LAW5002 Contract A - Acceptance PDF

LAW5002 CONTRACT A ACCEPTANCE Acceptance - Definition –“Unqualified assent to the terms of an offer” Paterson, Robertson & Duke, Principles of Contract Law 2 Acceptance – overview of issues Conduct constituting an acceptance...

LAW5002 CONTRACT A ACCEPTANCE Acceptance - Definition –“Unqualified assent to the terms of an offer” Paterson, Robertson & Duke, Principles of Contract Law 2 Acceptance – overview of issues Conduct constituting an acceptance Silence and acceptance inferred from conduct – What if the offeree says they didn’t intend to – Can an offeror prescribe silence as accept, or misunderstood, the offer? acceptance? – What if acceptance was a coincidence and – Can silence and conduct amount to an not in response to the offer? acceptance? Communication of acceptance Correspondence between offer and – Acceptance must generally be acceptance communicated. But at what time does – What if the terms of the offer and terms of communication of acceptance occur in acceptance are not the same? different mediums? – Ticket cases: O and A under stress General rule Postal acceptance rule Agreement without offer and acceptance Electronic communications – There may be agreement without O and A – When is communication not required? 3 Conduct constituting acceptance Questions: – What conduct amounts to acceptance? – What if an offeree appears to be assenting to the offer but was mistaken as to the terms? – What if the offeree did not familiarise himself or herself with the full terms of the offer? 4  Acceptance – modern approach - the objective test prevails TEST: Would the reasonable person consider the parties to have reached agreement having regard to their external manifestations. – Fitness First (Australia) v Chong (2008) NSW SC 5 Fitness First v Chong NSW SC 2008 “But I didn’t know about Mrs Chong signed a written contract for gym membership the $200 early (without reading) terms. termination Issue: Was Mrs Chong bound to fee!” pay the $200 even though the parties were not ad idem? 6 Fitness First v Chong NSW SC 2008 Facts: Mrs Chong became a member of Fitness First and signed a contract. After several weeks she was unable to continue exercising because of health problems and terminated her membership. Under the contract she was charged a $200 termination fee. She argued she did not know about the fee and never agreed to it. Issue: Was Mrs Chong bound to pay the $200 even though the parties were not ad idem? 7 Fitness First v Chong NSW SC 2008 Held: A valid contract does not require the parties to be of the same mind, or for each to fully understand the terms of the agreement. The general rule is that a person who signs a document which is known by that person to contain contractual terms and to affect legal relations is bound by those terms and it is immaterial that the person has not read the document (citing Toll v Alphapharm: Express Terms – Week 8). By signing the form, Mrs Chong behaved in such a way that a reasonable person would believe she was assenting to the printed terms. Mrs Chong is bound by the contract, and to pay the $200 fee. 8 Unilateral contracts - consciousness of the offer If a person returns a lost dog and subsequently learns of the reward that had been offered by the owner, can the finder of the dog claim the reward? Question from Principles Book [3.80] 9 Unilateral contracts - consciousness of the offer – an exception to the objective test In the case of unilateral contracts – the acceptance must be in response to the offer. – This is an exception to the general rule that external manifestations of acceptance are conclusive. The subjective intention of the offeree is relevant in unilateral contracts. The Crown v Clarke (1927) HCA 10 The Crown v Clarke (HCA 1927) Clarke (a suspect) gave information that led to REWARD conviction. He admitted he did this to £1000 defend himself and not in response to the reward. For information as shall lead to the arrest and conviction of the person or persons who Issue – Could Clarke claim the reward? committed the murders of John Walsh and Alexander Pitman 11 The Crown v Clarke (HCA 1927) Facts: Two Policemen murdered Reward of £1000 offered to anyone who gives information that leads to successful prosecution Clarke was arrested and charged Clarke gave information that led to conviction of Coulter. Admitted he did this to defend himself and not in response to the reward. Clarke claimed the reward Issue: Was there a valid contract between the Crown and Clarke? Held: Clarke not entitled to the reward because the act of giving the information was not done in response to the offer but for other purposes. By performing the act of acceptance, a presumption is generally raised that it is done in response to the offer. However in this case Clarke’s own admission rebutted that presumption. 12 The Crown v Clarke (HCA 1927) Isaacs CJ: The person accepting and performing must act on the offer. Example: “an offer of 100 pounds for swimming in the harbour on the first day of the year would be met by voluntarily performing the feat with reference to the offer, but would not in my opinion be satisfied by a person who was accidentally or maliciously thrown overboard on that date and swam the distance simply to save his life, without any thought of the offer. The offeror may feel morally impelled to give the sum in such a case but would be under no contractual obligation to do so”. Higgins J: Clarke did not act on the faith of, or in reliance on the reward. Although the exact fulfilment of the conditions stated in the reward would raise a presumption, that Clarke was acting on the faith of, or in reliance upon, the reward, the presumption was rebutted by his own express admission. Starke J: Ordinarily it is true that the law judges the intention of a person in making a contract by outward expression only by words or acts communicated. The objective approach in determining whether there was an agreement is usually applied. But, the position is different in a unilateral contract where communication of acceptance is dispensed with. In such a case, evidence of subjective intention can be taken into account. 13 Communication of acceptance General rule - Acceptance must be communicated to the offeror by the offeree (Latec Finance) – in any reasonable way unless a particular method of acceptance is prescribed by the offeror. – Exceptions: Acceptance inferred from conduct (eg Empirnall Holdings, Brambles) Offeror may dispense with need to communicate acceptance (eg Carbolic Smoke Ball, many unilateral contracts). General rule – Communication of acceptance is effective when and where it is received by the offeror - (Latec Finance; Brinkibon) – Qualifications: Postal acceptance rule: acceptance occurs when letter posted (Adams v Lindsell) Electronic Transactions Act – presumes time and place of receipt of electronic communications 14 Latec Finance v Knight (1969 NSWCA) Hire purchase application form completed by Knight. Latec Finance countersigned but did not communicate acceptance. 15 Latec Finance v Knight (1969 NSWCA) Facts: Knight signed hire purchase agreement for TV set. Form specified that it was an “offer” from customer (Knight) and not binding until signed by LF (not affected by any pre-payment or delivery). LF processed and accepted the offer but did not communicate it to Knight. Knight returned the TV because it was unsatisfactory (ie purported to revoke the offer). LF sued for breach of contract and sought payment of instalments. Issue: Had LF accepted Knight’s offer even though it had not communicated acceptance? 16 Latec Finance v Knight cont Held (Jacobs JA) General rule: The ordinary rule is that an offer is not accepted until acceptance has been communicated and actually received by the offeror. Qualifications: This requirement may be expressly or impliedly dispensed with by an offeror, generally in one of two ways: – Where an act is deemed effective acceptance (eg unilateral contracts, Carbolic) – Where acceptance deemed effective by dispatch of communication in a particular way, regardless of whether actually received (eg postal acceptance cases) Signing not acceptance here: LF argued that mere signing of form was acceptance (ie first category above) – NO – Clear language would be required to dispense with requirement to communicate acceptance – otherwise LF could retain form without signing and choose if and when to be bound. No inference of acceptance: Nor could one infer that Knight knew of the acceptance by LF. Knight did not retain the TV for a significant length of time that it could be inferred from his enjoyment that he knew Latec had effectively accepted (similar to inference from conduct cases). There was No contract. 17 When and where is acceptance communicated? Not an issue when parties are in the same room (or location). But what if parties communicate other than face to face (eg post, email, telephone)? General rule - a contract is formed when acceptance is communicated to the offeror - when (ie time) and where (ie place) the acceptance was received (Brinkibon v Stahag Stahl) Qualifications: – Postal acceptance rule – If it applies – acceptance effective on posting of acceptance. Applicable only to non-instantaneous communication (eg post, telegraph) – Deemed times of receipt for “electronic communications” to a “designated address” under the Electronic Transactions Act (email) 18 Postal acceptance rule Relevant to non instantaneous communications (eg postal mail, telegraph) The postal acceptance rule may apply depending on the intentions of the parties: – The parties must contemplate using the post as a means of communicating acceptance, for it to apply (as it is an exception) – If it applies, a contract is made when and where the acceptance is posted, even if it is received some time later or is lost in the post (Adams v Lindsell (1818)) 19 Adams v Lindsell (1818 UK) 2 Sep Offer sent - The defendants wrote to the plaintiffs: offer to sell wool (requested that the plaintiffs reply ‘in course of post‘). 