Chapter 1: the nature and importance of contract 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 contracts, 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 common law 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 invitation to treat… 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.