70211 Contracts

Week1:(a)Offer&(b)Acceptance;(c)Consideration&(d)introductiontopromissoryestoppel

Lecture 1: (a) Offer & (b) Acceptance The elements of contract Valid contract: agreement between two or more parties à whereby legal rights and obligations created à which the law will enforce (all 6 essential elements must be in place)

• All definitions stress the importance of an agreement + enforceability • Key elements:

o Promise o Capable persons o Obligation o Enforceable

• There needs to be: 1. Offer and acceptance 2. Consideration 3. Intention

• Which can be affected by: 4. Capacity 5. Legality 6. Consent

• The parties make the rules à the law of contract is just a mechanism to define, arrange and regulate the contractual transaction

o It provides a framework à sets parameters, ‘rules’ and guiding principles (e.g. freedom of contract and objective principle of the reasonable person making the contract)

• Uncertainty à may invalidate the contract • Background

o Increasing trade and industrial revolution à led to clearer enunciation of rules and need for compliance

§ Increasing acceptance of the idea of freedom and sanctity of contract o Substantial inroads and the increasing role of Equity (i.e. ‘unfair’) o Increasing statutory intervention

• Sources o Primarily common law o Statutory law à both federal and state

§ Statute > common law o Equity and equitable principles also apply

§ Concerned with preventing unconscionable conduct (i.e. conduct not based on good conscience)

§ Provides remedies (relief) even where contract law would not § In contract law problem solving à go to the common law first, then equity

o International obligations and influences

The theories

• Classical theory o “contract is the central concept on which commercial law is founded” (Schmitthoft)

§ Commercial law could not exist without contract law o Contract law provides a mechanism under which parties to a definite agreement can regulate

their relationship o Contract law is in place for:

§ Predictability § Certainty § Convenience

o Market individualism § Freedom of contract: embracing partner freedom and term freedom à parties who are

capable should be freely able to enter into a contract § Sanctity of contract: embracing the inviolability of contracts à parties should be held to

their bargains • i.e. the court will not interfere provided you followed the rules of contract

§ è these terms reinforce the purpose of contract law = certainty • Economic efficiency

o Provides rules to facilitate economic exchange and efficiency o It would be inefficient to enter into contracts that might be decided by the court at a later time o This aligns with the classical theory

• Critical legal scholars o Claims it conceals politics à supports the existing economic and social order

• Feminist o Women are physically, socially and psychologically and politically different from men à those

differences need to be taken into account o The law reflects a masculine viewpoint e.g. intention and ‘domestic arrangement’ (i.e. wives entering

into a contractual agreement with their husband) à there is no intention to be legally bound to their husband

• Relational theory o i.e. contract as a social relationship à most people don’t usually use the contract laws

o Business people in some contexts are ‘neither aware of nor significantly influenced by’ relevant principles of contract law (Macauley)

Key definitions

• Validity/enforceability o Valid: the essential elements à present o Void: no legal validity à one of the elements does not exist o Voidable: validly formed à but inherent defect through undue influence etc

§ It is only voidable on the behalf of the offeree § i.e. right to void a contract

o Unenforceable: validly formed à but with a technical defect § E.g. failure to pay stamp duty

o Illegal: “the court will not lend its aid to a man who founds his cause of action in an immoral or illegal act”

§ e.g. a contract to sell heroin • Performance

o Executed: where a party has performed their promise o Executory: where all the parties have done is exchange promises

§ Neither party has performed anything • Content

o Express: by written or spoken word o Implied: by conduct o Formal: some must be in writing

• Simple: six essential elements (can be both written or oral or both) • Unilateral/bilateral

o Unilateral: the offeree does not undertake to perform anything à but accepts the offer by performing their side of the bargain

§ E.g. Carlill (1983): the plaintiff accepted the offer by using the smoke ball § In a reward cases, the finder accepts the offer by returning the dog § In a unilateral contract à the obligation of the offeree is executed

o Bilateral: where there is an exchange of promises à at the formation, the obligations of both parties remain to be performed

§ Executory

Agreement

• Whether the parties have reached an agreement à not always easily ascertained o Traditional approach: offer and acceptance

§ Asks whether the parties reached agreement through applying the rules of offer and acceptance

§ i.e. when a properly constituted offer has been made by one party à accepted by the other = agreement at the moment of acceptance or, more precisely, at the moment of communication of acceptance

§ Offer and acceptance à represents a meeting of the minds to create binding obligations (consensus ad idem) (Smith v Hughes 1871)

§ I.e. even if you have been unwise in accepting an offer you now regret à you accepted it and it is binding

• The law therefore does not have much role to play à it just sets out the boundaries • It is assumed that adults can freely entered into the agreement

• The rules about offer and acceptance are based on the idea that up until the moment of formation à the parties are under no obligation to one another and are free to withdraw from negotiations

• This approach has been softened by: o Developments in the law of estoppel o Misleading conduct o Negligent misrepresentation o Unjust enrichment

à therefore, parties in negotiation today clearly owe obligations to one another before the moment of formation

• May also be difficult to determine when the offer/acceptance has occurred (i.e. because many everyday transactions are entered into with little or no discussion of terms)

o E.g. a tram ticket may be purchased from a machine, with very few terms being spelt out • A contract may however be established without an identifiable offer and acceptance à provided the parties

have manifested mutual assent and appear to have reached a concluded bargain • For a contract we also need:

o Consideration: the agreement is essentially the exchange of promises à both parties benefit o Intention: is a key factor o Certainty: is a requirement

Applying the rules

• Contract formation ‘rules’ à developed in the 19th century due to concern for certainty and a reasonable degree of precision (classical approach)

• The rules are precise à therefore in reality it is often difficult to fit the precise model to what people actually do (MacRobertson Miller Airline Services v Commissioner of State Taxation (WA) (1975)

• Carlill v Carbolic Smoke Ball Company (1893) o Facts:

§ The defendants, owned a medical preparation called "The Carbolic Smoke Ball“. § Advertisement offered to pay £100 to any person who contracted the influenza after having

used one of their smoke balls in a specified manner and for a specified period. § The plaintiff, Mrs Carlill (pictured left, at the age of 87), on the faith of the advertisement

bought one of the balls, and used it in the manner and for the period specified à contracted the influenza.

o Procedural history: defence argued: § No intention § No offer or acceptance § No consideration § Too uncertain as no time stipulated § Illegal as based on a wager

o Held: § The court had to decide using the ‘rules’ (see flowchart) was there an offer, acceptance,

consideration, intention and in this case was it legal? § The court adopted an objective approach à held it was a valid contract

Objective approach

• Requires an outward manifestation of an intention to form a contract à i.e. what would the reasonable person perceive the intention to form a contract was?

• Taylor v Johnson (1983) • Carlill v Carbolic Smoke Ball Company (1893)

o ‘It seems to me that in order to arrive at a right conclusion we must read this advertisement in its plain meaning, as the public would understand it. It was intended to be issued to the public and to be read by the public. How would an ordinary person reading this document construe it? ’ Carlill [1893] 1 QB 256 at 266 per Bowen LJ

• Australian authority: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) o “It is not the subjective beliefs or understandings of the parties about their rights and liabilities that

govern their contractual relations à What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe”

Offer Offer: an expression of willingness à to enter into contract on specified terms The nature of an offer

• OVERVIEW: Rules as to offer: o Must be definite o Must be made to a single person or a class of persons o Must be communicated à cannot be accepted without knowledge of existence o All terms of the offer must be brought to the notice of the offeree o Must be distinguished from an invitation to treat

§ i.e. an invitation or enticement to others to make an offer à no offer actually made o May be revoked any time prior to acceptance o May have conditions of acceptance o May lapse through non-acceptance o Reasonable person test: would it appear, to a reasonable person in the position of the offeree, that an

offer was intended and that a binding agreement would be made upon acceptance

• A proposal only amounts to an offer if: o the person making it indicates that an acceptance is invited; and o will conclude the agreement between the parties

• Bramble Holdings Ltd v Bathurst City Council o Obiter à an offer must take the form of a proposal for consideration which gives the offeree an

opportunity to choose between acceptance or rejection o Therefore, a communication which uses “the language of command” and “peremptorily requests” the

other party to adopt a particular course of action may not be regarded as an offer i.e. there needs to be a choice

• Reasonable person test: In determining whether an offer has been made, the crucial issue is whether it would appear to a reasonable man in the position of the offeree, that an offer was intended and a binding agreement would be made upon acceptance

o Thus, it does not matter whether the offeror intended to make an offer à the court determines the offeror’s intention objectively, according to outward manifestations

• Carlill v Carbolic Smoke Ball Company (1893) o Defence: refused to pay, claiming:

1. No promise was intended à the advertisement was a ‘mere puff’ 2. No offer had been made to any particular person 3. The plaintiff had not notified her acceptance of any offer 4. The agreement was uncertain because it failed to stipulate a period within which the disease

might be contracted 5. The plaintiff has supplied no consideration for the defendant’s promise

o Held: rejected all defence arguments § Claimed a contract had been formed § First argument: the statement relating to the bank deposit à made it clear that a promise was

intended • Court looked at the advertisement objectively, according to what an ordinary person

reading the document would think was intended à rather than a reference to what the defendant actually intended

§ Second argument: the offer was made to the whole world à could be accepted by any person who performed the conditions on the faith of the advertisement

§ Fifth argument: the use of the smoke ball by the plaintiff constituted both a benefit to the defendant and a detriment to the plaintiff, either of which would have been enough to constitute consideration for the promise

Unilateral contracts

• Carlill v Carbolic Smoke Ball Company (1893) o Unilateral contract à the offeree accepts the offer (formation) by performing his or her side of the

bargain (i.e. accepts by performance) o In this case, the plaintiff accepted the company’s offer to pay the reward à by using the smoke ball

(in accordance with the instructions and then contracting influenza) o “the consideration on the part of the offeree is completed executed by the doing of the very thing

which constitutes acceptance of the offer” o i.e. the offer is accepted by performing an act à and the performance of that act is all that the contract

requires of the offeree o Thus, by the time the contract is formed à the offeree has already performed all his or her obligations

• This contrasts from a bilateral contract à where the obligations of both parties remain to be performed o The obligations of both parties are therefore executory at the time of formation i.e. they remain to be

executed • Australian Woollen Mills Pty Ltd v Commonwealth

o This case highlights the inextricable connection between the requirement of offer and acceptance, intention, consideration and certainty

o Facts: § The plaintiff claimed that a unilateral had arisen out of the Commonwealth Government’s

wools subsidy scheme à wool scarce after WWII à therefore Commonwealth subsidised purchases of wool by manufacturers of woollen products to enable the manufacturers to supply the products at low prices

§ Commonwealth sent the plaintiff a letter to subsidised the woold they purchased § The stockpile of wool of the plaintiff exceeded the amount the Commonwealth claimed it

would pay à requiring the plaintiff to repay the subsidy paid on that excess o Procedural history:

§ Plaintiffs claimed that each of the announcements by the govt. constituted a contractual offer to pay the subsidy in return for them purchasing wool à this is a unilateral contract

