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Intention to Create Legal Relations / Parties To a Contract

Author: Dr Robert N Moles

Contract Law Homepage

A state of Injustice – table of contents
Losing Their Grip – The Case of Henry Keogh – table of contents

The Issue of “Intention”

Some writers say that a specific intention to create legal relations is not necessary,

and that the absence of consideration would be sufficient to deal with this. This is

much the same point as we will make in our discussion of promissory estoppel.
Here one could say that if you wanted to know whether a person intended to

create legal relations, you could look to see what they had done or promised to do

as their part of the arrangement. However, the question of intention is something
which is looked at in addition to the aspect of consideration. There are sometimes

good reasons why parties would like to see their relationships as non-legal.

Partnering Agreements

This is particularly the case in the modern use of partnering agreements. These are

informal, or moral agreements between parties and which are completed in

addition to the normal contractual arrangements. It is intended that the parties will
explicitly agree to cooperate with each other with a view to timely completion of

the contract, and to assist each other to overcome any difficulties which might

arise.

Business arrangements

It is understandable that the parties should wish to cloak their negotiations with

immunity so that a contract will not come into existence by inadvertence. But to
deprive a finalised arrangement of legal effect requires the clearest intention

Masters v Cameron

(1954) 91 CLR 353, High Court

An agreement was reached to sell a property. This agreement is made subject to

the preparation of a formal contract of sale which shall be acceptable to my

solicitors on the above terms and conditions. On the same day a deposit was paid

to the vendor’s agent. When the purchaser refused to proceed with the sale, both

parties claimed the deposit.
The purchaser said there was no contract and that the money paid should be

returned.

The vendor said there was a contract and the failure to proceed meant that the
money was forfeited.

At trial, it was held there was a contract.

On appeal it was said there were 3 possibilities:

1. The parties have finalised their agreement and intend to be bound straight away

– just want to be more precise. An assent without power to vary the terms

indicates a completed contract.

2. They have agreed all the terms, but have made performance of one or more

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terms conditional upon the execution of a formal document.

3. The parties do not want to be bound until they have completed the formal

document. Here, the parties may wish to retain the right to withdraw, if agreement
cannot be reached on outstanding matters.

In the first two cases we have a binding contract. In the third case we merely have

a record of the terms which are intended to form the basis of a contract to be
finalised.

If subject to contract means there are terms to be agreed, or conditions to be

fulfilled, then there is no contract until those things have been done. When not
expressly stated to be so, then it is a matter of construction. We conclude that no

contract has been formed here.

Was the payment anticipatory, to become a deposit under the contract? Was it
intended to be an interim guarantee that the purchaser would enter a reasonable

contract? We conclude that the payment was merely anticipatory.

Rose and Frank Co v Crompton

[1923] Court of Appeal

Plaintiff based in New York and sold carbon paper – defendant an English

manufacturer of it. After dealing with each other for a number of years they
entered into a written agreement which said inter alia:

this agreement is not a formal or legal agreement. It will not be subject to the

jurisdiction of either the British or American courts. It is a record of the

intention of the parties to which they honourably pledge themselves and is to be

carried out with mutual loyalty and friendly co-operation.

Plaintiff claimed that defendant was in breach of the agreement and the trial
judge held that it was legally binding. The Court said that for there to be legal

agreements, an intention to be legally bound is essential – with business

arrangements it usually follows as a matter of course that legal relations are
intended. With social arrangements the reverse is the case.

There is no legal obstacle to prevent them from doing so – this means that there is

no law and no issue of public policy against it. Once one reads the agreement in its
ordinary meaning, then it is manifest that no action can be maintained on the basis

of it.

However, once plaintiff actually ordered goods from defendant, then there would
be a contract of sale in regard to that transaction. It could be argued then that this

makes the agreement here rather like a tender to supply which does not have any

contractual effect until an order is actually placed.

Edwards v Skyways Ltd [1964] 1 WLR 349 – Queen’s Bench Division

The Company and Association reps met and agreed that payment would be made
of an ex gratia amount with regard to the pension payment, and a refund of

contributions. The decision was published in the newsletter. One redundant pilot

was told what his payment and refund would be. He received the refund, but then
the company rescinded its decision to make the ex gratia payments. When he

sought to recover it, he was told that there was no obligation to pay it.

The Co says the promise and agreement had no legal effect because there was no
intention to enter legal relations because ex gratia means not binding and the

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background knowledge of the parties understood it as such. Ex gratia may mean

without admission of liability, or without there being any pre-existing legal right

(may be to avoid setting an awkward precedent). Settlements are often expressed
in this way. But this does not mean that such agreements are legally

unenforceable.

It was understood at the meeting that if the payments were made without legal
obligation on the part of the company, then it would not be taxable. So the

agreement, it was argued, was intended to exclude legal sanctions. The evidence

was not sufficient to establish that this was the intention of all present. Judgment
for the plaintiff

See also Air Great Lakes

Esso Petroleum v Customs and Excise – free gift non contractual

[1976] House of Lords

This is somewhat like the Nestles case and their chocolate bar wrappers. Here,

Esso produced World Cup Coins which they gave away free with every so many
gallons of their petrol. The coins had no intrinsic value. I think that in this case, as

with a number of others, it is important to remember that this is not an action in

which a disappointed customer was being refused what had been bargained for,
but that under the Purchase Tax Act, it had to be determined whether the coins

were produced for sale. If so Esso would have to pay a large sum in tax. In reading

the judgments in this case, one might be minded to think that the judges’
sympathies were not with the claims by the Revenue.

The majority view was that although Esso were very much involved in selling

petrol, it does not follow that there was any legally binding contract with regard to
the coins. Otherwise, it seems that no dealer could ever make a free gift to a

customer. Despite the use of posters etc, I think that the facts negative any

presumption with regard to contractual intention on the part of the purchaser or
the dealer.

Lord Fraser did point out that Esso advertised that instead of getting just 4 gallons

for a certain payment you would now get 4 gallons + a coin – presumably Esso
would not have bothered advertising if they thought that it was insignificant –

presumably by the customers going out of their way to get it indicates that they

regard it as a part of what they had bargained for. Each customer would have a
right to a coin when ordering the 4 gallons in accordance with the advertisement.

The use of the words gift and free did not change that. It may be that the minimal

value of the medal influenced their views.

All except Lord Fraser said there was no sale of the coins.

3, including Fraser said there was an intention to enter legal relations

2 thought there to be a collateral contract – it being the view that any contract re
the coins would be additional to the contract for the petrol.

If a person has been collecting the set – maybe because it is thought that they may

increase in value, is the customer not at a disadvantage if the supply of coins is
discontinued? Have they not relied on the offer in just the same way as in Carlill?

Claims are often made that heads of agreement, letters of intent or letters of

comfort were never intended to have contractual force

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Banque Brussels Lambert SA v Australian National Industries Ltd

(1989) 21 NSW LR 502 Supreme Ct NSW

Spedley Ltd wanted to borrow $5m from a Belgian Bank. The bank wanted some
additional assurance that the loan would be paid off. Spedley was partly owned,

through a holding company by ANI. They wrote to the bank saying:

that they are aware of the loan, and that they have shares in the holding

company. They would not reduce their holding in the holding company until the

loan was paid off, and that they would give 90 days notice of any intention to

reduce their holding and the bank could then ask for the loan to be repaid within

30 days. Their practice is to ensure that obligations are met as they fall due.

ANI did sell its shares without that notice, and S Ltd was not in a position to

repay. The bank says it is not liable to repay based on Kleinwort Benson v
Malaysia Mining [1989] 1 All ER 785 which held that a statement in a letter of

comfort did not impose any legal obligation – they made no contractual promise

and their repudiation of their moral responsibility was not thought to be a matter
for the court.

Letters of comfort

They were first used in the 1960s in USA when people were reluctant to give

guarantees, because they would have to be disclosed in accounts as contingent

liabilities. The French view has been that they are enforceable, because otherwise,
the idea that a commercial instrument would be meaningless would be

unthinkable.

The claim in contract

Is there an intention to create legal obligations? Is the letter sufficiently

promissory? Start with the assumption that in commercial transactions, legal

relations are intended. The onus of proving the absence of such intention rests
with those who assert it – Edwards v Skyways.

At the time it was important to the bank to obtain a suitable letter from ANI.

There should be no room in the proper flow of commerce where statements made
by businessmen after hard bargaining and to induce another to enter into a

transaction would be a merely honourable engagement – without any express

statement to that effect. The whole thrust of the modern law is to give effect to
transactions. It is for this reason that uncertainty, a concept so much loved by

lawyers, has fallen into disfavour as a tool for striking down commercial bargains.

What factors are important? Clearly the words are important. But, it is said, a
finely tuned linguistic fork is inimical to justice.

The statement re 90 days notice was clearly intended to confer a benefit upon the

bank. That notice with provision for demand allows for recovery. In this case, the
not our intention to reduce carries the import of intention to give rise to legal

relations. The third para gives assurance that ANI wished to assure that Spedley

would be able to repay its loans – its promissory nature is clear. The bank has
made out its case that ANI was in breach of 2 enforceable contractual promises.

We saw in Placer Development that the voluntary assumption of obligation was

not a question of whether the parties had expressed an actual intention, but on the
proper inference to be drawn from their actions.

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Ultimately therefore, intention is one of the policy outlets of the law as to which

agreements ought to be enforced as contracts, and which of them should find no

legal redress.

Allan and M Hiscock Law of Contract in Australia.

Domestic and social arrangements

Australian European Finance v Sheehan (1993)

This issue raises some really important questions as to why judges draw the

boundary lines in the way in which they do. This use of the public / private
distinction looks from one point of view as if the judges are keeping out of

people’s affairs and allowing them to sort things out themselves. On the other hand

it could appear that they are denying legal protection to those who might need it
most. Its not surprising that the courts do not wish to get involved in the sort of

agreement between people who share with regard to who is going to do the

washing up, etc. On the other hand, the title of the book which was quite well
known some years ago underlines the point – Scream Quietly or the Neighbours

Will Hear by Erin Pizzey. Or as Tracy Chapman says – if it’s a domestic affair,

then the police may not come at all, or if they do they will take their time about it.
“Not interfering” or “not getting involved” can seem like the pursuit of liberty –

but when its the police or the judges who are doing that, it can also seem like the

denial of civil liberties.

Contract law often has to deal with difficulties between husband and wife, de

facto’s, people who share. It is said that there is a presumption in law that an

agreement between husband and wife is not legally enforceable, but that this is
only a weak presumption. It may well be that this is an area in which we need a

feminist analysis of the law – as we have suggested, it parallels an aspect of the

criminal law – it is common for the police to refuse to intervene, even sometimes
in the case of most serious assaults, if they feel that it has taken place in the

context of so-called domestic relations. No doubt that arose from the idea

mentioned by Blackstone in his Commentaries on the Laws of England that a
husband was allowed to give reasonable chastisement to his wife – this included

beating her with a stick, provided that it was no thicker than his thumb.

So too in property law, it was long held that the property of the wife became the
property of the husband upon marriage, that women were not allowed to enter into

contracts in their own right, and indeed, the Venerable Bede tells us that in

medieval England, upon the husband’s death, the wife passed to the next owner
along with the rest of the property. But the disabilities of women are not just part

of ancient history – at the beginning of the 19th C, some of those campaigning for

radical reform never contemplated that women would get the vote – indeed, many
thought that it would fundamentally undermine the constitution if that were to

happen. [I’m thinking here of Bentham and Austin].

It is not surprising then, that in the present law, especially where domestic
arrangements are concerned, it is more difficult to assert legal rights, than in other

areas. Does this apply equally to all parties in the domestic arrangement? Both

rich and poor are equally entitled to sleep under the bridges in Paris.

Balfour v Balfour – Domestic arrangements not contractual

[1919] UK

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This involved a husband and wife – the husband was due to return to Ceylon (as it

was then called – now called Sri Lanka) where he had employment, but the wife,

on medical advice was to remain in England. The husband promised to pay the
wife £30-00 per month until the wife was able to join him in Ceylon. Later the

parties separated and were divorced. The judge in this case was Lord Atkin. I

mention this in passing, because he was the judge who was very significant in
Donoghue v Stevenson (1932), but who was ostracised by other judges in the

House of Lords, who did not agree with him, and this caused him much pain and

upset in his later years.

Lord Atkin said that commonly, parties to a marriage will make arrangements for

personal or household expenses. But they do not amount to contracts, even though

there may be present what would amount to consideration if it had occurred
between different parties. They are not contracts because the parties do not

intend that legal consequences should follow. To my mind, it would be the worst

possible example to hold that agreements of this sort should be enforceable in the
courts. The small courts of this country would have to be multiplied

one-hundredfold if legal obligations were to result. Agreements such as these are

outside the realm of contracts altogether. The consideration here is really the
natural love and affection which counts for so little in these cold courts.

There are several points which could be made here – remember that when the

courts talk of intention, they seldom mean the actual intention of the parties –
evidence concerning the psychological disposition of the parties would not be

regarded as relevant. What the judges are interested in is a reasonable inference

from the actions of the parties – an objective test. Now often, what is a reasonable
inference will tell you lots more about the person who is doing the inferring than it

will about the state of mind of the persons who are the subject of the discussion.

It seems to me that this is just the very situation where Mrs Balfour might have
had every intention of establishing an enforceable agreement with her husband.

The matter under discussion here was much more important to her than was the

matter in Shadwell v Shadwell – a gift from an uncle to a nephew which was held
to be enforceable. How can we account for the differences in the court’s attitude

in these 2 cases? Could one not have pointed to any reliance aspect of this

arrangement? Some say that the courts may wish to avoid unpleasant battles
between members of a family who have fallen out – but they do deal with just

these disputes in so many other cases. And isn’t potential unpleasantness and

hostility between people just the reason why the courts should intervene – to
resolve the matter in an orderly way rather than leave the parties without any

satisfactory way to resolve their differences?

Cohen v Cohen – Dress allowance – no intention (1929) CLR

The parties were married and separated some time later, after which an action was

commenced with respect to money which plaintiff claimed was due to her. She

said that before they were married, defendant had promised to pay £100-00 per
annum as a dress allowance. The payments were only made for a limited period

therefore £278-00 was outstanding for 1921-1923 the balance of the period.

The judge thought that there would be a problem in determining what the
consideration would be. If the intended marriage, it might well be that the promise

to marry was already existent therefore it would fail as an existing obligation. But

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this would only be relevant if it were thought that this arrangement was one which

was intended to give rise to legal obligations. The judge thought that there was no

such intention in this case. However, we should bear in mind that although the
plaintiff was not successful on this point, her action was successful on other

grounds. We should also consider that if plaintiff had bought dresses which she

could not afford, in reliance upon her husband’s undertaking, would the decision
on this point have been different? Would the case be decided differently today?

Promise of accommodation to encourage emigration – contractual

Todd v Nicol [1957] Sup Ct SA

Defendant wrote to the Plaintiff’s (sister and niece of her deceased husband) to

say how happy she would be if they would come to live with her in Australia. “I
must have company at my age – it is not good to live alone. The house is big

enough, I will do all I can to make it comfortable for you, and we could change it

around when you arrive. If you do come, and sell your things, keep your cutlery

and linen as we might be short of those things. I will help with emigration and

jobs”.

When she heard that they would be coming, the defendant wrote to say that she
had that morning visited her solicitor to add a codicil to her will to the effect that

if anything were to happen to her, when I sign it the house is yours for life

Margaret without expense, also you Gracie (unless you marry) and then in the
following letter she said that she was doing her darndest to think things out for

their protection – just in case. Obviously the in case she had in mind was her

pre-deceasing the others – not the breakdown of the relationship as in fact
happened. So, is there a contract enforceable in law, or just a social arrangement?

The judge explicitly acknowledged that the parties had probably not given any

conscious thought to the question of legal sanctions. He then gave a good
statement of consideration in terms of benefit and detriment.

He pointed out that business arrangements are presumed to be legally enforceable

– however, in this sort of situation we have either an honourable pledge – without
legal enforceability, or else we have:

1 the grant of an interest in land GRANT

2 a licence to occupy which is enforceable CONTRACT
3 an equity – in favour of the licensees ESTOPPEL

Here, there the parties made no explicit reference to intention, so the court has to

determine how best to deal with things. There is the expense – selling of plaintiff’s
things, no provision for discharge of the arrangement – the testamentary adjunct as

the judge called it. Now this could all have been based on goodwill, but I incline

to think that the arrangement was intended to be binding during the defendant’s

lifetime. Otherwise the Plaintiffs would have been subject to the whim of the

defendant in such an important aspect of their lives. The intention of the parties

was to enter into a legally binding arrangement.

