business law tutorial 04

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TUTORIAL 4

INTRODUCTION TO CONTRACT LAW

AND AGREEMENT: OFFER

1. What economic and commercial justifications are there for theexistence of the law of contract?

The law of contract is vital to ensuring business is conducted in the manner proposedby all parties. Commerce is conducted by numerous and various people andinstitutions all interacting with each other. It is essential therefore that there is a set ofrules which govern the behaviour of these parties in relation the commitments madeto the other parties.

Business survival is dependent, in part, upon the distribution and exchange of goodsand services. These functions exist because of promises each party gives to another.If promises are broken commerce cannot occur to the benefit of all parties. To ensurethat promises are kept parties can be protected by the terms of a promise, i.e. theterms of a contract, providing a punitive avenue against a contractual transgressor.

Contracts are made and underpin every facet of business operations. For example, abusiness' organisation depends upon a contract, as does its marketing, purchasing,hiring of labour, banking and sales. A certain measure of liability inherently exists in

each of these areas. Therefore a business needs to know what this is before andduring the life of the contract to ensure those operations are successful.

Hazards exist, in each of these operations, which threaten a business in achievingsuccess of any given outcome. As a way of reducing hazards a contract can be adevice used to control them, thereby minimising any associated risk. The control is acontracts legally binding nature.Parties are not restricted to just the law of contract. There are other laws which canalso protect parties involved in commerce. These include the law of torts and the lawof equity and restitution, and support can also be gained from parliamentary statutes.

A downside to the law of contract is that it connotes an atmosphere of distrust. Surelypeople and institutions have more confidence entering into agreements with those thatthey can trust. Trust must be the greater motivating force to ensure that agreementsare met. Parties which work together need to develop an open and free dialogue, and

by using a contract as a framework, better business can be built, as well as buildingbetter business relationships in the process. Adjustments or cancellation to contractsmay well be necessary to ensure ongoing and future business, beneficial to all parties.

Another downside is the potential for disputed matters to lead to a lengthy litigationprocess. This is both costly to all parties and it promotes a distrust of the legal

profession. It also makes it extremely difficult for the parties to conduct businessagain. Afterall, business is about making money and hopefully to the benefit of


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humanity. Its not about spending money on lawyers and making enemies in theprocess.

Good business survives on a strong adherence to good business ethics and promises.The termpacta sunt servanda indicates that people should be held to their promises.

When supported and underpinned by a contract, parties can reasonably expect thatsuch promises are acted upon, gaining not only immediate commercial benefits, butalso ensuring that future business can be achieved.

2 (1).What is meant by the expression 'freedom of contract'?

Freedom of contract means that parties have the freedom to make agreements uponwhatever basis they choose and is the underlying doctrine in contract law. Thisstemmed from the 19th century when the theory of laissez faire was eminent, believingthat intervention should be limited. It was believed that the management of affairs

was better done on a private basis and was far superior to public regulation.

Although, contracts still have to be enforceable under the law, whether they are madefreely or otherwise. Such agreements are considered determinative by the primaryobligations which the parties are willing to accept, as stated by Lord Diplock inPhoto

Production Ltd v. Securicor Transport (1980). He further explained that where acontract is deficient in stating all the primary obligations, it is implied that these arecovered by the law. Even so, if parties wish to make modifications they are free to doso.

The expression freedom of contract is accompanied by the another expression sanctity of contract. This maintains the integrity of the contract ensuring that thecourts cannot re-write it, simply because one of the parties considers that they shouldnot have entered into the agreement, the contract thus being enforceable according tothe agreed terms.

The success or benefit resulting from a contract to either party is proportional to thestrength or weakness of each party. Those with little bargaining power can be takenadvantage of because a stronger party is able to negotiate terms more beneficial tothemselves. Although this is a freedom, it cannot also be in the public interest.

(2).What inroads have been made on the concept of freedom of contract?

