11CHAPTER

In this chapter we look at the nature of contract law and the way in which it protects the rights of individuals and we examine some specific contract examples. We will also investigate how the law of contract applies to everyday situations. After reading the chapter and undertaking the activities you should be able to demonstrate the following key knowledge:● legal principles relevant to contract law● a contemporary issue regarding contract law● the capacity of the legal system to respond to demands for change● the methods and institutions for resolving disputes arising

under the law relating to contract law.

Focus on contract law

Elements

Acceptance ConsiderationOffer

Terms

Express

Conditions

Implied

Warranties

Capacity to contract

Minors

Contract law

Key terms acceptance Agreementtoanoffertoformacontract

consideration Somethingofvalueexchangedaspartofacontract

contract Alegallybindingagreement

infant/minor Incontract,apersonundertheageof18years

offer Aperson’sexpressionofwillingnesstoenterintoanagreement

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306  The Legal Maze

Contract lawAcontractisanagreementthatislegallyenforceable.Thismeansthatitispossibleforthepartiestoacontracttoenforcetheirrightsundertheagreementinacourtoflaw.Ifobligationsagreedtounderacontractarenotcarriedout,thepartywhosuffersmaytakelegalactiontoobtainaremedyforanyloss.

Peoplemakecontractualagreementsdaily.Simplygoing intoashopandmakingapurchaseorleavingclothestobedry-cleanedinvolvesacontractualarrangement.Someagreementsmayincludesubstantialsumsofmoneywhileothersmaynotbeconcernedwithmoneyatall.Itisessentialinmostagreementsthatallpartiesabidebytheirpartofthebargain.Thelawofcontractisconcernedwithensuringthatpeopleliveuptotheirpromises.

Elements of a simple contractThe law of contract has evolved over centuries through the operation of judge-madelaw.Inmorerecenttimes,certainmodificationshavebeenmadebyActsofParliament.However,theunderlyingprinciplesandrulesarethosedevelopedbythecourts.

Not all agreements are legally enforceable and, therefore, not all agreements arecontracts.Beforeacourtwillregardanagreementasacontract,itmustcontaincertainqualitiesorelements.

OfferForanycontracttoexisttheremustbeanoffer.Thismeansthatoneofthepartiesmustoffersomethingofvaluetotheotherparty.Forexample,HughmightsaytoAdam,‘Iwanttosellyoumycarfor$10000’.Inthissituation,Hughhasmadeaclearoffer.However,ifHughsaidtoAdam‘Iwanttosellmycarforbetween$10000and$15000’,thiswouldnotbeconsideredanoffer.InthefirststatementHughhasmadeaprecisestatementtowhichAdammayagree.Inthesecondstatement,Hughhasindicatedthatheispreparedtosellhiscarbuttheprecisecostofthecarisnotclear.Thecourtswillonlyrecogniseclearandunambiguousstatementsasvalidoffers.

Thepersonmakingtheofferiscalledtheofferor.Forastatementtobeanofferitmustbeclearlycommunicatedtotheofferee.

A contract is a legally enforceable agreement.

For a contract to exist there must be a clear offer.

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Invitation to treatNot all statements are offers.The lawdistinguishesbetween a clearly expressedofferand an invitation to others to enter into negotiations that may lead to the formationofacontract.Suchaninvitationisreferredtoasan invitation to treatanditdoesnotconstituteanoffer.Aproductwithapriceattachedinashopwindowissuchanexample.Thisisnotregardedbythecourtsasanofferbutasaninvitationtothecustomertoentertheshopandoffertobuytheproductataparticularprice.

AcceptanceTheremustbeacceptance.Therecanbenocontractifanofferisnotaccepted.IfHughofferstosellhiscartoAdamfor$10000,therecanbenocontractunlessAdamacceptstheofferbyagreeingtobuythecaratthespecifiedprice.Ifthereistobeavalidacceptance,theoffereemustagreetoalltermsoftheoffer.

Counter-offerIftheoffereechangestheterms,theofferhasnotbeenaccepted.Forexample,ifAdamweretoreplytoHughthathewillpay$8000forthecar,Adamisnotacceptingtheoffer.Adamis,infact,makinganofferinreturn(acounter-offer).Inthissituationtherolesofoffereeandofferorhavebeenreversed.