However, the sting in the tail of this case was that whilst the plaintiff’s won on the

question of intention – so as to create a contract [THE FORMATION ASPECT]-

the judge then found that their behaviour was so unreasonable, that he found them
in breach of contract.[the other side won on the EXCUSES ASPECT]

Promise of financial support contractual – but not indefinite

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Jones v Padavatton [1969] Court of Appeal UK

The mother lived in London and her daughter lived in the USA. The mother (P)

said that if daughter (D) went to London to take her Bar exams mum would pay
her a monthly allowance. Defendant in fact went to England and mum paid tuition

fees plus the monthly allowance. Mum then bought a large house for defendant to

live in with rooms to be let to tenants. Defendant collected the rents but did not
pass them on to mum. Defendant remarried in 1965, and in 1967 mum sought

possession of the house. Defendant counterclaimed for £1655-00 which she had

spent on the house.

One judge (Danckwerts) says little more than that this was one of those family

arrangements not really intended to be binding, and that the Balfour principle

could apply also to other family relationships. Another judge (Salmon) started by
pointing to many of the standard things which it would be useful to remind

ourselves of: – that if there is a contract then who has the onus of proof – here, the

judge said that the onus would be on defendant to establish that. He also pointed
out that the existence of a contract is a matter of intention – what, he asks, would

ordinary people have intended by communicating with each other in this way? He

took the standard line of saying that we apply an objective test – but we should
perhaps take the opportunity to pause and ask ourselves whether the references to

intention / ordinary / objective, give us any clear criteria regarding what is

involved?

The judge also points to the presumption against intending legal relations in

domestic arrangements – the presumption here being contrary to that of business

arrangements. He says that if the daughter had gone to London, then surely the
mother would not have been able to simply withdraw the allowance – the daughter

would have had a contractual right to it? But, we might add, what claim would the

mother have if the daughter just packed in her studies? Probably none – like the
uncle in Shadwell if the nephew did not marry. These situations might look like a

contract with obligations on one side only. Such a contract, he thought, would

only run for a reasonable time to allow the daughter to completer her studies (say
5 years) – that would take her up to 1967. She cannot then be expected to gain

anything further under the contract in 1968.

The remaining judge (Fenton Atkinson) asked what consideration there could be
from the daughter? Giving up her job and accommodation might be sufficient.

Then what evidence is there with regard to intention? When the daughter said,

when she wouldn’t let her mum into the house, that a normal mother doesn’t sue
her daughter in court that could be taken as a clear indication that legal remedies

were not intended to attach to the arrangement. But, we should ask, is it right to

view the evidence in this way? We should presumably be looking to evidence of
their intentions at the time they were entering into the arrangement – not what

they might have thought about it later. On this basis, most legal arrangements

could be avoided. Also, shouldn’t we be looking for objective intent rather than
actual intent?

Riches v Hogben (1986) Qd R 315

A son agreed to emigrate, having been assured that the mother would buy a home

and put it in the son’s name. She bought the home but put it in her own name.

After a time the son moved out under pressure from his mother, but brought an

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action to have the house put in his name.

HELD – The son relied upon the existence of a contract with his mother. The

court found was no problem with intention to create legal relations. However the
mother invoked the Statute of Frauds and there was no sufficient act of part

performance to overcome this.

An alternative ground relied upon by the son was the doctrine of proprietary
estoppel. The mother had made a promise to purchase the son a property. In

reliance on this promise the son went to the expense and inconvenience of

emigrating to Australia. The mother should be estopped from breaking her
promise. The son succeeded on this ground.

The remedies here are very flexible. The remedy could have been of damages

together with an order that the son be permitted to stay in the home, or that the
house be made over, or a charge be allowed over the house. In view of the nature

of the promise, an order was made that the son get the house and the mother be

entitled to stay in the granny flat. See also

Woodword v Johnston [1992] 2 Qd R 214

Roufos v Brewster [1971] 2 SASR 218

Dealings with government

It used to be the case that actions could not be brought against the government

(Crown). It is clear now that the government can enter into contacts for goods and

services just like anyone else. It is important to realise that government
departments complete a huge range of contracts – so much so that they often have

special arrangements with suppliers to provide them with goods and services on

preferential terms.

However, where some aspect of the government’s political or administrative

activities are involved, some different considerations apply. The government has

public responsibilities as well as private rights. Should its discretion to do the right
thing be fettered by prior promises to the same extent as with private individuals?

The cases indicate that the courts may be more reluctant to infer an intention to

create legal relations here. Even if there was some evidence of an intention to be
bound by the promise, it may not go to the extent of meaning that it was to be

subject to the adjudication of the court. The status of the parties and the nature of

the relationship have to be taken into account. Promises to pay a subsidy or to
keep schools within the electorate – made during an election campaign were not

enforceable. Supposing someone had re-arranged their business affairs on the

basis of a promise that taxes would not be increased – would this be enforceable?

See – Australian Woollen Mills Pty Ltd v Commonwealth

Admin of Papua New Guinea v Leahy (1961) 105 CLR 6

After a request from the plaintiff, the Commonwealth Dept of Agriculture took

over spraying to eradicate ticks. Plaintiff was to pay for the labour required and to

muster the cattle. The Dept’s officers failed to carry out the spraying carefully
enough and more serious infections occurred. Plaintiff sued for damages for

breach of contract. It was held that the arrangements were administrative and not

contractual. Same where the public authority is carrying out a statutory duty and
charges a fee to cover the cost of the service, it is unlikely that the arrangement

will be seen as contractual.

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Voluntary Associations

The normal view has been taken that members of organisations may well be

involved in consensual arrangements, but this does not mean that they are
contractual. The courts are more willing to exercise their powers where property

rights or a person’s ability to earn their livelihood are involved.

Cameron v Hogan (1934) 51 CLR (HH 215)

The plaintiff – previously Premier of Victoria, was excluded from the Labour Party

which he claimed was in breach of its rules and prevented from retaining the job
as Premier. The court took the view that normally, rules of a political organisation

to regulate its affairs, has not been understood to impose contractual duties on

officers or members. This is seen as a domestic matter. In adopting the rules the
members should not be thought to be creating enforceable contractual rights.

There has to be a clear indication of the intention to create legal relations. It may

well be the case that the courts will intervene on other grounds such as those to
protect natural justice.

The other question which may arise with a voluntary association is that of the

proper person to sue. The association has no legal personality.

McKinnon v Grogan [1974] 1 NSWLR 295 (HH 216)

The North Sydney Rugby club. Problems arose dealing with the election of the

general committee of the Club. It was suggested here that Cameron v Hogan had
probably not had a great influence and that it was out of touch with the changing

times. It has meant that the courts have not involved themselves in an area of

great importance, and it might be that if the High Court had a chance to look at it
they might do things differently. To liken the great political parties, or major

sporting institutions with a group of friends meeting for a chat is out of touch with

the times. The real issue in Cameron is one of judicial policy. In Buckley v Tutty
the court was able to put Cameron to one side because they could see that they

were dealing with a man’s right to carry on his trade and the doctrine of restraint

of trade is not limited to contractual situations. Why can’t people have the same
guidance in sporting and political organisations as they have elsewhere? Otherwise

the organisations will be given over to deceit, and the arrogant disregard of rights

which will destroy trust between members.

Despite Cameron, the courts often deal with disputes between members and social

clubs such as the RSL. If people join and subscribe to the constitution and bye

laws, they should be taken to be bound by them. Limitations on these rights can be
worked out in the cases.

In this case, there are no problems with procedure, but matters of great

importance.

Voluntary organisations can incorporate under State and Territory legislation.

Associations Incorporations Act 1983 (NSW) S11(2) provides: rules of an

incorporated association bind the association and members of it to the same extent
as if the rules had been signed and sealed by each member and contained

covenants on the part of each member to observe them.

Trade Unions – depends on the Commonwealth or State legislation under which
they are registered.

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Contract Law Lecture – Formation of Contract – Offer and Acceptance

Author: Dr Robert N Moles

Contract Law Homepage

A state of Injustice – table of contents
Losing Their Grip – The Case of Henry Keogh – table of contents

In General

Offer and acceptance are a means of analysing the process of negotiation to

decide whether and when a contract has been made and what therefore constitute

its terms. An example of its use to determine if there is a contract is provided by
the court in

Gibson v Manchester City Council – CA [1978] 1 WLR 520, Court Of Appeal

and of determining when it was made and what its terms were in
MacRobertson Miller Airline Services v Commissioner of State Taxation

(WA)(1975) both of which are discussed below.

The standard or traditional approach to contract law states that all contracts
require there to be an offer and an acceptance. Given that the courts will go on to

state that the details of the bargain and the adequacy of consideration are not for

them to assess, or determine, this amounts to a formalistic, or due process view of
contract law.

The idea of agreement was the vehicle which the courts used to invoke the idea of

individualistic consenting. It was said that there should be a “meeting of minds” or
a consensus ad idem in order to establish a contract. However, we should not

imagine that the courts would concern themselves with what the parties actually

think. In most circumstances, the court, through the use of the reasonableness test,
would decide what it would have been reasonable for the parties to have thought.

Oliver Wendell Holmes once said:

the making of a contract depends not on the agreement of two minds in one

intention, but on the agreement of two sets of external signs – not on the parties

having meant the same thing, but on their having said the same thing.

In Tamplin v James the judge said:

If a person will not take reasonable care to ascertain what that person is

contracting about, that person must take the consequences.

Accordingly, where a party’s conduct is such that a reasonable person would
believe that there is an unambiguous assent to the terms as proposed, that party is

then prevented (estopped) from asserting their true intention, assuming it to be

otherwise, and is bound by the contract as if they had intended to agree. See
Denning in

Solle v Butcher [1950]1 KB 671

In Gibson v Manchester City Council it was said that offer and acceptance as such
were not that important. This is sometimes referred to as the “global approach”

because there were so many papers and conversations passing back and forth that

it was impossible to break the interactions down into discrete acts of “offer” and
“acceptances”. So, in this case, in the British Court of Appeal, Lord Denning said

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that the analysis of the relationship in terms of offer and acceptance was not so

important. But the House of Lords disagreed with him when the matter was

appealed.

Examples of the use of offer and acceptance in deciding when a contract was

made – and what its terms were at the moment of making it – were considered by

the Australian High Court in MacRobertson. In this case, the court found it
difficult to determine just how offer and acceptance applied to a fairly common

event like buying an airline ticket. As Stephen J said, “the doctrine of offer and

acceptance encounters difficulties when applied to everyday contractual

situations”.

In more recent cases, where the question of mistake (and thus agreement) has

arisen, the courts have tended to emphasise the unconscionable nature of allowing
a party to benefit from another’s mistake. Whilst we deal with mistake later,

Atiyah deals with it as part of offer and acceptance.

In Cundy v Lindsay (1878), the plaintiff had supplied goods to a rogue, believing
him to be a reputable firm, as he had claimed to be. The rogue had disposed of the

goods to the defendant. The plaintiff was never paid. Which of the two innocent

parties could claim ownership of the goods?

It was held that the plaintiff had no knowledge of the rogue and intended to be

dealing with the reputable firm. There was therefore no consensus, no meetings of

mind which could lead to any agreement or contract whatever. It followed then
that the property remained with the plaintiff. We will look at this case again, when

we come to “mistake”

[As this is one of the first cases you will have looked at, it is well to remind
yourselves of the importance of assessing the significance of cases. We know that

this depends on what was said, by whom it was said, the level of the court and

when it was said. So when referring to cases, include a note, where appropriate,
relating to these factors i.e. date, jurisdiction, level, etc]

This case can be seen as a good example of the “will theory” in the 19th C – the

contract is to reflect the will or intentions of the contracting parties. A modern
case along the same lines is:

Bell v Lever Bros [1932] – the majority of the court thought that there was an

intention to contract. Lord Atkin said that it is of paramount importance that
contracts should be observed, and that if the parties honestly comply with the

essentials of the formation of contracts, that is agree in the same terms on the

same subject matter, they are bound, and must rely on the stipulation of the
contract for protection from the effect of facts unknown to them.

A contrasting case is New Zealand Shipping Co. Ltd. v Satterthwaite & Co Ltd

(The Eurymedon) [1975] – contract without formalities – see below

In books on contract law (Cheshire and Fifoot, for example) you will see that to

talk of consenting minds and the like is ” to mislead by adopting an alien approach

to the problem of agreement. “The issue is more to ensure that as far as
experience permits, the expectations of honest people (not necessarily the

contracting parties) are not disappointed.” They mean by this that the language of

offer, acceptance and agreement, suggests to the uninitiated that the courts are
looking to what the parties actually agreed. This is not the case. By the use of the

reasonableness test, they move from considering the actual expectations of the

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parties, to considering what reasonable people, in the position of those parties,

would have agreed to.

Standard Forms

We still speak of “agreement” despite the contracting which takes place, and

which looks nothing like it i.e. the move towards more standardised forms of

contract – or even just the standard printed terms and conditions which are issued
on all sorts of forms, dockets, tickets etc. The railways were probably the earliest

manifestation of this, but now it applies to all areas of business. In its more

extreme form it results in what we call a contrat d’adhesion – this time we have
borrowed from the French. Here, the terms are fixed by one party in advance, and

whilst being open to acceptance by anyone, the terms and conditions are to be

accepted en bloc. They are not open to discussion and amendment on an
individual basis. This hardly looks like the degree of consent and independent

judgment which “agreement” would seem to suggest. “Well organised business has

sometimes used it to deny all but the shadow of contractual power to the citizen.”

Cheshire and Fifoot.

This is not to suggest that there is anything sinister in the use of standard forms –

Architects, Lawyers, Builders use them when they may not have the resources to
have contractual documents drafted for each individual occasion. Nevertheless,

they do seem to rule out individual negotiation at the consumer end, and this is

why Cheshire and Fifoot speak of “the phenomena of agreement” rather than actual
agreements, to make it clear that we are not dealing with inward mental assent,

but with its outward and visible signs.

Essentials of a binding contract?

Offer and Acceptance – are the standard categories which we utilise to indicate

whether there is agreement. This form of analysis, directing our attention to the
aspect of agreement – when could it be said to have come about, and what were

the terms.

New Zealand Shipping Co. Ltd. v Satterthwaite & Co Ltd (The Eurymedon)
[1975] AC 154 Privy Council – strains to maintain technicalities of offer

Also called – The Eurymedon – cases involving ships are often named after the

ship involved.

Lord Wilberforce, in discussing whether a Stevedore was covered by an

exemption clause (in a Bill of Lading – a special type of shipping contract) said,

whether the contract involves an auction, a supermarket, or some other situation,
English law, having committed itself to a technical scheme, often in application

takes a practical approach and so forces the facts uneasily into the categories of

offer acceptance and consideration.

See also The Hon Sir A Mason and S Gageler “The Contract” in P Finn Essays in

Contract – where it was said that sometimes we seek to bludgeon the unwilling

facts of cases to fit within the traditional framework.

An Offer – Intention to Create Legal Relations

This question is linked to the issue of whether there was an intention to create

legal relations. There is no satisfactory definition of an offer beyond identifying it
by reference to the fact that it can be converted into a contract by an act of

acceptance. Whether it can be accepted depends upon the objective intention of

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the party making the statement which is alleged to be an offer.

Making an offer exposes one to the imposition of legal liability by another. In

deciding whether statements amount to an offer, the courts are said to use an
objective test. Therefore under the objective test an apparent intention to be

bound will suffice if 2 conditions are satisfied:

1. the conduct of the alleged offeror must be such as to induce a “reasonable
person” to believe that he / she is making the alleged offer.

2. the alleged offeree must actually hold that belief – i.e. believe that the offeror is

making a genuine offer, as opposed, for example, to playing a game. .

Harvey v Facey (1893) Privy Council – Mere statement of price is not enough:

Plaintiff telegraphed Defendant – “will you sell us Bumper Hall Pen?” (Apparently

a piece of ground, not a writing instrument). “Telegraph lowest cash price”.
Defendant replied “Lowest price £900”. Plaintiff then said, “we agree to buy at £900

– send deeds.” It was held that there was no contract. A mere statement of price is

not enough to constitute an offer. The statement of price was merely the provision
of information.

Advertisements, Shop Displays etc

A brochure or advertisement is an attempt to solicit offers, but does not constitute
an offer in itself. If it were otherwise, the commercial consequences would be

difficult to tolerate. Displaying goods in a shop amounts to an “invitation to treat”.

Pharmaceutical Society v Boots Chemists (1953) English Court of Appeal – shop
sign “invitation to treat”

In a self-service shop, is the sale completed at the shelf when the goods are

selected, or at the cash desk? The judge in this case said that the usual view has
been that customers (say in a bookshop) select the item they wish to purchase, and

then take it to the assistant, who accepts it and completes the contract. I cannot

see, he says, that this situation is any different. The plaintiff contends that the
defendant has offered to sell the goods by displaying them on the shelves, and that

the plaintiff accepts the offer by taking them from the shelf. If this is correct, then

a person who takes something from the shelves cannot then replace the item if
they see something which they would prefer more. It seems clear that the sale

takes place at the cash register.

