchange for the offer; murderers convicted. Clarke hence, acceptance must occur sought to claim the reward, in response to the offer the Crown refused to give it to him.

Who may accept an offer? • An offer may be accepted only by the person to whom it is addressed, this is illustrated by Boulton v Jones where the defendant’s order for goods, directed to a named trader, was, without the defendant’s knowledge, accepted and executed by the plaintiff to whom the trader had transferred his business

Accept by conduct • In certain circumstances, an offer may be accepted by conduct, rather than words • Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd demonstrates silence as acceptance

Case name Facts Principles established Empirnall Holdings Pty Ltd v Empirnall engaged Machon Nevertheless, when silence is Machon Paull Partners Pty Ltd Paull to redevelop a site it combined with other (1988) 14 NSWLR 523, NSWCA owned. After beginning work, circumstances, together they MP submitted a written may constitute a valid contract to E. E never signed acceptance. the document, but MP ‘…more often than not the continued to carry out work offeree will be bound because, and E continued to make knowing of the terms of the payments in accordance with offer and the offeror’s the document. E went into intention to enter into a bankruptcy, owing MP contract, he had exercised a considerable sums of money. choice and taken the benefit of It was important to MP’s the offer’ prospects of recovering these Further, ‘where an offeree sums that they could prove a with a reasonable opportunity contract existed (which would to reject the offer of goods or give it priority over other services takes the benefit of creditors) 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’ In this case E’s acceptance of the work should be taken as acceptance on the terms offered by Machon; this was no mere silence, but included conduct in taking the benefit of an offer, knowing the terms

Correspondence between offer and acceptance • Offeree and offeror must agree on mutual terms • Should the offeree’s response, even though couched in terms of ‘acceptance’, introduce new terms or seek to derogate from those proposed by the offeror, that response will amount to a counter- offer and terminate the original offer • See Butler Machine Tool Co Ltd v Ex-Cell-O Corp (England) Ltd (1979) 1 WLR • Maxitherm Boilers Pty Ltd v Pacific Dunlop Ltd is an example of battle of the forms

Case name Facts Principles established Maxitherm Boilers Pty Ltd v Maxitherm submitted a Maxitherm’s standard terms Pacific Dunlop Ltd (1998) 4 VR quotation to Pacific Dunlop for were made terms of the 559, Victorian Court of Appeal the installation of an contract because they formed autoclave. This quotation was part of the offer which PD expressed to be subject to accepted terms and conditions attached; The original quotation however none were attached. incorporated Maxitherm’s Subsequently, on 22nd March standard terms. A reasonable 1989, a fax was sent to Pacific reader of the quotation would Dunlop saying that supply have concluded that would be on Maxitherm’s Maxitherm intended to standard terms ‘as per contract in accordance with previous quotations’. certain conditions Eventually, when the autoclave was installed, it exploded and caused significant damage to the premises of Pacific Dunlop. PD then sued Maxitherm for breach of contract, Maxitherm relied on an exclusion clause contained in its standard terms and conditions.

Communication of acceptance • Acceptance will not be effective until it is communicated and it must be communicated to the offeror • If the offeree accepts the offer, but the offeror is unaware of this, acceptance does not occur. An agreement is reached when the offeror is notified that the offer has been accepted • An acceptance will create an agreement when it is received by the offeror, rather than the time it is sent by the offeree • Felthouse v Bindley is an example of communication of acceptance

Case name Facts Principles established Felthouse v Bindley (1892) 11 Paul Fenthouse offered to buy Felthouse could not impose a CB (NS) 869, Court of Common a particular horse from his sale of the horse on his Pleas nephew. Felthouse stated in nephew by requiring him to his written offer that ‘if I hear notify Felthouse if he did not no more about him, I consider wish to sell on those terms. the horse mine at $30 15s. His Here there was no nephew did not reply but communication before the sale instructed the auctioneer, and the nephew was, Bindley, not to sell the horse. therefore, not bound to sell The auctioneer mistakenly sold Felthouse the horse on the day the horse and Felthouse sued of the auction. the auctioneer for conversion It is clear that an offeror (dealing with another person’s cannot, by simply stating property in a manner silence will constitute consent, inconsistent with their impose a positive obligation to ownership of the goods). The reject an offer in order to avoid issue was whether or not a contract Felthouse was the owner of the horse at the time the auctioneer sold it

Exceptions to the acceptance rule • Waiver: Acceptance must always be communicated, unless there is a waiver. This means that the offeror is able to waive the need for communication so should the offeree decide to accept the offer, it is not necessary to communicate this decision. See Carlill v Carbolic Smoke Ball Company • Silence: The silence of the offeree, in the special circumstances of the case, constitutes acceptance. See Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd • : The offeror is estopped from denying communication; estoppel arises when conduct of the offeror prevents that party from asserting that communication of acceptance has not occurred. In such cases, the law treats the offeree’s acceptance as having been communicated to the offeror even though, in fact, it has not been (e.g not answering the phone) • Postal acceptance rule: Acceptance is deemed to be effective at the time and place a letter of acceptance is posted, or a telegram is handed in for transmission, rather than when and where it is received. The postal rule -Will only apply if the terms and circumstances of the offer indicate that the offeror contemplated that acceptance could be by post -Does not apply to instantaneous forms of communication such as the telephone, telex or email -Does not apply to the revocation of an offer-a contract will be formed even though a letter of acceptance is posted after a letter of revocation has been dispatched to the offeree but before it arrives -May not prevent the offeree countermanding a posted acceptance before it reaches the offeror

Case name Facts Principles established Bressan v Squires (1974) 2 Squires gave Bressan an option The parties must have NSWLR 460, Division of to purchase land. Clause 1 contemplated the option could the NSW Supreme Court provided that it could be be exercised by post. exercised ‘by notice in writing Consequently, prima facie, the addressed to me at any time exception applied. In this case, on or before 20 December, however, there was further 1972’. On 18 December language in the option itself Bressan posted a notice, suggested actual notice of addressed to Squires, acceptance was required by exercising this option. It was the stipulated date and, as a received on 21 December. consequence, the plaintiff’s Was the option exercised? case failed.

