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Contracts 101 – Conclusion: Protect your Business

steven — Thu, 19 Nov 2009 20:47:41 +0000

Disclaimer: I’m not a lawyer and I have no claim that this advice should be taken as legal advice in replacement of seeking out professional help. What I hope to do is educate you over a series of small posts about what constitutes a contract and you should be able to figure out when you might need to see a real lawyer. Although this series is in the Australian context many of the principles apply in other countries.

Throughout the Contracts 101 series there has been a central theme that has been driven home – contracts are not flippant agreements that we should be self-authoring. In the web development profession, of which I would claim a token place, there is strong industry-wide promotion of the cost savings for self-authored contracts. Therefore my main point, if you take anything away from this series, is to appreciate the complexity of the simple contract under Common Law.

Avoid Potential Catastrophic Costs

First, there should be an appreciation for why we make contracts. My personal opinion is that a contract is not primarily entered with the motivation of forcing the other party to comply. I would contest that you enter a contract to protect yourself from having to hire lawyers and defend yourself within your own country’s legal system or abroad in other legal systems. The potential catastrophic cost of being held accountable for a misunderstanding between contract parties far outweighs the big stick mentality that most small businesses appear to associate with contractual relationships. Particularly under Common Law systems there needs to be a detailed contract drawn up that covers a lot more than you would need in a Civil Law juristiction.

Only enter Win-Win Contracts

Second, there needs to be an appreciation that contracts should always be worth the cost of creating and performing to your business. By that I don’t mean to denegrate contracts or suggest that you should omit them from your business processes. However, I do mean that flippantly signing contracts that you cannot afford to defend or enforce seems to be a waste of your business time. In other words, negotiation of the contract and ensuring that both parties come to a fair win-win outcome is far more important than the documentation that you walk away with after the agreement is struck. Because the court will not enforce one-sided unfair contracts that you bullied others into entering. And, when you think about it, the unhappy party in a win-lose contract may take your case to court for a judicial outcome – which is expensive and may take months to a decade before resolution.

Know When to Consult a Lawyer

Third, there needs to be an appreciation that hiring a lawyer is a business expense that we need to be prepared to endure. If you cannot justify the expense then the contract is probably not worth your while to take on board. Do you hire an architect? A database engineer? A doctor? An accountant? Then why does it seem to be a catch-cry of the web development industry that we self-author contracts? Hire a legal professional as the need arises – with a view to the potential losses of not hiring them. This boils down to a simple business risk-management decision. Or, more succinctly, if you write your own contracts then employ a legal professional to offer you advice to it’s flaws and validity under Common Law.

Thankyou and Acknowledgements for this Content

Finally I need to reinforce upon you that I am not a lawyer. However, the resources used to collate the Contracts 101 series are taken directly from the University of Tasmania’s MBA program. To that extent, these installments were taken directly from my personal study notes taken early in 2009 and due to the nature of those notes there may, and probably will, be paragraphs or examples directly taken from several of the following resources. As such the sources need to be given and appreciated and I thank the respective authors in advance for their understanding that this information is not repeated in a commercial context.

There is a strong hope on my part that small businesses, particularly web developers, might take this series on board and become a lot smarter about how we deal with contracts.

Resources for this Series

The bulk of this information is obtained through Australian Business Law 26^th edition by Paul Lattimer, Managers and the Law: A guide for Business Decision Makers by Lynden Griggs, Eugene Clark and Ian Iredale, A Guide to Business Law thirteenth edition by John Carvan, John Gooley and Evelyn McRae, Law in Commerce third edition by Brendan Sweeney and Jennifer O’Reillly, as well as through the MBA unit BFA682 Law for Managers taught at the University of Tasmania by Simone Watson in 2009. These resources are highly recommended for improving your understanding about these issues. Many case files hyperlinked within this series are directly accessed via the Austlii database (Australia) and the BAILLI database (United Kingdom).

Installments in Contracts 101

Contracts 101 – Part 14: Ending the Contract

steven — Thu, 19 Nov 2009 19:28:28 +0000

In the previous installments of the Contracts 101 series the discussion covered the six elements required of a contract: the agreement, consideration, capacity, legality of object, possibility of performance and genuine consent. Following this outline the subject turned to promissory estoppel, the breach of the promise where there is no contract in material terms. This installment of the series looks at five ways that we can end the contract.

Breach
Frustration
Performance
Operation of the Law
Agreement

1. Breach

The breach occurs in situations where you might contract to have a shed built and the hired party fails to start work in reasonable time thereby leaving you on the completion date with an unbuilt shed. In other words, the breach of contract involves failure to fulfil the actionable details of the contract.