A retailer who displays goods for the purposes of sale is not making an offer of
sale.

We should always be aware of how these actions occur. In this case it would have

been an offence under the Poisons Act if the sale had been completed at the shelf
rather than at the cash desk, as it would have then lacked the supervision of a

qualified pharmacist.

However as Greig and Davis put it, the argument about not being able to return
selected items is hardly persuasive. Even if the display of goods were considered

as an offer, the normal rule that acceptance must be communicated to the offeror

would still apply because the customer by picking up the goods has not informed
the offeror of his / her acceptance. The customer would have to make his / her

way to the checkout to communicate the acceptance to the cashier. Therefore the

sale would still have taken place under the supervision of a registered pharmacist
as required by the legislation.

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Alternatively, it could be argued that the selection of goods is an “act” in response

to the offer which completes a unilateral contract as in Carlill which follows.

Fisher v Bell – (1961) Lord Parker (LCJ) display of knife in shop window, not
“offer”

Display of an article, with a price on it in a shop window, is in no sense an offer

for sale. Here, Lord Parker treated the matter as beyond dispute.

Lefkowitz v Great Minneapolis Surplus Store (1957) USA: This may be different if

we have something is “clear, definite, explicit” and which leaves nothing open for

negotiation then it constitutes an offer.

The same principle is usually applicable to price lists and other circulars sent to

prospective customers, or advertisements in newspapers, the argument being that

an advertiser does not intend to be bound by an offer in case they are flooded with
acceptances which could not all be met.

If there is some additional evidence of an intention to be bound by an

advertisement, the situation would be different.

Carlill v Carbolic Smokeball Co (1893) Court of Appeal – Offer can be made to

the world at large

The manufacturers of an influenza remedy in their advertisements said that if
anyone used their remedy and then caught flu they would be entitled to £100.

When a claim was made they said that there was no contract. It was held that an

offer made to the world at large, can become a contract with those who fulfil the
condition.

Lindley LJ suggested that if the company has been so unwary as to expose

themselves to a great many actions, then so much the worse for them.

Nowadays we see similar advertisements for anti-theft devices for cars – if the car

is stolen, then, it is said in the advertisement, certain benefits will be paid to the

owner. What is the status of such an offer – is it effective in contract?

The offer is the stage at which the offeror is ready to be bound. This is different

from a tentative stage of sounding the other party out.

Nagle v Feilden and Others: If an offer is subject to conditions, they must be
brought to the attention of the other party before the contract is concluded.

Thornton v Shoe Lane Parking (1971) 2 QB 163 Court of Appeal Signs and

Tickets

This case concerned a car park with an automatic ticket machine. At what stage is

the contract formed? If the plaintiff is injured in the car park, can the defendant

rely on a clause excluding or limiting liability which is contained, or referred to, in
the ticket? A notice outside the park said all cars were parked at the owner’s risk –

the ticket itself said “subject to conditions” displayed in a notice on a pillar in the

car park.

Lord Denning MR [His judgment in this case has had a wide influence, his style of

writing and speaking are rather different from that of many other judges] The

earlier cases saw the issue of a ticket as an offer – but those cases were based on
the theory – or “fiction” was the word he used – that the customer, at the time of

being offered the ticket could return it if it contained unacceptable terms. This

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could not be done where the ticket is produced by a machine. Also, the terms of

any contract must be brought to the attention of the offeree at the time of

contracting – thus notices should be placed at, or in front of, the entrance to the
car park.

Trade Practices Act 1974 (Cth) Australia

We should bear in mind the possibility that statements, whether part of an offer or
not, may give rise to enforceable rights under the Trade Practices Act 1974 (Cth)

if they prove to be false or misleading. The TPA 1975 Div 2A Part 5 also provides

that there will be a contract between consumer and manufacturer. The provisions
of the TPA are duplicated in the Fair Trading Acts of the States so as to apply to

individuals.

Contractual Intention Negatived – Conditional offers

Where one might expect a contractual intention, this may be negatived expressly.

If the parties to a transaction reach a stage where acceptance of an offer is made,
“subject to solicitor’s approval of contract”, as often appears with negotiations for

the purchase of real estate, what is the legal effect?

The term “subject to contract” has been considered by courts on numerous
occasions and it was examined by the High Court in

Masters v Cameron (1954) 91 CLR 353, High Court an agreement to complete a

contract

An agreement to purchase property was subject to:

the preparation of a formal contract of sale which shall be acceptable by

Cameron’s solicitors on the above terms and conditions….

The sale fell through. Was there a contract? If there was then the prospective

vendor could retain the deposit. If not, it would have to be given back. The High

Court said that there was not a contract, and Masters recovered the deposit. The
reason was that the agreement was not in its final form – it had to be acceptable to

C’s solicitors. Presumably the solicitors could have altered it quite substantially, by

deleting adding or modifying terms. Whether they did so or not, was immaterial.
The agreement gave them that power and so was not final.

The existence of a subjective intention may well be relevant to the determination

of the question of intention, but it should not be determinative of it.

Air Great Lakes Pty Ltd v Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 Court

of Appeal, Supreme Court NSW – subjective intention relevant

Easter Holdings – purchaser
Air Great Lakes – airline operator

Greenway – aircraft owners

Purchaser to acquire from airline operator Goodwill – $60,000
Purchaser to acquire from airline operator aircraft owners the plane – $140,000

The agreement was subject to issuing of appropriate licences and government

approvals. $50,000 was to be paid on settlement of the proposed agreement and
the remainder to be the subject of a further agreement.

Did the parties arrive at a consensus? If we look at the document alone, it is by no

means clear. But if we go to the extrinsic evidence, and discussions relating to

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those documents, it becomes clear that the parties did actually (subjectively)

intend a binding contract.

It is generally agreed that intention is important and there is some discussion in the
books as to whether that intention is to be actual or subjective. But questions in

that form are apt to mislead. It is more helpful to ask if subjective intention forms

a part in determining the existence of a contract, and if so what part.

The proper view is that the existence of a contract is a consequence which the law

imposes upon, or sees as a result of what the parties have said and done. Actual

subjective intention is a factor which the law takes into account, but it is not (or
not always) the determining factor.

So, intention to contract is relevant to but not determinative of the existence of a

contract. It may limit what otherwise might appear to be an exchange of congruent
promises. It does not follow that an intention to contract will always result in a

contract. Apart from intention, there may be other elements which are missing

On the other hand, if what the parties did looked too informal, or if it would be
inferred that they did not intent to contract, then evidence should be admitted to

establish that the inference is incorrect.

As Corbin on Contracts said, “the intention to contract, is a jural act separate and
distinct from the terms of their bargain”.

An example of how confusing a simple ticket case can be:

MacRobertson Miller Airline Services – airline ticket

The case arose to see if the airline ticket was a concluded agreement which would

be subject to stamp duty. The court said that there are many common situations

where the standard analysis in terms of offer and acceptance breaks down. Here
the court had to look at the purchase of an airline ticket in terms of offer and

acceptance. The 3 High Court judges (Barwick, Stevens, Jacobs) each expressed a

different view of the matter. Because obligations were excluded until the person
turned up at the aircraft, some judges took the view that issuing a ticket amounted

to issuing an offer, but was not itself the completion of a contract.

A similar diversity can be found in contracts of carriage:

Denton (1856) the offer is constituted by the announcement in a timetable – and

accepted by the purchase of a ticket

Wilkie (1974) – the provision of buses constitutes an offer which is accepted by
getting on the bus.

The Eagle (1977) A passenger making a booking makes an offer.

MacRobertson – the ticket is itself an offer.

Contractual intention may be negatived by inference from the circumstances, for

example, that the statement was made as an announcement of government policy

and not as a legal obligation.

Australian Woollen Mills Pty Ltd v Commonwealth (1954) CLR 424 High Court –

promise of subsidy

The Commonwealth Government had announced that a subsidy would be paid to
all manufacturers who purchased wool at auction for the purpose of local

manufacture. Prior to the 2nd World War the Government had implemented a

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similar assistance scheme which was discontinued during the war years. The

Government policy was to keep down the price of woollen goods to the consumer.

After the 1946 announcement, the plaintiff company purchased wool for local
manufacture and was accordingly, paid the subsidy until 1948 when the subsidy

was withdrawn. A dispute arose as to whether the Government’s promise of a

subsidy constituted an offer which upon acceptance gave rise to a contract
between the parties.

The High Court dealt with the case on the basis of whether the purchase of the

wool by the purchaser constituted the necessary consideration to render the
Commonwealth’s promise enforceable or whether the purchasers simply satisfied

the condition upon which the commonwealth had promised a gratuitous and

discretionary payment.

The court held that the scheme fell into the latter category. It held that the

announcement by the Government would only constitute an offer if it contained

expressly or impliedly, a request by the Government that a person to whom the
announcement was addressed should do the act designated.

NB: The use of the word “offer” is not conclusive.

Auctions and Tenders

There is no doubt that in an auction, it is the bidders who make offers and the

auctioneer who is free to accept one of those offers.

An auction is where property of some sort is put up for sale and people then make
successive bids, and the highest bidder usually becomes the purchaser. But how is

this situation analysed in terms of the law of contract? It could be said that the

auctioneer’s request for bids is an offer, and that each successive bid is a
conditional acceptance – ie a completion of a contract, subject to there being no

further higher bids. Alternatively, it could be said that it is the bidder who makes

the offer, and that the acceptance is then provided by the auctioneer, who signifies
acceptance of the highest bid in the traditional manner of banging the hammer, or

by some similar gesture.

Payne v Cave (1789) 100 ER 502 bidder offers, auctioneer accepts

In this case it was decided that it was the latter view which prevailed – that the

auctioneer is free to accept or reject any bid as it is the bid which is the offer –

The Sale of Goods Acts – (1895 – 1923) a separate Act for each State, but the
provisions are similar – provide that a sale by auction is complete when the

auctioneer announces that fact by the fall of the hammer, or in another customary

manner. Until that time, any bid may be retracted.

In what circumstances may the auctioneer’s discretion be fettered? Freedom of

contract suggests that the parties can make any arrangement they wish. If an

auctioneer announces that an auction is to be without reserve, is there an
obligation to sell to the highest bidder?

AGC v McWhirter (1977) Sup Ct NSW auction “without reserve”

There was a representation that the auction would be “without reserve”. It was
argued here that the correct view is that the bidder makes the offer. The court

took the view that the ratio of Payne is that the bidder is no more than an offeror –

no contract exists until the bid is accepted. Does “without reserve” constitute an

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undertaking to sell to the highest bidder? The court looked at cases either way, but

decided that Payne was still the ruling principle (a “without reserve” case). The

judge said, “An auction remains in my view an invitation to treat.” In this case,
Holland J also discussed the earlier cases of Warlow and Ulbrick and the following

notes are taken from his discussion of them in the AGC case.

Warlow v Harrison (1859) 120 ER 925 – without reserve – sold to vendor (as
discussed in AGC): Property was advertised for sale at public auction “without

reserve”. The Plaintiff, when in the position of being the highest bidder, had been

overbid by the vendor, and the property had been knocked down to the vendor.
The plaintiff sued the auctioneer, arguing that being the highest bona fide bidder,

there was a contract which the auctioneer, as his agent was bound to complete.

The court said that this reasoning was wholly at variance with Payne v Cave
(1789) which had been thought to be good law for some 70 years. It was decided

there that a bid at auction was not a conditional acceptance, but was instead a

mere offer. The auctioneer is agent of the vendor, and the assent of both parties is
necessary to a contract, and this is signified by the fall of the hammer – until then

either party may retract. If the vendor and the bidder are free until this stage, the

auctioneer cannot possibly be previously bound.

However, there was some disagreement when the case went up on appeal. Three

judges took the view that an auctioneer who put property up for sale “without

reserve” contracted with the highest bona fide bidder. That the “without reserve”
holding out by the auctioneer gave rise to a collateral contract. There was no

suggestion that such a bidder contracted with the vendor. Holland J in AGC said

that despite this, Warlow leaves the law where it was decided by Payne.

Ulbrick v Laidlaw [1924] VLR 247- dispute – obligation to re-auction (as

discussed in AGC): The conditions of an auction specified that the highest bidder

would be the purchaser and that if there was any dispute between two or more
bidders, the lot or lots would be put up again and resold. There was some dispute

as to who was the highest bidder for a lot but the auctioneer refused to put the

goods up for resale. “Applying the principle of Warlow, we think a contractual
obligation arose on the part of the auctioneer towards any bona fide disputant of

the class just defined”. In AGC it was said that if such an action were possible,

then it would be an anomaly in the law of auctions – Payne being a “without
reserve” case. An auction remains in my opinion an invitation to treat. The fact

that there is a reserve price indicates to bidders whether an offer at a lower level

will be considered. “Without reserve” indicates that the highest bid is an offer
which is liable to be accepted, but that the vendor remains free to withdraw the

property from sale or to accept any bid.

Harris v Nickerson (1873) advertisement of auction

An advertisement to hold an auction is not an “offer” to hold it but a mere

declaration of intention

Tenders / Standing offers

Some of the recent cases here indicate that the law on tenders may be diverging

from that on auctions.

Under this arrangement, the seller or buyer invites bids to be made – usually to be
submitted in writing by a specified time. The main difference between this

situation and an auction, is that the person submitting the tender, does so in

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ignorance of the bids being put in by others.

Tenders may be of 2 different types:

1. A specific purchase – a govt dept wants to purchase 3 new computers – invites
tenders in accordance with specification – the advertisement may be seen as

invitation to treat, the tender is then an offer which the dept may accept or not.

2. Requirement contracts – the govt dept wants someone to tender for the supply
of PCs “as required”. The tenderer puts in a price per unit. If dept says OK, what

have they done? Do they actually have any commitment to place an order? May it

order from other suppliers? So what we may have here is not the completion of a
contract, but the putting in place of a “standing offer”.

If an advertisement asks for tenders, that advertisement may be seen as an

invitation to treat. Where a tender is submitted on an “as required” basis – it may
be seen as an offer to supply at set price. The Government Dept may say that you,

the supplier, have a contract – but actually there is no contract in law, because

there is no legally binding commitment on either side. When the dept places an
order for a specified number of PCs – it amounts to the acceptance of standing

offer contained in the tender, and may amount to the completion of a contract at

that stage.

Great Northern Railway Company v Witham (1873) LR 9 CP 16

In this case Brett J speaks of the “acceptance” of a tender. This is not

“acceptance” in the sense used in this area of contract law. In this case GNR had
been given a standing offer, and W was given an order to deliver. It was held that

the failure to do so was in breach of contract as his standing offer had not been

withdrawn. There is a clear acceptance here of the idea of a “unilateral contract”
which has since become well accepted (See Wilberforce in New Zealand

Shipping)

The submission of a tender may well give rise to legally enforceable obligations. A
promise to accept the highest bid may be binding, and there may be an obligation

to properly consider any tenders which have been submitted.

Harvela Investments v Royal Trust Co [1985] 1 AC 207 House of Lords bid may
not refer to other bids

One of the bidders said that they would pay $ x more than the highest bid from the

other bidders. The court held that bids may not use other bids as the basis of
calculation, and the House of Lords held that the contract should have been

awarded to the highest fixed bid.

This case also suggests that a promise to accept the highest bid may be binding –
on the basis that the promise is like that in Carlill which is accepted by the highest

bidder. So an invitation to tender can be seen as an offer which is accepted by

putting in the tender. This completes one contract – another contract may then
arise if it is the most competitive bid and if it is in accordance with the

specification

Blackpool & Fylde Aero Club v Blackpool Borough Council (1990) 1 WLR 1195
Court of Appeal obligation to consider tender

An invitation to tender can create contractual obligations

The Club submitted a tender close to the deadline, which was stamped in error as

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if it had been received the following day. When they complained that they had

lost the contract because their tender had not received due consideration, they

were told that there was no legal obligation on the Council at that stage.

The court took the view that had the Club asked if a conforming tender would be

considered, the answer would be “of course”. The law would be defective if it did

not give effect to that. An implication was needed because there was no explicit
statement on the point. The judge said, “I am pleased to see that the right legal

answer accords with the merits”.

Global Approach

Attempts have been made to escape the limitations of offer and acceptance, by

looking to a more global approach. The idea is to see if “objectively” the courts

should hold there to be a contract, without looking too closely into all the details
of offer and acceptance – “in all the circumstances”.

