TUTORIAL4 INTRODUCTIONTOCONTRACTLAW ANDAGREEMENT:OFFER

1. What economic and commercial justifications are there for the existence of the law of contract? The law of contract is vital to ensuring business is conducted in the manner proposed by all parties. Commerce is conducted by numerous and various people and institutions all interacting with each other. It is essential therefore that there is a set of rules which govern the behaviour of these parties in relation the commitments made to the other parties. Business survival is dependent, in part, upon the distribution and exchange of goods and services. These functions exist because of promises each party gives to another. If promises are broken commerce cannot occur to the benefit of all parties. To ensure that promises are kept parties can be protected by the terms of a promise, i.e. the terms of a contract, providing a punitive avenue against a contractual transgressor. Contracts are made and underpin every facet of business operations. For example, a business' organisation depends upon a contract, as does its marketing, purchasing, hiring of labour, banking and sales. A certain measure of liability inherently exists in each of these areas. Therefore a business needs to know what this is before and during the life of the contract to ensure those operations are successful. Hazards exist, in each of these operations, which threaten a business in achieving success of any given outcome. As a way of reducing hazards a contract can be a device used to control them, thereby minimising any associated risk. The control is a contracts legally binding nature. Parties are not restricted to just the law of contract. There are other laws which can also protect parties involved in commerce. These include the law of torts and the law of equity and restitution, and support can also be gained from parliamentary statutes. A downside to the law of contract is that it connotes an atmosphere of distrust. Surely people and institutions have more confidence entering into agreements with those that they can trust. Trust must be the greater motivating force to ensure that agreements are met. Parties which work together need to develop an open and free dialogue, and by using a contract as a framework, better business can be built, as well as building better business relationships in the process. Adjustments or cancellation to contracts may well be necessary to ensure ongoing and future business, beneficial to all parties. Another downside is the potential for disputed matters to lead to a lengthy litigation process. This is both costly to all parties and it promotes a distrust of the legal profession. It also makes it extremely difficult for the parties to conduct business again. Afterall, business is about making money and hopefully to the benefit of

humanity. Its not about spending money on lawyers and making enemies in the process. Good business survives on a strong adherence to good business ethics and promises. The term pacta sunt servanda indicates that people should be held to their promises. When supported and underpinned by a contract, parties can reasonably expect that such promises are acted upon, gaining not only immediate commercial benefits, but also ensuring that future business can be achieved. 2 (1).What is meant by the expression 'freedom of contract'?

Freedom of contract means that parties have the freedom to make agreements upon whatever basis they choose and is the underlying doctrine in contract law. This stemmed from the 19th century when the theory of laissez faire was eminent, believing that intervention should be limited. It was believed that the management of affairs was better done on a private basis and was far superior to public regulation. Although, contracts still have to be enforceable under the law, whether they are made freely or otherwise. Such agreements are considered determinative by the primary obligations which the parties are willing to accept, as stated by Lord Diplock in Photo Production Ltd v. Securicor Transport (1980). He further explained that where a contract is deficient in stating all the primary obligations, it is implied that these are covered by the law. Even so, if parties wish to make modifications they are free to do so. The expression freedom of contract is accompanied by the another expression sanctity of contract. This maintains the integrity of the contract ensuring that the courts cannot re-write it, simply because one of the parties considers that they should not have entered into the agreement, the contract thus being enforceable according to the agreed terms. The success or benefit resulting from a contract to either party is proportional to the strength or weakness of each party. Those with little bargaining power can be taken advantage of because a stronger party is able to negotiate terms more beneficial to themselves. Although this is a freedom, it cannot also be in the public interest. (2).What inroads have been made on the concept of freedom of contract? Subsequent inroads have been made on the concept of freedom of contract, particularly by making agreements fair and equitable between parties. This has been achieved by protecting consumers and the public interest with legislative statutes and judicial intervention. Consumers are disadvantaged in relation to negotiating for goods and services. Generally it is the provider of the good or service who has more freedom to stipulate terms. Consequently a number of statutes have been enacted, which includes Sale of Goods Acts, Fair Trading Acts, and specifically the Trade Practices Act 1974 (Cth).

More often people with little bargaining power are being protected. As the Deakin University Business Law Study Guide (2000) suggests, this has resulted in: the automatic insertion of terms for the benefit of consumers; exemption clauses having legislative and judicial controls; contracts able to be challenged on the grounds of unfairness and unconscionableness; statutes prohibiting misleading or deceptive conduct.