§ Plaintiffs claimed that each purchase constituted acceptance of the offer and consideration for the promise to pay the subsidy

§ Unilateral contract because they accepted it on the basis of the offer o Held: no contract (no consideration or intention)

§ For a unilateral contract to arise à the promise must be made à in return for the doing of the act

§ Consideration: There must be a relation of quid pro quo (this for that) between the offeree’s act and the offeror’s promise à the doing of the act must be based upon the promise – not merely coinciding with it

• Tests for determining this: o Whether the offeror has expressly or impliedly requested the doing of the act

by the offeree o Whether the offeror has stated a price which the offeree must pay for the

promise o Whether the offer was made in order to induce the doing of the act

• This differs from a conditional gift à therefore an offeree must establish that money was to be paid by the offeror in return for the offeree travelling to Sydney

§ Intention: It is government policy à not an offer • They needed to have said something much more contractually binding • There must have been a voluntary assumption of a legally enforceable duty à so

that the offer would have given rise to a legal obligation • E.g. through statutory authority

o Commentary § An offer is effective only if it identifies a valid consideration and manifests intention to

create a legal obligation

Offers and invitations to treat Invitation to treat: invitation to others to make offers or enter into negotiations à i.e. no offer actually made

• Whether particular conduct amounts to an offer is a question to be decided on the facts of each case à no firm rules à however courts generally take a consistent approach to the identification of offer and acceptance in common transactions

Shop sales

• The display of goods for sale (shop window, shelving etc) à treated as an invitation to treat i.e. not an offer • Pharmaceutical society of Great Britain v Boots cash chemists Ltd (1953)

o Facts: § Plaintiff submitted that a sale had occurred in a self-service pharmacy under the supervision

of a registered pharmacist § The pharmacist supervised the transaction, but not the selection of goods of the shelves § The plaintiff submitted that the display of goods should be regarded as an offer à which is

accepted when the customer takes the good off the shelf o Issue: whether an offer was made when items on shelves or when paid for at cashier à to determine

whether supervisor requirements were legal (i.e. supervisor at cashier but not at selection of items) o Held:

§ Rejected the plaintiff’s argument à as customers must be entitled to return and substitute articles they have chosen from shelves

§ Therefore, customers are regarded as making an offer when they present these items to the cashier and are not bound until the cashier has accepted that offer (i.e. when the acceptance is communicated to the offeror [store])

§ Therefore, the defendant was held to have complied with the supervising requirements of the sale

• Goodwin’s of Newstown Pty Ltd V Gurrey (1959) o In Australia, the courts have tended to take a less technical approach when deciding whether goods

have been “offered for sale” for the purpose of determining whether a statutory provision has been breached

o Facts: § Defendant displayed television sets with market prices + provided info to prospective

customers § Prospective customers were told that the sets on display were not for sale à but an equivalent

set could be purchased from the defendant at the market price o Held:

§ Defendant held to be “offering goods for sale” in breach of the Early Closing Act 1926 (SA) à although the defendant’s conduct amounted to no more than an invitation to treat

• Wallace v Brodribb (1985) o Unnecessary difficulties introduced by drawing distinctions between offers and invitations to treat and

the expression of “offer to supply” should be given its ordinary meaning

o This relates to s 56(2) of the Trade Practices Act 1974 (Cth) (now s 35(2) of the ACL) à corporations advertising goods or services for supply at a specified price must “offer such goods or services for supply” at that price for a reasonable time and in reasonable quantities

Auctions

• The holding of a public auction à is an invitation to treat • There is no legal relationship prior to the fall of the hammer

o This is because the auctioneer does not make an offer to sell, but merely invited offers from those present at the auction

o Each bid is an offer o The auctioneer then communicates acceptance of the final bid by the fall of the hammer o No contractual claim can arise if the auction is cancelled (Harris v Nickerson 1873) o A bidder is entitled to withdraw his or her bid before it is accepted o The auctioneer is not obliged to sell to the highest bidder

• Sale of Goods Act 1923 (NSW) s 60 o A sale of goods by auction is complete when the auctioneer announces its completion o Until such announcement, a bid may be retracted

• The situation becomes complicated when an auction is advertised to be held “without reserve” (no minimum) o AGC (Advances) Ltd v McWhirter (1977)

§ Facts: the action was not advertised as being without reserve à but the auctioneer announced during the auction that the “property is on the market”

§ Held: • The property being “on the market” was held to have the same effect as advertising

the property as being without reserve • If the property is without reserve à the general auction rule is not altered i.e. the

holding of an auction without reserve did not constitute an offer and did not bind the vendor to sell to the highest bidder

Tenders

• A tender process involves each interested party submitted a single bid à without knowing what other bids have been made

o Commonly used by governments seeking to contract out the performance of government functions (e.g. construction or operation of a prison)

• A call for written tenders à invitation to treat o Offer is then made by the tender o Offer is then accepted by the vendor

• Instances where the call is the offer: Harvela Investments Ltd v Royal Trust Co of Canada (Ci) Ltd (1986) o Facts:

§ Tender promised to accept the highest bid § Harvela and Outerbridge were invited to submit written tenders for the purchase of shares à

successful tenderer obtaining control of the company § Letter sent by the vendors saying “we bind ourselves to accept” the “highest offer”

o Held: § The call for tenders was held to amount to an offer à because of the promise to accept

the highest bid (i.e. it was an offer capable of being accepted) § A person calling for tenders can stipulate the basis on which the tender process will be

conducted à and will be bound by any conditions they say will govern the process § Unilateral contract à because the contract was “brought into existence by the act of one

party in response to a condition promise made by the other” • Withdrawal of tenders: Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council (1990)

o Held: § English court of appeal held that the council was under an implied contractual obligation to

give consideration to complying tenders § The call for tenders amounted to an offer à accepted by the submission of a complying

tender § The council was liable for damages under this preliminary contract when it mistakenly failed

to consider the plaintiff’s complying tender

Ticket cases

• Relates to identifying offer and acceptance for the purpose of determining when, rather than whether, a contract was formed between two parties

o This is important in order to determine whether written conditions given by one party to another à form part of the contract

o This is because if one party gives the other notice of terms after a contract has been formed à those cannot form part of the contract

• If ticket was handed out by a person à accepted when the customer “took it and retained it without objection” • If from an automated machine: Thornton v Shoe Lane Parking Company [1971]

o “the customer pays his money and gets a ticket. He cannot refuse it. He cannot get his money back… he was committed at the very moment when he put his money into the machine”

o “the offer is made when the proprietor of the machine holds it out as being ready to receive the money”

o “the acceptance takes place when the customer puts his money into the slot” • E.g. tickets for passenger transport

o A ticket containing contractual terms is issued after the fare has been paid à it might therefore be thought that the contract is formed before the ticket is issued

o The courts have therefore usually regarded the issue of the ticket as an offer à which can be accepted or rejected by the passenger after the passenger has had reasonable opportunity to consider the conditions on the ticket

• MacRobertson Miller Airline Services v Commissioner Of State Taxation (WA) 1975 o Facts:

§ The airline quoted the fare and availability of seats à then issued a ticket in return for the fare

§ The ticket contained a condition given the airline the right to cancel a flight or cancel a booking à without incurring any liability

o Issue: whether an airline ticket was chargeable with stamp duty as an ‘agreement’ or a ‘memorandum of agreement’

o Held: § A ticket did not record the terms of an agreement à but rather the terms of an offer à

which was subsequently accepted by conduct § Barwick CJ

• Exemption clauses relieved the airline from any obligation to carry the passenger à no contract

• Unilateral contract à whereby the passenger was making an offer, but could be accepted by conduct i.e. if the airline carried the passenger, then airline would be entitled to retain the fare as a ‘reward’; if the passenger was not carried, the airline incurred no obligation other than to refund the fare

• i.e. no contractual obligation until the airline provided the customer with a seat on the plane

§ Stephen CJ à conventional analysis

• The ticket constitutes an offer by the airline à capable of acceptance of rejected by the passenger, once the passenger has a reasonable opportunity to read the conditions

• Therefore, the ticket records the terms of an offer

Electronic transactions

• No need for legislation regarding offer and acceptance as the common law rules continue to apply à Electronic Transaction Acts (ETAs) have been enacted anyway

• A proposal to make a contract through electronic communications à which is not addressed to a particular person, but is made generally accessible to people using information systems à is to be treated as an invitation to make offers à unless it clearly indicates an intention to be bound in the case of acceptance (s 14B NSW)

o E.g. ecommerce companies à websites offering goods and services should generally be considered to be making an invitation to treat (rather than an offer) (no difference from normal communication as in Grainger v Gough (1896))’

• A contract formed between a natural person and an automated system (or between two automated systems) à not invalid merely on the grounds that a natural person was not directly involved in the process (s 14C NSW)

• Where a natural person makes an ‘input error’ in the course of a transaction and the system provides no opportunity to correct that error à then the person making the error is entitled to “withdraw the portion of the communication in which the input error was made”

o This is provided he or she does so as soon as possible after learning of the error + provided he or she has not received any material benefit from goods or services provided by the other party

o The right to withdraw à not a right to rescind the contract o However, most websites provide an opportunity to correct input errors

Termination of an offer

• An offer will cease to be available to be accepted à when it is: o Withdrawn by the offeror (person making the offer) o Lapses o Rejected by the offeree (person accepting/rejecting the offer)

Withdrawal General rule

• An offer may be revoked at any time before it is accepted • Common law à a promise to hold an offer open for a specified period is not binding unless the offeree

has given consideration for that promise (option – discussed below) o Therefore, if the offer has not been accepted/considered à the offeror can revoke the offer before the

specified period has lapsed • The withdrawal is only effective when it has been actually communicated to the offeree • No exception is made for a withdrawal set by post

Options

• A promise to hold an offer open is binding at common law à if consideration has been given in return for that promise

o The agreement is then described as an option

o i.e. it contains a promise not to withdraw the offer for a certain time (because consideration for the benefit of being given the exclusive right to accept for a certain period - e.g. through money - was present)

• An option is an agreement between an option holder and grantor under which the option holder is entitled to enter into a contract with the grantor on specified terms, either at a specified time or within a specified period

o The option holder is then free to choose whether to exercise the option at that time or within that period

• Goldsbrough Mort & Co Ltd v Quinn 1910 o Facts:

§ The grantor gave the option holder an option to purchase certain land a specified price at any time within one week of the agreement à in return for the sum of the shilling paid to the grantor

§ The grantor then attempted to withdraw the offer before acceptance o Held:

§ The grantor attempting to repudiate the offer before acceptance was held to be ineffective § The option holder exercised the option within the specified period à and was able to force

the grantor to sell the land as agreed § A contract for the sale of the property à is condition upon the option being exercised

Lapse

• An offer expressed to be available for a particular period à will lapse at the end of the period • If no period is stipulated à the offer will lapse after a reasonable time has passed

o What time is reasonable will depend on the circumstances e.g. the nature of the subject matter and the form in which the offer was made

o E.g. a verbal offer to buy a car is likely to lapse after a short period; a written offer to purchase a substantial parcel of land will be open for acceptance for a relatively longer period