Subsequent inroads have been made on the concept of freedom of contract,particularly by making agreements fair and equitable between parties. This has beenachieved by protecting consumers and the public interest with legislative statutes and

judicial intervention.

Consumers are disadvantaged in relation to negotiating for goods and services.Generally it is the provider of the good or service who has more freedom to stipulateterms. Consequently a number of statutes have been enacted, which includes Sale of

Goods Acts, Fair Trading Acts, and specifically the Trade Practices Act 1974 (Cth).


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More often people with little bargaining power are being protected. As the DeakinUniversity Business Law Study Guide (2000) suggests, this has resulted in:

the automatic insertion of terms for the benefit of consumers;

exemption clauses having legislative and judicial controls;

contracts able to be challenged on the grounds of unfairness andunconscionableness;

statutes prohibiting misleading or deceptive conduct.

The use of form (pre-printed) contracts are more common now, for exampleResidential Tenancy Agreements are presented on a standard contract form.

The rights of parties are also being protected by imposing restrictions upon contractsif they are not in the public interest. Such legislation prefers to uphold social,economic and political values. For example, people cannot be discriminated against

because of sex or marital status in negotiating terms of employment under the SexDicriminations Act 1984 (Cth).

The judiciary also is reviewing its role in law-making by not being restricted bytechnical rules of contract. It seems that the courts are pursuing the objective of fairoutcomes for individual cases so that unfair benefits cannot be secured at the expenseof another party.

Commerce still requires contractual agreement and without such, in the absence ofmutual reconciliation, parties would be unable to make settlements. Common law,has by nature evolved slowly, and this has meant that inroads to the concept of

freedom of contract have also been slow, and more importantly incremental. Asstated in the Study Guide:

The emphasis remains that of ascertaining whether there is a contractaccording to an objective appreciation of the circumstances and then ofconsidering whether there exists factors which justify the court denying effectto that contract or some part of it by virtue of some statutory rule or equitable

principle.Thus a balance is being achieved between a partys right to negotiate freely, butwithin the constraints of law.

3 (1).Distinguish between the following:

-unilateral and bilateral contracts;

Unilateral contracts are those which only one of the parties is under obligationto perform. For example, in Carlill v Carbolic Smoke Ball Co (1893) asecondary party was not obligated to undertake the trial of a smoke ball toward against influenza. However, the company was obligated to fulfill itsterms of agreement should a secondary party comply. Other contracts are said

to be bilateral when both parties to a contract are obligated to perform.


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-simple and formal contracts;

Simple contracts are sometimes referred to as informal contracts and can becharacterised by agreements made orally, in writing, or both. Although somecontracts can be made in simple form, they may not be enforceable. For

example, statutes regarding the sale of land require a written agreement in aformal contract, if constructed in simple form the contract is not enforceable.

Formal contracts, also called specialty contracts, must be in writing, the partiesbound must sign them, and the signatures must be witnessed by someone whois not party to the contract (the requirements for contracts for the sale of land).

-implied and express terms;

Express terms are those agreements explicitly articulated in a contract.OsbornsConcise Law Dictionary (1993) describes express as directly

discoverable by word or act. Whereas implied terms exist where no agreedterms are expressed, and due to the conduct of the parties, or required bystatute, terms of a contract are implied to exist. For example the merchantablequality of goods sold to a buyer there are no express terms for the conditionof the goods, this is implied by the Sale of Goods Act (1979). Few contractsare entirely implied however express contracts can contain implied terms.

-void and voidable contracts

A void contract has no effect on any party, they are said to be void from thebeginning. Contracts may be rendered void by a mistake with the contract orif they are illegal. Promises cannot be enforced and neither can parties recoverdamages under a void contract. For example, a contract in which goods aresold by someone who is not the rightful owner, is void, as this is an illegal act.

Voidable contracts are those which are valid and binding, but there are certaincircumstances which enable one party to rescind the contract due to somecondition. Once a voidable contract is rescinded, it becomes a void contract,as if void from the beginning (ab initio).

(2).Why is a social, as opposed to a business, arrangement unenforceable?