The use of form (pre-printed) contracts are more common now, for example Residential Tenancy Agreements are presented on a standard contract form. The rights of parties are also being protected by imposing restrictions upon contracts if they are not in the public interest. Such legislation prefers to uphold social, economic and political values. For example, people cannot be discriminated against because of sex or marital status in negotiating terms of employment under the Sex Dicriminations Act 1984 (Cth). The judiciary also is reviewing its role in law-making by not being restricted by technical rules of contract. It seems that the courts are pursuing the objective of fair outcomes for individual cases so that unfair benefits cannot be secured at the expense of another party. Commerce still requires contractual agreement and without such, in the absence of mutual reconciliation, parties would be unable to make settlements. Common law, has by nature evolved slowly, and this has meant that inroads to the concept of freedom of contract have also been slow, and more importantly incremental. As stated in the Study Guide: The emphasis remains that of ascertaining whether there is a contract according to an objective appreciation of the circumstances and then of considering whether there exists factors which justify the court denying effect to that contract or some part of it by virtue of some statutory rule or equitable principle. Thus a balance is being achieved between a partys right to negotiate freely, but within the constraints of law.

(1).Distinguish between the following: -unilateral and bilateral contracts; Unilateral contracts are those which only one of the parties is under obligation to perform. For example, in Carlill v Carbolic Smoke Ball Co (1893) a secondary party was not obligated to undertake the trial of a smoke ball to ward against influenza. However, the company was obligated to fulfill its terms of agreement should a secondary party comply. Other contracts are said to be bilateral when both parties to a contract are obligated to perform.

-simple and formal contracts; Simple contracts are sometimes referred to as informal contracts and can be characterised by agreements made orally, in writing, or both. Although some contracts can be made in simple form, they may not be enforceable. For example, statutes regarding the sale of land require a written agreement in a formal contract, if constructed in simple form the contract is not enforceable. Formal contracts, also called specialty contracts, must be in writing, the parties bound must sign them, and the signatures must be witnessed by someone who is not party to the contract (the requirements for contracts for the sale of land). -implied and express terms; Express terms are those agreements explicitly articulated in a contract. Osborns Concise Law Dictionary (1993) describes express as directly discoverable by word or act. Whereas implied terms exist where no agreed terms are expressed, and due to the conduct of the parties, or required by statute, terms of a contract are implied to exist. For example the merchantable quality of goods sold to a buyer there are no express terms for the condition of the goods, this is implied by the Sale of Goods Act (1979). Few contracts are entirely implied however express contracts can contain implied terms. -void and voidable contracts A void contract has no effect on any party, they are said to be void from the beginning. Contracts may be rendered void by a mistake with the contract or if they are illegal. Promises cannot be enforced and neither can parties recover damages under a void contract. For example, a contract in which goods are sold by someone who is not the rightful owner, is void, as this is an illegal act. Voidable contracts are those which are valid and binding, but there are certain circumstances which enable one party to rescind the contract due to some condition. Once a voidable contract is rescinded, it becomes a void contract, as if void from the beginning (ab initio). (2).Why is a social, as opposed to a business, arrangement unenforceable? No matter what the context, promises matter. Promises play a critical role in the social context but are they enforceable? Social arrangements are usually made between parties who are well known to each other and whose outcomes do not rely upon the risk of losing quantities of goods, services, or money. The contract of marriage has the ultimate outcome of the partners being together until death. It is well known that in the event of a failed marriage, property is a key issue, and the award of such is enforceable. However if the key outcome is to remain together, and this fails, can togetherness be enforced? The Family Law Act (1975) enables either party to separate of their own free accord, and the social arrangement of marriage togetherness - is unenforceable.

Social arrangements do not carry with it the same type of risk which would generally be expected with a business arrangement. Parties making social arrangements are generally committed to achieving mutually beneficial outcomes in ordinary course, as well as to maintain the relationships. To enforce a social arrangement would cause tension and anxiety which would then jeopardise the arrangements existence, possibly causing the relationship to cease. Promises broken in a social sense can be the source of frustration and anxiety, and ultimately could cause ostracism. A reason for this occurring could be attributed to an individuals perceptions, or self reality, which will always be different to someone elses. Such reality is not always clear to another social party, that is to say that there is no written document where both parties can agree to, or accept, the perceptions of one of the parties, in a social sense. In a reasonable social environment it would be recognised that promises do matter. But only to social parties who hold that value as important. Also in such environments a certain level of trust will exist which may have the capacity to understand that a broken promise will have an underlying reason. In the social context it is the values which are held which will determine whether social arrangements are kept, or if not, are forgiven. Social values cannot be enforced, they can only be held by individual choice. 4 (1).Distinguish between an offer and an invitation to treat. What would be the effect if there was no distinction drawn between them? Discuss these issues by reference to case law.