• Reasonable person test: useful in determining the duration of an offer o Bartolo v Hancock (2010)

§ Facts: offer was made at the beginning of a five day trial to settle the litigation on the basis the parties would discontinue their claims against each other

§ Held: the offer was a “here and now” offer à aiming to dispose of the case “then and there” à therefore an attempt to accept the offer on the fifth and final day of the trial was unsuccessful

• Death: o Fong v Cilli (1968)

§ Held: an offeree could not accept an offer after the offeror’s death à where the offeree knew of the death before the purported acceptance

o Carter v Hyde (1923) § In the case of an option à there is a presumption that the death of the option holder à does

not prevent the option from being exercised by the option holder’s personal representatives § However, if the offer is personal to the option holder à the option lapses

Failure of condition and changed circumstances

• An offer may be made subject to: o Express/implied condition that must be fulfilled before the offer can be accepted o Express/implied condition that it should lapse upon the happening of a certain event

• Financings ltd v stimson (1962) o Facts:

§ Defendant signed an offer to purchase a car on hire-purchase terms from a finance company à given to him by the car dealer

§ The document contained a clause stating that the agreement contained would not be binding until it had been accepted by the finance company

§ Before the company signed it, the defendant took possession of the car but later returned it à car was then stolen and recovered in a badly damaged condition

§ The finance company accepted the defendant’s offer without knowing this à then sued the defendant for breach of the hire-purchase agreement

o Held: § The defendant’s offer was subject to an implied condition that the car should continue in the

condition it was in when the offer was made § On the failure of that condition, the defendant’s offer lapsed

Rejection and counter offer

• Once an offer has been rejected à it is no longer available for acceptance o A rejected offer may however be revived or may form the basis of an agreement which is inferred in

the absence of a valid offer and acceptance o The making of a counter offer à rejection of the original offer

• Courts draw a distinction between a counter offer and inquiry relating to an alteration of the terms (request of information – obtaining some guidance in deciding whether to accept/reject)

o The label ‘inquiry’ into information à signifies that the buyer has not manifested an intention to reject

o Therefore, the seller’s original offer should be treated as remaining open until an intention to reject is implied

Unilateral contract

• Difficulty arises where the offeree has begun to perform (and thereby accept the offer) à but has not completed the acts that constitute acceptance à and the offeror revokes

o E.g. the offeror offered to pay $100,000 to the first person to swim backstroke across Bass Strait à it might seem unfair if the offer could be revoked when a swimming was halfway across

• Veivers v Cordingly (1989) o Held: an offer made in exchange for doing of an act become irrevocable once the act has been partly

performed § This is because the offeror is subject to an implied obligation not to revoke the offer after the

offeree has started to perform § Further, the offeror has power to stipulate the terms on which he or her offer is made à and

can expressly reserve the right to withdraw the offer • Mobile Oil Australia Ltd v Wellcome International Pty Ltd (1998)

o Held: § An offer made in return for performance of an act is, like any other offer, revocable at any

time § The offeror will only be prevented from revoking the offer where there is an implied contract

not to revoke or an estoppel § An estoppel will arise only where the offeree is induced to adopt the assumption that the offer

will not be revoked and relies on that assumption in such a way that he or she will suffer determinant if the offer is revoked

Acceptance

Acceptance: unqualified assent to the terms of an offer à made in the manner specified or indicated by the offeror

• Overview o Acceptance is the moment of contract o Acceptance determines when and possible where a contract comes into being o Must be response to an offer o Must correspond with the offer o Must generally be communicated

Conduct constituting an acceptance Meeting of the minds

• An important question is whether the acceptance must result in an actual consensus between the parties or a “meeting of the minds”

o This depends on whether one adopts an objective or subjective approach to agreement o Subjective: no contract is formed unless there was a real consensus between the parties o Objective: whether the reasonable person would have consented, disregarding the offeree’s actual

state of mind • Taylor v Johnson (1983):

o While there is a significant difference in legal technique between subjective and objective theories à there is little difference in practice

o This is because subjective theory is coupled with a principle of estoppel § This operates where a person conducts himself or herself in such a way that a reasonable

person would believe that he or she was accepting to the terms of the contract § Therefore, a person is prevented from denying the existence of a contract § à bound through both objective and subjective approaches i.e. doesn’t matter about what the

offeree was thinking • Smith v Hughes (1871)

o Facts: § Plaintiff bought oats, on the faith of a sample provided by a seller § Thought they were old oats but he wanted new à unsuitable for his purpose

o Held: § There is no contract if the parties are not ad idem (of one mind) à unless an estoppel

prevents one of the parties from denying that he or she has agreed to the other’s terms § Therefore, an estoppel prevented the buyer from denying the contract à because he had

behaved in such a way that a reasonable person would believe he was agreeing to buy new oats (through his conduct- to the reasonable person)

• However, the courts have tended towards objective standards à because it is very difficult to investigate or rely upon private intentions: Fitness first (australia) pty ltd v Chong (2008)

o Facts: § Ms chong signed an application form to join a gym on a 12 month contract without first

reading the form § Unware that it stipulated she was liable to pay a $200 free if she cancelled the membership

within the first two months o Held:

§ A valid contract does not require the parties to have consensus ad idem in that each full know and understand the terms of their agreement

§ By signing the form, ms chong had manifested her assent to the printed terms à it was irrelevant that there was no true consensus ad idem between the parties

§ i.e. she accepted through her conduct without a meeting of the mind à not necessary

Consciousness of the offer • Bilateral: in the case of bilateral contracts formed verbally or in writing à it will usually be clear that the

offeree has deliberately accepted the offer • Unilateral: difficulty where the offeree performs an act requested by an offeror à without intending to accept

the offer à also depends on subjective/objective test o In these cases à a unilateral contract will only arise if the offeree performs the requested acts à

in reliance on the offer • The Crown v Clarke (1927)

o Facts: § Reward offered for information leading to the arrest and conviction of the murderer of two

police officers § Clarke and Treffene were arrested and charged with one of the murders à Clarke gave a

statement leading to his own release and the arrest of another man à Clarke therefore claimed the reward but the crown refused to pay it on the basis that he did not make the statement with a view of claiming the reward

§ Clarke admitted that although he had seen the reward notice, he made the statement in order to clear himself à no intention of claiming the reward

§ i.e. he gave no consideration to the reward until after the men were convicted o Held: no unilateral contract

§ HC held that while an offeree’s conduct is normally assessed by reference to external manifestations (objective) à performance of a requested act will not give rise to a unilateral contract if the evidence establishes that the offeree was not in fact acting on the faith of the offer

§ The HC decided the case purely subjectively à through looking at Clarke’s actual intentions (i.e. to clear himself)

§ Although clarke’s conduct would have led a reasonable person to believe he was assenting the crown’s offer à the principle of estoppel could only be used against Clarke to prevent him from denying the existence of the contract

Communication of acceptance The general rule

• An acceptance generally has effect only when communicated to the offeror o Required because this establishes the meeting of the minds (Carlill) o Therefore, a contract is formed upon acceptance

• Latec Finance Pty Ltd v Knight (1969) o Facts:

§ Mr Knight signed a hire-purchase agreement relating to a television sst à the document was expressed to operate as an offer by Knight (the hirer), irrevocable for a period of 7 days and was not binding on the hire-purchase company

§ Company accepted à noted on the document à but not communicated to Knight § Knight returned the TV set to the dealer before any instalments were paid à but the company

sought to enforce the agreement o Held: no contract was formed

§ Ordinarily, a contract is not made until acceptance is communicated § An offeror however, may expressly or impliedly decide to not actually communicate, as:

• The offeror may agree to treat the doing of an act as an effective acceptance • The offeror may treat the despatch of an acceptance by a particular method as

effective, whether or not the acceptance is received by the offeror § The company argued that this case fell into the first category à with the act of signing the

document treated as an effective acceptance

§ However the court held that clear language would be required to support such a construction of the document because, if signing without notification were enough, it would give the company power to “keep the form in their office unsigned, and then play fast and loose as they pleased”

The exception à the postal rule

• When the offeree has placed his acceptance in the post à there is a fictional meeting of minds à which concludes the offer and gives effect to the acceptance (Adams v Lindsell (1818) (even if received some time later/lost)

• “A finding that a contract is completed 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” (tallerman v Nathan’s merchandise (1957)

o This is a more narrow view o In this particular case however, it was said that “actual communication would be regarded as

essential to the conclusion of agreement on anything” because the issue was a “highly contentious correspondence”

• Burden of the risk that the acceptance might be lost à placed on the offeror o Where actual communication is involved à burden is placed on the offeree, who has no way of

knowing whether the acceptance has reached the offeror and therefore no way of knowing whether a contract has been formed

Scope of the postal rule

• Postal rule was extended to telegrams à as telegrams were given to the post office and delivered to the recipient in essentially the same way as posted letters (Cowan v O’Connor 1888)

• Entores v Miles Far Eastern Corp (1955) à The postal rule does not apply to instantaneous forms of communication (telephone or telex)

o Australian authority: Aviet v Smith and Searls Pty Ltd (1956) • Brinkibon Ltd v Stahag Stahl und stahl (1983)

o Facts: § Buyer sought to enforce a contract in the English courts à between themselves and an

Austrian seller § Contract was made by an exchange of telex messages between the buyers in London and the

sellers in Vienna § The buyers sent a telex to Vienna à accepting the terms of sale offered

o Issue: whether or not an English company could sue an Austrian supplier in an English court à through deciding whether the contract had been made in England

o Held: § Contract was made in Vienna à as this is where the acceptance was received § The postal rule does not apply because telex is considered instantaneous communication à

therefore a contract is formed when acceptance is communicated to the offeror (general rule)

§ The situation may differ where: • the message is sent or received through a third party • where it is sent out of office hours • where the message is not intended to be read immediately

Modern electronic communications

• Reese Bros Plastics Ltd v Hamon-Sobelco Australia Pty Ltd (1988): facsimile are treated as instantaneous communication à therefore acceptances sent by fax are governed by the general rule that an acceptance is only effective when received by the offeror

• However, the Brinkibon principle may apply where the message is: o Sent or received through a third party o Sent out of office hours o Not intended to be read immediately

• Internet messaging à also treated as instantaneous communication à acceptance only effective when received by the offeror

• Email à o May be technical problems at the third of third parties à where the email message may be delayed or

never reach the addressee o However, email is far quicker than post à even though messages need to pass through the hands of

third parties o Even if email were considered to be analogous to post à the postal rule would only apply if it were

thought to have been within contemplation of the parties that an acceptance sent by email should be effective on sending

o Therefore, acceptance would only be effective when received by the offeror

Method of acceptance

• Many ways including: o If an offer stipulates an exclusive method for communication à only acceptance via that method will

be effective e.g. only through written notice o Offeror expressly or impliedly dispenses the need for communication à e.g. unilateral contract à

doing of the stipulated act

Silence as acceptance

• A contact cannot be forced on the offeree by stipulating silence as the prescribed method of acceptance • Felthouse v Bindley (1862)

o Facts: § P – Uncle (Felthouse) offered to buy a horse from his nephew – he stated "If I hear no more

about him I shall consider the horse mine at £30 15s 0d" § The nephew never replied and uncle took the horse. Later an auctioneer mistakenly sold the

horse and the uncle then sued the auctioneer in the tort of conversion. § The basis of this claim was that the horse belonged to the uncle – tort of conversion would

have only succeeded if there was a valid contract between the nephew and the uncle. o Held:

§ It was held that there could not be a contract in circumstances where the offeror had purported to impose contract by saying "If I hear nothing, I shall assume that you have accepted" – even if the nephew was willing to accept it under those terms.

