Principles of Business Law - Contract Formation PDF

Principles of Business Law TOPIC 4: CONTRACT FORMATION FORMATION REQUIREMENTS: AGREEMENT AND CERTAINTY Formation requirements: overview  The principles of contract formation have been determined by the courts (that is, contract law consists of common law rules).  we find almo...

Principles of Business Law TOPIC 4: CONTRACT FORMATION FORMATION REQUIREMENTS: AGREEMENT AND CERTAINTY Formation requirements: overview  The principles of contract formation have been determined by the courts (that is, contract law consists of common law rules).  we find almost all of the contract law rules in the cases prescribed each week  A contract is formed when the following formation requirements are met: 1. Agreement 2. Certainty 3. Consideration/deed 4. Intention Formation requirement: agreement  It is first necessary to determine if the parties have reached an agreement.  The other formation requirements determine whether an agreement is an enforceable contract.  To show that the parties have reached an agreement, it must be shown that there was a meeting of the minds. Formation requirement: agreement  The courts typically test for an agreement by identifying an offer made by one party that is accepted by the other party.  What is a contractual offer? ‘An offer is the manifestation of willingness to enter into a bargain, so as to justify another person in understanding that his assent to that bargain is invited and will conclude it’: Restatement (Second) of Contracts (US)  How does one accept an offer? Acceptance occurs when the person to whom the offer was made gives his or her unqualified assent to the terms of the offer. The acceptance must correspond precisely with the terms of the offer. Agreement: Offer and Wendy owns and runs a restaurant. During negotiations with Trevor, a farmer, Wendy says to Acceptance Trevor “I will buy 100 kilos of your tomatoes for $10 a kilo”. (Example) Wendy makes an offer to buy 100 kg of tomatoes for $10 a kilo Trevor responds: “I want $15 a kilo. These are premium quality tomatoes”. Trevor makes a Trevor rejects counter-offer to Wendy can decide Wendy’s offer to buy Wendy. He offers to sell whether to accept the tomatoes for $10 a the tomatoes for $15 a Trevor’s offer kilo kilo Agreement: Offer and Acceptance (Example) (ctd) Wendy Wendy rejects Trevor’s offer of $15 a kilo responds: “If Wendy makes a counter-offer to Trevor, she offers to buy you agree to for $14 a kilo $14 a kilo we have a deal” Trevor can decide whether or not to accept Wendy’s offer Trevor accepts Wendy’s offer – he has expressed his Trevor unqualified assent to the terms of Wendy’s offer responds: “Agreed”. An executory contract is formed as soon as Trevor says “Agreed”. Contractual Wendy: to pay $14 a kilo for 100 kg of tomatoes obligations assumed Trevor: to supply 100 kg of tomatoes Formation requirements: Agreement (Offer) An offer must be:  Promissory (ie, it must involve an undertaking to do or refrain from doing something)  Placer Development Ltd v Commonwealth  Sufficiently certain  considered later as a separate formation requirement  Intended to result in a contract if accepted  cf invitations to treat  Partridge v Crittenden  Pharmaceutical Society of Great Britain v Boots Cash Chemists An offer must be promissory: Placer Development Ltd v Commonwealth FPBCL p 407 Facts  The Commonwealth government promised to pay PD a subsidy.  The subsidy was to be ‘of an amount or at a rate to be determined by the Commonwealth from time to time’. Legal issue:  Had the government made a legally binding promise? An offer must be promissory: Placer Development Ltd v Commonwealth (ctd) Decision  A majority of the High Court held that the Commonwealth’s promise was not contractually enforceable Reasoning  “[A] promise to pay an unspecified amount of money is not enforceable where it expressly appears that the amount to be paid is to rest in the discretion of the promisor”.  The Commonwealth made an illusory promise – there was nothing to enforce – the Commonwealth had complete discretion to determine the amount of the subsidy. An offer must be intended to result in a contract if accepted: Invitation to treat  Advertising goods or displaying them for sale usually involves an invitation to treat.  An invitation to treat invites others to make offers to the person making the invitation to treat.  Displaying goods in a store amounts to an invitation to treat, not an offer to sell.  Pharmaceutical Society of Great Britain v Boots Cash Chemists An offer must be intended to result in a contract if accepted: Invitation to treat (ctd) Advertising goods  The language used in the advertisement will determine whether it involved an invitation to treat or a contractual offer  Carlill v Carbolic Smoke Ball Co  very definite, promissory language, expressions of sincerity  offer  Partridge v Crittenden 2 All ER 421:  very little detail, no promissory language  invitation to treat Invitation to treat: display for sale: Pharmaceutical Society of Great Britain v Boots Cash Chemists FPBCL p 405 Facts  Boots ran a self-service chemist.  Non-prescription drugs were displayed on shelves.  