5 Sep Offer arrived & acceptance sent - Letter of offer arrived (it was sent to wrong address and arrived later than expected). The plaintiff posted letter of acceptance that day. 8 Sep Wool sold to third party - The defendants sold the wool to someone else (they had expected to receive any letter of acceptance from the plaintiff by then). 9 Sep Acceptance received - Letter of acceptance was received two days later than the defendants expected to receive it. Issue: Had a contract of sale had been entered into? 20 Adams v Lindsell (1818 UK) Held: The offer had been accepted as soon as the letter had been posted. So, there was a contract in existence before the sale of the wool to the third party, even though the letter had not actually been received by the defendant. [Note the parties had contemplated the mode of acceptance in the offer]. 21 Postal acceptance rule – when does it apply? Depends on the type of communication Does not apply to instantaneous communications (eg fax, telex) – Brinkibon Ltd v Stahag Stahl (1983 HL) Can apply to non–instantaneous communications – eg post, telegram What about near-instantaneous communications (eg email)? See: ETA 2000 Depends on the intention of the parties UK position – when postal acceptance contemplated: – “Where the circumstances are such that it must have been within the contemplation of the parties that, according to ordinary usage of mankind, the post may be used as a means of communicating the acceptance of an offer, the acceptance is complete as soon as it is posted” Per Lord Herschell, in Henthorn v Fraser 2 Ch 27, at 33 Australian position – narrower – when offeror contemplated and intended acceptance effective by post: – “a finding that a contract is contemplated by the posting of a letter of acceptance cannot be justified unless it is to be inferred that the offeror contemplated and intended that his offer might be accepted by the doing of that act” Per Dixon CJ and Fullagar J in Tallerman v Nathan’s Merchandise (1957) 98 CLR 93 22 Communication of Acceptance – ETA The Electronic Transactions (Victoria) Act 2000 (Vic) (“ETA”) prescribes the time of dispatch and receipt of electronic communications. This will in turn determine the time of communication of electronic communications for the purposes of determining whether there has been acceptance: “Electronic communications” - Section 3 - definition Time of dispatch – Section 13 Time of receipt: Section 13A – sent to a designated address are effective when capable of being retrieved by addressee – not sent to a designated address are effective when both capable of being retrieved by addressee and the addressee is aware that the electronic communication has been sent to that address. [Linkage to other topics: We looked at the ETA in Week 1 (Offer) in relation to proposals to form contracts online (invitations to treat), and we will also look at the ETA in Week 6 (Formalities) - formalities and the writing requirement] 23 ETA – “electronic communication” Section 3 Definition: “electronic communication” means: (a) a communication of information in the form of data text or images by means of...... electromagnetic energy...; or (b) a communication of information in the form of sound by means of.... electromagnetic energy... where the sound is processed at its destination by an automated voice recognition system” What does this mean? – will cover email, text, online communications, fax, voice mail converted into text – does not cover ordinary “oral” communications – eg telephone, voicemail 24 ETA – time of receipt – s13A Time of receipt of electronic communication: If an electronic address has been designated by the addressee: the time the electronic communication becomes capable of being retrieved by the addressee* (13A(1)(a)). If no electronic address has been designated: The time when both (13A(1)(b)): The electronic communication becomes capable of being retrieved by the addressee*; AND The addressee has become aware that the electronic communication has been sent to that address. Parties may agree otherwise * Assumed to be when it reaches the addressee’s electronic address unless otherwise agreed: (13A(2)) 25 When is an electronic address “designated”? “By “designated information system”, the Model Law is intended to cover a system that has been specifically designated by a party, for instance in the case where an offer expressly specifies the address to which acceptance should be sent. The mere indication of an electronic mail or telecopy address on a letterhead or other document should not be regarded as express designation of one or more information systems.” Paragraph 102 of the Guide to Enactment of the UNCITRAL Model Law on Electronic Commerce (1996) 26 Silence and acceptance inferred from conduct Acceptance may not be inferred from silence – Felthouse v Bindley (1862) But silence plus conduct may amount to acceptance – Empirnall v Machon Paull (1988) – Brambles Holdings Ltd v Bathurst City Council (2001) 27 Felthouse v Bindley (1862) “If I hear no more about him, I consider the horse mine at £30 15s” 28 Felthouse v Bindley (1862) Facts Negotiations between uncle and nephew over purchase of horse. Uncle wrote to his nephew offering to buy the nephew’s horse and said: “If I hear no more about him, I consider the horse mine at £30 15s”. Nephew intended to accept the offer and instructed his auctioneer that the horse had been sold and should be excluded from the other stock, but never told uncle. Auctioneer mistakenly sold the horse. Uncle sued auctioneer for conversion (ie auctioneer had no right to sell the horse because property had passed to the uncle). Held: No agreement because acceptance had not been communicated to the offeror/uncle. Contract cannot be forced on offeree by stipulating silence as the prescribed method of acceptance. 29 Empirnall Holdings v Machon Paull (NSWCA 1988) Empirnall – Verbal makes engagement of progress Further progress MP as project payments. payments made manager for But refuses to and work property sign contract: continued. development. MP “Eric does not Contract never commences work. sign contracts” signed. MP invoice for MP – continues work. Empirnall progress “We are proceeding insolvent. MP payments + on the understanding wants to rely on written that the conditions of charge clause in contract (with the contract are unsigned contract charge accepted”. – so as to be a clause) secured creditor. 30  Conduct as acceptance – Empirnall Holdings v Machon Paull (NSWCA 1988) Facts: Empirnall engaged MP (architects) to draw plans, obtain approvals and do other work in relation to a property development. Empirnall then verbally engaged MP to be project manager for the development. Work commenced. MP sent an invoice for progress payments and submitted a written contract for the works. Two progress payments were made but Empirnall did not sign the contract because (Mr Jury) “does not sign contracts”. MP proceeded with works and wrote to Empirnall saying “we are proceeding on the understanding that the conditions of the contract are accepted”. Further progress payments made and work continued but contract never signed. Empirnall became insolvent and MP sought to rely on contract clause that its fees were secured by a charge over the land. Issue: Did Empirnall accept MPs terms and conditions of the contract? 31 Empirnall v Machon Paull cont Held Apply an objective test: Would a reasonable bystander regard the conduct of the offeree, including silence, as signalling to the offeror that the offer has been accepted? Silence in conjunction with other circumstances may indicate that the offer has been accepted. It is a question of fact: – “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). A contract had been concluded. Inferred by accepting benefit of services with knowledge of the terms and conditions on which it was offered. 32 Brambles Holdings v Bathurst CC (2001 NSWCA) Brambles operated Council’s waste disposal depot. Dispute over Brambles’ entitlement to keep waste disposal fees collected from customers. 33 Brambles Holdings v Bathurst CC Background: Brambles operated the Council’s waste disposal depot. Brambles was paid a monthly fixed fee by Council, and also collected and retained waste disposal fees from customers. Dispute over the fees collected by Brambles for “liquid waste” between 1991 and 1995. Brambles kept the fees, and Council argued that they should have been passed on to Council. 19 September 1991 letter from Council to Brambles: stating that it had resolved to increase the liquid waste fees payable by customers and that the increased fees should be passed on to Council. Set out details of specific fees and timetable for increases. 3 October 1991 letter from Brambles in reply to Council’s 19 September letter: denying that the contract between the parties covered liquid waste. 34 Brambles Trial Judge held that Brambles was required to pass on all the liquid waste fees collected as a result of a contract formed by: – An offer contained in a 19 September 1991 letter from Council to Brambles stating that it had resolved to increase the liquid waste fees payable by customers and that the increased fees should be passed on to Council. – Acceptance of that offer by Brambles by way of proceeding to charge increased liquid waste fees according to the amounts and timetable proposed in the 19 September letter (ie by conduct). Brambles appealed. 