2. Frustration

Frustration occurs in situations where you might sign a contract selling your house to another party. However, prior to the money changing hands a cataclysmic storm makes the house unlivable and it has to be demolished. Frustration means that the contract could not be completed. There was an example within this series of a contract to paint a bridge which got demolished. No bridge = no contract. The possibility to paint the bridge no longer exists and the contract is frustrated.

3. Performance

The ideal ending of a contract is with performance. An example is the sale of a car where the purchaser drives away with signed papers of ownership and the seller has the money in exchange.

4. Operation of Law

Operation of law involves those situations where you might contract a party to do something which, before they can do so, is legislated as illegal. For example, were you to contract a party to create a neon sign for your shop, but before the party can start work on the sign there is a change in the law that forbids such signs being used. Thus, the operation of law ends the contract to make the sign.

5. Agreement

By agreement the contract can be brought to an end such as when somebody is leasing a car for 12 months and they find another person to take over the lease for the remainder of the period. All parties can agree that the original contract is ended and the new arrangement is contracted.

Issues and Items of Note

Performance must be precise and exact… Bolton v Mahadeva (1972), although the exception is when the work is divisible (such as with wages). Where minor omissions or defects exist the court normally allows recovery under the doctrine of substantial performance… Hoenig v Isaacs (1952). And a tender for performance of goods or services (described as an attempt at performance) amounts to discharge of the performance… Startup v Macdonald (1843).

Agreement can only take place where both parties have yet to perform their end of the bargain under the contract (otherwise this would amount to a gift if one person had performed and the other was let go from that responsibility – there would be no consideration).

In defining frustration there must be a supervening event that was not contemplated by either party and therefore performance is no longer possible… Davis Contractors Ltd v Fareham UDC (1956).

It might be worth stressing that one cannot recover for remote losses… Victoria Laundry (Windsor) Ltd v Newman Industries Ltd (1949), meaning that a direct causal link needs to be established rather than a broad brush that may or may not be assumed by the complainant. If your piano is not delivered to Queensland for a concert you can claim that you were unable to perform for your audience, but you would probably lose money trying to claim damages against the transport company because the piano you used instead fell over and broke your leg.

If you are aware that there will be a loss due to a breach you must do your best to mitigate the loss. Further, you cannot recover for loss which is avoided… British Westinghouse Co v Underground Electric Railway Co of London (1912).

On form contracts, liquidated (agreed) damages must be genuine and realistic pre-estimates (as covered in the Hire Purchase legislation).

Remedies for breach of contract most commonly consist of damages to put the innocent party into the same position as though the breach did not occur. Where there is no actual loss then only nominal damages will be awarded (perhaps $1) rather than the full actual cost. The court may also order specific performance or injunction, meaning the court can order either party to carry out the contract, or put in place an injunction to prevent the act from being carried out (both equitable remedies).

It should be obvious that the ending of the contract is an area well worth the business owners time and attention. As ending the contract is the final lesson in the Contracts 101 series the next post will draw some major points and conclusions which will hopefully be of value to the reader.

Note: Resources used for this series are identified in the first installment – Contracts 101 – Part 1: Outline.

Installments in Contracts 101

Contracts 101 – Part 13: Promissory Estoppel

steven — Wed, 18 Nov 2009 20:42:36 +0000

In the previous installments of the Contracts 101 series the discussion covered the six elements required of a contract: the agreement, consideration, capacity, legality of object, possibility of performance and genuine consent. However, there are situations where the lack of a contract will be addressed by the court. This is the area of contract law called promissory (or equitable) estoppel.

In short, promissory estoppel can be thought of as a breach of promise. It would become an issue for the court where somebody was led to believe that a contract would become reality but the other party reneges – in which case the court has the power to estopp the other party (prevent them) from using the lack of a contract as a defence. In which case it would be as though there was a contract in place. To prove a case of promissory estoppel six criteria need to be met.

The assumption of a particular legal relationship by A with B
B was responsible for the assumption
The actions or inactions of A were based on that assumption
B intended A to act
A suffered losses if their assumption was not fulfilled
B has taken no steps to put that assumption to rest as being false

In cases where these six criteria are met… Walton Stores (Interstate) Ltd v Maher (1988); Sword v Shiel – High Trees (1947); Commonwealth v Verwayen (1990); Giumelli v Giumelli (1999), the court has the power to estopp the other party from contesting there was no signed contract in the dispute. In effect, the offending party will be held to their promise as there has been an unfair loss to the injured party which was avoidable given the forgone opportunity to put them straight about their wrong assumption.