Communicating acceptanceIfcourtsaretorecogniseanacceptance,itmustbecommunicatedtotheofferor.Acceptancemaybeaverbalstatement,inwritingorinferredbytheactionsoftheparties.Thecourtsregardacceptancebymailashavingtakenplaceatthetimetheletterofacceptanceispostedratherthanwhenitisreceived.

Anofferormayindicateaparticularmethodofacceptance.Forexample,anofferormay insist that acceptance be made within a certain time or the offer will lapse (nolonger be regarded as being open). In such situations, acceptancewill generally havetobecarriedoutinthespecifiedmanner,orthecourtsmaynotrecogniseitasavalidacceptance.

An invitation to enter into negotiations is not an offer.

For a contract to exist the offer must be accepted.

ConsiderationOneofthemorecomplicatedrequirementsofavalidcontractisthatofconsideration.Courtswillnotenforceanagreementwhenthereisonlyapromisemadeandaccepted.Forexample,ifHughpromisestogiveAdamhiscarandAdamaccepts,thecourtswillnotrecognisetheagreementasacontract.Thisisseensimplyasanagreementbetweenfriends.Foracontracttoexist,theremustbesomethinggiven,doneorsufferedinreturnforapromise.Thisisreferredtoasconsideration.Itiswhatpassesbetweenthepartiesinreturnforthepromise.

For a contract to exist there must be consideration: something given, done or suffered in return for a promise.

308  The Legal Maze

In themajorityof situations, thepresenceofconsideration isclearbecausemoneypassesbetweenpartiesinreturnforsomegoodsorservices.However,moneyisnottheonlyformofconsideration.Physicallabourmightbeconsideration,orsimplythepromisetopaysomeamountorperformsometaskinthefuture.Thecourtsdonot insist thatconsiderationbeofequalvaluetothepromise.Asageneralrule,itisassumedthatwhenabargainisstruck,partiesshouldbefreetoagreetowhatevertermstheyplease.Thisprincipleisknownasfreedomofcontract.Ifapartyagreestosella$10000carfor$10,thecourtswillrecognisetheconsideration(ontheassumptionthatthesellerisfreetomakesuchstrangearrangementsiftheysochoose).

Intention to create legal relationsPeople often make arrangements with friends on social occasions where they do notintendthatlegalactionmightbetakenifeitherpartyfailstocarryoutthetermsoftheagreement.Forexample,whenfriendsagreetotakeaholidaytogether,andonepersonchanges theirmind, itwouldbeunreasonable tomake suchanarrangementbinding.Thecourtswillnotenforceagreementsunlessthepartiesintendedtheagreementstobelegallybinding.

Theproblemisthatpartiesseldomclearlystatewhethertheyintendtosetupalegallyenforceablerelationship.Forthisreasonthecourtshaveestablishedcertainpresumptions.First,agreementsenteredintobetweenfamilymembersoronsocialoccasionswillnotinvolveanintentiontocreatelegalrelations(unlessthereisevidencetothecontrary).Second,therewillbeanintentiontocreatelegalrelationsinagreementsofacommercialnature(unlessthereisevidencetothecontrary).

Certainty of termsBeforemakinganyagreementitisimportantthatallpartiesareabsolutelyclearaboutthetermsofthecontractandagreetobeboundbythem.Whenacontractisinwriting,itisimportantforthepartiestoreadthetermscarefullyand,ifnecessary,toseekadvice.Ifinthefutureyouaresigningacontract,neverdosounlessyouunderstanditfullyandarepreparedtoabidebyitsterms.

Capacity to contractBeforeanagreementwillberegardedasacontract,itisnecessarytoshowthatallpartiestothecontractarecapableofmakingalegallybindingagreement.Thecommonlawhasdeveloped certain rules about groups within the community that have only a limitedrighttomakecontracts.Thesegroupsincludepeoplewhoarebankruptandpeoplewithmentaldisorders.However,themostimportantgroupprotectedbythisaspectofthelawarereferredtoasminorsorinfants.Thesearepeopleunder18yearsofage.

Contracts and young peopleTherearespecialrulesforminorsinrelationtocontracts.● Contractsinvolvingminorswillnotbelegallyenforceableagainstthem.● Minorsmayenforcethecontractagainsttheotherpartyorpartiesinvolved.