No matter what the context, promises matter. Promises play a critical role in thesocial context but are they enforceable? Social arrangements are usually made

between parties who are well known to each other and whose outcomes do not relyupon the risk of losing quantities of goods, services, or money. The contract ofmarriage has the ultimate outcome of the partners being together until death. It is wellknown that in the event of a failed marriage, property is a key issue, and the award ofsuch is enforceable. However if the key outcome is to remain together, and this fails,can togetherness be enforced? TheFamily Law Act(1975) enables either party toseparate of their own free accord, and the social arrangement of marriage togetherness - is unenforceable.


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Social arrangements do not carry with it the same type of risk which would generallybe expected with a business arrangement. Parties making social arrangements aregenerally committed to achieving mutually beneficial outcomes in ordinary course, aswell as to maintain the relationships. To enforce a social arrangement would causetension and anxiety which would then jeopardise the arrangements existence,

possibly causing the relationship to cease.

Promises broken in a social sense can be the source of frustration and anxiety, andultimately could cause ostracism. A reason for this occurring could be attributed to anindividuals perceptions, or self reality, which will always be different to someoneelses. Such reality is not always clear to another social party, that is to say that thereis no written document where both parties can agree to, or accept, the perceptions ofone of the parties, in a social sense.

In a reasonable social environment it would be recognised that promises do matter.But only to social parties who hold that value as important. Also in such

environments a certain level of trust will exist which may have the capacity tounderstand that a broken promise will have an underlying reason. In the socialcontext it is the values which are held which will determine whether socialarrangements are kept, or if not, are forgiven. Social values cannot be enforced, theycan only be held by individual choice.

4 (1).Distinguish between an offer and an invitation to treat. What would

be the effect if there was no distinction drawn between them? Discuss

these issues by reference to case law.

The acceptance, of a commercial seller making an offer, which is capable of bindinghim, with respect to his goods or services, is the central issue in determining thedifference between an offer, and an invitation to treat. Often this circumstance is amere invitation to treat, seeking others to make the seller offers with the mind ofnegotiating a sale. If only an invitation to treat has been made, then a reply willmostly be an offer which the seller can either accept, thus making an agreement orenforceable contract, or reject. (Of course the solicited reply may not be an offer buta willingness to proceed with further negotiations.)

In order to ascertain if an offer or an invitation to treat has been made, it is necessary

to interpret the language used, noting the surrounding circumstances. The courts usean objective view, based on what a reasonable third party believes the partiesintended. This was upheld in Gibson v Manchester City Council[1978] 1 WLR 520at 523-4 where Lord Denning stated that

there is no need to look for a strict offer and acceptance. You shouldlook at the correspondence as a whole and the conduct of the partiesand see therefrom whether the parties have come to an agreement ... ifby their correspondence and their conduct you can see anagreement ... which was intended thenceforward to be binding thenthere is a binding contract in law even though the formalities have not

been gone through.


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Guidance has been developed to distinguish between what constitutes an offer or aninvitation to treat, and is dependent upon the intention of the party making it. Suchguidance has been upheld in situations which have been normally recurring, howevercare must be taken not to use the normal inference in one situation, and then apply itequally to another situation which may be inappropriate.

Promotional brochures giving details of goods, which a merchant has for sale, cannotgenerally be deemed as an offer. Even if the goods have been offered for sale, theinterpretation in a general sense will normally show the merchants intention tonegotiate a sale, while keeping the right to reject any offers. In Spencer v Harding[1870] LR 5 CP 561 it was held that a pamphlet stating we are instructed to offer tothe trade for sale of goods was not an offer capable of acceptance but rather aninvitation to treat. In the same manner goods displayed in a shop window with pricesattached are invitations to treat, as upheld by Lord Parker inFisher v Bell[1961] 1QB 394 at 399-400, and not an offer for sale the acceptance of which constitutes acontract.