Promissory estoppel also applies to situations where one party to a contract, either through their words or actions, leads the other party to believe that some legal right under a contract will not be enforced, and where the other party alters their position based on that assurance. However, for example, where rent has been agreed to be accepted below the contract rental, with due notice the party which promised the reduced rent can resume the suspended right to claiming the full rental under the original contract, if the contract is one which is ongoing (not a one-off)… Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd (1955). Although this may be a matter of whether there had been a change in the lessee’s position… Je Maintiendrai Pty Ltd v Quaglia (1980), or there had not been a change of position… Gollin & Co Ltd v Consolidated Fertilizer Sales Pty Ltd (1982). The promissee has to show they have suffered a material loss, having altered their position, in reliance on the promise, and because of it there would be an injustice to let the promiser renege from their word… Chin v Miller (1981).

Similarly, promissory estoppel may also involve situations where promises to land are created or encouraged by another person (such as the mother in Australia promising title to her house if her son and daughter-in-law migrated from England, then reneged when they arrived), resulting in the handing over of the promised land… Riches v Hogben (1986).

Be aware that it is not sufficient to just have a reliance and a loss; there also needs to be an encouragement from the party making the promise… Commonwealth v Verwayen (1990); Giumelli v Giumelli (1999).

In the next installment of the Contracts 101 series the issue of ending a contract will be explored.

Note: Resources used for this series are identified in the first installment – Contracts 101 – Part 1: Outline.

Installments in Contracts 101

Contracts 101 – Part 12: Genuine Consent

steven — Tue, 17 Nov 2009 20:29:30 +0000

Following through the Contracts 101 series from the agreement, consideration, capacity, legality of object and possibility of performance, this installment discusses the sixth and final element of the simple contract – genuine consent. In fact, genuine consent also comprises of five elements with which the business operator should become familiar:

mistake
misrepresentation
undue influence
duress
unconscionability

1. Mistake

There are a number of ways that a mistake can occur when committing to a contract:

Common mistake… Leaf v International Galleries (1950); The Saints Gallery Pty Ltd v Plummer (1988)
Mutual mistake… Couturier v Hastie (1956); Raffles v Wichelhaus (1864); Smith v Hughes (1871)
Uni-lateral mistake… Taylor v Johnson (1983); Ingram v Little (1960)
Mistake about the identity of the party… Cundy v Lindsay (1878); Lewis v Averay (1971)
Mistake to the nature of the document itself (non-est factum)… Petelin v Cullen (1975); Pt Ltd v Maradona Pty Ltd (1992)

Be aware that in Gallie v Lee (1969) Lord Denning stated that if somebody signs a document relying on the word of another or to its character or content then they cannot back away from their agreement. Therefore the oops factor defense probably won’t get you very far in a court. You still need to read and sign the document with due care and diligence (including consultation with a legal professional).

The law of mistake has also been simplified in recent years and the court will be unlikely to set aside a contract on the grounds of unilateral mistake. The important thing to note about mistake is that it does not refer to the simple error of judgement definition – in this sense, mistake may be something like the mutual mistake in Couturier v Hastie (1836) where both parties contracted to trade corn which had unbeknown to them been spoiled at sea. Or it could be a mistake where both parties misunderstood each other and therefore there was no real contract.

Also note that to claim non-est factum you must show that the document signed is radically different than that which was contemplated at the time. Questions to concern yourself with at the time of contractual agreements with a client, for example, might include their level of literacy and their competency to understand the contract.

Common Law remedies for mistake include rescission of the original contract, restitution of payments already made, specific performance directives from the court and rectification of the contract by the court. However, the Trade Practices Act provides further powers to the court above those provided by Common Law and provides the ability to impose penalties and fines and order corrective actions (all unavailable under the Common Law solution).

2. Misrepresentation

Misrepresentation consists of four elements:

A false statement was made
It was addressed to the person
It was a statement intended to induce them into entering the contract, and
It did induce them into the contract

Also, misrepresentation can either be innocent, negligent or fraudulent, and there are differences in the court’s response under Common Law to any breach. However, note that if it was only opinion that was offered then it is not misrepresentation… Bisset v Wilkinson (1926).