§ Mere “mental acceptance” is not enough. An offeror cannot compel to take positive steps to reject an offer by stating that silence will amount to acceptance

Acceptance inferred from conduct • In some cases à courts will accept an agreement has been formed even though the offeree has not effectively

communicated his or her acceptance to the offeror • Farmers’ Mercantile Union and Chaff Mills Ltd v Coade (1921)

o Facts: § Respondent’s applied to buy a share in the appellant company à company did not

communicate its acceptance of the offer within a reasonable time, but retained money paid by the respondents and entered their names on the register

§ The company intimated its acceptance only after a reasonable time had expired by making calls for payment of further instalments à however the respondents ignored the calls

o Held: § An agreement to buy the share could be inferred from the respondents’ inaction once they

became aware their names were on the register à i.e. agreement to take the shares inferred from their failure to respond – silence was acceptance through conduct

§ Starke j (dissent) à respondent’s silence could equally be regarded as a refusal to have anything to do with the company since its offer had lapsed and the matter was at an end

• Empirnall Holdings Pty Ltd V Machon Paull Partners Pty Ltd (1988) o Facts:

§ Involved comprehensive negotiations between the parties concerning a building project. § P architects (Machon) commenced work on the project and then forward to D (Empirnall) a

contract and progress payment claim. § P’s covering letter stated that ‘we are proceeding on the understanding that the conditions of

the contract are accepted by you and works are being conducted in accordance with those terms and conditions’.

§ D, who subsequently acknowledged that the proposed contract was “fine”, paid the claim but never signed the contract.

o Held: § The court, after restating the general rule that silence is not acceptance, held that in some

situations there may be a duty on the offeree to communicate a rejection of the offer. • The objective theory of contract requires an objective manifestation of assent to an

offer • The ultimate issue therefore was whether a reasonable bystander would regard the

offeree’s conduct, including the offeree’s silence, as signalling acceptance of the offer

§ In this case, Empirnall did more than remain silent à it took the benefit of the services provided by the architects, knowing they were to be paid for in accordance with the offer and having had a reasonable opportunity to reject the offer

§ Therefore, an objective bystander would conclude that Empirnall had accepted the offer on the terms proposed

• “when the 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 the offer was accepted according to its terms” (535)

Correspondence between offer and acceptance

• It is often said that an acceptance must correspond precisely with the offer i.e. the offer empowers the offeree to do no more than accept or reject the terms proposed by the offer

o The problem arises where two parties (e.g. buyer and seller of goods) à exchange inconsistent standard forms during contract negotiations à reaching agreement on the principal terms without deciding whose standard form should prevail à “battle of the forms”

The English approach

• The sending of the last form is the counter-offer à the “last shot” will therefore prevail à provided the recipient of the counter-offer can be taken to have accepted the terms proposed by the other sender

• Butler Machine Tool Co Ltd v Ex-cell-o Corporation (England) Ltd • Facts:

o The seller of machinery quoted a price on a standard form. The form contained a clause entitling the seller to vary that price (increase) where the seller’s costs increased during the period of manufacture

o The buyer placed an order for the same machinery on its own order form. The order form contained different standard conditions.

o The seller acknowledged the order by returning the acknowledgment form to the buyer • Held:

o The English Court of Appeal held that the seller was not entitled to rely on the price variation clause as it did not form part of the contract à i.e. held for the buyer s

o The buyer’s order constituted a counter-offer because it contained terms different from the seller’s original offer.

§ That counter-offer was accepted when the seller returned the acknowledgment § i.e. the seller’s quotation constituted an offer and the buyer’s order a counter-offer § the effect of the counter-offer was to “kill the original offer”, including the stipulation that the

seller’s terms prevailed à the seller accepted this counter-offer by signing and returning the tear-off slip to the buyer

§ The reference in the seller’s letter to the original quotation was taken to refer only to the price and identity of the machine à not to the terms on the back of the quotation

o Lawton LJà if the seller’s letter had amounted to a further counter-offer à then it could not have been said that the parties were ad idem à there would therefore be no contract between the parties

o Lord Denning: “as a matter of construction” à The seller’s acknowledgement of the buyer’s order was the decisive document, since it made clear that the contract was on the buyer’s terms and not the sellers

Conflict and synthesis à counteroffers • Even in simple contracts for the sale and purchase of commodities, parties may transact business on the basis

of their respective standard form. While the parties may agree on the basics of sale (e.g. subject matter), the other terms may differ. The difficulty this creates is referred to as the “battle of the forms”.

o Hyde v Wrench (1840) § Facts:

• Seller offered to sell his farm for 1000 pounds à buyer replied he would buy it for 950 pounds à seller refused to sell

• The buyer later purported to accept the seller’s original offer to buy the farm for 1000 pounds

§ Held: • The buyer had made a counter-offer (the 950 pounds) which terminated the offer by

the seller to sell the farm for 1000 pounds. • Therefore, there was no offer for the plaintiff to accept, and there was no contract. • No contract was formed because there had been a rejection by the offeree of a

fundamental term of the contract – the price à terminating the contract o BUT, the current Australian position is that even if there is agreement on the fundamental terms of

the transaction, if the offeree adds an additional term, a counter-offer is made. A contract will not be formed until the counter-offer is accepted.

• Two approaches suggested in Butler Machine Tool Co v Ex-Cell-O Corp [1979]: o Synthesis approach: per Denning preferred the view that the “documents were to be considered as a

whole, and the important factor was finding the decisive document” § Build a contract from the two sets of terms à made up of consistent terms + terms from one

set that appeared to be accepted by the other party § Any gaps in the synthesised contract could be filled with terms implied by the courts § This approach is better suited in reality à allows the court to take into account a party’s

willingness to accept some terms, but not others (may be implicit) o Conflict approach: Lawton and Bridge LJJ preferred traditional offer-acceptance analysis, and

considered that the last counter-offer killed all preceding offers (“Last shot” approach). § The battle can also be won by determining the party who is most persistent in insisting that

their own set of terms should prevail

§ This approach assumes a set of terms is either accepted or not à does not take into account more complex transactions

Legislative solutions • United States Uniform Commercial Code, ARTICLE 2-207:

o If there is a discrepancy arising out of a ‘battle of the forms’, then it does not necessarily result in no contract à so long as there is no ‘material discrepancy’

o The additional terms are to be construed as proposals for additions to the contract o Allow acceptance to include non-material modifications.

A meeting of the minds • Underlying many of the cases on offer and acceptance is the idea that a contract is formed only when there is

a meeting of the minds (consensus ad idem) between the parties • Dickinson v Dodds (1876): the “existence of the same mind between the two parties… is essential in point of

law to the making of [an] agreement” • Actual consensus or appearance of consensus?

o Subjective approach: requires actual consensus § This approach however, is for practical purposes almost indistinguishable from the objective

approach à because of the principle of contract by estoppel § Therefore under either a subjective or objective approach à a person who behaves as if

accepting an offer will be bound, even if there was no actual consensus o Objective approach: requires appearance of a consensus à even if the parties do not agree

• It is difficult however, to draw a clear distinction between the subjective and objective approaches à as the subjective approach turns on objective criteria

o Smith v Hughes: objective appearance of consent > party’s actual intentions § The rule requiring subjective intent was met by a counter-rule imposing contractual liability

where there was a false appearance of consent (objective) § Court maintained that a consensus was required to form a contract à But a party who

appeared to consent would be estopped from denying the existence of a contract, with the same result if an actual contract had been formed

o The Crown v Clarke: party’s actual intentions > objective appearance of consent • However for pragmatic reasons àthe courts have tended towards objective standards for interpreting conduct

o Private intentions à unreliable o è therefore, liability in contract is imposed on the basis of norms of reasonable behaviour (public

obligation)

Agreement without offer and acceptance

• Australian courts have followed their counterparts in the US in accepted that “a manifestation of mutual assent may be made even though neither offer nor acceptance can be identified and even though the moment of formation cannot be determined”

• Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) o “sometimes… having discussed the commercial essentials and having put in place necessary

structural matters, the parties go about their commercial business on the clear basis of some manifested mutual assent, without ensuring the exhaustive completeness of documentations”

o In these cases à the essential question is whether the parties’ conduct (including what was said and not said) à reveals an understanding or agreement (mutual assent) à which bespeaks an intention to be legally bound to the essential elements of a contract

• Brambles Holdings Ltd v Bathurst City Council (2001) o Facts:

§ D (Brambles) expressed dissatisfaction with the low fees offered by P (Bathurst council) for disposing of the city’s liquid waste.

o Held:

§ Brambles took advantage of commercial benefits being offered by the council à knowing the basis on which the council was prepared to allow the higher fees to be charged

§ This would lead a reasonable bystander to conclude that Brambles was assenting to the Council’s conditions

Non-contractual obligations • The classical approach to contract formation is based on the idea of a moment of formation when enforceable

contractual rights arise o Prior to that moment à no contractual obligations o Once that moment arrives à each party becomes liable for the other party’s full contractual

expectation o This however is no longer of decisive importance à because the modern law recognises numerous

non-contractual obligations between negotiating and contracting parties where the parties owe obligations to each other even if a contract is never formed

Lecture 2: (c) Consideration and (d) Introduction to promissory estoppel Consideration Consideration: requires that something must be given à in return for a promise (e.g. money, an act – something of value) à that is sufficient and actionable Promisor: the person making the promise sought to be enforced Promisee: the person seeking to enforce the promise

• “A valuable consideration in the sense of the law may consist either in some right, interest, profit or benefit accruing to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.” (Currie v Misa (1875))

• A contract may involve: o Immediate exchange of things: e.g. exchange of money for goods o Exchange of a thing for a promise: e.g. A pays $1000 to B à in return for B’s promise to build a

fence for A o Exchange of promises: e.g. A promise’s to pay $1000 to B à in return for B’s promise to build a

fence for A • Consideration must be identified where A (promisor) has made a promise to B (promisee) à which B wishes

to enforce à and there is some doubt at to whether B has given anything in return o i.e. there must always be something given in return

• Consideration is a requirement of the enforceability of promises o When a contract is made by an exchange of promises à each party’s promise provides consideration

to support the promise made by the other o An agreement not supported by consideration on both sides à nudum pactum (naked agreement) à

enforceable

Origins of consideration

• Originally concerned with the motivation for making a promise o 16th century à the legal effect of a promise depended on the ‘considerations’ or factors motivating

the making of the promise § ‘good consideration’ à provided evidence that a promise had in fact been made and indicated

that it would be just to enforce the promise

o 18th century à the fact that the promisor was under a moral obligation to the promisee à taken to be sufficient consideration for a promise