A contrary example of a merchants advertisement is found in Carlill v CarbolicSmoke Ball Co [1893] 1 QB 256 where it was found that the advertised 100 rewardwas indeed an offer because the advertisement was accepted by members of the

public who faithfully used the balls as described, yet still caught influenza. In similarfashion advertisements offering rewards for lost or stolen property, or for informationregarding criminal matters, are mostly considered as offers by the courts. InR vClarke [1927] 40 CLR 227 Clarke could have been successful in claiming the rewardhad there been true acceptance of the offer, furthermore his intention was for the

purpose of saving himself from the murder charge.

Invitation to tender is normally considered as an invitation to treat, but can also be anoffer, depending on how it is communicated. Invitations to tender can be consideredoffers if, in its communication, it is interpreted that by meeting certain conditions, a

binding agreement is inferred. For example, if the party seeking to tender binds itselfto the highest tender, this may be the offer, and the highest tender is the acceptance:

Harvard Investments Ltd v Royal Trust Company of Canada (CI) Ltd[1986] 1 AC207.

The effect of not being able to distinguish offers from invitations to treat would causeconfusion as to what could or could not be considered an agreement, or contract, and

thus would question its enforceability by law. Doubt would exist in determiningwhether or not a contract has been formed at all. Doubt would also arise withmerchants in advertising their products. If an advertisement was held as an offer, thena merchant would be required to ensure that enough stock was held to fulfill

potentially limitless orders. It can be accepted that stock held is not limitless and thatif the orders exceeded the amount of stock held, the merchant would then be liable indamages to each customer not receiving a fulfilled order.

(2).Cool Products Pty Ltd sends out a catalogue in which it prices a

refrigerator at $74 instead of $740. Ms Hot insists that the company sell

her the refrigerator for $74. Is Cool Products obliged to sell therefrigerator for $74? Give reasons and authority.


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Cool Products is not obliged to sell the refrigerator for $74 because the catalogue isonly an invitation to treat, inviting potential customers, including Ms Hot, to make anoffer to purchase the refrigerator. Subsequent to the offer Cool Products can legallyreject the offer. This was upheld in Spencer v Harding[1870] LR 5 CP 561 where it

was held that a pamphlet stating that we are instructed to offer to the trade for saleof goods was not an offer capable of acceptance but rather an invitation to treat. Inthe same manner goods displayed in a shop window with prices attached are alsoinvitations to treat, as upheld by Lord Parker inFisher v Bell[1961] 1 QB 394 at 399-400, and not an offer for sale the acceptance of which constitutes a contract. Finallyit could also be argued that the $74 price was a mistake which would avoid anagreement or allow the innocent party to do so at their option.

5 (1).What ways an offer may be terminated? Discuss.

The purported acceptance of an offer may fail to create a contract because the offerhas ceased to be effective, or terminated, in some way. This may have occurred dueto the offers revocation, rejection, death, lapse of time, or because some conditionhas not been met.

Revocation

Revocation is the formal communication of withdrawal of an offer by an offeror.This can only occur prior to an acceptance occurring and becomes effective once theofferee has received it. InByrne v Van Tienhoven [1880] LR 5 CPD 344, an offerwas accepted even though it was withdrawn purportedly prior to this event. Thedecision was upheld because the acceptance was effected before the offeree receivedthe withdrawal communication.

Another difficulty occurs when an offers acceptance involves the performance of anact, associated with unilateral contracts, as in Carlill v Carbolic Smoke Ball Co[1893] 1 QB 256. If an offeree has begun to perform the necessary conditions toenable acceptance to be completed, then an offer may not be revoked. However if theoffer is revoked, the offeror could be liable to damages, as upheld inMobil Oil

Australia Ltd v Lyndel Nominees Pty Ltd[1998] 153 ALR 198.