Remedies for misrepresentation include:

If innocent then the court may refuse to fulful the contract or provide equity
If fraudulent then there may be a liability for damages

Again, this also comes under the Trade Practices Act as misleading or deceptive conduct (s52), and false or misleading representation (s53), and could result in an injunction (s80), damages (s52) or ancilliary remedies (s87).

3. Undue Influence

Undue influence exists where one party uses their dominance in a relationship in such a way as to result in a situation where the weaker party loses their ability to act freely and voluntarily… Johnson v Buttress (1936). Relationships that inherently warrant attention in this regard include parent-child, doctor-patient, solicitor-client, religious advisor-devotee… Allcard v Skinner (1887). Although the courts do not limit themselves to these identified relationships. Therefore, the very nature of a relationship could affect the ability of the other party to provide genuine consent to the contract.

4. Duress

Again, contracts signed under duress lack genuine consent. Duress occurs where an illegitimate pressure is placed on the party to enter the contract… Scolio Pty Ltd v Cote (1992). As a test, the duress must be present and effective but it does not have to be the sole factor at play – duress can simply be a contributory factor… Barton v Armstrong (1976), and can include economic duress… Crescendo Management Pty Ltd v Westpac Banking Corp (1988); CTN Cash & Carry Ltd v Gallagher Ltd (1992).

5. Unconscionability

Unconscionability is a step further than undue influence or duress. Whereas undue influence is based on the use of influence in a relationship of uneven weight, and duress is based on direct illegitimate pressure to sign the contract, unconscionability involves the direct taking advantage of someone… Schroeder Music Publishing Co Ltd v Macaulay (1974); Commercial Bank of Australia v Amadio (1983); Louth v Diprose (1992).

In assessing unconscionability there must be an identified special disadvantage such as illness, ignorance, inexperience, impaired faculties, financial need or something other than the circumstances, that affected their ability to look after their own interest. This could include the inability to read and write English.Section 51AA-51AC of the Trade Practices Act cover unconscionable conduct with section 51AB(2) covering factors to take into consideration. Remedies include injunctions (s80), damages (s82), non-punitive orders (s86c) and other orders (s87).

Trade Practices Act and Fair Trading Act

The Trade Practices Act and the Fair Trading Act have extended the court’s power to address genuine consent in the context of a contract. The Trade Practices Act applies to corporations and the Fair Trading Act applies to firms and individuals. Therefore they have powers that exceed the Common Law constraints.

Conclusion

As the sixth and final element of the simple contract the genuine consent of parties is critical to the successful outcomes of our associated business objectives. Understanding that the court will not only consider what you are contracting, but also with whom and under what circumstance, can be a potentially business saving tool in your business arsenal. To anybody who has read the preceding installments of the Contracts 101 series there should be an apparent theme – the court will not enforce unfair or illegal contractual arrangements. Even more important to realise, a badly written or unenforceable contract has the potential to cost your business in major league court and lawyer fees over a number of years. So it is critical to business that we utilise lawyers where appropriate, rather than penning our own destinies to save a few dollars. After all, smart business is efficient business.

In the next installment of Contracts 101 the discussion will move to the situation where you may not have a signed contract – promissory estoppel. It may be easiest to picture this in your mind around the common idea of a breach of promise.

Note: Resources used for this series are identified in the first installment – Contracts 101 – Part 1: Outline.

Installments in Contracts 101

Contracts 101 – Part 11: Possibility of Performance

steven — Mon, 16 Nov 2009 20:37:00 +0000

Up until this point in the Contracts 101 series there has been substantial information at each step of the process of explanation of simple contracts. However, element five of the contract is often under-represented in our minds as to its importance.

Possibility of performance means the contract must be possible to complete because legally binding contracts cannot be undertaken to perform an impossible act. This is not to say that an entrepeneur on hiring a contractor is going to be confronted at year’s end by the contractor stating that their sub-contractors had difficulties and there was too much rain in July. No, that does not constitute a barrier to possibility of performance in regards to the contract – more likely than not, such a situation would simply be mismanagement or bad luck. Neither of which the court is open to addressing as a get out of jail free card for businesses.

For impossibility of performance there must be no way in living hell that the contract could be achieved – for example, you could not legally contract somebody to remove a large stadium in a week if you knew full well that it could not be achieved in less than two weeks due to physical and process constraints. And you cannot contract people to locate and return an item or person that does not exist. The contract must be possible to complete, otherwise the court will not treat it as valid in the eyes of the law.

It is worth noting, were the impossibility of performance to arise following the point the contract is entered into then the contract would be considered frustrated and would usually be discharged. For example, were you to contract somebody to paint the Sydney Harbour Bridge but after the second week there was a disaster that destroyed the bridge – well, you can see the dilemma. No bridge, no possibiliity of performance = no contract.