Gibson v Manchester City Council (1978) Court of Appeal global approach

Lord Denning stated that in his view: it is a mistake to think that all contracts can
be analysed into the form of offer and acceptance. I know in some of the

textbooks it has been the custom to do so, but as I understand the law, there is no

need to look for strict offer and acceptance. You should look at the
correspondence as a whole.

This approach was not accepted by the House of Lords. No contract, because it

was the tenants application which was the offer which was never accepted by the
Council.

If you should think that this idea must be a dead duck, because it has been

rejected by the House of Lords, then you should not be so faint hearted. The
Global approach was also found in

Butler Machine Tool v Ex-Cell-O Corp (1979) Court of Appeal

Lord Denning said that we could still look at it in terms of the traditional analysis,
but he agreed with the trial judge that there was much in this approach which was

out of date. The better approach was to look at all the forms, to glean from them

the agreement. The global approach offers more flexibility and the opportunity of
making sensible decisions then does the traditional rule-based approach in the end

adopted by Denning.

Multi-partite transactions

If the court is sufficiently determined to see relationships in terms of offer and

acceptance, it can find them anywhere – Cheshire and Fifoot point out that in
these cases, the analysis is manipulated to the point of distortion.

Clarke v Dunraven [1897] AC 59 – “The Satanita” entrants in a yacht race

Entrants in a yacht race gave an undertaking to the yacht club that they would be
bound by the rules of the club. It was held that they were therefore in a

contractual relationship with each other. It may be said that this is an example of a

case where the two parties to a contract assent to the terms put forward by a third
party. The first competitor offers to all others who may enter to observe the rules

if they will do so as well. The second competitor by entering accepts this offer and

makes a similar offer to others and so on.

Shanklin Pier [1951] 2 KB 854 High Court (UK)

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A (paint manufacturer) says my paint would be good for the pier

B – (pier owner) tells C (contractor) to use A’s paint when doing the pier. The

paint turned out to be unsuitable.
B successfully sued A for breach of the undertaking – why is this surprising –

because B didn’t buy anything from A. What consideration has B given to render

the promise by A enforceable? B’s entering into the contract with C which
contains within it the condition that A’s paint must be used.

This approach now has statutory authority in Australia

Trade Practices Act 1974 (Cth) Div 2A Part 5

A contractual relationship is deemed to exist between a manufacturer of goods

and a consumer – the consumer may now sue the manufacturer directly for defects

without having to sue the retailer.

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Networked

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Networked Knowledge –

Law Lectures

Acceptance and Unilateral Contracts

Author: Dr Robert N Moles

Contract Law Homepage

A state of Injustice – table of contents

Losing Their Grip – The Case of Henry Keogh – table of contents

Acceptance

Acceptance – the “magic moment” when the contract comes into being

I think it takes some ingenuity at times to reconcile the practice of the common

law with the theory of offer and acceptance as elements of contract. Napier J

Subdivisions Ltd v Payne [1934] SASR 214 at 220

It is usually said that offer and acceptance must correspond exactly. They must be

“mirror images” of each other. Any departure will result in the acceptance being

ineffective – a conditional acceptance being in effect a “counter offer”. One may

infer acceptance from conduct e.g. as in Carlill.

When stated in general terms, these provisions seem fairly straightforward – but

difficulties can arise.

Acceptance Must be in Response to the Offer

The whole idea of the analysis in terms of offer and acceptance is to emphasise the

reciprocal nature of the relationship. This is not a problem with regard to bilateral

contracts where one party makes an offer to which the other responds with an

acceptance, thus identifying the existence of a contract and its terms. In the case

of a unilateral contract, i.e. an act in reliance upon a promise, it is necessary to

show that a link exists between the act and the request that it should be performed.

Thus a party can hardly accept an offer of which he / she did not know or had

forgotten.

R v Clarke – rewards

(1927) 40 CLR 227 Australian High Court

A reward has been offered for anyone giving information which led to the

conviction of those responsible for the murders of policemen. Clarke gave

information which led to such arrest and conviction. However, his claim to the

reward was resisted. Clarke’s motive and intention in giving the evidence was to

protect himself and to clear himself of the charge of murder. Only after arrest,

conviction and appeal by the others, did Clarke think of claiming the reward

It was held that Clarke did not act “in reliance upon the offer or with the intention

of entering into any contract” – although clearly, the convictions would not have

come about without his evidence. Isaacs ACJ points out in his judgment the

difficult case of Gibbons v Proctor (1891) where, by contrast, a policeman was

allowed to recover a reward, although he did not know of the existence of the

reward when he sent off the information. He points out that in Anson on Contracts

it was stated that that decision was wrong, and that he (Isaacs) thought it was too.

So a mere coincidence between the act required and the doing of that act is not

sufficient – it requires some mental element connecting the two – and which we

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would call an intention – although we also know of course that in many cases, the

intention involved does not go beyond the doing of the act itself – the intention to

get on the bus, seldom involves an “intention” to create a contract, but we have no

problems construing the situation as if there were such an intention. This is often

done via the “objective test” idea – which was obviously thought not to be

appropriate to this type of situation.

Gibson v Manchester City Council – reciprocity not imposed

[1979] House of Lords

We looked at this case in the previous lecture, (sale of Council houses) – the letter

said it was not a formal offer and invited applications – Gibson sent in his letter

saying “I accept” – the H/L held that the purported acceptance could not have been

a real acceptance, because there was no offer on the table. Lord Diplock pointed

out that Denning had rejected the conventional approach and said one should look

at the position as a whole i.e. one should take a “global approach”. But he pointed

out that this may make outcomes less certain as the criteria involved are none too

clear. The conventional approach does well for all but exceptional cases. Diplock

also pointed out that there was a claim that Gibson had done much to improve his

house, therefore there was a reliance based argument which did not prevail here –

it being none too clear what Gibson had actually done.

It should be noted that 2 offers, identical in terms, made at the same time or which

cross in the post, will not create a contract because neither offer counts as an

informed acceptance of the other –

Tinn v Hoffman (1873) 29 LT 271.

Acceptance must correspond to the offer

As a contract is an agreement on certain terms, an offer in one set of terms can

hardly be accepted by a communication in different terms, a document which is

therefore called a counter offer.

Turner Kempson & Co v Camm – suggestions, not stipulations?

(1922)Sup Ct Vict – Full Ct.

Here we had an exchange of documents dealing with the sale of raspberry pulp.

The final contract note delivered by the plaintiff to the defendant supplier, had

provisions for delivery to take place in 3 lots of 5 tons each, with 10 days between

each delivery and contained provisions dealing with claims. At this stage the

defendant claimed there was no contract and sought to avoid completion

Counsel for the plaintiff suggested that the differences were not stipulations, but

suggestions. However the view was taken that the effect of the letter with the

contract note is to specify the terms of the acceptance, which is not an acceptance

pure and simple – what purports to be an acceptance, attempts to incorporate

different terms – it is clear that an acceptance is not to add anything to the offer,

even if consistent with

it.

R.A. Brierley Investments Ltd – no matching offer and acceptance

(1966) 120 CLR 224 High Court of Australia

Appeal from Supreme Court NSW

On 1 October 1965, Brierley (the vendor) was the registered holder of 13,000

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shares in the Hawkesbury Co. By 21 October it had 46,825 shares.

On 16 Sept, another company called Landmark made offers for 51% of the share

capital of Hawkesbury at 17s per share. Shortly after 1 Oct, B received the offer to

buy which said that the offer would remain open for one month after 1 Oct. On 29

Oct, B accepted the offer with regard to 51% of its then holding (23, 880 shares).

Landmark said the offer was only for 51% of the shares which were registered at 1

Oct and said it was prepared to treat the acceptance of the offer as a valid

acceptance for 51% of the shares which were held at 1 Oct i.e. some 6,000. B said

that the offer must be understood to relate to the number of shares at the time of

the acceptance. B sought specific performance of the sale of the shares.

If you look at this arrangement carefully you will find that there is no actual

correspondence between any of the purported offers and acceptances. The

majority of the court thought that the letter from Landmark to treat the acceptance

for a reduced amount, gave rise to an implied acceptance of this by Brierley. The

minority thought that this could not be right, for B continued to assert that there

had been an acceptance for the whole amount.

This need for harmony between offer and acceptance will not be satisfied in a

situation called a battle of the forms where buyer and supplier of goods both issue

their standard form contracts and each attempts to insist that it is its own document

which constitutes the contract between the parties. How is this problem to be

resolved?

Butler Machine Tool v Ex-Cell-O Corp – battle of the forms

[1979] Court of Appeal

In essence this was a transaction so typical of the modern ways of doing business.

Both buyer and seller deal with each other in accordance with their standard forms

for doing business, thinking little about the details of the transaction until

something goes wrong – then each appeals to the forms which they sent to try and

settle the matter. So whilst Lawton agrees with Denning as to outcome, could we

say that his understanding of the analysis is the same? No, the “global approach” of

Denning is clearly contrary to the “set rules” preferred by Lawton.

Denning said that in deciding what terms prevail, one could take the first shot

approach, the last shot approach, or a combination. Here the trial judge thought

that the terms of the initial document prevailed throughout. Denning thought one

should go by the last form which was sent without objection being raised.

A lack of identity between alternative or competing forms may not be vital if one

signifies or may be taken to signify the acceptance of the other to the exclusion of

any consideration of the differences contained in them.

Thornton v Shoe Lane Parking

see under “signs and tickets” in previous lecture

Sindel v Georgiou – “correspondence” depends upon intention

(1984) 154 CLR 661 High Court of Australia – Appeal from Sup Ct NSW

Here we had an “exchange of contracts” as part of a conveyancing transaction.

The actual documents exchanged did not correspond with each other. The court

held that the parties had agreed on the salient issues, and intended to enter a

binding relationship. Although there were some blanks in the documents, they did

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not contradict each other, therefore the court would hold there to be a binding

contract.

The United Nations Convention

Contracts for the International Sale of Goods (1980)

This provides that an acceptance which limits or modifies the offer is a counter-

offer. A reply, purporting to be an acceptance with different terms (but not

materially different) is an acceptance, unless the offeror objects promptly orally or

in writing. A material difference will include matters such as price, quantity,

quality, delivery details, provisions re liability or the settlement of disputes.

Where acceptance is an executory promise in exchange in for another executory

promise (an offer), it is BILATERAL

Where acceptance is an act in exchange for an executory promise (an offer), it is

UNILATERAL

Colonial Ammunition Co v Reid – standing offers

(1900) Sup Ct NSW

“This agreement imposes no obligation upon the Govt to order one single

cartridge from the Co – but they agree to pay the stipulated price for any goods

which they do order”.

In effect the so-called “contract” amounts to no more than a standing offer.

Acceptance Must Generally be Communicated

This elementary principle requiring the communication of an acceptance will

operate unless it is displaced by the clear intention of the parties.

Latec Finance v Knight – non communication of acceptance

[1969] NSW

A finance company had set up its operations so as to take advantage of these rules

of offer and acceptance. The purchaser was required to fill in the form and send it

back to the finance co as the offer. The finance co can then accept the offer, in

their office, by signing the appropriate section on the form – when the credit

reports check out OK. It was held that the signing of the form was to be seen as an

essential step in the procedure, but it was not to displace the normal requirements

of acceptance i.e. that it be communicated. An English case on all fours with this is

Robophone [1966] where Denning said that if the finance company could sign the

document in their own office, then they could assert the existence of a contract or

not as it suited them, and no one could say otherwise.

Carlill v Carbolic Smokeball Co – Offer can be made to the world at large

(1893) Court of Appeal – discussed in previous lecture

The manufacturers of an influenza remedy in their advertisements said that if

anyone used their remedy and then caught flu they would be entitled to £100.

When a claim was made they said that there was no contract. It was held that an

offer made to the world at large, can become a contract with those who fulfil the

condition.

The operation of this basic requirement may be affected by an implied assent to

the existence of a contract based upon an acceptance that was not communicated.

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Manchester Diocesan Council v Commercial Investments – communication

may be waived

[1970] Chancery Division

Offeror may waive communication, or by conduct, the right to insist on the express

manner of acceptance. As the plaintiff introduced the term, the plaintiff may waive

strict compliance with it. Where offeror indicates that acceptance in one form

would be OK, then acceptance may be in that manner or something better.

Tinn v Hoffman – something better will do

(1873) – if an offer stipulates acceptance by return of post – then an acceptance by

telegram or personal communication would be just as good.

Farmers’ Mercantile Union Mills v Coade

(1921) High Court of Australia

Coade and another applied to be shareholders in the company, and sent off their

money with the form. They heard nothing for a year or two and were then asked to

pay a call on the share, and again a year or two later. The company became

insolvent and they were asked to pay up. The majority held that from the time they

had notice of their shareholding, even if it was unreasonably delayed, they could

by their conduct be taken to have waived the requirement of communication.

Starke J argued some cogent points in his dissent.

What if the offeror attempts to create a contract with the offeree by imposing upon

the latter a need to deny the existence of the contract, e.g. if I do not hear from

you in seven days I will consider we have a deal? Normally this would not be

allowed.

Felthouse v Bindley – silence is not consent

(1862) Court of Common Pleas

The uncle offered to buy the horse and said that if he heard nothing further, he

would take it to be his. The case clearly indicates that a person who makes an

offer, cannot impose a bargain on the other merely by stating that silence indicates

consent. But could the acceptance here not be by conduct – taking the uncle at his

word and doing nothing more to try to sell the horse – what if the horse had been

held back at the auction, and then the uncle refused to pay? May not the person

making the offer dispense with the necessity to communicate the acceptance? If

one needs an overt act to indicate acceptance, why wasn’t the instruction to the

auctioneer sufficient?

Corbin, the great American writer in his article in the Yale law Journal says that it

should not necessarily be the case that silence cannot amount to

acceptance.

It is argued that whether silence indicates consent may depend on who is trying to

enforce the contract.

Supposing the offeree takes the offeror at his words i.e.: “I don’t have to do

anything. He says if I do nothing the contract will be concluded.” And so the

offeree does nothing. The offeror then tries to pull out of the deal and says “Your

silence does not amount to acceptance even though I said that it will be alright.”

Wouldn’t it be fair to say that the offeror has only herself to blame if silence is

being stipulated as a form of acceptance. In such instances, says Corbin, it would

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not be fair on the offeree who having relied on the offeror’s assurance does nothing

in response to the offer believing that to be the appropriate response.

The practice of sending unsolicited goods through the mail to a person with a

statement that if they are not returned within a stated period the recipient will be

taken to have agreed to buy them, has long been of concern to consumer

protection authorities.

Note that there is Commonwealth and State legislation providing that in many

circumstances the making of a demand for payment for unsolicited goods is an

offence and also that where the sender does not collect the goods within a certain

time the goods become the property of the recipient, in effect as a gift – See the

Trade Practices Act 1974 (Cth) s65 and the corresponding States Fair Trading

Acts.

Carlill is the most obvious circumstance – a more recent example follows:

However, silence may constitute consent to a contract where the circumstances

create a duty to deny a contractual relationship which would otherwise be assumed

to exist.

Empirnall Holdings v Machon Paull – benefiting from offer

(1988) 14 NSWLR 523 Court of Appeal Supreme Ct NSW

A property developer arranged for an architect to do some work, but did not

complete a proper contract – after being told that “Eric does not sign contracts”.

The court held that this circumstance was not so much an acceptance by silence,

but rather taking the benefit of an offer, with knowledge of the terms of it, and

with knowledge that the offeror was relying on payment being done for the work.

What Constitutes Communication?

Historically contract making was a person process between the two parties and

perhaps their lawyers. As commerce expanded contracts were still a matter of

personal negotiation, though the carrying out of that task might be entrusted to an

agent by one or both sides. The advent of a postal service in the late 18th century

in Britain created an entirely new problem for the courts. The offer and acceptance

were no longer virtually contemporaneous acts between the parties or their agents

face to face. Could there be a contract when that occurred? Cooke v Oxley

suggested not.

For a negative and confusing response see

Cooke v Oxley – confuses 2 stage completion of contract

100 ER 785

The defendant proposed to sell some goods to the plaintiff. The plaintiff asked to

be allowed until 4pm to decide. Before 4pm, the plaintiff gave notice to take the

goods. It was held that there was no contract. The courts did not appear able to

determine what to do when a contract was completed in two distinct stages.

However this answer was rejected in the specific context of negotiations by post in

Adams v Lindsell which formed the basis for the rule that an acceptance by post is

effective from the time of posting, not the time of delivery.

Adams v Lindsell – exception for postal rule

(1818) 106 ER 250

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It was said there that if a contemporaneous expression of assent were required

from both parties, no contract could be completed by post. If the offeror were not

bound until the acceptance was received, then the offeree ought not to be bound

until they had received notice that the acceptance had been received. To this

process there is no end. The offer must be seen as continuing whilst the letter is on

its way to the other party, and the contract is then completed by the acceptance of

it.