Theserulesaredesignedtoprotecttheinterestsofthosewhomthecourtshaveregardedasbeingatriskinmakingcontracts.Therearecertainexceptionstotheserulesandwewilldealwiththemostimportantofthese.

NecessariesMinorscanenterintocontractsrelatingtoproductsthatarenecessaryforthem.Iftheobjectofthecontract(theproduct)isnotregardedasbeingnecessaryfortheminor,itwillnotbepossibletoenforcethecontractagainstthem.

Necessarieshavebeendefinedasproductssuitabletotheconditioninlifeoftheminor,andtotheirrequirementsatthetimethecontractwasmade.Whatmaybenecessaryforoneminormaynotbenecessaryforanother.Todecidewhatisanecessary,thecourtmustlookateachindividualcase.

For a contract to be binding there must be an intention to create a legal relationship.

The parties to a contract must be clear about the terms of the contract.

The parties must be legally capable of making a contract.

People under the age of 18 can only make contracts for necessaries that are for their benefit.

Chapter 11  Focus on contract law  309

Bad feng shui over graves goes to courtFENG shui is the Chinese practice of channelling the flow of positive energy through building design. A special section of Springvale Botanical Cemetery known as Song He Yaun is built with feng shui principles, according to the cemetery’s website.

However, two graves in this part of the cemetery are the subject of ‘bad feng shui’ according to the owners of the graves who have claimed breach of contract. They sought undisclosed damages from the Necropolis Springvale for allowing construction of a giant mausoleum, which they claimed affected the feng shui of their respective parents’ graves.

One grave owner, Mr Lee Tang, of Rowville, alleged that the 4.5 metre monument deprived his father of the special

protection offered by a 1.8 metre high statue of the Buddha put there to watch over and protect the dead.

He claimed the cemetery management knew or should have known that for the Buddha statute to protect people, there had to be an unobstructed line of sight between the grave site and the statue. The other plaintiff, Mr William Shao of Croydon, bought a grave for his mother.

The cemetery management claimed that an obstruction between the Buddha and the graves is desirable, according to a proper application of feng shui principles.

Failing mediation, the County Court will hear the two cases together.

Note: This is an author-written article

It is because of this rule of contract law that businesses will not enter into creditarrangementswithyoungpeople.Minorsarenotabletoobtainacreditcardintheirownnameortoenterintodelayedpaymentrelationshipswithouthavingtheirparentsactasguarantors.Ifparentsdothis,itistheywhoarelegallyboundratherthantheminors.

Contracts for the benefit of the minorAcontractforthebenefitofaminorcanbeenforcedbyacourt.Acontractforthebenefitofaminorwouldincludecontractsforeducationandtraining,suchasanapprenticeship.If thecourt isof theview that thecontract isofbenefit to theminor, then itmaybeenforcedagainstthem.

LegalityTobelegallybindingtheobjectofthecontractmustbelegal.Forinstance,anagreementwithahitmantokillarivalwouldnotbeenforcedbyacourtbecausetheobjectofthecontract(tomurdersomeone)isagainstthelaw.

Terms of a contractThemostimportantelementofanycontractisthepartofitthatsetsouttheobjectoftheagreementandwhatisrequiredofeachparty.Ifitisacontractforthepurchaseofgoods,themost important issueswillbethenatureofthegoods,theirdeliveryandthepricepaid.Theseareknownasthetermsofthecontract.Inotherwords,thetermsofacontractarethosemattersaboutwhichthepartieshaveagreed.

Whenpartiesaremistakenaboutthetermsorthemeaningoftheterms,theextenttowhichthecontractmaybeenforcedwilldependonthenatureofthemistake,whomadethemistake,andforwhatreasonthemistakewasmade.

A contract is not legally binding if the object of the contract is illegal.

The terms of a contract set out the object of the agreement and what is required from each party.

MisrepresentationsThere is a possibility that information passing between the parties before making anagreementisfalse.Suchfalseinformationmaybegivendeliberatelyinordertocheattheotherpartyintoenteringtheagreementoritmaybegiveninnocently.Falseinformationgivenbyonepartythatpersuadesorinfluencestheotherpartytoenterthecontractiscalledamisrepresentation.Themisrepresentationmaynotformpartofthetermsofthecontract,butitwillaffecttheextenttowhichthetermsofthecontractwillbeenforceablebythecourts.