The acceptance, of a commercial seller making an offer, which is capable of binding him, with respect to his goods or services, is the central issue in determining the difference between an offer, and an invitation to treat. Often this circumstance is a mere invitation to treat, seeking others to make the seller offers with the mind of negotiating a sale. If only an invitation to treat has been made, then a reply will mostly be an offer which the seller can either accept, thus making an agreement or enforceable contract, or reject. (Of course the solicited reply may not be an offer but a willingness to proceed with further negotiations.) In order to ascertain if an offer or an invitation to treat has been made, it is necessary to interpret the language used, noting the surrounding circumstances. The courts use an objective view, based on what a reasonable third party believes the parties intended. This was upheld in Gibson v Manchester City Council [1978] 1 WLR 520 at 523-4 where Lord Denning stated that there is no need to look for a strict offer and acceptance. You should look at the correspondence as a whole and the conduct of the parties and see therefrom whether the parties have come to an agreement ... if by their correspondence and their conduct you can see an agreement ... which was intended thenceforward to be binding then there is a binding contract in law even though the formalities have not been gone through.

Guidance has been developed to distinguish between what constitutes an offer or an invitation to treat, and is dependent upon the intention of the party making it. Such guidance has been upheld in situations which have been normally recurring, however care must be taken not to use the normal inference in one situation, and then apply it equally to another situation which may be inappropriate. Promotional brochures giving details of goods, which a merchant has for sale, cannot generally be deemed as an offer. Even if the goods have been offered for sale, the interpretation in a general sense will normally show the merchants intention to negotiate a sale, while keeping the right to reject any offers. In Spencer v Harding [1870] LR 5 CP 561 it was held that a pamphlet stating we are instructed to offer to the trade for sale of goods was not an offer capable of acceptance but rather an invitation to treat. In the same manner goods displayed in a shop window with prices attached are invitations to treat, as upheld by Lord Parker in Fisher v Bell [1961] 1 QB 394 at 399-400, and not an offer for sale the acceptance of which constitutes a contract. A contrary example of a merchants advertisement is found in Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 where it was found that the advertised 100 reward was indeed an offer because the advertisement was accepted by members of the public who faithfully used the balls as described, yet still caught influenza. In similar fashion advertisements offering rewards for lost or stolen property, or for information regarding criminal matters, are mostly considered as offers by the courts. In R v Clarke [1927] 40 CLR 227 Clarke could have been successful in claiming the reward had there been true acceptance of the offer, furthermore his intention was for the purpose of saving himself from the murder charge. Invitation to tender is normally considered as an invitation to treat, but can also be an offer, depending on how it is communicated. Invitations to tender can be considered offers if, in its communication, it is interpreted that by meeting certain conditions, a binding agreement is inferred. For example, if the party seeking to tender binds itself to the highest tender, this may be the offer, and the highest tender is the acceptance: Harvard Investments Ltd v Royal Trust Company of Canada (CI) Ltd [1986] 1 AC 207. The effect of not being able to distinguish offers from invitations to treat would cause confusion as to what could or could not be considered an agreement, or contract, and thus would question its enforceability by law. Doubt would exist in determining whether or not a contract has been formed at all. Doubt would also arise with merchants in advertising their products. If an advertisement was held as an offer, then a merchant would be required to ensure that enough stock was held to fulfill potentially limitless orders. It can be accepted that stock held is not limitless and that if the orders exceeded the amount of stock held, the merchant would then be liable in damages to each customer not receiving a fulfilled order. (2).Cool Products Pty Ltd sends out a catalogue in which it prices a refrigerator at $74 instead of $740. Ms Hot insists that the company sell her the refrigerator for $74. Is Cool Products obliged to sell the refrigerator for $74? Give reasons and authority.

Cool Products is not obliged to sell the refrigerator for $74 because the catalogue is only an invitation to treat, inviting potential customers, including Ms Hot, to make an offer to purchase the refrigerator. Subsequent to the offer Cool Products can legally reject the offer. This was upheld in Spencer v Harding [1870] LR 5 CP 561 where it was held that a pamphlet stating that we are instructed to offer to the trade for sale of goods was not an offer capable of acceptance but rather an invitation to treat. In the same manner goods displayed in a shop window with prices attached are also invitations to treat, as upheld by Lord Parker in Fisher v Bell [1961] 1 QB 394 at 399400, and not an offer for sale the acceptance of which constitutes a contract. Finally it could also be argued that the $74 price was a mistake which would avoid an agreement or allow the innocent party to do so at their option. 5 (1).What ways an offer may be terminated? Discuss.