Case name Fact Principles established Brinkibon Ltd v Stahl und Stahl- The offeror, Brinkibon The issue was does the postal Warendhandelsgesellschaft (London, England) wanted to rule apply? If it did the mhB (1983) 2 AC 34, House of sue the offeree, Stahg (Vienna, contract would have been Lords Austria) for breach of contract. concluded in England and Acceptance of Brinkibon’s offer English law would apply; if it had been by way of telex from did not apply then the contract London to Austria. Which would have been concluded jurisdiction’s law applied? where the acceptance was (Note, in the absence of a received-Vienna. stipulation by the parties about It was held that the postal rule which laws will govern the does not apply to contract the laws of the direct/instant forms of country/place where the communication (including contract was formed will telex)-as telex was used here apply. Generally this will be the postal rule did not apply where the offeror receives the and the contract was formed in acceptance; however, where Vienna the postal rule applies it will be the law of the jurisdiction in which the offer was sent

• Mode specified by the offeror: The offeror has specified a special mode for indicating acceptance that does not involve communication

• The offeror can specify the mode in which acceptance is to occur and this may include dispensing with the need for actual communication. Summarized in Manchester Council for Education v Commercial & General Investments Ltd

Electronic communications • The formation of contracts by means of electronic communications is now governed by legislation in all Australian jurisdictions. The Australian Act, unlike the Convention, is not restricted to business transactions but also applies to personal, family and household contracts. Electronic Transactions (Victoria) Act 2000- eg emails • Dispatch of an electronic communication occurs when you hit send on your email and it disappears into the void. • The result of this legislation is that where email is contemplated as a means of acceptance that acceptance occurs when the email is sent (if email not contemplated, then when it comes to the recipient’s attention). • It will be deemed to have been received at the addressee’s place of business. Thus, if the addressee’s place of business is Melbourne, but she happens to check her email while on a business trip to Hong Kong, the email will be taken to have been received in Melbourne.

Agreements reached without offer and acceptance • There are many instances in which the common law will conclude that an agreement has been reached between two parties even though it is not possible to realistically analyze their dealings in terms of offer and acceptance • Clarke v Dunraven: In these circumstances, even though there was no communication between applicants, the House of Lords concluded that there was a contract between them in the terms of the race rules • Brambles Holdings Ltd v Bathurst City Council demonstrates agreements without offer and acceptance

Case name Facts Principles established Brambles Holdings Ltd v Brambles managed the In this case, it could be inferred Bathurst City Council (2001) 53 Council’s solid waste for 7 that, by charging higher fees, NSWLR 153, NSWCA years (to 1989) under a Brambles had accepted the contract. A new contract was offer contained in the concluded mid-1990 referring September 1991 letter to general waste and providing Heydon JA notes that it is that part of the fees Brambles difficult to fit all commercial received was to be remitted to arrangements into a simple Council. Just over a year later ‘offer; and ‘acceptance’ (in September) Council wrote analysis, especially where the to Brambles saying it could relationship between the increase the fees it charged for parties is ongoing receiving liquid waste but that In these cases it is necessary to part should be remitted to look at the ‘whole Council. Brambles increased relationship’, not just at what the fees it charged but did not was said and done at the point remit any fees to the Council. of formation Brambles argued that liquid waste was not covered by the 1990 contract and that no new contract had arisen in response to the Council’s September 1991 letter

Bilateral and Unilateral contracts • Unilateral contract: Only one party makes a promise • Bilateral contract: Refers to agreements made whereby both parties make promises to each other. Such contracts create mutual legal rights and obligations

Case name Facts Principles established Errington v Errington [1952] A father bought a house for his -The couple never bound son and daughter-in-law, themselves to pay the financed through a mortgage installments to the building taken out on the property. He society promised them that if they -The fathers promise was a made the payments due under unilateral contract, a promise this mortgage the house would of the house in return for their be theirs upon his death. They act of paying the installments. did this and occupied the It could not be revoked by him house. 9 years later, the father once the couple entered on died leaving the house to his performance of the act, but it widow. After the couple would cease to bind him if they separated, although the wife left it incomplete and continued to occupy the house unperformed, which they have and pay the installments, the not done. widow sued for possession. If the daughter-in-law Her claim failed at first continues to pay all the instance and she appealed. building society installments, the couple will be entitled to have the property transferred to them as soon as the mortgage is paid off. Appeal dismissed

Case name Facts Principles established Mobil Oil Australia Ltd v Mobil represented to its In a unilateral agreement the Wellcome International Pty Ltd dealers that any dealer who act of acceptance is also the (1998) 81 FCR 475, Federal performed at a set level for sic consideration and act of Court of Australia (Full Court) years would be given a performance given in exchange franchise for a further 9 years for the offeror’s promise. In at no cost. Mobil subsequently mist cases the offeree’s power discontinued the scheme and a to complete the act sought number of dealers alleged requires no cooperation by the (amongst other things) breach offeror. Here, however, of contract Mobil’s revocation of its scheme made it impossible for the dealers to complete the act of acceptance. As a result, the Court concluded that there was not a ‘universal proposition that an offeror is not at liberty to revoke the offer once the offeree ‘commenced’ or ‘embarks upon’ performance of the sought act of acceptance…’