35 Brambles Issues on appeal: – Were the terms of the 19 September letter accepted? Was the 3 October letter a rejection of the 19 September offer? Had the 19 September offer been accepted by conduct? Note: The facts of this case exemplify a typical scenario where commercial parties operate without a clear contract (either in terms of existence or content). This happens all the time. Contract law does not neatly fill the gap. 36 Brambles Per Mason P and Ipp A-JA – The 3 October letter was not a rejection of the offer but merely part of the posturing that often accompanies negotiation (citing Stevenson Jacques). – Brambles accepted the offer in the 19 September letter by charging the increased fees from October 1991. Per Heydon JA – The 3 October letter was a rejection of the Council’s offer. – However the general principle that a rejection of an offer brings it to an end is not universal. A rejected offer may remain operative if it were repeated or otherwise revived or if in the circumstances it should be treated despite its rejection as remaining on foot, and available for adoption as the basis of mutual assent manifested by conduct. – By charging the higher fees according to the rates and timing in the 19 September letter, it would appear to a reasonable person that Brambles had assented to those terms, despite its initial rejection. 37 Brambles Per Heydon JA – discussed the limitations of offer and acceptance analysis in the classical theory of contract formation and reviewed authorities: – “..offer and acceptance analysis is a useful tool in most circumstances... But limited recognition has been given to the possibility of finding that contracts exist even though it is not easy to locate an offer or acceptance” – “… it is relevant to ask: in all the circumstances can an agreement be inferred? Has mutual assent been manifested? What would a reasonable person in the position of the Council and a reasonable person in the position of the defendant think as to whether there was a concluded bargain?” 38 Correspondence between offer and acceptance General rule - Acceptance must correspond exactly with the offer – If the offeree attempts to vary (or add to) the proposed terms, then the purported acceptance is a “counter-offer” (ie a fresh offer) and the original offer is terminated Recall difference between counter-offer and clarification (Stevenson Jacques) Rule difficult in practice – An initial offer is rarely accepted or rejected in its entirety – some terms accepted and some new ones proposed. – It is also common for parties to exchange their “standard terms” of contracting – in a “Battle of the Forms” – see Butler Machine Tool Co. 39 Butler Machine Tool Co v Ex-Cell-O Corp (UK CA 1979) 5 June – Seller’s letter says 23 May - Quote they will supply “in accordance with our quotation”; and signs from seller and returns buyer’s tear off (Butler), slip: “we accept your order on includes price the terms and conditions variation clause stated thereon” 27 May - Reply from Seller supplies buyer (ExCellO) with machine. Tries to order: “please supply on claim under price terms and conditions as variation clause in below and overleaf”; and 23 May quote. tear off slip for seller to sign. (No price variation clause) 40 Butler Machine Tool Co v Ex-Cell-O Corp Facts: Negotiations re sale of machine. 23 May - Seller’s quotation to sell machine included price variation clause 27 May - Buyer replied with order and tear off slip for seller to sign: – “Please supply on terms and conditions as below and overleaf”. No price variation clause. – Tear off slip for seller to sign: “we accept your order on the terms and conditions stated thereon” 5 June - Seller signed and returned tear off slip with cover letter that they would supply machine “in accordance with our... quotation” Seller supplied machine and attempted to apply additional charge on basis of the purported price variation clause. Issue: Did the seller’s price variation clause in its 23 May quotation apply? 41 Butler Machine Tool Court was unanimous that the price variation clause did not apply but applied substantially different reasoning. Lawton and Bridge LJJ: Conflict approach – ie find a winner (“last shot” approach) – Applied the classic offer and acceptance approach. – Seller’s 23 May quotation was an offer. – Buyer’s 27 May order was a counter offer (the effect of which was “to kill the original offer”). – Seller’s 5 June letter with signed tear off slip was acceptance of the counter offer. The words “this being delivered in accordance with our.. quotation of 23 May” referred to the price and identity of the machine, not the terms and conditions on the back – Therefore the price variation clause did not form part of the contract. 42 Butler Machine Tool Lord Denning – a “synthesis” approach – may be a combination of terms – “In many...cases our traditional analysis of offer, counter-offer, rejection, acceptance and so forth is out of date... The better way is to look at all the documents passing between the parties - and glean from them, or from the conduct of the parties, whether they have reached agreement on all material points – even though there may be differences between the forms and conditions printed on the back of them”. – Described it as a “battle of the forms” In most cases the battle is won by whoever fires the last shot – who puts forward the latest terms and, if not objected to, the other party is taken to have agreed to them. But in some cases: the battle is won by whoever gets in first – whoever makes an offer on certain terms ought not to be disadvantaged if the other party places an order on their own form with materially different terms unless the different terms are specifically drawn to the offeror’s attention. the battle depends on the shots fired by both sides – terms and conditions of both sides are to be construed together/reconciled to give a harmonious result (or conflicting terms replaced by reasonable implication). 43 Butler Machine Tool Denning continued – application to facts In this case, considering the documents as a whole – the 5 June letter (with signed acknowledgement slip) is the decisive document. It makes it clear that the contract was on the buyer’s terms which did not include a price variation clause. 44 Battle of the Forms - observations Traditional “last shot” approach prevails in the UK and probably Australia (Butler Machine Tool). Where buyer’s and seller’s terms conflict, options are: – There may be no contract – There may have been acceptance by conduct – There may be non contractual relief available (estoppel, misleading and deceptive conduct, restitution) 45 Ticket cases – offer and acceptance under stress 46 Ticket cases – O&A under stress Pose problems for identification of the offer (and acceptance), for a number of reasons. – The process of contracting and ticketing vary – Often contain new terms – Often contain sweeping exclusion clauses However, the “conventional analysis”, considered the usual approach, is that the ticket is an offer which the purchaser can accept or reject after he or she has had reasonable opportunity to accept or reject 47 Mac Robertson v Commissioner of State Tax (WA) (1975 HCA) Facts; The airline’s passengers reserve a seat on flight, pay fare, and then receive a ticket Ticket contained conditions giving the airline the right to cancel a flight or a booking without incurring any liability Issue: Whether airline ticket is an agreement (for tax purposes)? (In particular whether the ticket was chargeable with stamp duty as an “agreement” or a “memorandum of agreement”) Held: Ticket did not record the terms of an agreement (but for different reasons…) 48 MacRobertson v Commissioner of State Tax Stephen J: - no – ticket is the offer Adopted “conventional analysis” - ticket constitutes an offer by the airline capable of acceptance or rejection by the passenger when he/she has had reasonable opportunity to read the condition. Thus ticket only records terms of an offer. Barwick CJ: - no because of exemption clause Sweeping exemption left no room for obligation to carry the passenger In any case, passenger makes the offer by presenting at the airport, and airline accepts by carrying (ie, no contract until passenger provided with a seat on airplane). The ticket is a receipt of the prepaid fare. Jacobs J: - no – both of the above reasons Ticket is not a contract, based on reasons advanced by Stephen J and Barwick J. 49 Ticket cases - review The “conventional” approach isn’t always taken (courts have taken various analyses as to when a contract is formed in ticket cases). There is no one- size-fits-all approach to determine when a contract is formed in a ticket scenario. The particular facts need to be carefully considered. Ticket cases often arise in context of incorporation of terms – (Week 8 – Express Terms) 50 Agreement without offer and acceptance What if you cannot identify a clear offer and acceptance? Consider possibility of acceptance inferred from conduct – Empirnall v Machon Paull, Brambles v Bathurst CC A contract may be made without an identifiable offer and acceptance. Remember: this is a last resort approach – first look to see whether you can identify a distinct offer and acceptance. – Test for agreement without offer and acceptance from Heydon JA in Brambles: In all the circumstances can agreement be inferred? Has mutual assent been manifested? What would a reasonable person in the position of the parties think as to whether there was a concluded bargain? 