The purported acceptance of an offer may fail to create a contract because the offer has ceased to be effective, or terminated, in some way. This may have occurred due to the offers revocation, rejection, death, lapse of time, or because some condition has not been met. Revocation Revocation is the formal communication of withdrawal of an offer by an offeror. This can only occur prior to an acceptance occurring and becomes effective once the offeree has received it. In Byrne v Van Tienhoven [1880] LR 5 CPD 344, an offer was accepted even though it was withdrawn purportedly prior to this event. The decision was upheld because the acceptance was effected before the offeree received the withdrawal communication. Another difficulty occurs when an offers acceptance involves the performance of an act, associated with unilateral contracts, as in Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256. If an offeree has begun to perform the necessary conditions to enable acceptance to be completed, then an offer may not be revoked. However if the offer is revoked, the offeror could be liable to damages, as upheld in Mobil Oil Australia Ltd v Lyndel Nominees Pty Ltd [1998] 153 ALR 198. The offeror can promise not to revoke the offer prior to its acceptance, until some time has elapsed, or until a certain event occurs, in return for some valuable consideration. The holder of an option may exercise his or her right to accept the offers terms and if not the exercise will be invalid. An example of this is the trade of share traded options in the stock market. A buyer of an option has the right, but not the obligation, to buy a number of underlying shares at an agreed price, within an agreed time period. Options are sold at a price, which is not redeemable, even if the share price is not accepted by the expiry time. The owner of the shares, the offeror, cannot revoke the offer as the offer terminates at the agreed expiry time. Rejection An offer can be rejected by an offeree. In this event it cannot later be accepted. An offer can also be rejected less explicitly, by the offeree making a counter-offer, characterised by a purported acceptance, but with new terms which are not found in

the original offer. An example is found in Hyde v Wrench [1840] 3 Beav. 334; ER 132. Consequently the counter-offer becomes the new offer, terminating the original offer. When pre-printed standard contract forms are used, for example between a supplier and a receiver of goods, complications may occur due to the forms having different wording, and thus different offers. Sometimes multiple forms will be exchanged raising the question of which terms are the agreed final ones? In Butler Machine Tool Co Ltd v Ex-Cell-O Corporation (Eng) Ltd [1979] 1 WLR 401, it was viewed that the terms contained in the last form submitted will comprise the final counter-offer and therefore govern the transaction, with previous forms been rejected. The offeree can request information in seeking to clarify the terms of the original offer, and provided that no new terms are either added to or deleted from the offer, a rejection has not occurred, as in Stevenson Jacques v McLean [1880] 5 QBD 346. For a rejection to become effective, its communication must be received by the offeror. This will hold even when an acceptance was communicated by the offeree, but later changed his or her mind, if the rejection was received before the acceptance. Death If either the offeror or the offeree dies then it is generally the convention that the offer cannot be accepted and is thus terminated. However an offeree can accept an offer in ignorance of the death, which will binding upon the estate if the offerors personality would not be vital to the transaction occurring (Fong v Cilli [1968] 11 FLR 495 and Laybutt v Amoco Aust Pty Ltd [1974] 132 CLR 57 at 75-60). Otherwise no contract will be made. If the offeree dies then the offer will likely lapse since it is intended that an offer is made to a living person (Reynolds v Atherton [1921] 125 LT 690). Lapse of time If a certain time period is stipulated within which an acceptance must be received, then failing acceptance within this period the offer will be terminated. If no time period is stipulated then the courts consider what would amount to a reasonable time (Ramsgate Victoria Hotel Co v Montefiore [1866] LR 1 Ex 109), concluded by the nature of subject matter in the offer and the means of its communication (Manchester Diocesan Council for Education v Commercial and General Investments Ltd [1970] 1 WLR 241 per Buckley J at 247-8). Conditions If an offer is conditional either upon an event happening, or upon an event to have happened, the offer can be terminated if those conditions are not met (McCaul (Aust) Pty Ltd v Pitt Club Ltd [1959] SR [NSW] 122). Typical practical examples are subject to finance clauses.

(2).Goodman offers to sell his farm to Goodlady for $150,000. Goodlady says that she would purchase it for $149,000. Goodman refuses to sell at this price eventhough he loses only $1,000. Since the difference is only

$1,000, Goodlady thereafter decides that she should buy the property and agrees to the original price. Is Goodman obliged to sell the property? No, Goodman is not obliged to sell the property as there was no contract. Goodladys offer to buy the farm for $149,000 amounted to a rejection of Goodmans offer to sell it for $150,000, it was a new statement of terms not found in the original offer. Having been rejected, Goodmans offer could not thereafter be accepted by Goodlady. (Hyde v Wrench [1840] 3 Beav. 334 ER 132) If Goodlady has only requested more information from Goodman regarding the payment of $150,000, what effect would this have on the offer? The offer would remain open to acceptance by Goodlady, as the request for information only seeks to clarify the terms of the offer, not change it, and therefore not rejecting it. (Stevenson Jacques v McLean [1880] 5 QBD 346)