False information given by one party that persuades or influences the other party to enter a contract is called a misrepresentation.

Express and implied termsThetermsofacontractmaybeeitherexpressorimplied.Expresstermsarethosetermsthatareclearlystatedorallyorinwritingbythepartiestothecontractatthetimethecontractisformed.Impliedtermsaretermsthatmakeuppartofthecontracteventhoughtheymaynotbespecificallymentioned.Forexample,ifsomeonebuysameatpiethepriceofthepiewouldbeanexpresstermofthecontract,butthefactthatthepieissuitableforconsumptionisimplied.Thefactthatgoodssoldaresuitableforthepurposesforwhichtheyaresoldisanimpliedtermofacontract.

Guarantees and warrantiesItisraretofindasellerexpresslystatinginacontractthatthegoodswillperformparticularfunctionsforaparticularlengthoftime.Sometimesguaranteesandwarrantiesaregiveninwriting,butthefineprintintheseguaranteesmayfailtoadequatelyprotecttheconsumer.Onmanyoccasions,purchasersmayfindtheseguaranteesintheboxwiththegoods.Itmaybedifficulttoprovethatsuchguaranteesformpartofthecontractbecausetheyarefoundafterthecontracthasbeenmade.Alternatively,consumersmayhavedifficultyinenforcingguaranteesgivenbythemanufacturer,withwhomtheconsumermaynothaveacontract.Anotherproblemwithsuchguaranteesisthattheyrelyontheconsumersendingadocumenttothemanufacturer—somethingmanyconsumersfailtodo.

Forthesereasons,parliaments,atboththefederalandstatelevels,havepassedlegislation insisting that contracts for the sale of goods and services includecertain terms. In many cases, these implied terms provide greater protection

thanthosegiveninwrittenguarantees.Thesetermsrelateto‘merchantablequality’andspecifythatthegoodsmustbe‘fitforthepurposeintended’.

Express terms are stated at the time the contract is formed. Implied terms are part of a contract even though they are not stated.

Check your understanding1 Insimpleterms,explainwhat‘capacitytocontract’means,includinginyour

answerthespecialrulesandexceptionsthelawhasdevelopedinregardtoaninfant’scapacitytocontract.Ifyouwereajudgeandcouldpossiblychangethislaw,doyouthinkthatthesespecialconditionsshouldrelatetoallyoungpeopleunder18(infants)today?Explainyouranswerfullywithreasonsandexamples.

2 Outlinethemainelementsofacontract.

Apply your understanding Case study Musicaloffering

Readthecasebelow,thencompletethetasksthatfollow.

Sam saw an advertisement in Up for Grabs magazine offering Molly’s grand piano for a sale price of $4000. Sam wrote to Molly responding to the advertisement stating that he would ‘take the instrument at your price’.

On 1 May, Molly wrote back to Sam stating that she now wanted $5000 for the grand piano but would keep her offer open for another week.

Sam received Molly’s letter on 4 May and immediately wrote back to Molly stating he agreed to pay the $5000 ‘at your convenience’. Unfortunately, this letter was delayed in the postal system and did not arrive until 11 May.

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Chapter 11  Focus on contract law  311

Ann sent a CD to Terry with a note saying, ‘If you don’t give me a call within the week, I will assume you like the CD and wish to keep it at the price stated’. After no such call was received, Ann waited for payment, which was not forthcoming. Ann wants to sue Terry.

Aysun is 17 years old and enters into a finance contract for the purchase of a car. After having the car sitting in the garage for six months, Aysun decides that she has made a mistake, stops making the payments and is sued by the finance company.

Case studyMinorcontractConsiderthecasebelow.WhatlegaladvicewouldyougiveAysuninthissituation?

1 IsMolly’sadvertisementinthemagazinean‘offer’oraninvitationtotreat?Givereasonsforyouranswer.

2 WouldacourtconsiderSam’slettertoMollyan‘offer’?Whyorwhynot?3 Explaintheterm‘counter-offer’.4 HasMollymadeavalidcounter-offertoSam?Explainyourreasons.5 Sam’sacceptanceofMolly’soffertosellhimthepianohasbeendelayed

inthepost.Doesthatmakehisacceptanceinvalidorvalid?Explainyouranswer.