51 Agreement without offer and acceptance Other judicial comments in support of agreement without offer and acceptance: Lord Denning (minority) in Butler Machine Tool - “synthesis” approach to battle of the forms – “look at all the documents passing between the parties and glean from them or their conduct whether they have reached agreement on all material points”. Denning’s approach (Court of Appeal/disapproved by HL) in Gibson v Manchester City Council - “look at the correspondence as a whole and at the conduct of the parties and see therefrom whether the parties have come to agreement on everything that was material”. Lord Diplock (House of Lords), in Gibson v Manchester City Council - noted the possibility of exceptional types of contracts “which do not fit easily into the normal analysis of offer and acceptance” Stephen J, in MacRobertson Miller Airline Services v Commissioner of State Taxation, noted that the traditional offer and acceptance analysis “encounters difficulties when sought to be applied, outside the realms of commerce and conveyancing, to the everyday contractual situations which are a feature of life in modern urban communities”, for example ticket cases. Read [3.145] of Principles Book 52  WARNING This material is substantially based on slides prepared by Lisa di Marco and has been reproduced and communicated to you by or on behalf of Monash University in accordance with s113P of the Copyright Act 1968 (the Act). The material in this communication may be subject to copyright under the Act. Any further reproduction or communication of this material by you may be the subject of copyright protection under the Act. Do not remove this notice. LAW5002 CONTRACT A OFFER Offer - Overview What is an offer? Termination of an offer – Role in contract formation – Revocation – Definition – manifestation of – Lapse and Death of offeror willingness, certainty, objective – Failure of a condition and – C/f a mere “puff” changed circumstances – In ticket cases (in week 2) – Rejection and Counter offer Offers distinguished from an “invitation to treat” – Shop Sales – Online Sales – Auctions – Tenders 2 Agreement The traditional approach to establishing Agreement is through Offer and Acceptance. – Offer made by one party (the “Offeror”) – Offer Accepted by the other party (the “Offeree”) – Agreement occurs when acceptance is communicated by the Offeree to the Offeror. But there are limits to this approach and there may be Agreement without Offer and Acceptance. 3 Bilateral v Unilateral contracts Bilateral Contract Most contracts 2 parties to the contract (“A” and “B”) Can be executed or executory Both parties exchange a promise or set of promises for each to do something in the future (e.g. A promises to transfer ownership of his car to B. In return, B promises to pay $100 to A) Both A and B’s promises are executory (i.e. to be performed at some point after the contract is formed) 4 Bilateral v Unilateral contracts Unilateral Contract Typically reward scenarios 2 parties to the contract (“A” and “B”) Only 1 promise is made (e.g. A promises to pay $100 to B if B finds A’s lost puppy) B accepts A’s offer when B performs the stipulated task. Contract is formed at the same time B performs her obligations under it. (No need to give notice of acceptance prior to performance.) At the time the contract is formed, A’s obligation/promise is executory and B’s obligation has been executed (ie already performed). Eg: Carlill v Carbolic Smoke Ball; Mobil Oil v Wellcome 5  Bilateral Unilateral promise promise A B A B promise act 6 Definition of Offer – “An offer may be described as the indication by one person (the “offeror”) to another (the “offeree”) of a willingness to contract on certain (disclosed) terms”. Carter, Peden & Tolhurst, Contract Law in Australia (7th ed, 2018) [3- 07] (citing Australian Woollen Mills v Cth) – “An offer is an expression of willingness to enter into a contract on specified terms. A proposal only amounts to an offer if the person making it indicates that an acceptance is invited and will conclude the agreement between the parties”. Paterson, Robertson and Duke – Principles of Contract Law, 5th ed, 2016 [3.10] (referring to Restatement of Contracts (2d) (US)) – An offer in itself does not give rise to a binding obligation. 7 Offer – an objective test Questions: What type of manifestation (statement or conduct) constitutes an offer? What if the offeror’s outward manifestation is different from his or her actual intentions? Answer: The courts use objective standard, i.e. the view of a reasonable person in the offeree’s position Terminology Offeror = person who makes the offer Offeree = person to whom the offer is made (i.e. who may accept or reject the offer) 8 Gibson v Manchester Council (1979 HL) Facts: Council letter 10/2/1971 to Gibson (tenant of Council Housing). Issue: Was this an offer to sell for £2,180 9 Gibson v Manchester Council Facts Manchester CC wrote to Gibson proposing to sell council housing Gibson completed the application form and returned the form to the Council Local government election - new local council stopped all proposed sales, including that to Gibson Gibson sought to enforce the sale (by specific performance) Issue Was there a contract? Was there offer and acceptance? 10 Gibson v Manchester Council Held: Trial Judge — for Gibson Court of Appeal—for Gibson (2:1) – Denning: “look at the correspondence as a whole and at the conduct of the parties and see therefrom whether the parties have come to agreement on everything that was material” (departed from conventional approach of offer and acceptance) House of Lords—for Council (unanimous) - Lord Diplock: – No reason here to depart from conventional approach of construing the documents to identify a clear offer and acceptance (though refers to the possibility of exceptional types of contracts” “which do not fit easily into the normal analysis of offer and acceptance”). – “may be prepared to sell” and request for “formal application” were fatal and make it impossible to construe this letter as a firm contractual offer 11 Carlill v Carbolic Smoke Ball (1893 UK CA) 12 Carlill v Carbolic Smoke Ball Advertisement in Pall Mall Gazette, 1891 read: “£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. £1000 is deposited with the Alliance Bank, Regent St, showing our sincerity in the matter”. 13 Carlill v Carbolic Smoke Ball Facts: Mrs Carlill used (or at least claimed to have used) the smoke ball as directed for four weeks She contracted the flu Claimed £100 reward Carbolic refused to pay Mrs Carlill sued for breach of contract 14 Carlill v Carbolic Smoke Ball Carbolic Co argued that there was no contract: No offer made – 3 arguments: – advert was not a promise (or offer); was mere puff: Held: Objective test: Would it appear to a reasonable member of the public that an offer was intended? Clearly an offer; not a puff (why else the £1000 deposit) – no offer can be made to the world at large (it was not made to anyone in particular): Held: It is possible to make offer to the public at large (unilateral offer) – Too vague and uncertain to be an offer - no time limit: Held: Advert was not too vague or uncertain: time limit would be by reference to a reasonable time 15 Carlill v Carbolic Smoke Ball Carbolic Co argued that there was no contract: Mrs Carlill did not communicate acceptance: – Held: Acceptance occurs by performance. Acceptance need not be notified before performance. No consideration moved from Mrs Carlill – Held: Consideration was: advantage to Carbolic gained by use of the smokeball to promote sales, and detriment to Carlill in her inconvenience in using the smokeball 16 Offer distinguished from: Mere puff A mere puff is an exaggeration which no reasonable person would take seriously (not an offer) – Leonard v Pepsico. Eg Pepsi Harrier Jet Commercial: https://www.youtube.com/watch?v=U_n5SNrMaL8 17 *Offer distinguished from: Invitations to treat An invitation to treat is an invitation to others to make an offer or enter into negotiations. Not an offer because lacks sufficient indication of willingness to be bound. Typical categories: Most advertisements (eg catalogues) Goods displayed in shops (Boots) Goods offered for sale online (Electronic Transactions Act s14B) Property declared “on the market” at auctions (AGC v McWhirter) Requests for tenders (Harvela, Hughes Aircraft) 18 Invitation to treat: goods displayed in shops Pharmaceutical Society v Boots Chemist (1953 UKCA) 19 Pharmaceutical Society v Boots Chemist Facts/ issues: Pharmacy and Poisons Act made it illegal to sell drugs except under supervision of a registered pharmacist. Pharmacists were present at check-out. Was having the goods on the shelf an offer capable of acceptance by taking them off the shelf? If so, Boots would have been in breach of the legislation. 20 Pharmaceutical Society v Boots Held: The goods being displayed on the shelves was an invitation to treat Customers make an offer to buy the goods at the checkout Pharmacists could either accept or reject the offer Boots therefore not in breach of the legislation Why? It would be unworkable to say that taking the goods off the shelf was an acceptance of an offer, because it implies that the customer could not have a change of mind and return the goods to the shelf before paying for them 21 Invitation to treat: goods offered for sale online Source: technofaq.org 22 Online proposals: Electronic Transactions (Victoria) Act 2000 14B. Invitation to treat regarding contracts 1) A proposal to form a contract made through one or more electronic communications that: a) is not addressed to one or more specific parties; and b) is generally accessible to parties making use of information systems is to be considered as an invitation to make offers, unless it clearly indicates the intention of the party making the proposal to be bound in case of acceptance. 