In Contracts 101 Part 12 the discussion moves to the sixth and final element of the contract – genuine consent.

Note: Resources used for this series are identified in the first installment – Contracts 101 – Part 1: Outline.

Installments in Contracts 101

Contracts 101 – Part 10: Legality of Object

steven — Sun, 15 Nov 2009 19:26:32 +0000

Following from the first three elements of the contract – the agreement, consideration and capacity – the fourth element is legality of object which covers Common Law and Statutes involving illegal and void contracts, including restraint of trade… G. W. Plowman and Son Ltd v Ash (1964); Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978). Generally, illegal contracts will not be enforced by the court – including those contracts which contravene public policy, crimes or torts; contracts which promote sexual immorality; contracts which prejudice the status of marriage; contracts which involve trading with an enemy country, promote corruption, or pervert the course of justice; and contracts which involve the performance of illegal acts in a foreign and friendly state.

Contracts illegal by Statute include those which the government deems must include particular terms or details such as licenses or particular clauses. To this extent, it is important to be aware that certain contracts are unenforceable void contracts or they may even be downright illegal. However, for the illegal contract, the illegal factor must be fundamental to the contract… Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978). In the case of Yango Pastoral, in the previous hyperlink, Yango contested that due to First Chicago Australia Ltd being unregistered under Australian Statute that Yango should be able to not repay their loan. The court found that the illegality of being unregistered was not fundamental to the case of the loan and ordered Yango to repay the loan.

A restraint of trade is where one party is restricted in liberty by another party in the future… Petrofina (Great Britain) Ltd v Martin (1966). However, with regard to restraint of trade, if a contract is reasonable it may be upheld by the court. To this end it should be noted that restraint of trade contracts should be considered as void unless reasonable with consideration given to the interests of the parties and the interests of the general public – including geographical area and time duration. It is not the court’s intention to stifle honest economic development nor to stop people from earning a living.

So, where it is deemed reasonable, there may be grounds for restraint of trade within something like an employment contract. It may be fair to restrain an employee or contractor from soliciting work from your clients for the next 12 months… but it would be unreasonable to include a contract that enforces some condition such as that they may not be a web developer within the boundaries of Tasmania for the next five years. It is imperative that if such conditions are included into a contract then it can be justified as reasonable and in the public interest before it will be enforced by the court.

The takeaway point of the legality of object element of a contract is that we need to be careful with the nature of the contract. The court will not support anything that is grossly unfair or illegal, and it will not stifle trade, promote immoral behaviour or allow the public interest to be compromised. Therefore, before entering into a contract it is a wise move to pass it before lawyers who are in a position to assure the legality of the deal at hand.

While, at least in the web development industry, there is a tendency to write our own ad-hoc contracts with one-sided powers and constraints – be aware these may be unfair in the eyes of the court. Further, and more seriously, these self-authored contracts may have fundamental flaws that make them not only worthless to our business objectives but also put us at risk of having to defend ourselves within the costly court system if we are sued by the other party. So my advice is to stop treating contracts as flippant agreements where you get sub-contractors to sign on the dotted line. The truth is that you could lose your house, your marriage and your business if you get it wrong. One objective of this series is to impress upon the business owner the need for professional help from a trained lawyer when it is deemed appropriate. Contracts are critical business processes – so value them.

The next installment of Contracts 101 will include a brief discussion of the fifth element of the contract – possibility of performance.

Note: Resources used for this series are identified in the first installment – Contracts 101 – Part 1: Outline.

Installments in Contracts 101

Contracts 101 – Part 9: Capacity

steven — Sat, 14 Nov 2009 23:22:38 +0000

Having discussed the first two elements of the contract in the agreement, which consists of an offer (as distinguised from an invitation to treat) and acceptance, and secondly consideration, the discussion of Contracts 101 moves to the third element of the contract – capacity. This is a critical area to be aware of when entering into contractual arrangements because the capacity of a person or entity may dramatically affect the outcome.

Capacity is the legal ability of a person or corporation to enter into a contract. Corporations are legal entities in their own right… Saloman v Saloman (1897), in the fashion of an artificial person and so can also enter into contracts. Those incapable of being legally bound by contracts are considered disabled in certain situations and the list includes minors… Nash v Inman (1908); Doyle v White City Stadium Ltd (1935), people suffering mental illness, sentenced convicts (at least in Tasmania), the intoxicated… Blomley v Ryan (1956), and bankrupts.