• Eastwood v Kenyon (1840) o Overthrew moral obligation as sufficient consideration o ‘bargain’ concept à consideration came to be seen as something of legal value given in exchange for

a promise à ‘price of the promise’

The essential elements

• Consideration includes: o The promisee incurring a detriment or the promisor receiving a benefit o That benefit/detriment must be given in return for the promise

The benefit/detriment requirement

• This includes: o Promisee (person enforcing the promise – doing the promise asked) à incurring a detriment (e.g. an

act, property) o Promisor (the person who offered the promise – wanting the promise performed – either asked for it

to be performed on paid the promisee to do it) à receiving a benefit (e.g. an act, property that benefits them – often gives money/promises to give money)

• Consideration “may consist in some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility, given, suffered or undertaken by the other” (Currie v Misa (1875)

• Example: o Billy (promisee) wishes to enforce Amy’s (promisor) promise to pay him $1000 o The consideration given by Billy may be the transfer of property (e.g. his car), the performance of his

services (building a fence for Amy) or the making of a promise to transfer property or for him to perform services in the future

o Billy may also make a promise not to do something (e.g. to not sue Amy in respect of a tort or breach of contract committed by her or not to trade in competition with her)

o à the consideration given by Billy is a detriment to him and a benefit to A (she gets his property or a fence built; no suing or competition à in return for her money)

• It is important to recognise that mutual promises will provide good consideration for each other o E.g. if Billy makes a promise in return for Amy’s promise, this is:

§ Benefit for Amy à because she will have an enforceable right to have the promise performed

§ Detriment to Billy à because he will come under an obligation to perform the promise

The bargain requirement

• The benefit conferred on the promisor or the detriment suffered by the promisee à must be given in return for the promise

o i.e. the act relied on the consideration must be performed as the agreed price of the promise • Australian Woolen Mills Pty Ltd v Commonwealth (1954)

o Facts: § The plaintiff claimed that a unilateral had arisen out of the Commonwealth Government’s

wools subsidy scheme à wool scarce after WWII à therefore Commonwealth subsidised purchases of wool by manufacturers of woollen products to enable the manufacturers to supply the products at low prices

§ Commonwealth sent the plaintiff a letter to subsidised the wool they purchased § The stockpile of wool of the plaintiff exceeded the amount the Commonwealth claimed it

would pay à requiring the plaintiff to repay the subsidy paid on that excess

§ i.e. AWM claimed that by purchasing wool à it provided consideration for the commonwealth’s promises to pay the subsidies

o Held: no contract (no consideration) § For a unilateral contract to arise à the promise must be made à in return for the doing

of the act § There must be a relation of quid pro quo (this for that) between the offeree’s act and the

offeror’s promise à the doing of the act must be based upon the promise – not merely coinciding with it

• i.e. the act must be performed as a result of the promise • Tests for determining this:

o Whether the offeror has expressly or impliedly requested the doing of the act by the offeree

o Whether the offeror has stated a price which the offeree must pay for the promise

o Whether the offer was made in order to induce the doing of the act • This differs from a conditional gift à therefore an offeree must establish that money

was to be paid by the offeror in return for the offeree travelling to Sydney § The acts of purchasing wool à satisfied the test outlined in Currie v Misa (1875):

• Legal detriment to AWM • Benefit to the Commonwealth

§ HC held: “No relation of quid pro quo between a promise and an act can be inferred”. • At best it was a conditional promise of a gift that could not be legally enforced à no

bargain; government should have requested something to be done. Woollen relied on government scheme and suffered reliance = not good consideration. Bargain would have occurred if a request was made by the Commonwealth.

• PC: Simply an administrative arrangement. § è Therefore, the “bargain” aspect of consideration will be satisfied if the acts which are said

to amount to consideration à have been performed at the request or implied request of the person making the promise

• In this case, the statements by the commonwealth were in the nature of policy announcements à no ‘request’ to purchase wool could be implied

• It was therefore irrelevant that AWM had acted to their detriment in reliance on the commonwealth’s promise

• It is possible for an act to satisfy the bargain aspect of consideration (i.e. the act is done as a result of a express/implied request or price) à but not the benefit/detriment requirement: Ballantyne v Phillott (1961)

o Facts: § Phillot had commenced proceedings against Ballantyne (his formed mistress) à to recover a

substantial sum of money he had lent to her § Some evidence that Ballantyne had asserted that she had lent money to Phillot and had

claimed she could sue him for defamation à although it seems doubtful that she had, or even believed she had, an enforceable claim against him on either ground

§ At the instigation of a third party à the two signed a written document in which Phillot agreed to discontinue the proceedings and release all claimed he may have had against her

§ Ballantyne then relied on the agreement to institute fresh proceedings to recover the debt § As consideration for Phillot’s promises (i.e. to discontinue proceedings) à Ballantyne relied

on a statement in the signed document that she had no right or claim against Phillot in respect of the action for debt or otherwise

o Held: § Ballantyne had not given consideration for Phillot’s promises § Ballantyne did not promise to give up a claim against Phillot and no promise could be implied

in the circumstances

§ Even if Ballantyne’s admission could be regarded as the price of Phillot’s promise à the making of the admission did not constitute a detriment to Ballantyne or a benefit to Phillot

Bargains and conditional gifts

• AWM case illustrates the distinction between a contract and a conditional gift: o Contract: a promise to pay someone $100 in return for performance of an act o Conditional gift: a promise to pay someone $100 if they perform a certain act

• The court used the example of a promise by A to pay B (who is in Melbourne) $1000 upon B’s arrival in Sydney

o No contract arises because A gets nothing out of B’s arrival à it is merely a gift for arriving in Sydney à no relationship between the promise and the act

o If, on the other hand, A had an urgent need for B’s presence in Sydney and B expressed concern about the cost of travel à B’s act may be regarded as consideration for A’s promise

o That is because it would then be possible to infer a request by A which establishes the necessary connection between A’s promise and B’s act

Bargains and reliance • Important distinction between:

o An act performed in reliance on a promise: will not constitute good consideration à may give rise to estoppel: Beaton v McDivitt

§ Facts: • McDivit (respondent) owned a large block of land which he feared he would not be

able to afford to keep when it was rezoned by the local council. • With this in mind, he promised to transfer part of the land to Beaton if he would

move onto the land and cultivate it. • Beaton did this – he built a house on the land and cultivated it as McDivit had

prescribed. • After 7 years, a dispute arose and McDivit ordered Beaton off the land.

§ Procedural history: • Dillwyn v Llewelyn à represented “an exception to the modern requirement that a

contract should be a bargain supported by consideration in the nature of quid pri quo” à Young J held that the plaintiff’s reliance on the defendants’ promise amounted to consideration and gave rise to a dillwyn type contract

§ Held: • Court argued there was no contract, and that a promise does not constitute

consideration for the purposes of simple contracts. • McHugh JA and Kirby P made it clear that there was no exception to the bargain

concept of consideration (i.e. something for something) • They said that the Dillwyn type cases involved the enforcement of promises by way

of estoppel and not by way of contract • Kirby found that the bargain requirement was not satisfied on the facts à since

Beaton made no promise which could be regarded as a quid pro quo for a promise to transfer the land

• On the other hand, McHugh and Mahoney JJA found that Beaton had provided consideration by working the land at the McDivitt’s request à Beaton’s performance of the requested acts therefore gave rise to a unilateral contract

• However, Beaton was unsuccessful because Mahoney JA found that the contract had been brought to an end by frustration à because the land had never been subdivided (Plot B didn’t exist so Beaton didn’t have a claim to it)

o An act performed in return for a promise: is regarded as good consideration • Atco Controls Pty Ltd (in liq) v Newtronics Pty Ltd (in liq) [2009]

o Facts: § Atco provided a series of annual ‘letters of support’ to the auditors of its subsidiary

(Newtronics) à whereby Atco confirmed it would not seek to recover debts owed by Newtronics to the detriment of other creditors + confirmed that it would provide sufficient funds to Newtronics to enable Newtronics to meet its trading debts

§ This support was needed for Newtronics to remain solvent and to continue to trade à the provision of these letters allowed Newtronics to be presented in its audited accounts as a solvent, going concern

§ Newtronics became insolvent à liquidator claimed the letters of support were evidence of a contract between Atco and Newtronics under which Atco undertook to provide financial support for Newtronics

o Procedural history: by continuing to trade à Newtronics provided consideration for Atco’s undertakings

o Held: § The most that could be said was that Newtronics had continued to trade in reliance on Atco’s

undertakings § For the consideration requirement to be satisfied à Newtronics would have to show that

Atco’s undertakings were offered as the price or quid pro quo for the action of Newtronics continuing to trade

§ “In this case, that required Newtronics to show that Atco in effect requested Newtronics to continue to trade in return for the undertaking of continued support and that Newtronics was moved by that request”

§ no such request was implied because “atco for all intents and purposes ran Newtronics and had no need or intention of requesting it to do anything”

Consideration must move from the promisee

• Promisee (person enforcing the promise – doing the promise asked) à incurring a detriment (e.g. an act, property)

• Promisor (the person who offered the promise – wanting the promise performed – either asked for it to be performed on paid the promisee to do it) à receiving a benefit (e.g. an act, property that benefits them – often gives money/promises to give money)

• Consideration given in return for a promise need not move to the promisor (wants the promise to be

performed). For example: o A may undertake a contractual obligation to B à in return for a benefit conferred by B on C o A might agree to pay a reward to any person who finds and returns C’s dog o If B finds and returns the dog in reliance on A’s promise, B’s act will not confer a benefit on A, but

will constitute a legal detriment to B and will have been given in return for A’s promise o è consideration need not move to the promisor à but it must move from the promisee [A]

• This has led some to question whether Lush J was right to accept in Currie v Misa that a benefit to the promisor [receiving the benefit – wanting the promise performed] can constitute good consideration

o The argument is that a benefit to the promisor cannot be treated as an alternative to detriment to the promisee in the requirement of consideration because if the consideration moves from the promisee à it must necessarily constitute a legal detriment to the promisee

o This argument appears to not be accepted by the courts à which in recent cases, have clearly accepted a benefit to the promisor as an alternative to detriment to the promisee in satisfying the requirement of consideration

• è Therefore, a person who wants to enforce a promise must have paid for it o Only by providing consideration can one establish a right to have it enforced

• The promisee must provide the consideration stipulated by the promisor o It is not sufficient for this to pass to the promisor from some other source

• On the other hand, the terms of the promise may stipulate that the consideration pass to a third party, rather than to the promisor à e.g. where two or more parties to a contract are regarded as joint promisees, consideration may be provided by one of them on behalf of both or all of them: Coulls v Bagont’s Executor & Trustee Co Ltd (1967)

o Facts: § Mr Coulls (the deceased) entered into an agreement with O’Neil Construction giving the

latter the right to quarry part of his land. § The company was authorized to pay royalties to Mr Coulls and his wife as joint tenants. § O’Neil and Mr and Mrs Coulls signed the document evidencing this agreement. § After Mr Coulls death, his executor sought a determination of whether O’Neil was bound to

pay to royalties under the agreement to Mrs Coulls. o Held:

§ In the HC, it was held by the majority that the agreement constituted a contract between O’Neil and Mr Coulls alone so that the royalties were payable to his estate and not to Mrs Coulls.

