Definition of A CONTRACT?

• A contract is an exchange of promises between

two or more parties, which are enforceable by
law therefore:
• A contract is a legally enforceable promise

•So, how do we know which type of promise is a

contract?
Agreement between the parties

Consideration (that something be given in exchange

for a contractual promise)
Intention to create legal relations

Capacity to contract

Elements of a contract or an
enforceable promise
Case summary - agreement
Element Case
Offer can be made to world at large Carlill v Carbolic Smoke Ball Co [1893]

Supply of information is not an offer Harvey v. Facey [1893]

Request for further information is not a Stevenson, Jacques & Co v McLean (1880)
rejection of the offer
Offer cannot be withdrawn for the time Goldsbrough Mort & Co. Ltd v Quinn (1910)
discussed if the offeree gave a consideration
An exception to invitation to treat Carlill v Carbolic Smoke Ball Co [1893]

Counter-offer cancels original offer Hyde v Wrench (1840)

Silence is not acceptance Felthouse v. Bindley(1862)
Unilateral contracts Carlill v Carbolic Smoke Ball Co [1893]
Postal rule- acceptance as soon as letter is Adams v. Lindsell (1818)
posted
An agreement is usually broken down
into two parts: an offer and
an acceptance and involves a 'meeting of
the minds' (a consensus) between two or
Element 1: more parties.
Agreement It means that an agreement is said to exist
if it can be shown that one party has
made an offer and another party has
accepted that offer and communicated
their acceptance.
To prove that there was a consensus
between the parties is measured
objectively (just like in the tort of
Negligence)
if it would appear to a reasonable person
that the parties had reached an agreement
that is sufficient.
An offer is a definite proposal made with
the intention that it will become BINDING on
the person making it, as soon as it is
accepted.
A person makes an offer when they express
a willingness to immediately enter into a
Offer contract with the offeree.
For example, if Johnny tells Jim that he is
willing to sell his pizza oven to Jim in return
for $10000, Johnny is expressing a
willingness to enter into a contract with Jim
and is therefore making an offer to Jim.
LEGAL RULES OF AN OFFER

• Offer can be made to one person, to a group or to the world at large.

• Request for/Supply of further information is not an offer
• An offer may be kept open if supported by consideration
• There must be a willingness to be bound or it may be an invitation to
treat.
Offers can be made to one person, to a group or
to the world at large

World at large means – an offer made to the general public

Usually in advertisements

Carlill v Carbolic Smoke Ball Co [1893]

One of the defenses used by the company was that it cannot be a legal
contract because the offer wasn’t made specifically to Mrs Carlill.
The court then said that the offer was made to the world at large- anyone
who read the advertisement could buy the Smoke balls.
Request for/ Supply of further information is not an offer

Request for further information - a party who asks for further

information is not making an offer
Supply of further information - a party who provides further information
that was requested during the negotiation process of a contract is not
making an offer.
For example: Johnny offered to sell his pizza oven to Jim for $10000
and Jim asks him a question regarding the pizza oven- it doesn’t mean
that he accepts the offer, he is only asking for an information.
An offer can be kept open to give time to an
offeree to consider it.
An offer can be kept open to give an offeree time to consider it, but it
is unenforceable unless the offeree leaves consideration (e.g. a
deposit); it means the offeror can still withdraw their offer before the
time finished unless the offeree paid a deposit.

For example, leaving a deposit is sufficient consideration to keep an

offer open. The offeror can not revoke the offer before the time period
expires if there is a consideration.
THERE MUST BE A WILLINGNESS TO BE BOUND
OR IT MAY BE AN INVITATION TO TREAT

• An offer is not the same thing as an invitation to treat.

• An invitation to treat is a statement to others inviting them to make
an offer.
• For Example: Price attached to goods on display is not an offer - it is
an inducement to customers to consider buying the product.
Therefore if a store has made a genuine mistake on price they are
not legally bound to it.
• The law presumes that the following examples are all invitations to
treat: price lists, circulars, catalogues, goods on display in a shop and
tenders
An exception to Invitation to Treat

by using an objective test (looking at the facts of an individual case).

In other words sometimes an advertisement or goods on display will be
considered an offer by the court depending on the facts including:
words, terms and tone of the advertisement which shows that they are
willing to enter into a legally enforceable contract immediately upon the
acceptance of the advertised offer.
Agreement element 2: Communication of the acceptance

When the offeree indicates by words or by actions that they are willing
to immediately enter into a legally enforceable contract with the offeror
on the terms offered, they are said to accept the offer.
Legal Principles/rules of communication of acceptance:

 Acceptance must be unqualified.