In cases of necessities minors are bound by contract, taken on suitability of their lifestyle at the time rather than bare survival necessities… Sale of Goods Act s7(2). Common Law also allows contracts with minors for valid employment, training and education provided they are of benefit to the minor. However, up until shortly after turning 18 minors can repudiate a contract making it a voidable contract. Therfore, if you lend money to a minor or take an IOU then it is not enforceable.

Mentally ill and intoxicated people must prove that the other person was aware of their incapacity to understand what they were doing at the time. This means they were intoxicated to the extent they were not aware AND the other person knew this to be the case.

Also note that corporations require an agent to sign on their behalf due to their status as an artificial person created by legislation.

As you can see there is a lot to be said for thinking about who is entering the contract and their capacity. Particularly, you might show some restraint if you suspect the other person may be suffering from mental illness. By that I mean, beyond the legality of entering into that contract, you also have a moral obligation to society not to exploit people who walk into your business – for example, signing up a manic depressive for $3000 worth of non-refundable goods and services just to rack up a sale. Not only is that unethical, oneday it might come back with a fancy lawyer and cost you several years defending yourself in the courts. Is it worth the sale? Similarly, is it worth trying to exploit a minor when they may simply forfeit the debt?

Another point to take away from the capacity element of contracts is that when you deal with corporations you need to be sure that you are dealing with somebody appropriately authorised to act as an agent on their behalf.

The next installment of Contracts 101 will very briefly discuss the fourth element of the contract – legality of object. This covers the area of illegal and void contracts as well as restraint of trade.

Note: Resources used for this series are identified in the first installment – Contracts 101 – Part 1: Outline.

Installments in Contracts 101

Contracts 101 – Part 8: Consideration

steven — Fri, 13 Nov 2009 19:50:39 +0000

The first element of the contract discussed in this series was the agreement which consisted of an offer, as distinguised from an invitation to treat, and an acceptance. Then the discussion briefly moved in Part 7 to the Battle of the Forms. Moving past the agreement, this part of the Contracts 101 series progresses to the second element of the contract – consideration.

In short, consideration is the price of something of value that the person promised has themselves promised in return. Thus, a contract requires a promise for a promise. However, this price can be in a range of ways and not just monetary – it could be a right, interest, profit, benefit, forebearance, detriment, loss or responsibility given or suffered. In other words, the other party must contribute to the bargain for there to be a contract. The four rules of consideration are:

May be executed or executory but cannot be past… Roscorla v Thomas (1842)
It does not need to be adequate, provided it has some value… Chappell & Co Ltd v Nestle Co Ltd (1960)
It must be sufficient and reflect the value… Stilk v Myrick (1809); Hartley v Ponsonby (1857); Collins v Godfrey (1831); Glasbrook Bros Ltd v Glamorgan City Council (1925)
Must move from the promise… Tweddle v Atkinson (1861)

Consideration… Currie v Misa (1875), is a promise for a promise and requires that the exchange of promises is intended to legally bind. Whereas a gratuitous gift, which is a one way promise without a return promise, will not be enforceable in the court (unless it was made under seal, such as a deed).

Consideration also must be definite (not vague)… Placer Development Ltd v Commonwealth (1969), legal and possible to perform, it should be executed or executory… Guthridge v Coco (2002); Shiels v Drysdale (1880), it must move from the promisee… Coulls v Gatot’s Executor and Trustee Co Ltd (1967), although it need not move to the promisor… Pico Holdings Inc v Wave Vistas Pty Ltd (2005), and it may be a promise not to pursue court action, or the compromise of a dispute… Wigan v Edwards (1973).

Consideration is an essential element of every simple contract and, provided it is of some value (nominal or trivial), there is no question to its adequacy. However, the consideration must not be unlawful or breach public policy and it must be capable of performance. The consideration must also be sufficient (as opposed to being insufficient). When the rule says it must move from the promisee that means the person enforcing the contract must show they have furnished the consideration.

Insufficient consideration occurs when there is the performance of a public duty imposed by law… Collins v Godfrey (1831); Glasbrook Bros Ltd v Glamorgan City Council (1925); when under a public duty the person does no more than their obligation; when performance of a duty is already imposed by contract… Stilk v Myrick (1809); Hartley v Ponsonby (1857); when there is acceptance by a creditor of part payment (no consideration by the owing party except under the original contract); when there is a moral obligation, and when there is an illusory or uncertain promise.