§ BUT there is an exception to the rule that a person who seeks to enforce a promise must, as a promisee, establish that consideration was given for the promise à Where a promise is made to two or more persons jointly, and only one of them provides consideration, the person not providing the consideration directly can still enforce the promise.

• “If A, B and C are parties to a contract and A promises B and C that he will pay C $1000 if B will erect a gate for him, C cannot compel A to carry out his promise, because, though a party to the contract à C is a stranger to the consideration”

o i.e. C has not given consideration for the promise à he is not doing anything, it is B who is doing something and incurring detriment

o The above example shows how it is possible to be a party to a contract in which a promise is made, but still be a stranger to the consideration given in return for that promise

o A party to a contract who has not provided consideration will be able to enforce a promise only if she can be regarded as a joint promisee

o However, whether a person is regarded as a joint promisee and therefore as a party to consideration given by another, involves a question of interpretation

Sufficiency of consideration • Consideration must be sufficient (legally enforceable) à but doesn’t need to be adequate

o It must be something which is of value in the eye of the law o If consideration of some value exists à the courts will not be concerned with its adequacy

• Woolworths Limited v Kelly (1991) o General principle is that courts do not enquire into the adequacy of consideration. o Thus a nominal consideration will be adequate consideration. o If adequacy was a term of a contract all contracts would be uncertain o This is because the courts have no way of assessing the value a particular person places on the

consideration he or she has contracted to receive o The courts’ stance protects economic freedom, even though “that liberty extracts a price in social

terms” § Economic efficiency is best pursued through voluntary exchanges § The role of the courts therefore is simply to ensure that a bargain has been struck and an

exchange made • The refusal of the courts to consider the the adequacy of consideration means that a promise to give a

peppercorn is good consideration for a promise to pay $1m o Parties can effectively avoid the requirement of consideration through the use of nominal

consideration o Thomas v Thomas (1842)

§ Facts: a woman’s promise to pay 1 pound towards the ground rent and to keep the house in good repair in exchange for a promise by her husband’s executors to give her the right to occupy the house for life

§ Held: this was good consideration à “motive is not the same thing with consideration. Consideration means something which of some value in the eye of the law, moving from the plaintiff”

• Although inadequacy of consideration does not itself invalidate a contract à it may be taken into account as evidence of procedural unfairness in the formation of a contract

o Where a party under a special disability has received inadequate consideration à this will provide evidence that the other party has unconscionably taken advantage of that disability

Discretion as to performance • A promise will not constitute good consideration if the promisor retains an unfettered discretion as to

performance o If the promisor is not bound to perform, then the promise will constitute an illusory consideration

• ‘A promise cannot constitute consideration if it is too uncertain to be enforced, or if the promisor has reserved an absolute discretion on whether or not to perform that promise.’

• Placer Development Ltd v Commonwealth (1969) o Facts:

§ P entered into a contract with D (Commonwealth) to establish a timber company in Papua New Guinea to produce plywood for import to Australia.

§ A clause in the agreement stated that D would subsidise the cost of import customs duty into Australia à “an amount or at a rate determined by the Commonwealth from time to time”

§ The subsidy was paid for some years and then later withdrawn o Held:

§ The agreement imposed no obligation on the Commonwealth to pay any subsidy § Therefore, the Commowealth’s promise was illusory consideration à they could determine

whether they wanted to perform the promise à bad consideration à clause not enforceable § “The general principle… is that wherever words which by themselves constitute a promise

are accompanied by words showing that the promisor is to have a discretion or option as to whether he will carry out that which purports to be the promise, the result is that there is no contract on which an action can be brought at all.”

Past consideration General rule

• Past consideration is not considered sufficient consideration o Executory if the act or forbearance has still to occur. o Once the act that constitutes the consideration has been performed it is executed. o Past consideration occurs where the act or forbearance pre dates the promise.

§ i.e. something given before a promise is made cannot constitute good consideration • The thing may have been given gratuitously. For example:

o A gives B a dog and B subsequently promises to pay A $50 for it o A cannot rely on the giving of the dog as consideration for B’s promise à the giving of the dog is

past consideration • Another common example is where, after a contractual transaction has been completed, one of the parties

makes a promise which the other seeks to enforce: Roscorla v Thomas (1842) o Facts:

§ P (Roscoria) purchased a horse from D (Thomas). § After the sale was concluded, D promised P that the horse was in good health and was not

vicious. § The horse was vicious and P sued for breach.

o Held:

§ The court held that the promise was not binding as it was made independently of the sale (i.e. after the sale concluded)

§ D’s subsequent promise was not supported by a return promise from P (i.e. no consideration by P) à and therefore it could not be enforced.

Promise to pay for past services • Exception to the past consideration rule à An act done before a promise can be good consideration if:

o The act was done at the promisor’s request. o The parties understood that the act was to be remunerated by the conferring of a benefit such as a

payment (The act must have required some performance and can’t be an act done out of friendship or generosity).

o The payment, if it had been promised in advance, would have been legally recoverable. • i.e. an exception to the past consideration rule is made in the case of a promise to pay for past services

o Where services are performed at the request of the promisor, in circumstances that raise an implication that they are to be paid for à then performance of the services by the promisee will constitute good consideration for a subsequent promise to pay for them

• Ipex Software Services Pty ltd v Hosking (2000) o Facts: respondent transferred to a corporate group a compute software business of which he was part

owner on the understanding that he would receive shares in the restructured group o Held: the transfer was good consideration for a subsequent promise to transfer 5% of the equity in the

group to the respondent • Lampleigh v Brathwaite (1615)

o Facts: § D had committed murder. § He asked P (Lampleigh) to obtain a pardon for him from the King. § P agreed and in the process incurred considerable expense. § Subsequently, D promised to P 100 pounds to cover costs. § D failed to make the payment and the P sued. § D argued that the subsequent promise was unsupported by consideration.

o Held: § The court disagreed and held that D’s request for assistance included an implied promise

that P would ultimately be paid for his services. § The request for assistance and the promise to pay 100 pounds were part of the same

transaction. § It is arguable that, where past services are rendered at the request of the promisor, then a

subsequent promise to pay is enforceable. • Re Casey’s Patents: Stewart v Casey [1892]

o If there’s initial discussion and no price is mentioned, and later discussion mention price à it may be argued that the later discussions were making definite the terms of the contract, not being part of the past consideration rule.

o Court held subsequent promise to pay can be construed as an admission of the act or as a means of making definite or fixing the terms of the contract (through fixing the amount of reasonable remuneration for the act).

The existing legal duty rule • A promise to perform an existing legal duty or the performance of an existing legal duty is not sufficient

consideration to support a contract • The issue is often raised in relation to one sided variations to contracts à where one party either assumes an

additional obligation or agrees to release the other party from an obligation o Beneficiary: the person who promises to perform an existing legal duty à claims the benefit of the

contractual modification o Modifying party: the person who assumes an additional obligation or releases the beneficiary from an

obligation

• For example: o Assume that one party (the beneficiary) has agreed to build a garage and fence for another (the

modifying party) for $30,000 o After the contract has been made, the beneficiary realises that she has agreed to perform the work at a

loss o She expresses some reluctance to perform, so the beneficiary and the modifying party reach an

agreement that if the beneficiary builds the garage, the modifying party will pay the beneficiary an extra $5000 and will not require the beneficiary to build the fence (more money; less work)

o In return for the modifying party’s promises, the beneficiary has simply promised to perform her contractual obligations à she has not agreed to do anything she was not already obliged to do, however the modifying party has provided consideration

o The courts will therefore not enforce a promise made by a modifying party in such a situation à even though it was intended to be binding

• “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 the contract” (Wigan v Edwards (1973))

• EXCEPTION: Performance of an existing duty will be good consideration where there is a bona fide grievance or if there are additional risks.

• Stilk v Myrick (1809) o Facts:

§ P signed on as a crew member on a ship. § During the voyage, two crew members deserted and D (captain) promised to divide the wages

that would have been paid to the deserters among the remaining crew. § When D failed to honour his promise P sued.

o Held: § The court held there was no consideration for the promise to pay the extra wages. § Under the original agreement, P and the other crew members contractually promised “to do

all they could under all emergencies of the voyage”. § The desertion of the 2 crew members as an emergency and therefore P was already under a

contractual duty to help bring the ship back. • Wigan v Edwards (1973)

o Facts: § Wigan sold land to Mr and Mrs Edwards on which he had recently erected a house. § The contract sale did not contain any warranty that the house had been constructed in a proper

manner. However, the Edwards gave Wigan a list of matters that they said required attention before they would finalise the sale.

§ In response, Wigan promised to “fix minor defects within one week of finance being approved + any major faults in construction 5yrs from purchase date”.

§ Settlement then took place. § Wigan did not remedy the defects as promised. Edwards took proceedings to recover the costs

of the work. P argued that D’s failure to do so was breach of contract. o Held:

§ Mason found that there was a contract between the parties and that Wigan should have carried out the repairs.

§ HOWEVER, Mason concluded that Wigan was not in breach of contract when proceedings had commenced, and that the Edwards therefore had no cause of action at that time à appeal dismissed.

§ There was an existing duty to complete the house (in exchange for money) but no promise to fix the house (i.e. no further consideration given to Wigan for this).

§ Mason J noted that the existing legal duty rule is conceptually justified by the fact that a promise to perform an existing contractual duty is an illusory consideration à the promisor incurs no new burden and the promisee receives no benefit he or she did not already enjoy

Part payment of a debt • Payment of a lesser sum than the amount due à cannot normally be treated as satisfaction for an existing debt

o Therefore, part payment of a debt does not constitute good consideration for an agreement to discharge the debt

• Pinnel's Case (1602) o Facts:

§ Pinnel loaned money to Cole, who said that he didn’t have all of it, so asked if Pinnel could accept half. Pinnel agreed.

§ He then sued for the remainder of the money o Held:

§ Court said that part payment of a debt is not good consideration § Even if a creditor will agree to accept something less, they can still have a go at the

debtor for the rest of the payment • Foakes v Beer (1884)

o Facts: § D (Foakes) owed P (Beer) 2, 090 pounds. P agreed to allow D to pay off the debt by an

immediate payment of 500 pounds and the balance of instalments, and in return she gave a promise not to commence debt recovery proceedings against D.