This is the main exception to the rule that acceptances have to be communicated,

to be effective. In these cases the acceptance is effective upon posting – even

though there may be delay or even non-delivery.

Adams is an early authority. In British v American Telegraph Co (1871) It was

said that convenience requires the rule to be so – otherwise, people might deny

receipt of letters. The answer is that if the rule is otherwise, people would untruly

assert posting them.

The law was subsequently stated in

Henthorn v Fraser – post within ordinary contemplation

[1892] 2 Ch 27

Lord Herschell said that where the circumstances are such that it must have been

within the contemplation of the parties that, according to the ordinary usages of

mankind, the post might be used as a means of communicating the acceptance of

an offer, the acceptance is complete as soon as it is posted.

The applicability of the postal rule will determine not only the time of the

completion of a contract, but also the place and hence the jurisdiction which

applies.

Bressan v Squires – (notice in writing)

[1974] Sup CT NSW

Was the important date that of posting or of receipt? The general rule requires

actual communication – except by post. The exception is based on expediency &

convenience. The matter is important for it will determine not only the time of

completion, but also the place (and hence jurisdiction) of completion. The parties

need not contemplate that posting would conclude the contract – that would make

the requirement too restrictive. Here, the post was clearly contemplated – so a

contract would be found unless there were reasons for holding otherwise. When

the offeror says that “notice” should be given, this could mean “actual notice” –

which would require communication. If the parties meant “posted”, they could

easily have said so. In my view, says the judge, “in writing addressed to me” leaves

the matter ambiguous. The matter, he says, is one of impression – my impression is

that “addressed” did not mean posted but that actual notice was required.

This appears to be the sort of case where the judge is finding an ambiguity, where

many others would not – isn’t a letter “in writing – addressed?” Why might the

judge have come to this view – we should bear in mind that the contract being

considered here was an option for $2- dealing with land.

The following case spells out in more detail the significance of the word “notice”.

Holwell Securities Ltd v Hughes

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[1974] 1 WLR 155 Court of Appeal

This case involved an option to purchase premises. The agreement said that the

option could be exercised by “notice in writing” addressed to the vendor at any

time within 6 months from that date. It was accepted that an acceptance was

posted but this was not received. The offeree sought specific performance. The

action was dismissed at trial.

The judge held that “notice in writing” should be contrasted with “agreed in

writing” and “required in writing”. The word “notice” comes from the Latin word

“to know” and the Oxford Dictionary suggests it means intimation or warning.

Now, notice in writing to the vendor meant that he was to actually have this

information – but he never did because it never got to him. The Plaintiffs were

unable to do what the agreement said they were to do, and fix the vendor with the

knowledge of the exercise of the option. If this construction of the option is

correct, there is no room to apply the postal rule in this case.

What should we do about a letter which is mis-addressed, so that it might not

arrive in the ordinary course of post? One could say that this does not comply with

the normal requirements of the postal rule. But what then happens if a specially

vigilant postman notices the mistake so that it is properly delivered?

Although the rule has been applied to similar modes of communication, e.g.

telegrams, it has not been applied to those where the response is virtually

instantaneous e.g. faxes, sms, emails and telephones.

Brinkibon Ltd v Stahag Stahl – telex and instantaneous communication

[1983] 2 AC 34 House of Lords

NB. Lord Wilberforce, a well respected judge in commercial matters, here

demonstrates his awareness of the artificiality of the intention theory, and takes

into account more commercial considerations.

If the telex was sent from London to Vienna where is the contract made? If seen as

a postal acceptance, then on posting – in London. If seen as a telephone

acceptance, then on reception in Vienna.

Entores says that a telex is to be treated like a telephone message. The English Co

says this should be reviewed. But Entores has not been subject to adverse

comment and should be accepted as a general rule. In this area, it is difficult to

have a universal rule. One should have regard to intentions, business practice and

where the risk should lie. In the case of instant communication between principals,

the contract is made when and where the communication is received, indicating

the time at which the deal is clinched and the jurisdiction and law which applies.

Reese Bros v Hamon-Sobelco -applied instant communication rule to faxes

(1988) 5 BPR The Court of Appeal of Supreme Court NSW

Should the postal acceptance rule be retained?

Prescribed Means of Acceptance.

It is open to an offeror to prescribe the precise method by which an acceptance

must be made in such a way as to render other means ineffective. In such a

situation a requirement that a notice should be given in writing is not satisfied by a

telephone message left with a clerk or an answering machine. The courts are

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reluctant to impose an absolute requirement and all will depend upon the apparent

intentions of the offeror. For example, a statement in an offer requiring a reply by

return of post is likely to be regarded as imposing a time limit rather than just a sole

means of communication.

Hudson Holdings Ltd v Rudder and French – acceptance by post or delivery

(1973) 128 CLR 387 High Court of Australia

Hudson wanted to make a takeover bid for a company and offered to buy its

shares. The offer talked about how to accept by post, but French delivered his

acceptance to the company. When it went into liquidation, French claimed his

money back, but it depended on whether he had completed a contract with the Co.

It depended on whether the clauses dealing with posting were stipulations. The

judge held that the real concern of the company was with the receipt of the

acceptances, not the method of delivery; so actual delivery was seen as a valid

acceptance.

Withdrawal of Postal Acceptance

A classic difficulty in this area is the problem of what happens when a letter of

acceptance is posted, but the offeree then has a change of heart, and attempts to

withdraw the acceptance before it reaches the offeror, by using a faster means.

The notice of revocation could then take effect before the acceptance has arrived?

Would it necessarily be unjust to allow the withdrawal to be effective? This could

mean, of course that the offeree can have the best of both worlds for a day or

three?

TPA 1974 Cth Unsolicited goods

S 65 1 receiver of them not liable to pay for them and not liable to damage to them

(other than wilful damage or unlawful acts)

After the expiry period provided for in the Act, the sender is not allowed to take

action to recover the goods. The goods then become the property of the person to

whom they were sent.

The above sub section does not apply when the person unreasonably refuses to

allow the sender to take recovery of the goods – has taken possession – where

person receiving knows goods intended for someone else.

Before s65, it might have been thought that opening a package and keeping the

contents amounted to an acceptance. This section makes it clear that opening the

package does not matter.

Exemption Clauses

In contracts for carriage of goods, the carrier’s exemption clauses have been held

to protect 3rd parties as well.

Where the owner of goods employs a contractor to ship goods from A to B, that

contractor will have the benefit of certain exemption clauses – the question arises

as to whether the benefit of them extends to a third party contractor

(sub-contractor) – stevedores or truck drivers. The analysis suggests that the offer

of the exemption is extended to the TP contractors, who accept it by dealing with

the goods in accordance with their task – unloading etc. Many of them will not

know at that stage of the existence of the exemption clauses – therefore, if the

reward cases analysis was carried through, one would say you cannot accept what

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you do not know about. Yet here, the unilateral contract analysis is allowed to

bring “contract” into existence. It is claimed that this is patently artificial, and is

only used to get around the privity of contract rule – and to allow contracts which

will sensibly allow for risk allocation. Cheshire and Fifoot suggest that this should

be done specifically without “conjuring up” a unilateral contract for the purpose.

Another point in this connection is ONUS OF PROOF. Smith v Chadwick (1882)

referred to by Higgins J indicates that if an action is prima facie in accordance

with that required by the offeror, then the inference is that it was done in reliance

upon it. It is open to the other party to show that this was not so, but the existence

of such a presumption means that it may be very difficult for me to establish an

intention (or lack of intention) which accompanied your doing certain things. The

presumption in Clarke was rebutted by his own express admissions.

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Consideration – in Acceptance of Contract

Author: Dr Robert N Moles

Contract Law Homepage

A state of Injustice – table of contents
Losing Their Grip – The Case of Henry Keogh – table of contents

The issue of “consideration”

This involves an analysis of the different types of promises and the ways in which

the court can ascertain which promises are intended to be taken seriously enough

to be enforceable by the courts.

To be bound by a promise usually means that some sort of sanction will follow for

not keeping it. With a breach of a moral promise, the sanction is likely to be

ostracism or disapproval. With the breach of a legal promise, the sanction will be
imprisonment, fine or community service for a criminal offence, damages or

specific performance for breach in a civil case.

The lack of consideration is one reason then for saying that a promise will not be
recognised by the courts. It is worth noting that the concept of consideration is

peculiar to the English common law. Other systems, such as the European Civil

Law system, will enforce gratuitous promises (Khouri and Yamouni –
Understanding Contract Law)

Historical background

We have already seen how originally consideration was closely related to the
causa of the civil law – it provided a motive for contracting and a motive for why

the arrangement should be enforced. With the shift away from motive to the

notion of a quid pro quo, consideration assumed an appearance more recognisable
to the law of today. Nevertheless it would be a mistake to imagine that the

consideration of the common law was a replacement for the intention which was

the basis of promissory liability in the civil law.

See the problem of deciding whether a particular situation is a conditional gift or a

promise supported by consideration if the condition is performed by the promisee

The notion of exchange – consideration must move from the promisee

To find out if a promise is enforceable, one must look to see what the other party –

the person to whom the promise was given – has done in return for it. If I promise

to do something, has the other party done anything for it – promised to pay,
actually paid, delivered something to me etc. In most cases, this is perfectly

straightforward – I have promised to build the extension to your house and you

have paid me a deposit and agreed to pay the balance in stages.

A contract of guarantee can be difficult to see in this way – think of a loan from

Bob to Beverley – Geraldine is asked to guarantee the loan (Bob wants security as

Beverley is a student) – the general rule is that consideration must move from the
promisee, but the provision of Geraldine’s guarantee constitutes good

consideration for the enforceability of the loan.

Formality is one way of providing it – a deed under seal

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Contract Law lecture: “Consideration” in Acceptance of Contract http://netk.net.au/Contract/04Consideration.asp

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Reliance can be another. It is a contentious matter as to the extent to which this

has been adopted in our system. The modern case of Walton’s Stores indicates that

it may be becoming

more important.

Consideration means that a promise made to you will not necessarily be

enforceable in the courts unless you can establish that you have given something

for it. Suppose I promise to deliver a ton of gravel to you next week – you get your
shovel and barrow ready, and I don’t turn up. I probably would not be liable to you

in damages, because you haven’t given anything in return, and merely getting your

barrow ready would not be sufficient reliance to make it enforceable. However, if
at the time of making the arrangement, you said that you would pay me $10 per

ton for the gravel that would be sufficient consideration. A promise to pay is

sufficient to count as giving something, even though the promise is not to be put
into effect for some time yet.

Benefit and \ or detriment

Consideration is often spoken of as a benefit to the promisor or a detriment to the
promisee. Some will make the point that a mere promise from one party is neither

a detriment to that party, nor is it a benefit to the other. Atiyah also argues that

real benefit and detriment is not sought, because of the adequacy point – that the
courts will not concern themselves with the adequacy of consideration – a point

we will look at in a moment. Is it really a benefit to someone to get $1 for a car?

Maybe not, but it may well be good

consideration

The Logical Problem

The promise might, of course, become a benefit or a detriment if it is enforceable.
But its being a benefit or detriment is a condition of its enforceability, and

therefore, one should be able to establish that it is a benefit or detriment,

independently of that.

Quid pro quo – Beaton v McDivitt – bargain theory – the way to go

(1987) 13 NSWLR 162 Court Appeal, Sup Ct NSW

McD believed his land was to be rezoned. He worked part of it and sought
someone to work the other as permaculture. B’s took the 4th block, built a house

farmed the land and assisted to create access road. After 7 years they had a

dispute and B’s were ordered off the land.

Historically, there is little difference between the common law consideration and

the Roman causa. But in the 19th C there was a shift from motive and reliance to

bargain. So in Thomas, (1842) we distinguish motive from consideration – which is
something of value moving from the plaintiff. Currie v Misa:

A valuable consideration, in the sense of the law, may consist either in some

right, interest, profit, or benefit accruing to one party, or some forbearance,

detriment, loss or responsibility given suffered or undertaken by the other.

This is the bargain view, supported by O.W. Holmes and approved in R v Clarke

(1927). The ratio of Woollen Mills accepts the basic elements of the bargain
theory, and rejects the reliance based view. None of the cases referred to by the

judge can be seen as contract unless there is a quid pro quo.

McD’s promise was an offer the consideration for which was the act of the
plaintiff in coming and working the block. Once he went on to the land to work it,

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it was not open to McD to withdraw the offer.

Australian Woollen Mills v The Commonwealth (1954) 92 CLR 424 High

Court of

Australia

This case involved a subsidy scheme to assist local manufacturers to remain

competitive in their use of wool. Plaintiff claimed to have made purchases of wool
“in pursuance of the said agreement”, during a period for which the Govt was

unwilling to pay. Here, the announcements were not from commercial motivation

but from a Govt trying to deal with the aftermath of war – public money is
involved. To what extent is this important in explaining the decision? The court

took the view that the subsidy was not a request, invitation or an inducement to

purchase wool – would you agree with this? There was nothing, they said, to
suggest that the subsidy and purchase of wool were related, no quid pro quo.

Govts can of course make contracts in the normal way – purchase of equipment,

employment etc. But in this type of case, it may have been thought that this was
an attempt to bind the Govt in a policy type of situation where flexibility was

more important.

The privity rule

The general rule is that only those who are parties to a contract can enforce it or

have rights under it. Other people might benefit indirectly from the contract being

enforced, but the third parties cannot bring legal action in their own name to have
it enforced.

This is why the manufacturer in Donoghue v Stevenson denied liability – because

they did not have any contract with the consumer (the cafe owner did) and they
thought there was no other ground of action.

Otherwise it is claimed that a third party to a contract, intended to benefit from it,

but who has not given consideration for the promise of the promisor, cannot
obtain enforceable rights under the contract. If the promisee wishes to sue for

damages for the benefit of the third party, there is some question as to whether

anything greater than nominal damages can be obtained – if the loss is that of the
third party and not the promisee. The promisee may be able to have the contract

specifically enforced for the benefit of the third party, but this may not always be

satisfactory.

Agency is different

The normal agency relationship is not really a qualification to this, because the
agent is bringing the principal into a contractual relationship with the other

party.

The Agent as such is not a party to the contract. However, the “undisclosed

principal” makes it slightly different. So long as the agent has authority, and
intends to contract for the undisclosed party, and the other party has not shown

that they are unwilling to enter into the contract with another (even though they

do not know of the other’s existence) then the agent can contract on behalf of that
principal. In this situation, the agent and the principal can sue and be sued, but

there must be something like an election, as you could not proceed against both.

Trust is different

A trust is used where someone has the legal title to something (a contract) but is

then taken to be holding it not for their own benefit but for the benefit of a third

party. It is possible that the third party could claim that the promisee holds the

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benefit of the promise on trust for that third party so as to enable them to get

around the rules of contract law? See the discussion on this in Trident.

Trident General Insurance Co Ltd v McNiece Bros Ltd

(1988) 165 CLR High Court of Australia (Court Appeal, Sup Ct, NSW)

A company took out public liability insurance for construction work being carried

out at the plant. The “assured” was stated to be contractors and sub-contractors.
McN became a principal contractor for construction work being carried out at the

plant. A worker injured at the site obtained judgement against McNeice who

sought an indemnity under the policy. Trident denied liability.

Trident says there are 2 important principles

Only a party to a contract can sue under it

Consideration must move from the promisee

Is privity was just another way of putting the consideration point? These

fundamental rules have been under siege throughout the common law world.

Rules which generate uncertainty in their application to ordinary contracts
commonly entered into by citizens call for reconsideration.

Justifications for privity and consideration rules? Preclude risk of double recovery

from the promisor by the promisee and the third party. Privity is a barrier for the
contracting party to a whole range of potential plaintiffs. Third party right to sue

would limit freedom of action of parties, especially the promisee. At present, with

the consent of the promisor, the promisee could rescind, modify, compromise or
assign rights under the contract. Could even take rights intended for the third

party.

Corbin “Third Party Beneficiary Contracts in England” 1968 35 University of
Chicago Law Review said that third party rights would exist at the expense of the

rights of the contracting parties. Should there be just intention to benefit third

party, or also intention that third party should be able to sue?

Regardless of the layers of sediment, we consider that it is the responsibility of this

court to reconsider in appropriate cases common law rules which operate

unsatisfactorily and unjustly. Estoppel is not adequate and even if it were, the
rights of persons under a policy of insurance should not be made to depend on the

vagaries of such an intricate doctrine.

The likelihood of reliance of the third party in the case of benefit to be provided is
so tangible that the common law rule should be shaped with that in mind; even

more so when the insurance is said to cover the insured and the subcontractors.