Therefore, when entering contracts it is important to realise the necessity of the promise for a promise. Also, that the courts will not enforce the gratuitous gift however it was promised to you. Further, past acts cannot be consideration in a promise of the present – but that may be overlooked if the past act or forebearance was at the request of the person who happens to be making the present promise.

In Contracts 101 Part 9 the third element of a contract – capacity – will be discussed.

Note: Resources used for this series are identified in the first installment – Contracts 101 – Part 1: Outline.

Installments in Contracts 101

Contracts 101 – Part 7: Battle of the Forms

steven — Thu, 12 Nov 2009 19:59:20 +0000

Following on from Contracts 101 Part 6, the Battle of the Forms is an area where courts try to figure out where the offer was actually made and the offer accepted – in fact, which contract is applicable to the situation. In the to-and-fro of negotiation it can be the finer points of law that define the contract, and after you think about it for a time you’ll realise that if you can’t work out between you what the contract is then the court is going to do that for you.

The following case is a good example to walk through the Battle of the Forms. Note that reading the Butler Machine Tool Case in this case study will be essential to your understanding of this synopsis (its not very long – please give it a read).

Brief Synopsis of the Butler Machine Tool Case

In the Butler Machine Tool case… The Butler Machine Tool Company Ltd v Ex-Cell-O Corporation (England) Ltd (1977), party A was to sell an expensive piece of equipment to party B. Party A sent an offer to sell with conditions on the back that specifically stated that prices could be increased given external market forces and some other conditions, and they noted that these conditions would hold regardless of Party B imposing any conditions in their acceptance / contract.

Party B, rather than simply accepting the terms, communicated to the seller (A) that they would purchase the equipment on certain amended conditions which were written on the back of the acceptance. They also added a slip for signature of A to say that A accepted the new version of conditions – namely, no option to raise the price on delivery to B regardless of market forces. Further, the time stated by A to make and deliver the equipment was not realised and Party B had to wait extra time before receiving the equipment, and this impacted on their business processes and organisation.

Party A received the amended conditions and sent a letter to B stating that their original conditions still applied from May 23rd, but the slip was signed and returned with the letter (falling under the Postal Acceptance Rule… Henthorn v Fraser (1892); Household Fire & Carriage Accident Insurance Co Ltd v Grand (1879). This letter from Party A was an acceptance of an offer to Party B’s (the buyer’s) conditions… Elizabeth City Centre Pty Ltd v Corralyn Pty Ltd (1995) – an acceptance in its own right.

The issue boiled down in judgement to being a case where A’s original offer had been killed by B’s counter-offer, so A’s conditions did not apply and the price could not be raised on the late delivery of the machine to B. In short, this was an acceptance by Party A of Party B’s conditions.

Legal rules or principles arising from the case

Battle of the Forms… Hyde v Wrench (1840). An agreement in a contract comprises of an offer and an acceptance. The four rules of an offer are:

Must be distinguished from an invitation to treat
Can be made to a specific person or to the whole world
Must be communicated
Can be withdrawn at any time prior to acceptance

When ascertaining the Battle of the Forms, it is crucial to realise that a counter-offer rejects a previous offer and makes a new offer… Trollope & Colls Ltd. & ors.v. Atomic Power Constructions Ltd (1963). Also, relating to this counter-offer and acceptance, it is deemed that a contract exists at the last form that is sent without objection taken to it… Brogden v Metropolitan Railway (1877); B. R. S. v Crutchley (1968). Identification of the last offer and acceptance is the crucial element of figuring out which contract applies.

The acceptance at the point of the seller signing the slip and returning it to the buyer (the counter-offer) as applying to the Butler Machine Tool Case, met all nine criteria; specifically the six applicable:

There was reliance on the offer
It was complete and unqualified
There was unconditional assent
It was clear and certain
It was express
It was communicated

Irrelevant to the legal argument, the Postal Acceptance Rule applied to the supplier’s acceptance and mailing of the letter and signed slip. The contract had acceptance on the posting of the letter of acceptance.

Conclusion

As you can see from the preceding case, and especially so if you read the actual Butler Machine Tool case, there is a definate process the court will place on determining the true nature of a disputed contract. Therefore, as a business operator, it is important to be familiar with the rules of an offer and those of acceptance. In Part 8 of this series the second element of a contract will be discussed – consideration. I should assure you that the remaining five elements are significantly briefer than those of the agreement; however, they are equally as important.

Note: Resources used for this series are identified in the first installment – Contracts 101 – Part 1: Outline.

