Principles of Business Law - Contract Formation PDF

Principles of Business Law TOPIC 4: CONTRACT FORMATION FORMATION REQUIREMENTS: CONSIDERATION AND INTENTION Formation requirements overview: recap A contract is formed when the following formation requirements are met: 1. Agreement 2. Certainty 3. Consideration/deed 4. Intent...

Principles of Business Law TOPIC 4: CONTRACT FORMATION FORMATION REQUIREMENTS: CONSIDERATION AND INTENTION Formation requirements overview: recap A contract is formed when the following formation requirements are met: 1. Agreement 2. Certainty 3. Consideration/deed 4. Intention Formation requirement: Consideration/deed General principles  Unless the promise is included in agreement that is recorded as a deed, a promise must, amongst other things, be supported by consideration to be enforceable under contract law.  The doctrine of consideration requires some element of exchange between the parties.  The consideration requirement means that one-sided promises are generally unenforceable. Formation requirement: Consideration/deed Deed  If the agreement is recorded in a deed, it will be enforceable whether or not both parties have provided consideration.  Deed: an instrument that has been signed, sealed and delivered (executed in a particular way).  Deeds must be witnessed by a person who is not a party to the agreement. How to provide consideration A party may provide consideration by:  promising to do an act, or refrain from doing an act  both parties to an executory/bilateral contract  one party to a unilateral contract  doing an act, or refraining from doing an act  one party to a unilateral contract Adequacy of consideration  Consideration must be sufficient but need not be adequate.  there must be some identifiable benefit/detriment but its magnitude is not important.  This is often referred to as the peppercorn principle.  Thomas v Thomas The magnitude of the benefit provided is not relevant: Thomas v Thomas FPBCL p 427 Facts  Mr T expressed a desire that, should he die first, his wife be allowed to stay in their family home until her death.  After Mr T died, the executors of his estate entered into a lease agreement with Mrs T.  Mrs T promised to pay only £1 a year for the lease and to keep the house in good repair. Issue  Had Mrs T provided sufficient consideration to make the agreement between the executors and Mrs T binding? The magnitude of the benefit provided is not relevant: Thomas v Thomas (ctd) Decision  Mrs T had provided consideration.  She was entitled to enforce the agreement. Reason  Although Mrs T’s promise was not in any sense equivalent in value to the benefit she received, she nevertheless provided sufficient consideration – it is enough that the promise is of some value, no matter how small. Past consideration  Past consideration is not good consideration.  This rule is most often invoked where, after the contract has come into existence, one of the parties makes an additional promise which the other seeks to enforce. Past consideration: example  A promises to buy, and B promises to supply, certain goods  When B delivers the goods, he tells A that the goods come with a 12-month warranty.  A cannot enforce the promise of the 12- month warranty – why?  A did not provide consideration in exchange for the promise.  A cannot point to:  her promise to buy the goods as consideration, this promise was exchanged for B’s promise to supply the goods (past consideration).  her payment to B. Making payment involves B performing her obligation under the contract (performance of an existing legal duty). Existing legal duty rule  Performance of an existing legal duty, or a promise to perform an existing legal duty is not good consideration.  Example:  B agrees to build a fence for A.  B falls behind and A promises B an additional payment if B promises that the fence will be completed on time.  B promises A that the work will be performed on time.  A has provided consideration – she promised to make a payment she was not bound to pay under the contract.  B has not provided consideration – he promised to complete on time, something he was already bound to do under the contract. Existing legal duty rule: Stilk v Myrick FPBCL p 422 Facts  When two sailors deserted a voyage, the captain of the ship promised the remaining crew that they would share the deserters’ pay if they worked extra hard to get the ship safely back home.  The employment contracts between the captain and the sailors required the sailors to do all that was necessary in times of emergency.  Desertion by crew was such an emergency. Agreement the sailors wish to enforce  Captain’s promise of additional pay in exchange for  Existing legal duty rule: Stilk v Myrick (ctd) Issue  Had the crew given consideration for the captain’s promise of additional pay? Decision  The crew had merely performed an existing legal duty – they had given nothing of value in exchange for the captain’s promise. Reason  Under their contracts of employment, the crew were obliged to do whatever was necessary in times of an emergency (which included desertion of crew members).  So, they were already bound to step up their efforts and get the ship safely back home. Exception to the existing legal duty rule: The practical benefit exception The existing legal duty rule does not apply where the person making the fresh promise obtains a practical benefit from other party’s promise to perform an existing legal duty.  Musumeci v Winadell Practical benefit exception: Musumeci v Winadell Pty Ltd FPBCL p 393-4 Facts  M leased a fruit and vegetable shop from W.  At a later point in time, W leased a shop in the same shopping centre to a chain fruit and vegetable store.  M’s business decreased and W agreed to reduce the rent payable by M.  Later, when M decided not to renew the lease, W resiled from the promise to reduce the rent and claimed the full amount from M. Issue  Had M provided sufficient consideration to support W’s promise to accept less rent? Practical benefit exception: Musumeci v Winadell Pty Ltd (ctd) Decision  M promised to do no more than perform its existing contractual duties (in fact it agreed to pay less rent than the lease provided for).  