2) Subsection (1) extends to proposals that make use of interactive applications for the placement of orders through information systems. What does it mean? Goods or services offered online generally to be treated as an invitation to treat (unless clear intention to be bound by acceptance). 23 Invitation to treat: public auctions ▪ General rule is that: – the auction is an invitation to treat; – the bid is the offer; and – the offer is accepted by the auctioneer’s “fall of the hammer”. ▪ The general rule is said to apply even when the auctioneer says a property is “on the market”, or advertised for auction “without reserve” AGC v McWhirter (1977 NSWSC) ▪ This means that: – the seller can withdraw the property before acceptance of a bid; – the seller can refuse to accept a bid (doesn’t have to sell to the highest bidder); and – the buyer can withdraw a bid before acceptance. 24 Auctions – AGC v McWhirter (1977 NSWSC) Mortgagee auction - vendor (mortgagee) rejected highest bid from mortgagor. Held: Vendor had not made an offer to sell despite auctioneer declaring that property was “on the market”. 25 Tenders – What are they? A prospective purchaser of goods or services will often assess potential suppliers through a tender process. The suppliers effectively bid for the work through submitting a tender. Often used for the sale of commercial or residential property Often used by governments contracting - an example from the Australian government’s tenders website: 26 Invitation to treat: request for tenders The general rule is: – request for tenders is an invitation to treat; – tender from interested supplier is the offer But, there are exceptions – Sometimes the call for tenders may be an offer: Harvela Investments Ltd v Royal Trust Co of Canada (CI) Ltd 27 Harvela Investments v Royal Trust Co (1986 HL) TELEX – FROM ROYAL TRUST TO A HARVEY & CO SHAREHOLDERS “we invite you to submit … any… offer you wish to make” [to purchase RT’s shares in A Harvey & Co] Issue: Was “if any offer made by you is the highest this an offer? offer received we bind ourselves to accept... provided [it] complies with the terms...” 28 Harvela Investments v Royal Trust Co (1986 HL) Facts: Royal Trust sent telex to two other shareholders “inviting” them to make a “single offer” for its shares in A Harvey & Co Ltd “if any offer made by you is the highest offer received we bind ourselves to accept... provided [it] complies with the terms...’ Harvela submitted an offer of $2,175,000 Outerbridge’s offer was for “$2,100,000, or $101,000 in excess of any other offer” Held: The “invitation” telex was an offer Harvela accepted the offer by making the highest fixed price bid (Outerbridge’s “referential bid” did not contain the highest fixed price bid) 29 How is an offer terminated? Revocation of offer by offeror Lapse of time: if no time prescribed, then after a reasonable time Death of offeror/ offeree Failure of a condition Rejection by offeree: rejection must be communicated 30 Termination of offer - Revocation Withdrawal or Revocation Can occur at any time before acceptance is communicated (even if the offeror promised to keep it open) – Dickinson v Dodds By words or action inconsistent with continuance of offer - Dodds. Effective when it reaches (i.e. communicated to) the offeree (by offeror or some other reasonably reliable source) - Dodds Offers to the public at large can be revoked in the same way (or other way with same coverage) that the offer was made (eg. in newspaper). Exceptions: If consideration has been paid to keep the offer open – options - Goldsborough Mort v Quinn If a unilateral contract, performance has commenced, and there is an implied contract not to revoke or an estoppel – Mobil Oil v Wellcome 31 Revocation of offer: Dickinson v Dodds (1876 UKCA) 10 June – Dodds offers to sell land Later on 11 June to Dickinson – – Dickinson offer open until informed about 9am 12 June sale to third party 11 June – Dodds Before 9 am on sells the land to 12 June – third party Dickinson tried to accept 10 June offer 32 Revocation of offer: Dickinson v Dodds (1876 UKCA) 10 June: Dodds made an offer to sell land to Dickinson (to be left open until 9am on 12 June). 11 June: Dodds sold the land to Allan. Evening of 11 June: Dickinson’s agent, Berry, told Dickinson about Dodd’s sale to Allan. Before 9am on 12 June: Dickinson accepted Dodd’s offer. Issue: Was there a binding contract? Held: Dodds revoked the offer by selling the land to someone else. This revocation had been communicated to Dickinson before acceptance (Berry was a reasonably reliable source). There was no contract. Consider: Would there have been a contract if Dickinson hadn’t known about Dodd’s sale to Allan? 33 Revocation: options A promise to hold an offer open is binding at common law if consideration has been given in return for that promise. – Goldsbrough Mort v Quinn (1910 HCA) (This is an exception to the general rule that an offer can be revoked any time prior to acceptance.) 34 Goldsbrough Mort v Quinn (1910 HCA) Goldsbrough paid 5 shillings for the right to purchase land at Bena Billa for 30s per acre “calculated on a freehold basis” within a week. Quinn purported to revoke the offer. Goldsbrough accepted within the week and sought specific performance (ie the land). Held: Here, the offeree paid for the option to have one week to consider the offer. It was held that the offeror could not withdraw before the expiration of the promised period. 35 Goldsbrough Mort v Quinn The Judges analysed the arrangement in different ways: Griffith CJ/ O’Connor J - conditional contract –There was a contract to sell the land subject to a condition (ie exercise of the option). *Isaacs J – 2 separate contracts –There were two separate contracts: option was a preliminary contract to hold the offer open (ie an offer with a promise not to withdraw); and the exercise of the option created a second contract to sell the land. On either analysis: An option contract (a promise to keep an offer open, for value) is binding, and specific performance can be given. 36 Revocation of offer: unilateral contracts There is no universal rule that a unilateral offer cannot be revoked before acceptance (even where offeree has begun performance). Generally, a unilateral offer can be revoked before acceptance, however a remedy may be available under: – an implied contract not to revoke – estoppel (week 7) Mobil Oil v Wellcome 37 Mobil Oil v Wellcome Intl Pty Ltd (FFC 1998) Announcement by Mobil to franchisees that if scored >90% in Circle of Excellence program for 6 years - entitled to 9 free extra years on franchise – “we will find a way to extend your tenure automatically.. if you consistently achieve 90% or better in the Circle of Excellence judgings.” Plaintiff proceeded to get such scores but offer revoked after 4 years and program cancelled 5 franchisees commenced action against Mobil Oil as test case (over 150 affected) 38 Mobil Oil v Wellcome Trial J (Wilcox): Unilateral contract offer cannot be revoked once performance has commenced. Held FFC: No offer - statement too vague and uncertain to be a contractual obligation Even if it were an offer, Mobil entitled to revoke unilateral offer although performance had commenced. There is no general proposition that an offeror can’t revoke the offer once the offeree commences performance. 39 Mobil Oil v Wellcome Held FFC cont: But there may be times where there is an implied ancillary contract not to revoke the offer once the offeree commences performance (an implied promise not to revoke given in return for consideration of commencing performance) - in which case revocation is not effective and offeror is liable to pay damages for breach of ancillary contract. Consider particular circumstances: – Does the offeror know the offeree has commenced performance? – Does the offeree understand that incomplete performance is at their own risk? – Did the parties intend that the offeror should be able to revoke the offer? – Is the performance beneficial or detrimental to the offeree? 40 Mobil Oil v Wellcome Held FFC cont: No such implied ancillary contract here because: “commencing” performance is too vague – after one day? the franchisees did not suffer any substantial detriment the franchisees were already bound to adhere to Mobil franchisee standards [We look at this case again in Week 7 – Estoppel] 41 Termination of offer: Lapse of time Offer may be open for specified period – will lapse at end of specified time – Bartolo v Hancock If no period specified – will lapse after a “reasonable time” – What is “reasonable” will depend on the context – apply objective test 42 Termination of offer: Death of offeror Offer will lapse on death of offeror (where offeree knows of the death) – Fong v Cilli (1968) 11 FLR 495 (NT SC) Vendor died before one of the purchasers signed. The remaining purchaser had notice of the death. Offer lapsed. Implication that an offer may still be accepted before notice unless personal services required. No clear authority as to whether an offer will lapse on death of offeror when offeree doesn’t know about the death (depends on the parties’ intentions and the circumstances). Option contracts remain enforceable against deceased estate unless: – Personal services of deceased required; or – Intent of option was that it not be exercisable after death Laybutt v Amoco Australia Pty Ltd (1974 HCA) No clear authority as to whether an offer will lapse on death of offeree, however it seems that an offer would generally lapse on death of offeree (however, depends on the parties’ intentions and the circumstances). 