Many will assume it to be effective and refrain from taking other cover. That is
what happened here. But why should respondent depend on making out a case of

estoppel?

Notwithstanding the caution with which the Court ordinarily reviews earlier
authorities, and the operation of long established principle, we conclude that the

principled development of the law requires that it be recognised that McNeice was

entitled to succeed in the action. Appeal dismissed.

Brennan J took a much more cautious view and thought that this change would

not fit in with the overall system of law and was foreign to the system of the

common law.

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Gaudron thought that the third party would have a right based on principles of

restitution and unjust enrichment.

New Zealand Shipping [1975] AC 154

This seems to be a clear example where the judges clearly avoided the privity

rules in order to give effect to the business efficacy of the contract and the

intention of the parties – they had clearly intended all along that the stevedores
would be covered by the exemption clauses and presumably insurance

arrangements had been made on this basis.

The exclusion clause deemed the carrier to be trustee and agent for the
independent contractors.

Carter and Harland ask if it would not have been better for the courts to declare

that privity is no longer a part of the modern law of contract – but what then of all
the difficulties which Brennan in Trident pointed to?

Port Jackson Stevedoring v Salmond (1978) 139 CLR 231 High Court of

Australia

(1980) 144 CLR 300 Privy Council

The decision of this case further supported the New Zealand decision. The
“Himalaya clause” is capable of conferring upon a third party falling within the

description “servant or agent of the carrier”, defences and immunities conferred

by the Bill of Lading upon the carrier as if such persons were parties to the
contract contained in the Bill of Lading. Stevedores employed by the carrier will

also come within it. It was said that this was not so much a new principle, as

finding that accepted principles require the stevedores to obtain the benefits. The
importance of that case is the way in which the judges were able to find a contract

between the shipper and the stevedores. Their lordships would not encourage the

seeking of fine distinctions to diminish the applicability of the general principles.

More recent cases enable this to be perhaps developed to other forms of transport

– Celthene Hauliers [1981] and Frigmobile [1983]

Adequacy of consideration

The normal rule for contracting is caveat emptor – let the buyer beware. As the

buyer has not only the best incentive, but also the best opportunity to assess the
situation and the relative merits of the exchange, the court will not be drawn into

assessing whether or not someone has made a good deal, or whether they have got

good value. The value of something does not consist merely of what it is
objectively, but also upon the needs of the purchaser.

Woolworths Ltd v Kelly (1991) 22 NSWLR 189

Kirby Plaintiff suggested that whilst certain things given as consideration might
seem inadequate to the court, they may in fact be valued as consideration for

idiosyncratic or sentimental reasons by the promisor.

I throw away my telephone cards but others place great value on them and there is
a brisk collectors market for them.

A book may only be of certain value on its own, but if you have all the other

books in that series, apart from that one, then you may well be willing to pay more
for it. If there is no unfair advantage, then the courts will not look at the

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ADEQUACY of the consideration. There might be extreme cases where a deal is

such an obviously bad deal that the courts will infer that there was in fact some

unfair advantage present. See CBA v Amadio (1983) for an example of this.

Thomas v Thomas – nominal rent and covenant to repair

(1842) Queen’s Bench UK

Here we had a promise to convey a house, provided Plaintiff paid £1 pa rent and
kept the premises in good repair. The provision for payment and the obligation to

repair were held to be quite sufficient consideration for a contract. The moral

feeling which motivated it was seen to be not relevant.

Given that the courts say that they will not be drawn into the adequacy of the

consideration, does that mean that if I promise to do something for you in return

for something which appears to be of negligible value, that the promise is still just
as binding? What if I ask you to send in packet tops, or milk bottle tops, does that

count as some “value or detriment”? The answer could well be YES.

Chappel v Nestles – chocolate bar wrappers

[1960] House of Lords

Nestles asked people to send in wrappers from chocolate bars. The repeated doing
of something, of value to the promisor, was held to be part of the consideration,

even though in one sense the wrappers were worthless. One of the judges making

the interesting point that a peppercorn does not cease to be a good consideration if
it is established that the promisor does not like pepper and will throw away the

corn.

Thus, an option is binding because a relatively small sum has been paid or
promised in return for a right to have an offer kept open for a specified period,

though the consideration if the option is exercised may be an astronomical amount

by comparison.

Forbearance and Compromise

Practically all tortious actions are settled out of court. Each time a claim is settled,

the plaintiff will be asked to sign a document to say that the payment is accepted
“in full and final settlement of the claim” – making any further legal action in the

matter no longer possible. Forbearance and compromise is present in all

settlements – “forbearance” being the willingness not to proceed with the action,
“compromise” being the actual settlement.

The consideration is said to be the giving up of one’s right to use the courts – to

sue. But what if the initial action was without merit – has one given up anything?
The assumption is that you have unless it can be established that the action was

started without good faith. This could be a difficult thing to prove.

There is an important public policy issue at stake here. There is a public interest in
seeing an end to litigation, to avoid a case from constantly being re-opened. On

the other hand, it might be seen as a way of converting a somewhat shaky claim

into a more certain claim.

Wigan v Edwards – (honest belief sufficient)

(1973) 47 ALJR 586 High Court of Australia

P agreed to buy a house from Defendant for $15,000. Before the formal

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documentation was completed, Plaintiff said they had found defects and were not

going to proceed. In return for their promise to go ahead, Defendant gave an

additional promise that any major faults within 5 years from purchase, would be
put right. [This situation is like that of exemption clauses which appear after the

event, or like Roscorla v Thomas where the purchaser attempted to get additional

promises after having agreed the purchase of the horse].

The court took the view that the general rule was that to perform an existing duty

is no consideration. A qualification to the general is that to promise do what one is

bound to do is good consideration when it is given by way of a bona fide
compromise of a disputed claim – the promisor believing that circumstances exist.

Here it was suggested that the work was shoddy, and although the defects

complained of may not have allowed the party to pull out of the contract
altogether, this did not matter – so long as the issue taken up was bona fide – it

does not matter that the court may take the view that the claim may have been

unsuccessful if pursued. Only that there should be an honest belief – that the claim
should not be vexatious or frivolous.

As with other contractual relationships, the arrangement might be bilateral (a

promise for a promise) or unilateral (a promise or request, express or implied,
followed by an act in reliance upon that promise or request).

Wigan v English and Scottish Life Assurance Association – security w/o

consideration

[1909] 1 Ch 291 Chancery Division

Hackblock had a life insurance which was to be forfeited if the insured committed
suicide, but without prejudice to the bona fide interests of third parties. He owed

money to Wigan, and had effected an assignment of the policy to secure the debt

in order to obtain more time to pay. Wigan gave him more time without knowing
of the assignment, which was subsequently destroyed. After Hackblock had

committed suicide, Wigan learned of the assignment, and claimed benefit under

the policy as an assignee for valuable consideration.

Wigan did not give any consideration for any interest he might have acquired

under the deed. The mere existence of a debt from A to B is not sufficient

consideration for the giving of a security from A to B in respect of it. Such
security may well be given in return for extra time to pay, or for forbearance to

sue. None of those things existed here, therefore the security was voluntary.

Butler v Fairclough – abandonment of claim as consideration

(1917) 23 CLR (Isaacs J)

It must not be assumed that a promise to abstain from issuing a writ is always

valuable consideration. A promise not to sue for a limited period, as abandonment
of a claim may be good consideration where there is liability or a bona fide belief.

But temporary forbearance to sue where there is no liability is no consideration.

Callisher v Bischoffsheim – Doubtfulness of original claim not relevant

(1870) LR 5 QB Queen’s Bench

A person promised not to sue for an agreed time, provided that some bonds were
delivered to them. When the bonds were not delivered, the person claimed

damages for breach of that agreement. The other person said that, as the money

had not been due in the first place, (assumed for the purpose of these proceedings

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that that was true). they could not enforce the delivery of the bonds. The court

took the view that if D’s claim were accepted, no agreement to compromise a

doubtful claim could be enforced. If a party to an action believes bona fide that
there is a chance of success, then there is reasonable ground for suing and the

forbearance will constitute good consideration. The other party obtains an

advantage – being free from the necessity to defend the action.

If a party made a claim which they knew to be unfounded – then an attempt to

derive an advantage by compromise would be fraudulent. Essential to understand

that there are in fact 2 contracts – the initial contract which is the subject of the
dispute, and then the 2nd contract which is intended to settle the dispute arising

from the first. The question is whether there is consideration for the 2nd contract,

and what effect this has on the obligations arising from the first.

McDermott (D) v Black (P) – Accord executory and accord and satisfaction

(1940) 63 CLR 161 High Court of Australia

Plaintiff complained that an initial agreement which had become the subject of a
dispute between the parties, had been induced by fraud. Plaintiff then said that he

would withdraw the allegations of fraud, in return for a further 3 week extension

of time to pay, which was agreed to. Plaintiff did not pay eventually, and
subsequently brought proceedings for fraud, and sought the return of his security.

The lower court held that the initial agreement had been based on fraud, and that

the negotiations between Plaintiff and Defendant were too vague to constitute a
contract of compromise. On appeal, HELD the arrangement was to release from

an obligation to pay damages for deceit – in return for an extension of time –

“which is in law an accord and satisfaction”. There is no doubt that the general
principle is that an accord without satisfaction has no legal effect and the original

cause of action is not discharged as long as the satisfaction agreed upon remains

outstanding. However, if it can be shown that the parties agreed to accept the
promise and not the performance of the promise, then the cause of action is

discharged from the date that the promise was made.

One of the other judges took the view that the agreement to withdraw the
allegations did not amount to an agreement not to revive the allegations at any

time. This can be seen to be a difference of view re the underlying facts, and not a

difference re the legal principles involved.

Past Consideration

If an act is performed then a subsequent promise to pay by reference to that act is
not enforceable as the consideration was past.

This gives rise to some interesting problems. Can something be good consideration

for this contract, if it has already been consideration for a previous contract? In
which case, you may only be promising to do again what you are already obliged

to do. Today, one would have to be mindful of the extensive additional protection

available under the Sale of Goods Acts and other statutory provisions such as the
Trades Practices Act.

Roscorla v Thomas – horse free from vice – additional promise after sale

(1842) 3 QB 234 Queen’s Bench

In this case someone had already bought a horse, and then obtained some extra

undertakings from the seller “in consideration of that sale”. The sellers additional

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promises were that, the horse was not more than 5 years old, was “sound and free

from vice” – presumably it did not stay up late at night playing cards etc. The court

took the view that the pre-existing and executed consideration could not support
the subsequent promise. In other words, after the deal has been completed, you

cannot go back and get some additional undertakings, unless those additional

undertakings are themselves supported by some ADDITIONAL consideration.

This was probably one of the early manifestations of a rejection of consideration

as causa. Nevertheless aspects of moral consideration remained in the principle

that a subsequent promise to pay would be enforceable if the original act had been
undertaken at the request of the promisor.

Lampleigh v Braithwait (1615) 80 ER 255

Braithwait who had been found guilty of murder asked Lampleigh to do his best to
obtain a pardon from the King. As a result Lampleigh rode about the country

doing his best to obtain the pardon. Subsequently, in consideration of his efforts,

Braithwait promised to pay him £100. Hobart CJ said that a mere voluntary
courtesy will not do. But if the courtesy were moved by a request of the party

which gives the assumpsit, it will bind, for the promise, though it follows is not

naked but couples itself with the suit before. It could be said that the type of
request would have given rise to an implied promise to pay what it was worth, and

the subsequent promise serves to fix the amount.

Past service – implication to pay

This principle has been modified in the modern law so that the subsequent promise

to pay is enforceable only if there was an implication at the time it was performed
that the act would be paid for.

The argument here is that a past service raises an implication that at the time it

was rendered, it was to be paid for. When subsequently there is evidence of a
promise to pay, that may be seen as an admission which fixes the amount of the

bargain, on the basis of which the service was rendered. Perhaps this addition was

to prevent someone taking unfair advantage of another in respect of work which
has already been done – the back pedalling on your obligations after you’ve got

someone else to do the work for you.

Casey v Commissioner of Inland Revenue [1959] NZLR 1052 Supreme Court,

New Zealand

In Feb and June 1918, the wife loaned her husband sums of money amounting to
£875. He promised that when in a position to do so, he would repay the loans with

interest. Although no rate was specified, they believed that the current rate

payable on loans to farmers by stock merchants would do. In 1954, the farm
property was sold and the wife was reimbursed £5000. The Inland Revenue

claimed that duty was payable on the amount over £875 as it was a payment

without valuable consideration (a gift). At the time of the loans, the payment of
interest was contemplated, and their subsequent agreement fixed the amount –

Casey’s Patents. No basis for saying that the claim had become Statute barred.

Judge made law allowed that after the expiry of the period, a continued
acknowledgement of the indebtedness allows the period to run.

Re Casey’s Patents; Stewart v Casey [1892] 1 Ch 104 Court of Appeal

– I shall not go into the case here but it is noted up in the case outlines.

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Existing duty as consideration

A person may be under a duty to perform an act for 3 principal reasons

because of a promise to the person with whom you are negotiating.
because of a promise to a third party

because required by the general law

If one already has an obligation to do the act in question, can the promise to do
that act, or the doing of it, constitute consideration for an additional promise of

payment for it?

Duty owed to other contracting party

It is easy enough to see a “policy” issue for the courts to deal with in that it could

lead to much unfair pressure if A was able to insist upon an additional payment
from B who had already promised to pay a lesser sum for the exact same

performance by A.

The issue of public policy arose in the so-called “seamen” cases – the reason being
that for a seaman serving on a British ship to leave the vessel before the end of its

voyage, amounted to an act of mutiny. However, as in Glasbrook it was accepted

that, if a seaman performed acts beyond his contractual obligations, he could be
paid over and above the money promised for the original performance.

Stilk v Myrick – tasks within existing duty

(1809) King’s Bench

Plaintiff was employed as a seaman under articles at £5 per month. On a voyage

from London to the Baltic and back, 2 of the crew deserted. The captain could not

replace them and the rest of the crew said that they would work the vessel back to
London, and share the wages of the other 2. The extra money was not paid. It was

said that before they left on the voyage, they had undertaken to do all they could

under all the emergencies of the voyage and the desertion of the crew is to be
taken as part of such an emergency. The court found that the remaining crew had

no liberty to quit when the other men left.

Hartley v Ponsonby – tasks beyond existing duty

(1857) 119 ER 1471 Queen’s Bench

Plaintiff was a seaman on a ship sailing from UK to Bombay and earning £3 per
month. During the course of the voyage, 17 of the crew refused to work and were

sent to prison. Defendant undertook in writing to pay Plaintiff £40 to assist in

sailing the vessel to Bombay with a crew of 19. They arrived in Bombay 6 weeks
later. The extra payment was refused. At trial, it was established that Defendant

entered the agreement voluntarily. Additional crew could not have been found at a

reasonable price. There should have been crew of 36. The court found here that it
was unreasonable for the ship to proceed with just 19. Because it was dangerous

for the ship to proceed with so few hands, Plaintiff could not have been required

to perform the work. Therefore Plaintiff was free to undertake the remaining
voyage or not. The agreement was voluntary on both sides. They were free to

make a new contract. Plaintiff may have taken advantage of this position to make

a hard bargain, but this did not amount to duress.

Sundell v Yannoulatos – Non-enforcement of contractual rights can be duress

(1955) 56 SR (NSW) 323

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[comments taken from judgment in North Ocean]

Plaintiff entered into a contract to buy iron from Defendant at £100 per ton for

delivery some months ahead. Plaintiff set up a letter of credit in favour of
Defendant. Some months later, Defendant said that because of rising costs, unless

the price was increased, delivery could not go ahead. Eventually a new order was

sent with a new letter of credit at £140 per ton. Plaintiff reserved the right to stick
to the original agreement, and Defendant supplied without acknowledging that

condition. Plaintiff sought to recover the excess as having been paid under

“practical compulsion”. It was argued that the contract had been superseded by a
new one – this failed as there was no consideration for the increased letter of

credit. Also argued that practical compulsion did not extend to non-enforcement

of contractual rights. This failed also, indicating that Australian courts would be
more likely to allow recovery of such an excess payment, and the threat to break a

contract may be seen as a form of economic duress.

North Ocean Shipping v Hyundai – additional benefit in new arrangement

(letter of credit)

[1979] 3 WLR 419 Queen’s Bench Division

We will look at this more closely under Duress – this was a contract which

involved the building of a super tanker – the shipbuilder asked for more money

which was eventually paid under pressure. What did Hyundai do as consideration?
Given deals as complex as this, one can always find some shift in position – as part

of the dealings the parties agreed to some adjustments in the letter of credit, and

this was found to be sufficient to satisfy the requirement of consideration. The
judge said that merely to agree to a change to “maintain amicable relations” would

not be enough to amount to consideration. But if the parties were willing to cancel

the old deal and replace it with a new one, that would be quite acceptable.