The offeror can promise not to revoke the offer prior to its acceptance, until some

time has elapsed, or until a certain event occurs, in return for some valuableconsideration. The holder of an option may exercise his or her right to accept theoffers terms and if not the exercise will be invalid. An example of this is the trade ofshare traded options in the stock market. A buyer of an option has the right, but notthe obligation, to buy a number of underlying shares at an agreed price, within anagreed time period. Options are sold at a price, which is not redeemable, even if theshare price is not accepted by the expiry time. The owner of the shares, the offeror,cannot revoke the offer as the offer terminates at the agreed expiry time.

Rejection

An offer can be rejected by an offeree. In this event it cannot later be accepted. An

offer can also be rejected less explicitly, by the offeree making a counter-offer,characterised by a purported acceptance, but with new terms which are not found in


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the original offer. An example is found inHyde v Wrench [1840] 3 Beav. 334; ER132. Consequently the counter-offer becomes the new offer, terminating the originaloffer.

When pre-printed standard contract forms are used, for example between a supplier

and a receiver of goods, complications may occur due to the forms having differentwording, and thus different offers. Sometimes multiple forms will be exchangedraising the question of which terms are the agreed final ones? InButler Machine ToolCo Ltd v Ex-Cell-O Corporation (Eng) Ltd[1979] 1 WLR 401, it was viewed that theterms contained in the last form submitted will comprise the final counter-offer andtherefore govern the transaction, with previous forms been rejected.

The offeree can request information in seeking to clarify the terms of the originaloffer, and provided that no new terms are either added to or deleted from the offer, arejection has not occurred, as in Stevenson Jacques v McLean [1880] 5 QBD 346.

For a rejection to become effective, its communication must be received by theofferor. This will hold even when an acceptance was communicated by the offeree,

but later changed his or her mind, if the rejection was received before the acceptance.

Death

If either the offeror or the offeree dies then it is generally the convention that the offercannot be accepted and is thus terminated. However an offeree can accept an offer inignorance of the death, which will binding upon the estate if the offerors personalitywould not be vital to the transaction occurring (Fong v Cilli [1968] 11 FLR 495 and

Laybutt v Amoco Aust Pty Ltd[1974] 132 CLR 57 at 75-60). Otherwise no contractwill be made. If the offeree dies then the offer will likely lapse since it is intendedthat an offer is made to a living person (Reynolds v Atherton [1921] 125 LT 690).

Lapse of time

If a certain time period is stipulated within which an acceptance must be received,then failing acceptance within this period the offer will be terminated. If no time

period is stipulated then the courts consider what would amount to a reasonable time(Ramsgate Victoria Hotel Co v Montefiore [1866] LR 1 Ex 109), concluded by thenature of subject matter in the offer and the means of its communication (Manchester

Diocesan Council for Education v Commercial and General Investments Ltd[1970] 1WLR 241 per Buckley J at 247-8).

Conditions

If an offer is conditional either upon an event happening, or upon an event to havehappened, the offer can be terminated if those conditions are not met (McCaul (Aust)

Pty Ltd v Pitt Club Ltd[1959] SR [NSW] 122). Typical practical examples aresubject to finance clauses.

(2).Goodman offers to sell his farm to Goodlady for $150,000. Goodlady

says that she would purchase it for $149,000. Goodman refuses to sell at

this price eventhough he loses only $1,000. Since the difference is only


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$1,000, Goodlady thereafter decides that she should buy the property and

agrees to the original price. Is Goodman obliged to sell the property?

No, Goodman is not obliged to sell the property as there was no contract. Goodladysoffer to buy the farm for $149,000 amounted to a rejection of Goodmans offer to sell

it for $150,000, it was a new statement of terms not found in the original offer.Having been rejected, Goodmans offer could not thereafter be accepted by Goodlady.(Hyde v Wrench [1840] 3 Beav. 334 ER 132)

If Goodlady has only requested more information from Goodman

regarding the payment of $150,000, what effect would this have on the

offer?

The offer would remain open to acceptance by Goodlady, as the request forinformation only seeks to clarify the terms of the offer, not change it, and thereforenot rejecting it. (Stevenson Jacques v McLean [1880] 5 QBD 346)

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