Legislation required that some of the non-prescription drugs be sold under the supervision of a registered pharmacist.  Customers selected products they wanted and took the products they selected to the cashier.  There was a registered pharmacist supervising the cashier.  PSGB alleged that Boots was selling non-prescription drugs selected by customers without the supervision of a registered pharmacist.  Boots claimed that the non-prescription drugs were ‘sold’ when the cashier processed the sale, under adequate supervision by a registered cashier. Legal issue  Were the non-prescription drugs selected by the customer “sold” to the customer before the customer took them to the cashier? Invitation to treat: display for sale: Pharmaceutical Society of Great Britain v Boots Cash Chemists (ctd) Possible outcome 1 (Boots’ argument)  Display of goods = invitation to treat  Customer makes the offer to the cashier  Cashier accepts offer and processes payment (supervised by the pharmacist) Possible outcome 2 (PSGB’s argument)  Display of goods = offer  Customer accepts offer when he or she selects the goods (ie not under the supervision of a pharmacist) Outcome:  Boots’ argument was successful Invitation to treat: advertisement Partridge v Crittenden FPBCL p 401 Facts  P put an advertisement in a newspaper which stated “Bramblefinch cocks and hens, 25/- each”.  This was said to breach a statutory prohibition against unlawfully offering wild birds for sale. Legal issue  Was the advertisement:  an offer?  in which case P had breached the statutory prohibition  an invitation to treat?  in which case P had not breached the statutory prohibition Invitation to treat: advertisement Partridge v Crittenden (ctd) Decision  The advertisement was an invitation to treat, that is an invitation to enter into negotiations with interested buyers, not an offer Reason  “Unless advertisements come from manufacturers, … [they should be] construed as invitations to treat and not offers for sale”  NOTE: the Carlill case demonstrates this is not an absolute rule – the focus should be on the wording of the advertisement. Formation requirement: agreement Acceptance Acceptance must:  evidence unqualified assent to the terms of the offer  not be subject to a condition  Masters v Cameron  occur while the offer is still in existence  comply with requirements specified by the terms of the offer Acceptance must evidence unqualified assent Returning to the Wendy and Trevor example  The contract was formed when Trevor agreed to Wendy’s offer to pay $14 per kilo, without suggesting any variation or qualification. Acceptance must not be subject to a condition: Masters v Cameron FPBCL p 385-6 Facts  The parties signed a written memorandum whereby C agreed to sell a property to M at a stipulated price.  The document contained the following statement: This agreement is made subject to the preparation of a formal contract of sale which shall be acceptable to my [C’s] solicitors on the above terms and conditions.  When M ran into financial difficulties, he refused to complete the transaction.  M argued that he was entitled to refuse to complete because there was no binding contract of sale between himself and C.  M sought to recover the deposit. Acceptance must not be subject to a condition: Masters v Cameron (ctd) Legal issue  Was the signed memorandum:  a non-binding preliminary agreement?  a binding contract? Decision  The memorandum was a non-binding preliminary agreement. Acceptance must not be subject to a condition: Masters v Cameron (ctd) The court suggested three categories into which agreements that are ‘subject to contract’ could be placed: 1. The parties have reached finality in arranging all the terms of their bargain and intend to be bound immediately, but at the same time they propose to have the terms restated in a form which is fuller or more precise, but not different in effect;  agreement is binding 2. The parties may have agreed on all the terms of their bargain, and do not intend to vary to those terms, but nevertheless have made performance of one or more terms conditional upon the execution of a formal document;  agreement is binding 3. The parties do not intend to make a binding agreement at all unless and until they execute a formal contract.  agreement is subject to a condition, and not binding The court found that the agreement between M and C fell into the third category. Acceptance must occur while the offer is still in existence: Expiry or withdrawal of offers  Acceptance must occur while the offer is still in existence.  An offeror can state that the offer expires at a particular time.  Where no such period has been stated, the offer will expire/lapse after the passing of a reasonable period of time.  At common law, an offeror is entitled to withdraw to offer at any time before the offer has been accepted, unless he or she has made a contractual commitment to keep the offer open for a particular period of time.  