 Acceptance must be communicated to the offeror except in Unilateral contracts.
 Acceptance must be made strictly in accordance with the terms of the offer where the
offeror specifies a special method of acceptance.
 Acceptance must be made within the time specified or, if not specified, within a reasonable
time.
Acceptance must be
unqualified.
 The offeree must accept the offer without
qualification or without modifications or
changes , in other words no counter offers.
 Counter offer - the offeree tries to vary the
terms of the contract set by the offeror by
making a counter offer, which is a rejection of
the original offer.
A C C E P TA N C E M U S T B E
C O M M U N I C AT E D TO O F F E R O R
E X C E P T I N U N I L AT E R A L C O N T R A C T S .

 Theremust be communication of the

acceptance to the offeror.
 Acceptance
can be expressed by
words/conduct.
 Generally,the acceptance is ineffective until
it has been received by the offeror.
 Silence is not considered to be acceptance.
An exception- Unilateral contracts

A unilateral contract is a contract where one party pays the other party to
perform a certain duty. If the first party fulfils the duty, the second party is
obligated to transfer the specified funds. However, the first party is under no
binding obligation: they only have to fulfil the task if they want to.
Unilateral contracts often take the form of a reward or contest. For example,
Mike can place an advertisement offering to pay $300 for the safe return of his
missing cat. In this case, anybody can enter into the unilateral contract by
returning the cat- so acceptance & performance happens at the same time!
Postal rule
The postal rule is an exception to the fact that acceptance
of an offer takes place when communicated to the offeror.
Under the postal rule, acceptance takes place as soon as
the letter of acceptance is posted rather than when that
acceptance is received by the person who offered the
contract.

The rules of postal rules include the following:

 An offer made by post/letter is not effective until
received by the offeree BUT
 Acceptance is effective as soon as it is posted.
 For revocation to be effective, it must be received by
the offeree before they post their letter of acceptance.
A C C E P TA N C E M U S T B E M A D E I N
A C C O R D A N C E TO T H E I N S T R U C T I O N S
GIVEN BY THE OFFEROR

 Acceptance must be made strictly in accordance with

the terms of the offer where the offeror specifies a
special method of acceptance.

 For example, if Johnny offers to sell his pizza oven

to Jim stating that ‘reply by email’, the offer will
only be accepted by email or any other method which
is just as prompt or quick for example by phone but
not by letter.
Acceptance must be made within the
specified period of time.
If the offeror states a specified period of time for acceptance to be
made then, the offeree must reply within that time span.
If the offeror has not specified a period of time, then the offeree must
respond within a “reasonable period of time”.
The objective test can be used to identify what is a reasonable period
of time under the circumstances.
INTENTION: “something that you want
 and plan to do”
Not every agreement is a contract.
If Johnny offers Jim a job and Jim accepts the offer, the agreement
between Johnny and Jim is likely to be contract.
But if Johnny offers to meet Ash for lunch and she accepts the offer,
the agreement between the two is not a contract because neither of
them intended the agreement to be legally enforceable one.
THIS is the second requirement for a Contract!
INTENTION TO CREATE LEGAL RELATIONS

• The parties must have intended to enter into a legally binding agreement.
• In deciding whether or not the second requirement is satisfied, the court
does not ask the parties what they actually intended.
• Instead, the court looks at the conduct of the parties from the perspective
of a reasonable person and ask whether the parties were behaving in a way
that indicated that they intended the agreement to be legally enforceable-
(OBJECTIVE TEST).
APPLYING THE OBJECTIVE TEST

• In applying the objective test, the legal rule in regard to intention is

under two kinds of agreements:

• Social or domestic agreements, and

• Commercial agreements
Domestic/Social Agreement
Balfour v Balfour (1919)
Under Contract Law, it is presumed that parties
to an agreement of a family, domestic or social
nature do not intend to be legally bound.
In other words, if an agreement was made
between two friends in a social setting, or
members between a household like husband/wife
or brother/sister, the court will presume that it
was not intended to be a contract.
REBUTTAL OF SOCIAL/DOMESTIC AGREEMENTS
Wakeling v Ripling [1951]

• Social/domestic agreements can be rebutted (changed) if sufficient

evidence is given to show the opposite was intended.
• The objective test can be used by looking at the facts of the case
closely in order to determine whether the parties in an individual
case actually did intend to be legally bound by the agreement.
Business Agreements
Edwards v Skyways [1969]
Under Contract Law, it is
presumed that parties to an
agreement concerning commerce
or business intend to be legally
bound.
Therefore a commercial/business
agreement is usually a binding
contract.
Rebuttal of business agreements
Rose and Frank Co v JR Crompton and Bros Ltd, [1925]