43 Termination of offer: failure of condition and changed circumstances Express condition: The offeror may stipulate circumstances in which an offer will stay open or lapse, or which must be satisfied before an offer can be accepted (eg offer subject to board approval) Implied condition: If the offeror does not do so expressly, it may still be obvious to an objective observer that the offer was made on the basis of certain circumstances. It may be that if these circumstances change, that the offer lapses. – Eg: Financings Ltd v Stimson (1962 UKCA) – offer to purchase car subject to implied condition that car remain in same condition – unable to be accepted after car stolen and damaged. 44 Termination of offer: Rejection & Counter offer Once an offer has been rejected it is no longer available for acceptance A counter offer (eg “I’ll give you $X instead”) is treated as a rejection. A “mere inquiry” is distinguished from a counter offer and not a rejection (eg – “is there room for movement on the price?”, “would you accept $X?”) – Stevenson, Jaques & Co v McLean 45 Stevenson, Jaques & Co v McLean (1880 UK) Facts: McLean offered to sell iron to Stevenson, Jaques & Co for 40s per ton, offer open till Monday. 9.42am Monday, Stevenson Jaques & Co telegraphed: “please wire whether you would accept forty for delivery over two months, or if not, longest limit you could give”. Issue: Was this a rejection of the offer? McLean didn’t answer and sold the iron to someone else. Stevenson, Jaques & Co sent a telegram accepting the offer. Issue: Was there a binding contract to sell iron? Held: Not a rejection of the offer; not a counter-offer but a mere inquiry. The offer could have been revoked (but wasn’t) so it was still open and was accepted. There was a binding contract. 46 Offer – what you need to know A definition/test to apply to assess whether an offer has been made Distinction between an offer and a “mere puff” Distinction between an offer and an “invitation to treat” The difference between unilateral and bilateral contracts When is an offer terminated? When can an offer not be revoked? What is an option contract? Why does the offer remain open? What happens to an offer when the offeror dies? When can a change of circumstances cause an offer to lapse? Difference between an implied rejection/counter offer and a mere inquiry. 47  WARNING This material is substantially based on slides prepared by Lisa di Marco and has been reproduced and communicated to you by or on behalf of Monash University in accordance with s113P of the Copyright Act 1968 (the Act). The material in this communication may be subject to copyright under the Act. Any further reproduction or communication of this material by you may be the subject of copyright protection under the Act. Do not remove this notice. Welcome to LAW5002 (JD) (T3) CONTRACT A Dr Haemala Thanasegaran Email: [email protected]  Assessment ▪ Participation: 10% – Important Skills Development Exercise – Persuasive Oral Argument – More info on how this is assessed under the Assessments tab on Moodle ▪ Assignment: 30% – 2250 words – Hypothetical problem - Content covered: Weeks 1 - 4 – Release date: Week 4 (4.00pm on 16th Sept) & Due date: Week 7 (11.55pm on 7th Oct) – Important to adhere to Submission Dates to Not delay Feedback to Class (for Exam prep) – Extensions must go through Special Consideration applications (a Central process) & Not to be sent to CE/Lecturer. – Latest Special Consideration extension is 25th October 2024 (Week 9), after which, a New Assignment Question will need to be done. – Note: Strict Late Submission Penalty (5% per day/part thereof); Exceeding Word Limit (1 mark for up to every 100 words in excess of 2250 words). ▪ Final Exam: 60% – 2 hours and 30 minutes reading and writing time – All topics examinable – Hypothetical problem questions 2  Study resources & reading ▪ Reading Guide and Legislation Pack on Moodle ▪ Lecture Slides (Weekly) ▪ Problem Workbook & Extra Qs posted on Moodle (as & when notified) ▪ Andrew Robertson and Jeannie Paterson, Principles of Contract Law, 6th ed, LBC, 2020 (Principles Book) ▪ Andrew Robertson and Jeannie Paterson, Contract: Cases and Materials, 14th ed, LBC, 2020 (Case Book) 3 New textbooks can be purchased from the publishers Website - https://legal.thomsonreuters.com.au/principles-of-contract-law-6th-edition/productdetail/127441 You might ring them to see if you can get a discount as a Monash Law student. It pays to ask! You could also try Monash University’s book shop OR Check with your predecessors (2nd hand copies) Monash Retail, Book & Merchandise Store Campus Centre, Building 10, Clayton Campus 21 Chancellor's Walk, Wellington Road Clayton, VIC, 3800 Australia E: [email protected]. or Tel (03) 99053113.” 4  Workshops ▪ 2 hours 50 mins weekly classes ▪ Classes are intended to be interactive, involving class discussions and activities ▪ Students are required to read the relevant materials/slides before attending lectures, and be prepared to participate in discussions ▪ Prepare for weekly problem scenarios in the Problem Workbook ( or on Moodle under our Stream as may be advised) for the relevant week’s class ▪ Students are strongly encouraged to discuss, collaborate, attempt to answer and ask questions in class 5 Exam prep starts… now! Make great notes as you go along! “If you think that you will have time to bring your scattered lecture notes up to date and complete the reading of the additional references and will be able to consolidate all the material into a coherent whole between the end of lectures and the beginning of exams, you are in trouble” Professor Richard Fox’s advice to Monash law students, quoted in Krever, Mastering Law Studies and Law Exam Techniques (10th edn, 2019) p30 “And even if there were time to mechanically perform these tasks, an understanding of how to use concepts and precedents in legal arguments comes from working with the materials over an extended time, gradually appreciating how cases look at several weeks earlier can be used to distinguish the principles set out in earlier ones, and so forth.” Krever, Mastering Law Studies and Law Exam Techniques, (10th edn, 2019) p30 6 LAW5002 CONTRACT A INTRODUCTION TO CONTRACT LAW Definition – what is a contract? “… an agreement or set of promises that the law will enforce (ie for breach of which the law will provide a remedy)” – Principles Book, 3, citing Coote, “The essence of contract – Part 1” (1988) 1 Journal of Contract Law 91, 94-97 8 The nature of contract Contract Law is unique and important: – Parties create their own obligations – Contract is an everyday occurrence in the life of individuals – Contract underlies almost all commercial and economic activities – Contract law is foundational of all commercial law subjects Some Underlying Themes – Freedom of contract – Economic / commercial efficiency – Objective approach – Fairness— the law abhors certain types of conduct (such as deception, coercion, unconscionability) in contracting 9  Contract Law Map – Contract A & B Elements of Formation Matters Affecting Formation Offer Privity Acceptance Formalities Consideration Capacity Certainty Intention Contract Terms Estoppel Express Implied Vitiation of Contracts Misrepresentation Discharge of Contracts Mistake Frustration Illegality Performance Undue Influence Breach Duress By Agreement Unconscionability Termination Void/voidable Remedies Remedies Damages Rescission Injunction Damages Specific Performance Rectification 10 See Butterwortths Tutorials Series - Contracts Law, 2nd ed. 1999 Topics to be covered – Contract A Formation of Contract Estoppel – Agreement: Offer & Acceptance Terms and interpretation – Consideration – Express Terms – Intention to Creation Legal Incorporation/ Relations identification – Certainty Construction – Capacity – Australian Consumer Law – Formalities – Implied Terms – Privity/ parties Then, next trimester – Contract B … 11 Australian law - refresher Originated in English law Two sources of law: – Parliament: legislation / statute – Courts: cases (common law) Parliament can legislate to change case law. Contract is a “civil” (cf. criminal) law matter. A court: – Determines the facts based on evidence – Applies the law (statute or common law) to the facts 12  Domestic contract law Predominantly case law (contract) – common law and equity Other areas of case law impacting on contract: – Enforcement of promise by way of estoppel – Restitution for unjust enrichment Legislation affecting contracts: – Australian Consumer Law (ACL): Contract A: Unfair contract terms Consumer guarantees Contract B (Not relevant to this unit): Misleading or deceptive conduct Unconscionable conduct – Other legislation eg: – Goods Act 1958 (Vic) re: sale of goods – Statute of Frauds – Electronic Transactions Act 13 Is there a contract? The question “Is there a contract?” requires the establishment of 4 material elements: – an agreement between the parties (often expressed as “offer” and “acceptance”); – consideration (each party must give something in return for the other’s promise); – an intention to create legal relations between the parties; – the agreement must be complete and certain (i.e., there should not be any doubt as to exactly what each party is obliged to do in terms of the agreement). Other aspects of formation: – A party must have capacity to contract to be bound – Certain formalities required for some types of contract – Privity - only parties to the contract are bound 14  WARNING This material is substantially based on slides prepared by Lisa di Marco and has been reproduced and communicated to you by or on behalf of Monash University in accordance with s113P of the Copyright Act 1968 (the Act). The material in this communication may be subject to copyright under the Act. Any further reproduction or communication of this material by you may be the subject of copyright protection under the Act. Do not remove this notice. LAW5002 CONTRACT A CONSIDERATION Topics to be covered – Contract A Formation of Contract Estoppel – Agreement: Offer & Acceptance Terms and interpretation – Consideration – Express Terms – Intention to Create Legal Incorporation/ Relations identification – Certainty Construction – Capacity – Australian Consumer Law – Formalities – Implied Terms – Privity/ parties 2 Consideration – overview Definition Essential elements: – Benefit/Detriment – Bargain Consideration need not be adequate Consideration must be sufficient – Past consideration not sufficient Exception for services requested – Existing legal duty not sufficient 5 exceptions 3 What is consideration? - Definition ‘A consideration is a detriment or liability voluntarily incurred by the promisee … or a benefit conferred on the promisor at the instance of the promisee … in exchange for the promise’ Jenks, History of the Doctrine of Consideration, p. 81 4 Consideration – a diagram Promise Promisor Promisee Consideration Consideration is something of value given by the Promisee or a detriment suffered by the Promisee in exchange/return for the Promisor’s promise, in order to enforce the promise & contract. 