Installments in Contracts 101

Contracts 101 – Part 6: The Acceptance

steven — Wed, 11 Nov 2009 20:40:09 +0000

In Part 5 of the Contracts 101 series the first part of an agreement, the offer, was discussed along with the four rules of an offer and the distinguishing of an offer from a mere invitation to treat. An offer exists with the intention to be legally bound to a contract, otherwise it is an invitation to treat. The second part of an agreement is the acceptance and it is equally important to understand the nine rules of acceptance and related precedents. The nine rules of acceptance state:

Must be in reliance on the offer… R v Clarke (1927)
It must be complete and unqualified… Niesmann v Collingridge (1921)
Conditional assent is not acceptance, it must be unconditional
It must be clear and certain
It may be express or implied… Felthouse v Bindley (1862)
It may be retrospective
Counter-offer kills the original offer… Hyde v Wrench (1840), and makes a new offer… Trollope & Colls Ltd & ors. v Atomic Power Constructions Ltd (1963) – Battle of the Forms.
It must be communicated… Brambles Holdings Ltd v Bathurst City Council (2001), although silence does not constitute acceptance… Felthouse v Bindley (1862); Carlill v Carbolic Smoke Ball Co (1893)
The method of acceptance may be prescribed by the offerer… Nunin Holdings Pty Ltd v Tullamarine Estates Pty Ltd (1994); Elizabeth City Centre Pty Ltd v Corralyn Pty Ltd (1995)

A number of precendents have also been set to define the boundaries of acceptance:

Acceptance may take the form of an act… Carlill v Carbolic Smoke Ball Co (1893)
Acceptance in the form of a promise and not performance of an act must be communicated to the offerer – may be word of mouth, writing or conduct.
Acceptance can be made only by the party to whom the offer was made.
The existence of the offer must be known to the person accepting it.
Communication of acceptance must be in a regular and authorised manner… Powell v Lee (1908)
The offer must be accepted within a reasonable period of time… Empirnall Holdings Pty Ltd v McMahon Paull Partners Pty Ltd (1988)
Acceptance by conduct… Brambles Holdings Ltd v Bathurst City Council (2001)
Where acceptance constitutes an act no communication is required, unless the terms of the offer require it… Empirnall Holdings Pty Ltd v McMahon Paull Partners Pty Ltd (1988)
Acceptance must follow conditions stated in the contract, if any… Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1957)
When the words used are Subject to Contract the contract is not valid until drafted and signed… Masters v Cameron (1954); Bridle Estates Pty Ltd v Myer Realty Pty Ltd (1977). However, if terms have been reached and the parties intend to be bound then the contract is binding from the initial agreement… Godecke v Kirwan (1973)
The Postal Acceptance Rule states that if acceptance by post is contemplated by both parties then it is valid acceptance the moment the letter is posted… Henthorn v Fraser (1892); Household Fire & Carriage Accident Insurance Co Ltd v Grand (1879). Unless it is stipulated otherwise… Nunin Holdings Pty Ltd v Tullamarine Estates Pty Ltd (1994); Elizabeth City Centre Pty Ltd v Corralyn Pty Ltd (1995). If the communication is by fax or telex the postal acceptance rule does not apply. If it is email communication then acceptance is from the time they log into the system. And it could be argued that SMS is similar to email in this regard.

In summary of the first element of the contract – the agreement – there is an offer (as distinguished from an invitation to treat) and an acceptance. An offer has four rules and acceptance has a further nine rules. The take-away point of this discussion about the agreement element of the contract is that as a business operator you need to be very careful about your wording and intentions (implied or otherwise) when you negotiate or discuss work related issues. One large area of concern you should be aware of is that the lawyers will come and sieze access to your internal emails and they might reveal evidence that you were at the time intending to be bound (making an offer) whether or not you realised the ramification at the time. Internal discussion is as serious as external discussion.

One interesting point worth exploring in relation to the offer and acceptance is the Battle of the Forms that ensues to ascertain where the actual offer was made and where that particular offer was accepted. In the next installment of the Contracts 101 series (Part 7) a brief introduction to the Battle of the Forms through a synopsis of Butler Machine Tool Co Ltd v Ex-Cell-O Corporation England Ltd (1977) should provide at least enough insight to further personal enquiry.

It may also be worth your while to read Formation of Contracts by Email – Is it Just the Same as the Post? by Sharon Christensen in the QUT Law & Justice Journal via the Austlii database.

Note: Resources used for this series are identified in the first installment – Contracts 101 – Part 1: Outline.