M nevertheless provided consideration because of the practical benefit to W associated with keeping M as a tenant (W was struggling to lease stores in the mall). Formation requirement: Intention  ‘It is of the essence of contract, as a class of obligation, that there is a voluntary assumption of a legally enforceable duty’: Australian Woollen Mills (this case is not examinable).  Parties are free to expressly indicate whether they intend their agreement to have contractual force.  However, in many instances this issue needs to be resolved by making inferences about the parties’ intention from their conduct, their relationship to one another and the subject matter of the agreement. Traditional approach to determining intention  As we saw last week, traditionally, the courts made presumptions about intention based on the relationship between the parties.  Recall the married couple cases:  Balfour v Balfour  Cohen v Cohen  Presumptions were also used to resolve disputes about the enforceability of commercial contracts:  Esso Petroleum Ltd v Commissioners of Customs and Excise Modern approach to determining intention: Ermogenous v Greek Orthodox Community of SA FPBCL p 349 Facts  E was recruited by the GOCoSA from the US to serve as the Archbishop of the Greek Orthodox Church in Australia.  The GOCoSA paid E what appeared to be a salary.  After E resigned, he claimed to be entitled to various leave entitlements (said to be owed to him as an employee).  GOCoSA resisted making the payments.  In order to establish that he was entitled to the leave payments, E needed to establish that he was employed under a contract of employment. Issue  The preliminary question was whether the agreement between E and GOCoSA was a contract.  Did the parties intend their agreement to be an enforceable contract? Modern approach to determining intention: Ermogenous v Greek Orthodox Community of SA (ctd) Decision  The agreement was intended to be legally binding.  E was entitled to the leave payments. Reason  Whether parties intended their agreement to be binding should be determined by considering:  the subject-matter of the agreement;  the nature of the relationship between the parties; and  other surrounding circumstances. Intention: commercial agreements  Traditionally the courts assumed that agreements reached in a business or commercial context were intended to be binding.  Esso Petroleum Ltd v Commissioners of Customs and Excise Intention: commercial agreements Esso Petroleum v Commissioner of Customs & Excise FPBCL p 350 Facts  E ran a marketing promotion.  E promised to give customers a ‘free’ coin with every gallon of Esso petrol purchased. CCE’s argument  CCE argued that even though the coins were described as a ‘gift’ (a transaction that typically would not involve an intention to create contractual relations), E intended contractual relations with its customers.  If this was the case, then the production of the coins would be subject to taxation. Intention: commercial agreements Esso Petroleum v Commissioner of Customs & Excise (ctd) Issue  Did Esso and its customers intend the agreement to be contractually binding? Decision  The terms of the promotion were intended to be contractually binding.  The coins were therefore subject to taxation. Reason  Intention inferred from the commercial nature of the agreement.  Now, post-Ermogenous, the focus would be on the nature of the agreement, the relationship between the parties and other relevant surrounding circumstances.  Do you think the outcome would be different? Formation revision: Carlill V Carbolic Smoke Ball Co FPBCL p 329-30 Now we are familiar the formation requirements, we will consider Carlill v Carbolic Smoke Ball Co  to consolidate our understanding of the formation requirements  to see an example of a unilateral contract Formation revision: Carlill V Carbolic Smoke Ball Co (ctd) Facts  CSB Co manufactured a device called a ‘Carbolic Smoke Ball’ which was claimed to prevent colds and influenza.  CSB Co placed the following advertisement in a number of newspapers: £100 reward will be paid by the Carbolic Smoke Ball Company to any person who contracts the increasing epidemic influenza, colds or any disease caused by taking cold, after having used the ball three times daily for two weeks according to the printed directions supplied with each ball. £1,000 is deposited with the Alliance Bank, Regent Street, shewing our sincerity in the matter  C purchased a smoke ball from a chemist on the faith of the advertisement and used it in accordance with the CSB Co’s directions from 20 Nov 1891 until 17 Jan 1892, when she contracted influenza.  When CSB Co refused to pay her £100, C sued for breach of contract. Formation revision: Carlill V Carbolic Smoke Ball Co (ctd) Nature of claim Unilateral contract:  CSBC promised to pay the reward (offer)  Ms C accepted the offer and provided consideration by using the ball as instructed Formation revision: Carlill V Carbolic Smoke Ball Co (ctd) Issues, decision and reasons  Was the promise to pay the reward contained in the advertisement an offer? Did it demonstrate an intention to be contractually bound?  Yes – the advertisement was unlike the one in Partridge v Crittenden. It contained a firm promise. Further, the statement about money being deposited in the bank demonstrated an intention to be bound.  Had Carlill accepted the offer?  Yes - Carlill accepted the offer by performing an act.  She used the ball, in accordance with the CSBC’s instructions. Formation revision: Carlill V Carbolic Smoke Ball Co (ctd) Issues, decision and reasons (ctd)  Had Carlill provided consideration in exchange for the promise to pay the reward?  Yes - Carlill provided consideration by performing the requested act.  She used the ball, in accordance with the CSBC’s instructions  Were the terms sufficiently certain?  The terms of the offer were clear  CBSC’s promise is stated in clear, quantifiable terms.  The method by which Carlill accepts the offer and provides the consideration (by using the ball as instructed) was also stated in clear terms.