§ D made all the instalment payments as agreed. P later demanded an additional 360 pounds as interest on the debt and D refused to pay.

o Held: § The court held that the interest was payable. § D had a pre-existing obligation to pay the whole debt, and the mere payment by

instalments of the debt was not sufficient consideration. • Exceptions:

o Where the debtor pays before the due date or in a different form o Where several creditors jointly agree to forego part of each of their debts (composition’) (Couldery v

Bartrum 1881) o Where the payment is made to the creditor by a third party o Where the debtor gives something other than money

§ “by no possibility a lesser sum can be a satisfaction to the plaintiff for a greater sum: but the gift of a horse hawk or robe etc might be more beneficial to the plaintiff than money, in respect of some circumstance, or otherwise the plaintiff would not have accepted it in satisfaction” (Pinnels case 1602)

o This leads to an absurd situation in which a promise to accept $999 in discharge of $1000 debt is unenforceable for want of consideration à whereas a promise to accept $1 plus an old sandshoe in discharge of the same debt will be enforceable

o In practice, where a creditor is prepared to accept a lesser sum à the rule is commonly avoided through the use of a more conventional form (deed)

§ If the agreement is made in the form of a deed à it will be binding in the absence of consideration

Exceptions to the existing legal duty rule 1. Fresh consideration • Where the beneficiary provides fresh consideration by undertaking to do something more than he or she

originally promised • Hartley v Ponsonby (1857)

o Facts: § D (captain) promised P an additional payment if he helped sail the ship back to port. § P agreed and D later reneged on the promise. § Unlike in Stilk v Myrick, nearly half the 36 crew members had deserted the ship when it was

docked en route.

o Held: § The court held that P had done more than he was contractually bound to do and,

therefore, had provided consideration § The remaining crew were under no obligation to go to sea in dangerous conditions à therefore

providing fresh consideration by agreeing to continue the voyage § The captain’s promise of extra wages was therefore enforceable

• Therefore, the existing legal duty rule can be avoided, if parties are aware of it, by the beneficiary giving nominal fresh consideration in return for the promise or concession made by the modifying party

o E.g. in Stilk v Myrick the remaining crew could have agreed to work longer shifts

2. Practical benefit • Where the modifying party obtains a practical benefit from the beneficiary’s promise to perform an

existing obligation • Williams v Roffey Brothers & Nicholls (Contractors) Ltd (1991) – UK

o Facts: § A enters into a contract with B for the supply of goods or services in return for payment by B. § Prior to completion B has reason to doubt whether A will complete. § B then promises A additional payment in return for B promising to perform on time. § As a result of this promise B obtains a benefit or obviates a disbenefit (didn’t have to go to

court, didn’t have to find other carpenters, met deadline etc). § B reneged on promise.

o Held: § The court held that the general rule will not apply if the promisor benefits from the

promise or its performance (of the existing obligation). § General rule will also not apply if ‘the promisor avoids a disbenefit’ which might have

resulted from the promisee’s failure to perform the existing obligation. • Musumeci v Winadell Pty Ltd (1994) - Aus

o Facts: § P conducted a fruit shop as a tenant of D in a local shopping centre. § When D allowed another fruit shop business to commence trading in the centre, P sought a

reduction in rent as the competition created financial difficulties. § D agreed to this reduced rent but later resiled from its promise and claimed the full amount.

o Held: § Santow J modified the rule from Williams by allowing the rule to operate if a party

suffered a practical detriment; that it should only apply if there has been no unfair pressure to induce the promise and that the practical benefit/practical detriment is worth more to the promising party than any remedy against the promisee.

§ The landlord, in exchange for the promise of allowing the tenant to pay a reduced rent, received the practical benefit - a fully let shopping centre.

§ The tenants suffered a detriment by staying on at a reduced rent and the exposure to the risk of competing with the large retailer.

§ Tenant gave up the option of walking away from the lease an action that could have resulted in proceedings for breach however they could have defended that claim (legally no inhibition on lessor to introduce new competition).

§ *Added to the rule introduced in Williams v Roffey: • The benefit needs to outweigh the benefit of another remedy eg: suing for breach. • The promise is not given by way of economic duress or fraud or undue influence or

unconscionable conduct nor as result of any unfair pressure.

3. Promises made to the third parties

• A promise to perform an existing contractual obligation does not amount to good consideration if it is made to a person who was not a party to the contract

• Pao On v Lau Yiu Long [1980 o Facts:

§ In February 1973 Pao On agreed to sell shares to Fu Chip, a public company controlled by Long as the majority shareholder.

§ To protect the value of the shares, Pao On and Fu Chip agreed that the former would retain 60% of the shares acquired until 1974.

§ In April 1973, Pao On refused to proceed with the sale unless Long agreed to indemnify him against the value of the shares he retained falling below a certain sum.

§ Long agreed to this demand because of fear that delay caused by litigation would threaten public confidence in the company.

§ The sale proceeded and at some time later Pao On sought to enforce the indemnity. Pao On failed in HC court of appeal, appealed to Privy Council.

o Held: § Lord Scarman noted the following requirements for the exception to apply:

• The act must have taken place at the promisor’s request; • Objectively, the parties must have understood that the act was to be remunerated or

compensated; and • The remuneration or compensation must have been legally enforceable.

4. Compromise and forbearance to sue • A promise to perform an existing legal obligation will constitute good consideration where it is made by

the beneficiary as part of a bona fide compromise of a disputed claim • Wigan v Edwards (1973)

o Facts: § Wigan sold land to Mr and Mrs Edwards on which he had recently erected a house. § The contract sale did not contain any warranty that the house had been constructed in a proper

manner. However, the Edwards gave Wigan a list of matters that they said required attention before they would finalise the sale.

§ In response, Wigan promised to “fix minor defects within one week of finance being approved + any major faults in construction 5yrs from purchase date”.

§ Settlement then took place. § Wigan did not remedy the defects as promised. Edwards took proceedings to recover the costs

of the work. P argued that D’s failure to do so was breach of contract. o Held:

§ HC held that a promise made as part of a bona fide compromise constituted an exception to the existing legal duty rule

§ In order to fall within this exception, it was not necessary for the Edwards to establish that they had a valid legal entitlement to refuse to perform the contract à it was enough that the intimated that they did not consider themselves bound to perform and that their claim was honestly made

5. Termination and replacement • Where parties have terminated their original contract and entered into a new contract • This is so even if the obligations of one party (modifying party) are more onerous than those in the original

contract and the obligations of the other (beneficiary) are identical to those in the original contract • Since the original contract is brought to an end, the promise made by the beneficiary is seen as a ‘new’

promise à which provides consideration for the promises undertaken by the modifying party

The purpose of consideration

Criticism of the doctrine of consideration The function of consideration Promises under seal

• Aka ‘deed’ à recorded in a particular form, traditionally involved sealing and delivery (this since been modified through common law)

• A promise which is not supported by consideration will nevertheless be enforceable at common law à if it is made under seal

o Dixon Cj in Ballantyne v Phillott (1961) à if the plaintiff had overcome his prejudice against solicitors, then a seal would have been affixed to the agreement and the consideration point would not be available to him

• The solemnity (seriousness) of that form is recognised by the courts as a justification for enforcing a promise in the absence of consideration

o Contracts which are not under seal and which therefore require consideration to be binding = simple/informal contracts

• In Australia, deeds are commonly used to ensure the enforceability of promises where there is some doubt as to whether consideration is being provided by the promisee, such as a guarantee or an agreement to compromise a disputed claim

Promissory Estoppel Estoppel: an equitable claim à that prevents a party from denying the existence of an assumption as to a state of affairs (which assumption the other party has relied and acted upon) à in circumstances where the denial would be unconscionable

• It is important to emphasise the need for unconsciousability before estoppel will apply; it is not available as a back-up submission in every case where the parties have failed to establish a binding contract.

• ‘…there must …be the creation of encouragement by the defendant in the mind of the plaintiff of an assumption that a contract will come into existence, or a promise be performed, or a transaction carried out between the plaintiff and the defendant, and reliance on that by the plaintiff in circumstances where departure from the assumption by the defendant would be unconscionable.’ - Austotel (1989) 16 NSWLR 582 at 585 per Kirby P

• Estoppel can provide: o Enforceable rights where none are provided in contract law. o Prevent one party from enforcing contractual rights against another.

• Fundamental distinction between estoppels and misrepresentation/ misleading/ deceptive conduct: o Estoppel is only concerned with inconsistent conduct. o Misrepresentation and misleading or deceptive conduct also involves loss arising from reliance upon

representations but the protection arises from the representation proving untrue. § Estoppel = protection that arises from inconsistent conduct not related to representations

being true/untrue. o Misrepresentation will not lead to an action in estoppel.

Forms of estoppel • Estoppel by record = prevents further proceedings. • Estoppel by deed = facts stated in deed cannot be denied. • Estoppel by representation and equitable estoppel common features:

o Both estoppels are founded on assumptions induced by the conduct of another person o Both are essentially concerned to prevent detriment resulting from action taken on the faith of

the assumption if the assumption is not adhered to o Both operate only where it is unjust or unconscionable to depart from the assumption

• Estoppel by representation: where one person (the representor) leads another (the relying party) à to adopt an assumption of fact à the relying party acts on the assumption in such a way that they suffer detriment if the representor subsequently denies that it is true è the representor is therefore ‘estopped’ from denying the truth of the representation

o E.g. where a builder has negotiated the terms of a building contract with a customer à with the parties intending to be bound only when a written contract has been signed

o The builder prepares a written contract, signs it and send it to the customer o The customer telephones the builder à tells the builder that the customer has signed the contract o On the faith of that assurance, the builder purchases materials for the job and rejects other offers of

work during the relevant period o The customer has induced the builder to adopt an assumption of fact (that the customer has signed the

contract) à which has been relied upon by the builder (by purchasing materials and refusing other work) à such that the builder will suffer detriment if the purchaser now denies having signed the contract

o The customer is therefore estopped from denying that she has signed the contract o Effect = the rights of the parties are determined on the basis of the assumed state of affairs à

providing a foundation for the builder to sue in contract if the customer denies the existence of the contract

• Equitable estoppel (promissory estoppel + proprietary estoppel) o Proprietary estoppel: where the relying party acts to his or her detriment on the faith of an

assumption that the relying party has or will be granted in relation to land o Promissory estoppel: any application of equitable estoppel that does not relate to an interest in

land

Brief history of estoppel Stage 1: Foundation cases

• The forerunner to estoppel by conduct was estoppel by representation of fact • Historically, the doctrine was a rule of evidence à could only be used as a shield (defence), not a sword

(cause of action) o i.e. the doctrine could never eradicate the requirement of consideration

• Classical contract theory à equity cannot intervene in future promises (promissory estoppel) • Important to the law of of contract are estoppels arising from promises to do something in the future

o Prior to Jordan v Money à ordered a representor to ‘make good’ a representation as to future conduct that was intended to and did in fact induce reliance

• Jordan v Money (1854) o Equity could only make a good statement of fact o A majority of the HoL held that a promise or representation as to future conduct à could only be

binding by way of contract i.e. no equitable remedy • Combe v Combe (1951)

o Facts: § D (husband), in the course of divorce proceedings, promised P (wife) he would pay her a

yearly allowance of 100 pounds. § P did not apply for spousal support following divorce because it seemed such an order would

be redundant as her income, with the payments, would exceed that of her husband. § D made only one payment of 25 pounds. P sued him for the remaining money owed. § At trial it was found that, although there was no consideration for the promise, it was

enforceable due to the doctrine of promissory estoppel. o Held:

§ This decision was overturned on appeal, Lord Denning stated that ‘Promissory estoppel does not exist to give new causes of action where none existed before.’