Business agreements can be rebutted (changed) if

sufficient evidence is given to show the opposite
was intended.
The objective test can be used by looking at the
facts of the case closely in order to determine
whether the parties in an individual case actually
did intend to be legally bound by the agreement.
Consideration
CONSIDERATION

q An agreement is not a contract unless both parties to the


agreement have paid, or promised to pay, a price.

q The contribution of each party to the agreement is called
consideration.

q Considerations can take the form of:
q The
The payment
payment of of money
money
The provision of goods
q The provision of goods
The provision of a service
q The provision of a service
Refraining from doing something (eg. Agreeing not to sue) OR
qRefraining
A promisefrom doing
to do anysomething (eg.things
of the above Agreeing not to sue) OR
q A promise to do any of the above things

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1
Promisee & Promisor
Carlill v carbolic Smoke Ball Co
If the promisee (the person to whom promise is made) has not provided
consideration to the promisor, then the promise is merely a gift and as a general
rule legally unenforceable.
For example:
If Johnny offers to give Jim his pizza oven and Jim accepts the offer, the
agreement between them is not legally enforceable because Jim has not
provided any consideration in return of Johnny’s promise.
HOWEVER-

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Rules/principles of
consideration
Consideration must be of some legal value but need
not be ‘correct’ value (sufficient not adequate)

 The nature of consideration must be definite, not

vague.

Part payment of a debt is not sufficient consideration

for a promise by the promisee to waive the payment
of balance of a debt.

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Consideration must be of some legal value
but need not be a “correct” value
Thomas v Thomas (1842)

Consideration must be sufficient but not adequate.

The term sufficient refers to having a legally
recognized value.
The term adequate refers to the market value
(the consideration does not need to equal to or
match the other party’s promise).

For example: A car can be quite legally sold for $2.

The $2 is of “some” value in the eyes of the law.

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The consideration must be
sufficient & definite, not vague.

Examples of insufficient consideration include:

1. A vague promise
2. Past consideration and
3. A promise to do something one is already
obliged to do.

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1. A vague promise
White v Bluett (1853)

If the price paid by the promisee is a vague promise to do something, this is
insufficient consideration.

‘Vague’ here means uncertain or of no legal value.

For example, If Johnny promises to give Jim his pizza oven in return for Jim’s
promise to ‘be nice’ to him or to pay ‘fair price’, Jim’s vague promise is insufficient
consideration and Johnny’s promise is therefore unenforceable by Jim.

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2. Past consideration
Roscorla v. Thomas [1842]
If the price paid for a promise was paid by the promisee before the
promise was made (past consideration) it is insufficient consideration.
For example- if at the end of a busy shift, Johnny promises to pay his staff
Cathy a $50 bonus in return for her hard work, his promise is not legally
enforceable because Cathy has not provided sufficient consideration.
Cathy’s hard work during the shift is insufficient consideration because it
was a price paid before Johnny made the promise HOWEVER
If Johnny had promised her the reward before the start of her shift, it
would be legally enforceable as Cathy’s hard work would be sufficient
consideration.

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3. A promise to do something one is already obliged to do.
Stilk v Myrick (1809)

If the price paid by the promisee is the fulfilment of a prior legal
obligation (i.e. something that the promisee was already legally
obliged to do) this is insufficient consideration.
The promisee’s legal obligation may be one that is owed as a public
duty or as a contractual duty. For example, if Johnny’s business
premises are broken into and he promises to pay the police officer a
small reward if he is able to catch the criminal, Johnny’s promise is
not legally enforceable because the police officer’s consideration for
that promise- catching the criminal- was something that he was
legally obliged to do anyway as a police officer.

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Part payment of a debt is not sufficient consideration for a promise
by the promisee to waive the payment of balance of a debt.
Foakes v Beer (1884)
For example- Jim owes Johnny $10000 for the pizza oven. When the time comes
to pay, Jim doesn’t have enough money. Johnny promises that if Jim pays $8000,
he will waive payment of remaining $2000. Can Johnny later change his mind &
insist Jim pays the remaining $2000?
YES, Johnny has promised to waive the $2000, but has Jim provided
consideration for Johnny’s promise?
Jim did pay $8000 but that was fulfilment of a prior obligation.
Johnny can therefore change his mind to waive the $2000!

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CAPACITY OF PARTIES
• To form a valid contract, the parties must have the capacity to enter into it.
• Capacity of parties refers to the ability of the offeror or offeree to fully understand
the rights and obligations of an agreement that they have entered into. This is
done to prevent someone from exploiting these parties.
• The following classes of people may be restricted from entering contracts
according to the law:
• minors (under the age of 18 years)
• mentally ill and intoxicated persons

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