5 What is consideration? - typical examples Consideration can be constituted by a number of things. Some examples follow. In bilateral contracts consideration is a promise, for example: – a promise to pay a sum of money – a promise to sell land – a promise to do a certain number of hours of work – a promise to buy a car – a promise not to do something In unilateral contracts consideration is the performance of the act in accordance with the terms of the offer. – Eg: Mrs Carlill provided consideration by buying and using the smokeball 6 Consideration by way of a promise Promise Promisor Promisee (also a promisee) (also a promisor) Consideration (also a promise) Q: So how do you work out who is the promisor and promisee if both parties are promisors and promisees? A. It depends on which promise is being enforced. The person seeking to enforce a promise made by the other party is the promisee in respect of that promise and must provide consideration. Terminology: Promisee = the person seeking to enforce a promise Promisor = the person making the promise sought to be enforced 7 Consideration – an essential element of an enforceable contract – but not required for deeds Consideration is required for the enforceability of any promise not made in a deed (under seal) Agreement not supported by consideration (and not made in a deed) is called nudum pactum (i.e. naked agreement), and is unenforceable What is a deed? – Promise made in particular form and subject to particular rituals. Eg: Signed sealed & delivered by X in the presence of Y (witness/s) 8 Consideration - what are its essential requirements? There are two essential elements: – *Benefit/Detriment requirement Promisee must confer a benefit (usually, but not necessarily, on the promisor) or promisee must incur a detriment – *Bargain requirement The benefit or detriment must be given in return for the promise 9 The benefit/detriment requirement Promise Promisor Promisee Benefit to Detriment to promisor? promisee? Consideration There must be: a detriment incurred by the promisee, or a benefit conferred on the promisor at the instance of the promisee 10 The Benefit/Detriment requirement In most cases, consideration will result in both a benefit to the promisor and a detriment to the promisee. For example: – Payment of money – financial gain for promisor / financial loss for promisee – Transfer of property – material gain for promisor / material loss for promisee – Undertaking of labour – work product for promisor / physical/mental exertion for promisee 11 Principles of Consideration (1) Consideration – must move from the Promisee …. but need not move to the promisor (benefit may be conferred on a third party) Promise Consideration Third Promisor Promisee party Qualification: Where two parties are joint promisees, consideration may be provided by one of them on behalf of the other: Coulls v Bagot’s Executor (Week 6: Privity) 12 The Bargain requirement - overview The requirement: The benefit or detriment must be given in return for/in exchange for/as the price paid for the promise. It is a requirement of “quid pro quo”/ “this for that” - Australian Woollen Mills; Beaton v Mc Divitt – A request from the promisor is relevant but not conclusive in establishing quid pro quo Australian Woollen Mills; Beaton v McDivitt – There is a distinction between a promise made in return for an act, and a conditional gift Australian Woollen Mills; Beaton v McDivitt – There is a distinction between performance in exchange for a promise (good consideration) and performance in reliance on a promise Beaton v Mc Divitt 13 Australian Woollen Mills – the bargain requirement Subsidy (promise) CTH AWM quid pro quo? (promisor) (promisee) Purchase wool (Consideration?) Issue: Was the promise given in return for AWM purchasing wool and vice versa? 14 Australian Woollen Mills Pty Ltd v Commonwealth (1954) HCA Facts: – June 1946 - Commonwealth announced a “subsidy” would be paid to manufacturers on wool purchased and used for manufacture in Australia after 30 June 1946 – AWM, a manufacturer, purchased large quantities of wool for local manufacture in 1946, 1947 and 1948, and received large subsidies from the Commonwealth – June 1948 – Commonwealth announces an end to the subsidy program – AWM had large stockpile of wool affected by the cancellation – AWM claimed to recover subsidies on all wool they had purchased prior to the cancellation - £176,153 in total Issue: – Was there a valid contract – was there consideration? Was the Commonwealth’s promise to pay the subsidy made in return for AWM purchasing the wool? 15 Australian Woollen Mills Pty Ltd v Commonwealth Held - principles: (HCA): – This is a purported ‘unilateral’ contract (which they described as an ‘unscientific and misleading’ term) – The bargain requirement – the promise must be in return for the acts to be performed; and the acts performed must be done in consideration of the promise: ‘In cases of this class it is necessary, in order that a contract may be established, … that the statement or announcement which is relied on as a promise was really offered as consideration for the doing of the act, and that the act was really done in consideration of a potential promise inherent in the statement or announcement. Between the [Commonwealth’s] statement or announcement, which is put forward as an offer capable of acceptance by the doing of an act, and the act which is put forward as the executed consideration for the alleged promise [AWM purchasing the wool], there must subsist … the relation of a quid pro quo’ [i.e. “this for that”] 16 Australian Woollen Mills Pty Ltd v Commonwealth Held – principles cont (HCA): Need to distinguish between promises which are conditional gifts and enforceable promises. In the absence of an express or implied request from the promisor, the promise is likely to be a conditional gift: – Review the example mentioned in the case – if A offers B £1,000 on Bs arrival in Sydney – this is a conditional gift and there is no binding contract. However if A requests that B go to Sydney (so as to help A in Sydney) the request indicates that the promise to pay is given in exchange for the act of B going to Sydney. Held – application to facts: No enforceable promise to pay the subsidy because of lack of consideration/ no quid pro quo In this case, statements made by the Commonwealth were in the nature of policy announcements (conditional gifts) and no request to purchase wool could be implied. Nothing said by the Commonwealth suggested that payment of the subsidy was promised in return for AWM purchasing wool. 17 Australian Woollen Mills Pty Ltd v Commonwealth Held - Privy Council: No offer: no contract existed because there was no offer made, on the basis of: – lack of intent (a mere policy statement – scheme was not contractual but administrative) and – lack of certainty (the “scheme” was somewhat arbitrary/illusory, the Commission able to determine the amount of the subsidy and other key aspects of operation). 18 Beaton v McDivitt 1987 NSWCA “You can have the land when it is rezoned if you work the block by means of organic farming.” Issue: Was the working of the land by Beaton consideration? 19 Beaton v McDivitt Facts: McDivitts owned 25 acres of land but farmed only a portion of it. McDivitts feared the Local Council would rezone the land, meaning higher rates would have to be paid. Fearing they would be unable to pay the higher rates, the McDivitts divided the land into 4 blocks. 3 blocks would be retained by the family; the 4th would be made available to someone interested in permaculture. Eventually, the 4th block was made available to Mr Beaton rent-free on condition he employ permaculture cultivation techniques. At the time, Mr Beaton was having difficulties with his landlord. Mr McDivitt said he would transfer title to the block to Mr Beaton when the rezoning took place (thought to be in 2 or 3 years). Beaton accepted the proposal and worked the land for 7 years (the rezoning never took place); spent money planting trees/shrubs; helped build and maintain a road on the property. The relationship then soured (over a Tai Chi seminar held in Mr Beaton’s house). The McDivitts reneged on the deal. Issue: Was there a contract between the McDivitts and Beaton? Had Beaton provided consideration for the promise to transfer the land? 20 Beaton v McDivitt Trial Judge held: – There was a contract. Although there was no consideration in the traditional sense (ie quid pro quo), Beaton’s reliance on the McDivitts’ promise amounted to a form of consideration (following Dillwyn v Llewellyn (1862)) – But the contract was frustrated because the rezoning never happened NSW CA held: – Dillwyn v Llewelyn and the cases that followed were based on estoppel, not contract law, therefore did not provide an exception to the bargain requirement. Contract does not protect a reliance interest. This meant that detriment suffered in reliance (eg maintaining the road) was not relevant. Need to assess whether working the land using permaculture (as foreshadowed by the offer) was good consideration provided in exchange for the offer. 