§ Therefore it can be used as a defence only and cannot be used to do away with the requirement of consideration for a contract.

§ N.B. this was the 1950s, at which time domestic relationships were viewed very differently – man sole ‘breadwinner’, it was a promise made within a domestic relationship and at the time this did not constitute a valid, legally binding promise – held that promissory estoppel could only be used as a defence, not a cause of action

Stage 2: First Development of promissory estoppel – ‘high trees’ • Traditionally the courts have made a distinction between:

o common law estoppels (i.e. representations of existing facts) o equitable promissory estoppels (i.e. representation of future intention).

• Need pre-existing legal relationship – i.e. cannot use promissory estoppel to create a new legal relationship (shield not a sword).

• Representation can be express or implied (from words, conduct or silence where there is a duty to speak). • Must be inequitable (unconscionable) to allow the promisor to go back on promise. • Promisee:

o Has relied on representation or promise and altered its position. o Cannot return to original position without detriment.

• Central London Property Trust Ltd v High Trees House Ltd (1947) o Facts:

§ P (central) leased a block of flats to D (High trees) in 1939 for 99 years at an annual rental rate of 2, 500 pounds.

§ The outbreak of the war made it difficult for D to find enough tenants and therefore pay the rent due to P.

§ In early 1940, P agreed to reduce rent by 50% = did not stipulate the period the reduced rent would apply. D paid reduced rent for 5yrs.

§ Early 1945, flats began to fill again (end of WW2). § P (in a test case) sued D for 625 pounds, this being the difference due in the agreed rent for

the last 6months of 1945 (i.e. from the time flats were fully occupied). o Held:

§ Denning concluded that the parties intended the rent reduction to be temporary only so that the full rent could be claimed once the flats were full, therefore Central’s claim succeeded.

§ The 1940 agreement was only valid for the duration of the war and therefore P was entitled to the originally agreed rent.

§ HOWEVER, Lord Denning’s obiter stated that, had P sued for the rent in the period between 1940-45, it would have failed. The 1940 agreement would act as an estoppel (i.e. a defence) to any claim for unpaid payments, notwithstanding that D had not provided any consideration for P’s promise to accept the lower rent.

o Commentary: § This case formed the basis of promissory estoppel § It operated where a person made a promise which was:

• Intended to affect the legal relations between parties • Intended to be acted upon • Was in fact acted upon

§ Did not provide a cause of action for damages for breach of the promise à but operated to prevent the representor from acting inconsistently with the promise

§ i.e. if a landlord promised to accept a reduced rent from a tenant, and the tenant acted on that promise à promissory estoppel would prevent the landlord from claiming the amount of rent foregone

§ After the case, it was thought that promissory estoppel could arise only where the parties were in a pre-existing legal relationship à therefore the principle only applied to a suspension of existing contractual rights

§ The English courts were reluctant to allow promissory estoppel to be used for the positive enforcement of a promise à fearing that the enforcement of relied-upon promises would undermine the doctrine of consideration and thus the law of contract

• Je Maintiendrai Pty Ltd v Quaglia (1980) - SA o Facts:

§ Tenant of shopping centre negotiated a reduction in rent on the basis that most of the shops were vacant.

§ After approx 18 months a dispute arose and the owner sued for the arrears of the rent owing. o Held:

§ It was clear to the court that the owners had made a promise and that the tenant would suffer harm (in having to incur a lump sum liability) as a result of the promise being going back on, thus rendering an injustice.

§ SA Supreme Court found in favour of tenant. Stated that they agreed to allow promissory estoppel to be used as a course due to the ‘detriment’ that would be suffered by the tenant.

§ Therefore for promissory estoppel to apply, detriment had to be established. • Legione v Hateley (1983) – HC

o Facts: § Written contract for the purchase of land stipulated the date that the parties were to settle the

contract. § Clause in contract stated that if not settled on that date notice to complete would be issued. § The day before the date arrived the solicitor of the purchaser called the vendor and stated that

they were having difficulties and the contract would be settled a few days late. § Spoke to the secretary who stated ‘I think that’ll be alright but I’ll have to get instructions.’ § A few days later the contract was rescinded by the vendor on the basis that settlement was

late. § This went to the High Court where the question was whether the comments by the secretary

estopped the purchaser from doing this. o Held:

§ Held that the secretary’s statement did not raise an estoppel for P, as it was not a clear representation or promise.

§ Mason and Deane JJ stated that there are 2 conditions for promissory estoppel to apply: • Promise must be clear and unequivocal (this can be express or implied from

conduct). • There must be a material loss through reliance on the promise if there is a

departure from the promise.

Stage 3: 2nd Development of Promissory estoppel – ‘Walton’s Store’ • Walton Stores (Interstate) Ltd v Maher (1988)

o Facts: § P owned a commercial property that D commenced negotiations to lease. As part of their

agreement, P was to construct a building according to D’s plans and specifications. § An existing building had to be demolished before construction of the new store could

commence. On 21 October, a draft agreement for lease was sent to P’s solicitors. They requested amendments. On 7 November, P’s solicitors informed D’s solicitors that P needed the agreement signed, otherwise they could not build the new store within the time required. P did not want to demolish the existing building until it was clear there were no problems with the proposed agreement.

§ D’s solicitors forwarded a new agreement incorporating the requested amendments with a letter stating “we have not yet obtained our client’s specific instructions to each amendment…but we believe approval is forthcoming…we will let you know tomorrow if any are not agreed to”. The agreement was signed by P and returned to D’s solicitors by way of exchange. P heard nothing further – assumed nothing wrong – commenced work by demolishing the existing building (fact known by defendants).

§ D changed their minds – instructed solicitors to “go slow” and chose not to execute the agreement. In early January the following year, P began constructing the new building. 19 January, 1984 (building 40% complete) – D finally informed P they would not be proceeding with the agreement. P sought, inter alia, a declaration that a binding agreement existed.

o Held: § HC allowed promissory estoppel to be used as an offence rather than just a defence. The

result was that now promissory estoppel can be used as a sword, to commence a course of action in Australia in limited circumstances (this is not the case in England).

§ Brennan J: • P assumed a legal relationship existed or would come to exist between P and D. • D induced P to adopt assumption/expectation. • P acted/abstained from acting in reliance on assumption/expectation. • D knew of P’s action, or intended P to do so. • P action/inaction will cause P to suffer detriment if assumption/expectation not

fulfilled. • D has failed to act to avoid detriment, whether by fulfilling promise or

otherwise. § Remedy (per Brennan J):

• The unconscionable conduct is the element which ‘shapes the remedy’ and this controls the wider objective of avoiding detriment.

• The equity could only be satisfied by ‘treating Waltons as though it had done what it had induced the Mahers to expect that it would do, namely, by treating Waltons as though it had [entered a binding agreement].’

o Commentary: Principles abstracted from this case: § Allowed promissory estoppel to be used as a sword; § Recognised promissory estoppel as a general principle which could operate in any

circumstances of legal relations, not just existing contractual relations. § Remedy should meet the equity. § The HC also attempted to draw together the various strands of estoppel into one

overarching doctrine.

OVERVIEW: Elements 1. Some form of pre-existing relationship • There is generally some form of pre-existing legal relationship (e.g. Legione v Hately (1983)) but it is not

required (Waltons (1988), W v G (1996), Acc v Gray (2003)).

2. A promise by one party that they will not insist on their strict legal rights • A person promised that contractual rights would not be enforced à and that promise was relied upon by the

promisee • The effect of the estoppel was to prevent the promisor from asserting those rights.

3. An adopted assumption • An adopted assumption (can be of fact or future conduct, may be of fact or law) (Waltons; Silovi (1998)), but

note Austol (1989) can apply even if the precise terms of the agreement could not be ascertained. • Assumption must be clear and unambiguous. Important information cannot be missing but does not

necessarily need to be precise but has to be constrained by reasonableness (ACC v Gray (2003)). • There is a failure to fulfil the assumption.

4. Inducement • An adopted assumption (can be of fact or future conduct, may be of fact or law) (Waltons; Silovi (1998)), but

note Austol (1989) can apply even if the precise terms of the agreement could not be ascertained.

• Assumption must be clear and unambiguous. Important information cannot be missing but does not necessarily need to be precise but has to be constrained by reasonableness (ACC v Gray (2003)).

• There is a failure to fulfil the assumption.

5. An actual reliance by the other party on the promise • An actual reliance by P on the assumption (Waltons; Austotel (1989)). • Wishful thinking is not good enough. Mere hope rather than a consequence of words or conduct will not

create an estoppel (Lorimer v State Bank NSW (1991)).

6. Reasonability and Unconscionability • Reliance needs to be reasonable (Murphy v Overton (2001), Ausotel (1989)). • D knew of or intended the reliance (Ampol v Mathews (1991)). • A degree of unconscionability by D – the behaviour must be unfair (Waltons). • Departure would be unconscionable à needs to be unfair to move away from alleged promise (Waltons).

o Ausotel (1989) involved a ‘fair fight’ between two large corporations where there was no real risk of unfair advantage being taken by one over the other.

7. An element of detriment • The most difficult and potentially troublesome element in estoppel is the element of detrimental reliance. In

some of the estoppel cases in which Lord Denning had a say he would argue that it is sufficient if the promisee has acted on the promise. He de-emphasised the requirement of detriment.

• It is probably safe to assume that in Australia the courts require detrimental reliance (Verwayen).

8. Unauthorised representations • Representations that are not authorised generally do not create an estoppel but if the principle knew or should

have known of the representation and fails to deny, may create an estoppel (Corpers v NZI (1989)).

Relief available • The effect of an equitable estoppel is to raise equity in favour of the relying party.

o Brennan J (Waltons): The object is to avoid the detriment which will be suffered, not to compel the other party to fulfil the assumption.

• Equals an entitlement to some equitable relief within the courts discretion. P needs to persuade the court to fashion a remedy to suit the particular case.

• Traditionally equitable estoppel has been preclusionary – stop one from denying something. The unifying approach to estoppel has meant that equitable relief became more flexible (Giumelli v Giumelli (1999)).

• Approach to determine remedy between (i) minimum necessary to make good the assumption and (ii) an approach precluding the departure from the assumption (Verwayen).

o Expectation based relief = simply the loss of benefit you would expect to receive (the rent). o Reliance based relief = the amount of expenditure incurred in reliance on the promise (the cost of

demolishing the building).

Limitations Estoppel as a cause of action:

• Does not override consideration – still need unconscionable behaviour. o If consideration is in place, can’t move to estoppel because common law will give you a remedy - if

there is a contract then pursue contractual remedies. • We no longer need to rely on estoppel supporting another cause of action; it can create an independently

enforceable right. • But do you still need a cause of action independent of the plea? à probably not (W v G (1996); Gray v

National Crime Authority (2003)).