6 Asaclass,discusswhetherMollyhasbreachedhercontractwithSam.

Case studyPostalofferConsiderthecasebelow.WillAnnsucceed?Givereasonsforyouranswer.

Multimedia report or posterElementsofacontractPrepareeitheraMicrosoft®PowerPoint®presentationorasetofA4postersillustratingtheessentialelementsofavalidcontract.

Case studyOfferandacceptanceReadthecaseonthefollowingpage,thencompletethetasksthatfollow.

The next day (5 May), Molly had lunch with her sister Jennifer. They discussed the piano and agreed that Jennifer could buy the piano for $3500 if she also looked after Molly’s children on Saturday nights.

On 6 May, the piano was delivered to Jennifer’s house.

312  The Legal Maze

Offer and acceptanceThe defendant owned a chemist shop. The products in the shop were displayed on shelves and customers served themselves. Under the United Kingdom’s Pharmacy and Poisons Act, special rules applied to the sale of dangerous drugs listed in the Act. Some of these drugs were displayed on the shelves in the chemist shop. The Act stated that these dangerous drugs could only be purchased under the supervision of a registered pharmacist. The defendant employed a pharmacist to supervise the sale of products and the pharmacist was stationed at the checkout counter.

Two customers purchased drugs included in the poisons list. The customers sued the defendant, arguing that the purchase of the drugs had not been supervised in accordance with the Act. They based their case on the argument that the supervision by the pharmacist at the checkout counter was unsatisfactory because the contract for the sale of the products had already been made by the time the customer took the goods to the checkout.

The plaintiff argued that an offer of sale had been made by placing the dangerous products on the shelf with prices attached and that acceptance took place when the customer removed the goods from the shelf. At this point of time the contract was complete and it had been made without supervision.

Source: Pharmaceutical Society of Great Britain v. Boots Cash Chemist [1953] 1 QB 401

1 Thecasehingedonwhentheofferandacceptancetookplace.Didittakeplaceatthetimethegoodswereremovedfromtheshelf(unsupervised)oratthetimethegoodswerepaidfor(supervised)?Explain.

2 Summarisethemainissuesrelatingtoofferandacceptanceintheabovecase.3 Provideacurrentexampleofwherethissituationcouldoccur.

Case studyIntentiontocreatelegalrelationsReadthecasebelow,thencompletethetasksthatfollow.

The defendant was required by his employer to work in Ceylon. In 1915 he returned to England and stayed with his wife until 1916, when he returned to Ceylon. For medical reasons his wife remained in England. An agreement was made between the defendant and his wife that he would pay her £30 per month so that she could maintain herself in his absence.

Chapter 11  Focus on contract law  313

1 Isthisalegallyenforceableagreement?Explain.2 Givetwootherexamplestoillustratesituationswhereagreementsaremade,butnot

withanintentiontocreatealegalcontract.3 Whyisitimportantforthelawtodistinguishbetweensituationsintermsoftheintention

ofthepartiestocreatelegalrelationships?4 Thiscaseisagoodexampleofhowthelawhaschangedinlinewithchanging

communityvalues.Today,MrsBalfourcouldbringhercasetotheFamilyCourtundertheFamily Law Act 1975(Cwith),thoughtheoutcomeofthiscasewouldnotbecertain.Itwoulddependontheparticularcircumstancesofbothparties.WhatdoyouthinktheoutcomeoftheBalfourcasecouldbetoday?

Case studiesContractualsituationsReadthecasesbelow,thencompletethetasksthatfollow.

Case AHugh offers to sell Adam his mountain bike. Adam agrees to Hugh’s asking price of $320 but wants Hugh to include his special riding jacket. Hugh tells Adam that he will think about it and tell him tomorrow if he agrees. In the meantime he sells the bike to Sara instead.

Case BAhmed goes to the local video store and finds a latest release DVD marked at $19.99. Latest release DVDs are usually much more expensive so he takes the DVD to the counter to purchase it. The shop refuses to sell the DVD at the marked price.

Case CGrant owns a restaurant. The restaurant is always very busy on Christmas Day. To encourage all the staff to work on Christmas Day he offers to pay them triple time. They all agree to work on Christmas Day. However, when the staff members receive their pay they discover that they have only been paid double time for the day’s work. They complain to Grant. He replies: ‘But the union said I only had to pay double time for working Christmas Day so you have been paid the correct amount’.