A promise to keep the offer open is only enforceable where, amongst other things, the promisee (ie, the person to whom the offer was made) has provided consideration to the promisor (ie, the person promising to keep the offer open). Acceptance must comply with requirements specified by the terms of the offer Acceptance must comply with requirements specified by the terms of the offer  For example, if the offeror states that the offer must be accepted in person, sending an email to the offeror stating that you accepted the terms and conditions would not amount to acceptance. When is acceptance effective?  The general rule is that a contract is not formed until acceptance of the offer has been communicated by the offeree to the offeror.  Returning to the example: acceptance was effective when Trevor said “Agreed” to Wendy.  Exceptions:  Postal acceptance rule.  Electronic communications.  Unilateral contracts (see Carlill). When is acceptance effective? Postal acceptance rule  The postal acceptance rule provides an exception to the general rule that the contract is not formed until acceptance is communicated to the offeror.  Where:  acceptance occurs via post; and  the circumstances are such that the offeror intended that the offer could be accepted by post the offer will be treated as accepted as soon as the acceptance is posted.  Henthorn v Fraser Postal acceptance rule: Henthorn v Fraser FPBCL p 364-5 Facts  F offered to sell certain houses to H.  H was given 14 days in which to accept the offer.  The day after receiving the offer, H posted a letter of acceptance to F.  After the letter was posted by H, but before it was received by F, another buyer offered F a higher price for the houses.  F purported to withdraw his offer to H. Postal acceptance rule: Henthorn v Fraser (ctd) Legal issue  F could not withdraw the offer if H had accepted it  Had H accepted the offer before F’s attempt to withdraw it? Decision  Acceptance was effective as soon as H posted the letter.  Thus, F’s attempt to withdraw the offer was ineffective and binding contract existed between H and F. Reason  Where the circumstances are such that it must have been within the contemplation of the parties that … the post might be used as a means of communicating the acceptance of an offer, the acceptance is effective as soon as it is posted.  An offeror is free to state that acceptance by post is not acceptable, in which case the postal acceptance rule does not apply. Acceptance by fax or email There is no exception from Acceptance made or by the rule that acceptance fax or email is considered occurs when it is instantaneous and communicated to the acceptance is effective offeror when acceptance when the fax/email is occurs by way of fax or received by the offeror. email. Acceptance by telex: Brinkibon Ltd v Sthalwharenhandelsgesellschaft FPBCL p 321-2 Facts  B (based in London) wished to purchase machinery from S (based in Vienna).  During the negotiations, a number of telexes were exchanged between the parties.  One such telex (sent from B to S) constituted an acceptance of an offer from S.  A dispute arose between the parties, and it was necessary to determine whether the English or Austrian courts had jurisdiction to hear the case.  This matter was determined by asking where the contract had been formed. Acceptance by telex: Brinkibon Ltd v Sthalwharenhandelsgesellschaft (ctd) Legal issue  Where was the contract formed? In which country did acceptance take place?  Should the postal acceptance be extended to acceptance by telex? Decision  The postal acceptance rule should not be extended.  The acceptance took place where the telex was received (that is, in Austria, when the acceptance was communicated to the offeror). Reason  Telexes should be treated in the same way as other instantaneous communications, not in the same way as communications via the post. Acceptance by e-mail  Why did we consider a case about telexes?  Think about how the common law develops.  Provides guidance as to the treatment of e-mails.  E-mail, like faxes and telexes, are a form of instantaneous communication.  Thus, the offer is likely to be treated as accepted when received, not when sent.  When is an e-mail received?  Legislation defines when receipt of electronic communications, such as e- mails, takes place.  The Electronic Transactions (Victoria) Act 2000 (Vic):  defines the time of receipt (which determines when the acceptance is effective) (s 13A)*  defines the place of receipt (which determines where the contract was formed) (s 13B) * our focus  Acceptance by e-mail: Electronic Transactions (Victoria) Act 2000 (Vic) Section 13A: Time of receipt FPBCL [16.3] Did the offeror designate an electronic address as a way to accept the offer? Yes No Receipt occurs when Receipt occurs when the electronic the offeror becomes communication aware of the reaches the electronic designated address. communication Formation requirement: certainty  A contract must be expressed in sufficiently clear and precise terms.  Where the language used by the parties has one or more possible meanings, the certainty requirement is met.  Where there are multiple possible meanings, the courts will decide which meaning to give the words when interpreting/construing the terms.  uncertainty only raises a formation problem if the language is meaningless.