21 Beaton v McDivitt Decision of NSW Court of Appeal (1987) cont McHugh and Mahoney JJ – good consideration: – Beaton’s working of the land at the McDivitt’s request was sufficient consideration, giving rise to a unilateral contract c/f Kirby P – no consideration: – the bargain requirement was not satisfied on the facts, as Beaton had made no promise that could be regarded as a quid pro quo for the exchange of land BUT Mahoney JA: found that the contract had been frustrated by the failure of the Council to rezone the land. [frustration is covered in Contract B] Therefore Beaton was not able to enforce the promise (McHugh in minority) 22 (2) Consideration must be “sufficient” but need not be “adequate” “Adequacy” here refers to the fairness of the exchange – the Courts will not inquire into the adequacy of the consideration - Woolworths v Kelly. This means: – Nominal consideration – such as a peppercorn – will be sufficient consideration. – Parties can effectively avoid the requirement of consideration through the use of nominal consideration, as frequently occurs. Why is adequacy not relevant? Woolworths v Kelly 23 Woolworths v Kelly (1991) (Kirby J) NSWCA Reasons why the common law will not inquire into the adequacy of consideration for the purposes of determining if a legally enforceable contract exists: 1. Different people will put different values on the bargain they are getting for different reasons. It is therefore impossible for the courts to indulge in an evaluation of the equivalence of promises. 2. Judges are not qualified to give opinions about the wisdom of certain bargains. They have legal expertise; not expertise in economic evaluation. 3. If courts were to assess the adequacy of consideration, litigation could involve a vast amount of evidence on this issue. Different judges would reach different conclusions on the same evidence. 4. This would then lead to great uncertainty in the enforceability of contracts. Certainty has great economic importance in society. 5. The law provides other means to challenge an unjust bargain (e.g. where no intention to create legal relations; also equity, statutes prohibiting unconscionable conduct). 6. Economic freedom of parties to make their own deals ‘untroubled by the paternalistic superintendence of the courts as to the adequacy of their bargains’. 24 Consideration must be “sufficient” Something already done by the promisee is not Past good consideration consideration Exception/qualification for past services performed at the request of the promisor What is not A promise to perform a pre-existing legal Existing legal “sufficient” duty duty is not good consideration 5 exceptions consideration? A promise that is illusory (ie has no real content) is not good consideration Illusory We will review in topic of “Certainty” consideration Also recall Kirby J in Beaton v McDivitt, and Barwick J in MacRobertson v Miller Airlines 25 (3) Past consideration not good consideration - overview General rule - Past consideration is not good consideration. – Something given by the promisee before the promisor makes the promise is past consideration for that promise and is not good consideration. Roscorla v Thomas (1842) Qualification/exception – Subsequent promise to pay for services requested – Past services are good consideration for a subsequent promise to pay for those services if they were performed at the request of the promisor and there was an implication they would be paid for Ipex Software Services Pty Ltd v Hosking (2000) Lampleigh v Braithwait (1615) 26 Roscorla v Thomas 1842 Roscorla buys horse from Thomas Thomas later promises – “the horse is sound and free from vice” Issue – Was payment of the purchase price good consideration for the subsequent promise that the horse was free from vice? 27 Roscorla v Thomas Facts: – Roscorla bought a horse from Thomas. – After the sale was completed, Thomas promised that the horse was “sound and free from vice”. – But the horse was not, and Roscorla sued relying on the payment of the purchase price as good consideration for the subsequent promise. Held: – As a general rule, a promisor’s promise must be coextensive with the promisee’s consideration. – Consideration past and executed will not support any further promise made by the promisor. Accordingly, there was no consideration provided for Thomas’ subsequent promise. – [There was no implied promise at the time of sale that the horse was free from vice.] 28 Past consideration – qualification/exception: promise to pay for past services Consideration must not be past, except where the promise is to pay for past services performed at the request of the promisor This qualification/exception applies where: – promisor requests the promisee to perform certain services (this request being made before an actual promise to pay for them is made); and – the surrounding circumstances evidence an understanding that the services would be paid for; and – the promisee performs the services requested; and – the promisor subsequently makes the promise to pay for the services (or maybe more correctly, fixes the price for the services). 29 Lampleigh v Braithwait (1615) Request: B asks L to do all he can to help him secure pardon Promise: B promises from king (for murder) to pay L £100 Work: L travels to see the king and incurs considerable expense Issue – Was L’s work good consideration for the later promise from B for payment? 30 Lampleigh v Brathwait (1615) Facts: – Brathwait had murdered Patrick Mahume. – Brathwait asked Lampleigh to help him secure a pardon from the King. – Lampleigh agreed to undertake the task and did so. This involved significant travel and expense. – Upon his release, Brathwait promised to pay Lampleigh £100 for his trouble but then changed his mind. Held: – Where: A makes a request to B that he perform services; and B then performs the services requested of him; and A then promises to pay B for the performed services, B’s performance of the services is good consideration for A’s promise. – Accordingly, Brathwait was legally bound to pay the £100. [Note: the requirement that there was an understanding that the services would be paid for was only later developed by the common law] 31 Ipex Software Services v Hosking 2000 VicCA Services: Transfer of software business from Hosking to Ipex Group Promise: Formal agreement signed. Hosking to get 5% of Ipex Group Issue: Had Hosking provided good consideration for the promise to provide him with a 5% stake in the restructured corporation? 32 Ipex Software v Hosking Facts: – Hosking was part-owner of a computer software services business. – Hosking’s business was to be acquired by Ipex. – Hosking assisted in the transfer of the business (involving transferring all clients) believing that, in return, he would receive shares or units in the restructured corporate group - the evidence suggested this was everyone’s understanding. – After Hosking’s “services” of transferring the business had been performed, an agreement was formally entered into which specified Hosking would have a 5% stake in the restructured group. – Ipex, however, failed to transfer to Hosking a 5% stake in the restructured corporation. Issue: – Had Hosking provided good consideration for the promise to provide him with a 5% stake in the restructured corporation? 33 Ipex Software v Hosking Held (Callaway JA): – ‘The [transfer of the business] was not, however, intended to be gratuitous, nor was it an example solely of detrimental reliance. It was more like the performance of a service on the basis that it would be paid for, followed by a promise which fixed the amount of the payment. – ‘In my opinion, the transfer of the business was not past, but executed, consideration and it was capable of supporting the promise on which the respondent sued [to give him a 5% stake].’ 34 (4) Existing legal duty – overview General rule: Promise to perform, or actual performance of, an existing legal duty is not sufficient consideration (for a further promise) – Stilk v Myrick – Foakes v Beer 5 Exceptions: – Fresh consideration - Hartley v Ponsonby – Practical benefit – Williams v Roffey; Musumeci v Winadell; – New obligation to a third party - Pao On v Lau Yiu Long – Bona fide compromise of a legal dispute – Wigan v Edwards – Termination and replacement of agreement – Hartley v Ponsonby 35 Performance of an existing legal duty is not sufficient consideration Statement of the Rule – “The general rule is that a promise to perform an existing duty is no consideration, at least when the promise is made by a party to a pre- existing contract, when it is made to the promisee under that contract, and it is to do no more than the promisor is bound to do under that contract” Wigan v Edwards (1973) 1 ALR 497 at 512 (Mason J) 36 Examples of existing legal duties Public duties – duty to attend court to give evidence pursuant to a subpoena – duty to obey the law Contractual duties – a pre-existing contract obliges a party to perform a certain task – a further promise to perform the same task is of no value 37 Stilk v Myrick (1809) Stilk engaged to work Myrick agrees to split on Myrick’s ship for 5 the deserters’ wages pounds per month. amongst the Original crew of 11 remaining crew 2 of the crew desert Issue – Did Stilk provide good consideration for the promise of extra wages? 38