Some time later, the husband wrote suggesting they remain permanently separated. The payments then ceased. The plaintiff argued that she had given consideration by consenting to the original agreement and therefore sued for continued payment.

Source: Balfour v Balfour [1919] 2 KB 571

314  The Legal Maze

Case EAndy has been offered an apprenticeship with a builder. He told the builder that he may have trouble getting to worksites because he doesn’t drive. The builder said: ‘Not a problem, I will pick you up and make sure that you can get to work’. However, after a couple of weeks, the builder gets tired of picking up Andy and insists that Andy make his own way to work or he will not have a job.

Case FBree walks out of a pub late one afternoon and into the store next door. Although she does not appear to be drunk, she has been drinking most of the day. At the store she sees a deluxe wide-screen television. After speaking to a salesperson she signs a contract to buy the television. The next morning Bree wakes up and realises what she has done. She rings the store and explains that she was drunk and cannot afford the television. The salesperson says, ‘You looked all right to me. You signed the contract, it’s yours.’

Case GA man wanting to commit suicide is frightened that he will not succeed. He makes an agreement with two ‘hit men’ to pay them $20 000 to ‘finish him off’ if his attempt at suicide is not successful. Just as the man predicted, his suicide attempt was unsuccessful. He wakes up in hospital. The two ‘hit men’ had not fulfilled their part of the agreement.

Foreachofthecasesabove:a Explainthekeyelementsnecessarytoprovethatacontractexists.b Discusswhetheracontracthasbeenbreached.c Suggestanydefencesthatmaybeavailable.

Case studyLotterywinorloss?Readtheextractonthefollowingpage,thencompletethetasksthatfollow.

Case DMartina is a keen Kangaroos supporter. Her mother follows the Demons. The Kangaroos and Demons have made it to the Grand Final. Martina and her mother have a bet about which team will win. When the Demons win, Martina refuses to pay.

Chapter 11  Focus on contract law  315

Thinking critically and creatively aboutthechapter

Thefollowingactivitieshavebeendesignedtodevelopabroadrangeofanalytical,criticalandcreativethinkingskillsandabilities.

Low

-ord

er thinking to

 higher o

rder 

thinking

Remembering Minors cannot make contracts for credit. Give five reasons for this.

UnderstandingUsing what you have learned about contract law, summarise your understanding of the term ‘contract’.

Applying Develop a mnemonic to identify the different elements of a contract.

AnalysingDiscuss the benefits of the following statement:  ‘An invitation to enter into negotiations is not an offer’.

Evaluating Evaluate the different ways contracts can be made.

Creating

Use BAR to improve the use of contracts.

B = make something bigger

A = add something

R = remove or replace something

Ch

apte

r 11

1 Outlinetheelementsofacontract.Dotheyapplyinthissituation?2 Whatdoyouthinkwillbetheoutcomeofthiscase?Whydoyoubelievethis?

IT should have been a rags to riches story after the lottery numbers of a Logan work syndicate came up but four months later, they haven’t seen the money.

The syndicate of Logan Hospital cleaners and wardsmen won more than half a million dollars in June. However, four months later none of them have seen any of the money.

‘If you don’t pay and when you win, you want a share, where is the justice?’ she said.

‘Why should we pay someone who doesn’t pay?’With lawyers now involved, the group’s winnings—

worth $571 428.58—have been put in Ms Hodgson’s solicitor’s trust account.

Ms Hodgson said the money could not be distributed to herself and the other six deserving syndicate members until the legal dispute with their colleague was settled.

That has exacerbated tensions among them, with Ms Hodgson complaining she was being harassed.

Ms Hodgson—who was injured in the 2005 Bali bombings and who was a volunteer caring for

tsunami victims in Indonesia—said the escalating Lotto dispute was now so upsetting, she was on stress leave from her job. She said she wished she had never set up the yndicate, named 8 Angels, in honour of the nickname she was given for her work with children in Banda Aceh and Fiji. ‘I’m very angry,’ she said. ‘I’m an international volunteer worker, but now my reputation, my name, has been ruined.’ Ms Hodgson said she was waiting for the dispute to go to mediation and once it was settled, she planned to give her share of the money to charity.

Source: Courier-Mail, 19 October 2008

Logan Hospital colleagues fight over frozen lotto win