Compare with

[note here and on following case from Cheshire and Fifoot]

Judicial support for the views [that an existing consideration is good] can be found
in the judgment of Denning LJ in Ward v Byham where he challenged the

accepted rule. “[A] promise to perform an existing duty, or the performance of it,

should be regarded as good consideration, because it is a benefit to the person to

whom it is given.” He repeated this view in Williams v Williams but added the rider

“so long as there is nothing in the transaction which is contrary to the public

interest”. The same view was recommended by the English Law Revision
Committee in 1937 and endorsed by Treitel. In Australia a single voice, Hudson J

in Popiw v Popiw164 has given support to Denning LJ in Ward v Byham. In the

United States there has been judicial hostility to the rule and some legislative
reform in some states and in the Uniform Commercial Code in relation to sale of

goods.

Williams v Roffey Bros & Nicholls (Contractors) Ltd – existing duty a benefit?

[1991] 1 QB 1

Here we have a building contractor who entered into a contract to refurbish a

block of flats. It subcontracted the carpentry work for £20,000. The plaintiff
carried out some of the work and received interim payments amounting to

£16,200. The plaintiff then found that he was in financial trouble and had agreed

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to a price which was too low. The defendant became aware of this and, wishing to

avoid penalty provisions in the head contract and the disruption associated with

finding another sub-contractor, agreed to pay the plaintiff an extra £10,300 to
complete the work. The defendant’s representative initiated this subsidiary

agreement, recognising that the plaintiff’s original price was too low. Only £1500

was paid pursuant to the subsidiary agreement. The plaintiff sued for the
additional money.

The Court of Appeal held that the subsidiary agreement was enforceable.

Glidewell LJ drew on Ward v Byham, Williams v Williams and the Pao On case
and concluded:

(i) if A has entered into a contract with B to do some work for, or to supply goods

or services to, B in return for payment by B and (ii) at some stage before A has
completely performed his obligations under the contract B has reason to doubt

whether A will, or will be able to, complete his side of the bargain and (iii) B

thereupon promises A an additional payment in return for A’s promise to perform
his contractual obligations on time and (iv) as a result of giving his promise B

obtains in practice a benefit, or obviates a dis-benefit, and (v) B’s promise is not

given as a result of economic duress or fraud on the part of A, then (vi) the benefit
to B is capable of being consideration for B’s promise, so that the promise will be

legally binding.

This was a case where the plaintiff, by agreeing merely to complete the work
already contracted for, suffered no detriment but he did provide a benefit. “If both

parties benefit from an agreement it is not necessary that each also suffers a

detriment.”

Musumeci v Windadell Pty Ltd

Charles and Margaret Musumeci entered into a lease for premises within a

shopping centre. They claimed that the terms of the lease had been varied so that
the sum due was two thirds of that which was otherwise due and that the

consideration was like that in Williams v Roffey. P’s had to overcome the Stilk v

Myrick and Wigan v Edwards arguments re fulfilment of existing duty.

Santow J pointed to the view of Gibson LJ in Selectmove Ltd, where it was said

that the Roffey principle could not be extended to the Foakes v Beer situation,

unless done by the House of Lords or Parliament. He went on to acknowledge the
trend to sidestep the artificial results of strictly applying the doctrine of

consideration. He pointed out that consideration does not need to be adequate, an

existing duty to A can become good consideration to B, and that a deed can do
away with consideration altogether. Estoppels can be used to avoid

unconscionability where consideration is lacking. So Santow suggested that

Australian courts should follow Roffey and regard practical benefit as good
consideration. The principles are:

A has contract with B to provide goods or services

B, before completion has reason to doubt that A can or will complete the bargain.
B then promises A some additional consideration in return for A’s promise to

perform his obligations.

B obtains a benefit or avoids dis-benefit so long as A’s continuing is seen as worth
more to B than any likely remedy against A, bearing in mind the cost to A of

obtaining the assurance.

A thus suffers detriment, in that A is foregoing the opportunity not to perform the

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contract, where the non-performance could be seen by A as worth more than

performance in the absence of the additional benefit.

B’s promise is not given by way of economic duress or fraud or undue influence or
unconscionable conduct by A, nor as result of any unfair pressure

The benefit to B is capable of being consideration for the promise so as to make it

legally binding.

Here, the practical benefit from allowing lower rent was the enhanced capacity of

Ps to stay in occupation and carry out their future obligations despite new

competition from another tenant. The practical benefit was the enhanced capacity
to continue to operate at full capacity.

One might conclude that the High Court has eroded the strict requirement for

consideration in every contract.

The fact that consideration may be found in such a situation will not deprive a

promisor of relief in a case of unfair pressure on the ground of economic duress.

Greig and Davis point out in Law of Contract that

the doctrine of consideration with its arbitrary choice between a new contractual

obligation which is enforceable, and one which fails entirely for want of

consideration, seems a clumsy means of resolving a dispute.

Duty owed to third party

Despite doubts that have from time to time been expressed, it is well established

that a promise by A to pay B if B performs a duty owed to X for which X has
already agreed to pay B is enforceable by B if B does the act required by A.

Shadwell v Shadwell – Payment by 3rd party in consideration of marriage

(1860) 142 ER 62

P entered into an agreement to marry Ellen. His uncle, writing to congratulate him

said, “I will pay you £150 per year during my life until you income as a barrister
shall reach £600 pa.” When the uncle died, Plaintiff sought to recover outstanding

amounts. The personal reps argued that Plaintiff was under a contractual

obligation to marry, therefore no consideration. The court held that the marriage
was an object of interest to the uncle and he benefited by its taking place, thus

there was consideration.

A reminder that unilateral contract analysis is often a useful way to get around
tricky problems – difficulties of promising, communication of acceptance and

consideration which cannot be dealt with within the traditional rules. It was used

effectively in the following case.

This is referred to by Treitel as the “invented consideration” case

New Zealand Shipping Co v Satterthwaite (The Eurymedon) – 3rd party,

exemption clause

[1975] AC 154 Privy Council

The clause

The clause of contract read inter alia “it is hereby expressly agreed that no

servant or agent of the carrier (including every independent contractor from

time to time employed by the carrier) shall in any circumstances be under any

liability to the shipper consignee or owner of the goods for any loss or damage,

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and the carrier shall be deemed to be agent or trustee for the benefit of all

persons, servants or agents from time to time (including independent

contractors)

Clearly the clause was intended to benefit the independent contractors or

stevedores, who in this case were a company which was part of the same group of

companies as the carrier, and the stevedoring company acted as the agent of the
carrier in New Zealand.

This case was an ordinary contract of sale for a machine – the parties being in UK

and Australia. Machine to be shipped. Shipping contracts use some technical
language, and we should be clear we know what some of it means. This involves a

contract of carriage, between the Consignor (the shipper) and the consignee. The

carrier runs the ship. The Stevedore Co provides the people to unload the ship.
The contract of carriage is called a Bill of Lading – It amounts to a document of

title during shipping – goods can change hands many times, and it is therefore

negotiable during the voyage (can be assigned from one to another and each
assignee is entitled to the rights of the original owner). A copy of the Bill of

Lading goes to the consignee. In this case, the machine was dropped by the

stevedores whilst unloading. An attempt to sue the stevedores was met with the
claim that they were protected by the exemption clause in the contract of carriage.

“No servant or agent of the carrier will be under any liability for loss or damage

during transit”

Can a TP benefit from a contract to which they are not a party? The general rule is

that only a party to a contract can obtain rights under it – privity of contract –

consideration. Argued here that there is a unilateral contract between the
stevedores and the owner. “I offer an exemption to anyone willing to unload the

goods.” It may not be much like the reward cases, but the PC said that that was

how it was to be seen. Very artificial. Why then was the court so keen to allow the
stevedores the benefit of the contract?

In the shipping trade, most of those involved are big players. Ship owners, carriers,

owners of goods. What the courts were really looking at was who is in the best
position to insure – to bear the risk? If one knows clearly where the risk lies, then

it can be covered by appropriate insurance. If this decision makes it clear that the

owners are the appropriate people to take out the insurance, then the carriers and
stevedores do not need to cover the risk and that cost factor does not need to be

included in the freight rates. Also – avoid the complications of multiple insurances

on the one risk. It does not really matter at what stage the additional cost occurs –
the ultimate consumer will cop for it anyway.

Lord Wilberforce’s statements in this case are very revealing – when he looked at

the question of consideration, he said that the rules with regard to offer and
acceptance and so on often do not fit modern transactions. Better to see the

exemption as designed to cover the whole of the carriage, irrespective of whether

it is done by the carrier, the agent or an independent contractor.

Port Jackson v Salmond – exemption clause effective after unloading?

(1978) 139 CLR 231 High Court of Australia (NSW Court of Appeal)

(1980) 144 CLR 300

Shipment of razor blades from Canada to Australia. Goods unloaded at Sydney

and mis-delivered by agents of stevedore. It was argued: [another example of

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putting forward arguments in the alternative]

Fundamental breach by bailee – the idea that a fundamental breach does away

with the protection of any exemption clauses never got very far in Australia.

Agency – “Himalaya clause” (extends protection of defences of Bill of Lading to

independent contractors) could not help because not shown that carrier had

authority to act on stevedore’s behalf.

Capacity – The Bill of Lading ceased to operate once the goods passed over the

ships rail.

HELD that in Satterthwaite’s case they had taken the view that a Himalaya clause
could extend the defences of a Bill of Lading to 3rd parties as if they were parties

to the contract. Their lordships would not encourage fine distinctions to diminish

the applicability of the general principle in the light of established commercial
practice. A nod and a wink to potential litigants to let them know the courts

attitude to this line of cases – If you want to try and be clever in distinguishing

cases, we will not be impressed.

Celthene v WKJ Hauliers – Extension of principle to inland transport

[1981] 1 NSWLR 606

This case indicates that the Satterthwaite principles would be extended to inland
transport. Here the Ps had given a parcel to TNT and the agreement allowed for

the fact that someone else may carry it on their behalf. The exclusion clause

covered almost every possible event, and a sub-contractor and driver were sued.
Neither of them were parties to the contract. It was held that Eurymedon

(Satterthwaite) applied and the judge said that this would be in accordance with

commercial expectations. It was found that Reid’s criteria applied? We might think
that it was a bit of a stretch to see how they could apply to the driver. R v Clarke

not even mentioned here – that suggested that you should know of the offer and be

acting upon it. Here the driver clearly did not know of the existence of the
contract – but the judges said that that did not matter. It shows how the judges can

manipulate the rules or even ignore them – play “fast and loose” with the rules as

Denning said in Latec Finance

Life Savers (A’asia) Ltd v Frigmobile Pty Ltd

[1983] 1 NSWLR 431

took the view that The Eurymedon case was applicable to all forms of

transportation of goods per Huntley JA at 438

Pao On v Lau Yiu Long

[1980] AC 614 Privy Council

An act done before the giving of a promise can sometimes be consideration for it.

If done at promisor’s request, and on the understanding that the act was to be
remunerated, and the payment must have been legally enforceable if promised in

advance.

The promise here, not to sell under the main agreement was at D’s request. Parties
understood that request was to be compensated for and that such a guarantee

would be legally enforceable. The modern statement of the law is in Casey’s

Patents.

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Argued that there was no implication that restriction on selling was to be

compensated for. But the promise of indemnity must be linked back to the prior

promise not to sell.

There is also the question of the real consideration for the indemnity, being the

promise to perform the pre-existing contractual obligations to Fu Chip. There is no

doubt that a promise to perform a pre-existing contractual obligation to a third
party can be valid consideration – New Zealand Shipping. Unless the guarantee

was void for illegality, or voidable on grounds of duress, the extrinsic evidence

establishes that it was supported by consideration.

Duty required by law

Collins v Godefroy – witness expenses

[1831] 109 ER 1040

Plaintiff sued to recover compensation for loss of time in attending court as a

witness under subpoena. Held that since the law imposes a duty on people to turn
up, a promise of remuneration to do that which the court requires is without

consideration. The principle also applies to promises not to do that which the law

prohibits.

Glasbrook Bros Ltd v Glamorgan County Council – extra police

[1925] AC 270 House of Lords

During the 1921 coal strike, miners were involved in picketing which sometimes
led to violence. The colliery manager insisted on extra police cover and some 70

people were provided. Under a written agreement, Defendant promised to pay

specified amounts. When payment was sought, Defendant refused to pay. HELD
that any attempt by a public authority to extract payment for normal services

should be strongly resisted. If in any situation the provision of police is deemed

necessary, then it would not be proper to exact payment for those services.

However, where the person or institution under a duty has, in return for a promise

of payment, gone further than that duty requires, the additional performance can

constitute consideration. Where there is no public policy bar to the performance
of the duty being a matter of contract, then another person can acquire a right to

enforce the duty by a promise to pay for its performance. If the provision of extra

police was in excess of operational requirements, (as was the case here) then it
could be proper to ask for payment for it.

Popiw v Popiw

[1959] VR 197, Supreme Court of Victoria

The wife claimed an interest in the matrimonial home. She had left her husband,

and to encourage her to return home, he said that if she did return, he would put
the title to the home in their joint names. She returned and stayed for four weeks,

when she left again. Husband acknowledged obligation in affidavit.

Debts – Payment of lesser sum

The converse of a situation where a promisor agrees to pay an additional sum for

the same performance is that where a debtor owing a sum for a past act pays, with

the creditor’s agreement, a lesser sum to that which is due. As there is no
consideration supporting the creditor’s agreement, the creditor may not be bound

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by it and so be able to insist on payment of the full amount which was due.

Suppose you owe me $100 and I say give me $80 and I’ll forget the rest. Can I

after getting the $80 sue you for the balance of $20? What have you given to
render the promise to give up the $20 enforceable? If nothing, then no reason why

the $20 is not still recoverable.

Pinnel’s Case – horse, hawk or robe – variation required

(1602) Court of Common Pleas

P sued Defendant on a bond. The defence was that the Plaintiff had agreed to

accept £5 2/6d on 1 Oct instead of £8 10s on 11 Nov. This is quite a famous case,
but note that the most often quoted remarks from this case, in the light of the

facts, are obiter dicta

Held: Payment of a lesser sum on the day in satisfaction of a greater cannot be
satisfaction for the whole. But the gift of a horse, hawk or robe might be more

beneficial than the money. But where the whole sum is due, then in no way can an

acceptance of part of it be satisfaction for the whole. But payment of part of it
before the day on which the whole is due, might be more beneficial. Similarly, if I

am due to pay you £10 at Westminster, and you say that you will accept £5 at

York, then that will be good satisfaction for the whole.

Couldery v Bartrum – canary birds, or tomtits or rubbish of that kind

(1880) Court of Appeal UK

Clearly, in this case, the MR is indicating that he feels that the principle of Pinnel’s

case leads to some unsatisfactory, and maybe absurd consequences. “According to

English common law, a creditor might accept anything in satisfaction of his debt

except a less amount of money. He might take a horse, a canary, or a tomtit if he

chose and that was accord and satisfaction, but by a most extraordinary

peculiarity of the English common law, he could not take 19s 6d in the £ – that

was nudum pactum – it would not be accord and satisfaction. Now there are

situations in which creditors would be given less, if they could assure the debtor

that that would be an end of it, whereas if they pressed for the full amount, they
would maybe get nothing – the available funds would be taken up in legal

wrangling. How could you bind the creditors – “for not every debtor had got a

stock of canary birds or tomtits or rubbish of that kind” [I must say, I think that is
very funny – for a judge]

It was decided that if the creditors together decided that they would take less than

the full amount, the fact of that agreement between them would be counted as
consideration. That meant then that no one creditor could then try and go for the

whole lot, because that would give that creditor an unfair advantage. [this still

applies to compositions with creditors]

The other judge in the case took the view that – the requirement in our law that a

gratuitous contract should be under seal is not unreasonable.

Foakes (D) v Beer (P)

(1884) House of Lords

Plaintiff obtained judgment against Defendant for £2090. There is a statutory rule

that judgment debts carry interest. Defendant asked for time to pay, and Plaintiff
said if you pay me £500 on account and £150 twice a year, until paid off, I’ll not

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proceed to enforce the judgment or claim the interest. After the amount had been

paid off, Plaintiff claimed the interest. At trial, the judge held that Plaintiff could

not proceed for judgment and interest.

This case extended the concern which had been expressed in Couldery about

Pinnel’s case. Business people recognise that prompt payment without hassle

rather than having to press for the full amount. Isn’t a promise to accept less,
followed by an action for the full amount a bit like cheating? Why shouldn’t a

promise to accept less be enforceable? Otherwise the balance can be sued for

within 6 years. It is OK to pay less if you pay it earlier than it would otherwise be
due, or if the payment takes some different form to that which had been agreed to.

It seems to have been accepted that payment of a lesser sum by a third party in

full satisfaction of a debt releases the debtor

Budget Rent-A-Car v Goodman

[1991] 2 NZLR 715 High Court New Zealand

Additional cases

Coulls v Bagot’s Executor and Trustee Co – Joint promisees

(1967) High Court Australia

Arthur owned a property, and allowed a Construction Co to quarry on it with

royalties to be paid to himself and his wife Doris with payments “going to the

living partner”.

Where only one of 2 joint promisees provides the consideration for the promise, it

does not mean that the other promisee cannot benefit from it. However, the action

should be brought by both, and it may well fail if brought by one only.

Dunton v Dunton – Promise to remain sober?

(1892) Sup Ct Victoria

Mr Defendant promised he would pay £6-00 per month as part of a maintenance

agreement in return for his wife’s promise to conduct herself “with sobriety and in

a respectable, orderly and virtuous manner and provided she did no act that would
subject him or her to hate contempt or ridicule. HELD that this was not just a

promise to do what one was already bound to do – it was a promise which

involved surrendering a degree of liberty – it was a good consideration. The
dissenting judge thought that it was too vague to count as consideration. Yet one

has to ask, how can a person stipulate for what they want in return for the

promise, and then turn round and say that it doesn’t count as consideration?

Placer Development Ltd v The Commonwealth – Govt Subsidy

(1969) 121 CLR 353 High Court Aust

The Commonwealth provided that it would pay a subsidy on any timber on which
import duty had been paid and not remitted on export. HELD that a promise

combined with a discretion as to whether it will be carried out, amounts to no

promise (or no contract at all). A promise of a subsidy is meaningless if there is no
specification of the amount. There is no implication that a reasonable subsidy

should be paid, for there is no standard by which to judge such a thing. If the Govt

promises to pay such a subsidy as it thinks fit, then there is no contract. The
dissenting judge, Menzies J, said that if one asks whether there is a duty to fix a

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subsidy, the answer must be yes. Hard to imagine the parties giving the agreement

any other interpretation at the time. I do not regard a promise by the

Commonwealth to fix an amount as being illusory. Windeyer J, also dissenting,
said that ordinarily the court would have no difficulty, where an unspecified sum

is to be paid, in inferring that a reasonable sum was intended. A quantum meruit,

requires such a judgment. In this case there is no course of business dealing which
the court can use for comparison, therefore the court has no basis upon which to

substitute its own judgment. But because the court cannot make such a judgment,

it does not follow that the Commonwealth is released from the obligation to make
such a judgment.

To what extent should one have regard to the fact that this case involves the

expenditure of public money? Does this mean that one should avoid placing a
requirement to pay on a public (govt) body? Shouldn’t one expect a public body to

act as an ideal litigant, and to set proper standards of conduct – to act in an ethical

manner?

Ward v Byham – promise to keep child happy

[1956] Court of Appeal

The father of a child, promised the mother that he would pay £1 per week
maintenance, provided that the mother could prove that the child was well looked

after and happy.

Denning MR said that the mother could have brought affiliation proceedings, and
an agreement not to do so would have been good consideration [an agreement not

to pursue a legal right can amount to a detriment which constitutes consideration]

– but the mother did not think of that at the time. So it could be said that the
mother is only doing what she is obliged to do. Then Denning added, going against

basic doctrine on consideration – “I have always thought that a promise to perform

an existing duty should be regarded as good consideration, because it benefits
the person to whom it is given. If the father gets the benefit for which he has

stipulated, then he ought to honour the promise. The mother’s act completed a

unilateral contract.

Illusory promises

Discretionary promises

Where a promise may be said to be lacking in substance for some reason, the

court might well hold that even though it looks to be promissory, it is in fact not

so. This might occur for example, where the promise is lacking in substance – a
promise to carry someone on an aeroplane combined with an exclusion clause

which allows the carrier not to carry the person or effects, might be said to contain

no enforceable obligation at all. See MacRobertson Miller Aeroplanes – and
Cheshire and Fifoot.

Promises lacking content

Where there is a promise which has no discernible content, it might be said that

the promissory appearance is illusory. My offer to let you buy shares in a

non-existent company for example – See Cheshire and Fifoot and

Biotechnology Australia Pty Ltd v Pace

(1988) 15 NSW LR 130

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An option to participate in an equity scheme which does not exist.

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Networked

Knowledge
Networked Knowledge –

Law Lectures

Termination of an offer

Author: Dr Robert N Moles

Contract Law Homepage

A state of Injustice – table of contents
Losing Their Grip – The Case of Henry Keogh – table of contents

The Termination of Offers

In order for there to be a valid acceptance there must be an offer to which that

acceptance is a response. This principle requires not only that an offer has been

made but that it is in existence at the time of the acceptance. An offer may come
to an end in a number of ways.

Revocation

Rejection (explicitly or by counter-offer)
Termination (lapse of time)

Death

Condition bringing an offer to an end.

By Revocation

The basic requirement is that a revocation requires communication to the offeree

of the fact that the offer is no longer open. Under the postal rule, although an
acceptance is effective upon posting – a revocation is only effective UPON

RECEIPT

Byrne v Van Tienhoven – revocation requires communication

(1880) LR 5 CPD 344 Common Pleas Div

The court took the view that a revocation is not effective prior to its

communication, and that the posting of a letter of revocation does not constitute
communication of it.

The rationale is that a state of mind not notified cannot be regarded in dealings.

The principle is that the writer of an offer impliedly accepts that a posted answer
will be sufficient – and that the post office will act as agent for the purpose –

therefore delivery to the post office is delivery to the other party.

But this principle is not applicable to the withdrawal of an offer. Any other view
would lead to great inconvenience. Nobody could act on an acceptance until a

further stage had been gone through of confirming that a revocation had not been

sent to them in the meantime.

A counter offer kills the original offer

If you respond to an offer by putting forward an alternative proposal, it will likely
be regarded as a counter offer, the effect of which will be to terminate the original

offer.

If A offers to sell something for $100 and B says I’ll give you $95, if A says NO, B
then cannot say OK I’ll give you $100 and insist upon the completion of the

contract. See Hyde v Wrench

But remember the Butler Machine Tool approach – we could try to get away from

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the traditional to-ing and fro-ing of the offer counter-offer analysis and say look at

the transaction as a whole – what then?

Remember also the United Nations Convention on Contracts for the International
Sale of Goods which indicates that an acceptance with only minor modifications

will not be construed as a counter-offer. It came into force 1 April 1989 and has

altered Australian law – see ACT Sale of Goods (Vienna Convention) Act 1987.

We will also look to see whether we can distinguish between a counter offer and a

request for more information Stevenson Jacques – and the effect of death upon an

offer – Laybutt.

Communication of the revocation does not have to be by or on behalf of the

offeror.

Dickinson v Dodds -communication by 3rd party

(1876) 2 Ch defendant463 Court of Appeal UK

Here we had an agreement to sell which was “to be left over to 12 June 9am” – in
effect it was only an offer. Before he accepted the offer, the offeree was told by a

third party that the offeror was selling the property to someone else. The plaintiff

then did all he could to accept the offer. The offeror then told him that it was too
late, and the property had already been sold.

Well, there was no consideration to keep the property unsold until 12 June, despite

the fact that one or maybe both of them thought that they were so bound i.e. that
the promise imposed some obligation, at least upon D. There is no authority which

requires an express retraction – if the plaintiff knew that the defendant no longer

wished to sell to him, even if he had only heard it “on the grapevine” then the
revocation was effective. Prior to the purported acceptance of the offer, plaintiff

knew that defendant had revoked.

This case does not affect the requirement that a revocation of an offer must be
communicated – but a revocation does not require specific language or form –

there is no requirement that the revocation must be communicated personally by

the offeror.

Could it have been said that a revocation must be in similar mode to that of the

offer – or better – telephone and telephone, writing and writing. Could there be a

feeling of injustice that the offer seemed to have some formality about it, but that
the revocation had none? Or was plaintiff just trying to take advantage of

“technicalities”?

Stevenson Jaques & Co v McLean – A “mere inquiry” not a counter-offer

(1880) 5 QBD 345 Queen’s Bench Division

Traders wanted to sell some iron and indicated the price they were looking for.
The plaintiffs, being brokers, would only buy once they had lined up a buyer to

take from them. Early one morning, before trading on the market began, they rang

the traders to find out what flexibility there might be to negotiate before getting in
touch with potential buyers. The market was unstable and the plaintiff wanted to

know the negotiating range. “please wire whether you would accept 40 for delivery

over 2 months, if not, longest time limit”

Here, the court took the view that because the telegram was not a counter-

proposal, but a mere inquiry it should not have been treated as a rejection of the

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offer.

As no notice of withdrawal was given by the offeror the plaintiff could regard it as

a continuing offer, and their acceptance of it made the contract complete.

If at the moment of communication of the revocation there had been no

acceptance, the offer comes to an end and no contract can ensue (unless

something happens to revive the offer). This proposition is subject to a
qualification in the case of a unilateral contract in a situation where, prior to

acceptance, the offeree has already embarked upon actions forming part of or

moving towards acceptance of the offer.

Veivers v Cordingley – acceptance when consideration commences

[1989] 2 Qd R 278 Full Court Supreme Ct Queensland

C was trying to buy some property which would have been worth a lot more to
him if he could get permission to subdivide the plots. After some complicated

exchanges, C said that if V could get the necessary permissions, V would pay an

extra $200,000.

V set about getting those permissions, and whilst he was doing so, C purported to

withdraw his offer. It was held that C’s promise was a promise by C in return for

an act to be done by V which, when performed, would form the consideration for
C’s promise and make him indebted for the amount of the promise.

Starke J in R v Clarke said, “any person knowing of the offer, who performs its

conditions, establishes prima facie, an acceptance of that offer”. All that V did
was in the hope that approval would earn him the sum. Unlike Clarke V had no

other motive for doing what he did.

C claimed that no valid approval had been given, at least not within the 12 months
specified, and that the offer had been withdrawn before the approval was given

and the offer accepted. Was it open to C to do so – could he retract the offer?

Normally an offer may be withdrawn before acceptance. But it may be different
where we have a unilateral contract, and the promisee has already started the act

which when completed will constitute the acceptance of the promise.

Abbot v Lance (1860) is authority for the proposition that although as a general
rule an offer may be retracted before acceptance, if it is in the form of an offer for

an act, then acceptance takes place when the offeree elects to do the relevant acts

or act the offer becomes irrevocable once the act or acts have been partly
performed.

That decision would lead to judgment for V. C knew that V was making active

efforts to obtain council approval. He incurred legal expense with regard to the
appeal and for surveyors’ expenses for the new plan. It was only after much effort

and expense had been incurred that C purported to withdraw the offer – when he

knew that V had partly performed the acts which would constitute the
consideration. On the authority of Abbott it was no longer open to him to do so.

Actual communication of revocation is necessary and appropriate where the

offeree is identifiable. Where an offer has been made, not to an individual or small
and ascertained group of people, but to an indeterminate number (such as the

readership of a particular newspaper), actual communication may be impossible.

Does this means that such an offer cannot be revoked?

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There is no clear Australian or English authority. See Shuey v United States.

Can you revoke an offer after consideration has commenced?

(1875) 92 US 73

Options.

An offer is revocable even within any time limit for which the offer is said to be
open, unless there is separate consideration for the promise to keep the offer open.

In this case, there is then a separate contract – to keep the promise open for a time,

and this type of contract is called an option.

They are most useful where the person who is thinking of entering into a major

contract, wishes to have some time to carry out further investigations or

evaluations. If those investigations involve the commitment of some resources
(time, money) then the person conducting them would like to try to guarantee that

if successful, they can reap the benefit of that initial expense. The option is then a

way of encouraging this initial involvement prior to making a major commitment –
it keeps one’s “options open”.

So, an offer is revocable, within any specified time limit, for which the offer is said

to be open

Dickinson v Dodds – offer withdrawn within “time limit”

(1876) 2 Ch defendant463

One of the parties had “agreed to sell” a property to the other, the offer to be held
open for a number of days. The so-called agreement was of course nothing more

than an offer. The prospective buyer had heard that the vendor was selling it to

someone else, and so attempted to give him notice of the acceptance. It was held
that so long as the buyer knew that the other party intended to deal elsewhere, the

offer was revoked. It did not matter that the buyer had not heard of it from the

vendor himself.

Unless the promise to keep the offer open for a specified period is supported by

consideration, i.e. it is a valid option.

An option is really a guaranteed opportunity to do something – the guarantee takes
the form of a contract. An option to purchase within a specified time, or at the

expiry of a lease would be an example. They are more commonly encountered in

connection with land transactions.

An option is, in effect, a useful way to keep an offer open. There are two ways of

looking at it –

The two contract view

The option itself constitutes a contract – which requires the offer to remain on the

table for a specified period. If the option is exercised, then another contract comes
into being at that time.

The one contract view

A contract comes into being when the option is granted, but it is subject to a
condition subsequent, such that if the condition is not fulfilled, the contract

terminates. Automatic termination unless something further is done, looks a bit

like the creature we mentioned earlier – the contract which excludes all liability.

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If a contract is established which terminates automatically unless something

further is done, it looks a bit like a contract without obligations (at least for the

grantee) – nevertheless, it is a well established part of our law.

Goldsbrough Mort v Quinn – Conditional contract or irrevocable offer?

(1910) 10 CLR 674 High Court of Australia on appeal Sup Ct NSW

The defendant gave the plaintiff an option with regard to the purchase and lease of
land. The option was to last for one week. Before the expiry of that time,

defendant repudiated the option, saying it had resulted from a mistake. Plaintiff

accepted the offer within the week.

The court re-iterated the standard view that a mere promise to leave an offer open

for a period of time makes no difference – it is unenforceable. But if there is

consideration for the promise it becomes binding – “an option given for value is not
revocable”. One of the judges took the view that what we have is a conditional

contract. Another took the view that we have 2 contracts – a unilateral contract

that the offer would stay open. An injunction could have been used to prevent a
sale to another during that time. Otherwise, an acceptance turns the position of

optionee to that of vendee. That has been done here. When the judge says that

specific performance of the original agreement is not only inappropriate but also
impossible, what does he mean? One can of course obtain specific performance of

the main agreement.

Contractual obligations after death of party

Laybutt v Amoco – option – death of grantee / grantor

(1974) 132 CLR 57 High Court

Australia

The general rule is that upon the death of a party, contractual liabilities pass to

that person’s personal representatives. This does not apply if the contract is for

personal services which require the exercise of personal skill and judgment.

It is important then to figure out if an option creates the type of contractual right

which continues in existence after the death of one of the parties, or whether it is

something less than that which ceases. To determine how death affects an option
we have to see whether the death is that of the

Grantee – the holder of the right to exercise the option or of the

Grantor – the person who has provided the option

Death of grantee ? Where death is that of the grantee, whether seen as a contract

or as a proprietorial right, the result is much the same, and the option may be

exercised by or on behalf of the grantee’s estate.

Death of grantor? If there is a contract subject to a condition, then the contract

continues to bind the representatives of the grantor post mortem. If the option is

an offer + a contract, then the question arises as to whether the offer lapses upon
the death of the offeror [this is the ordinary rule relating to offers] Should it be

different where the offer is such that the offeror could not have revoked it inter

vivos? There are a number of conflicting cases in Australia and the UK

Claim to equitable interest? On either view of an option, there is a contract – but if

the contract is only not to revoke an offer, then clearly it cannot give rise to an

equitable interest in the land. However, a conditional contract to sell would clearly
create an equitable interest in the land and which could be protected by a caveat

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although it would be contingent.

Spiro v Glencrown Properties Ltd – is contract creation or exercise of option?

[1991] Ch 536 Chancery Division

Was “the contract” the exchange of documents creating the option or the letter by

which the option was exercised? If the latter – then it did not comply with

statutory requirements.

The judge in this case took the view that there are “two metaphors” which are

sometimes used to explain options – “irrevocable offers” and “conditional

contracts”. He said that strictly speaking, an option is not either an offer or a
conditional contract. It does not have all the incidents of the standard form of

either of these concepts – it is a relationship sui generis. ‘There are ways in which

it resembles each. Both of the analogies are, in the proper context, valid ways of
characterising the option situation.

By lapse of time

An offer will not remain open indefinitely. It will come to an end at the lapse of

time specified in the offer or at the end of a reasonable time if no time is specified.

What is a reasonable time will depend upon the nature of the transaction and the
circumstances as a whole.

Manchester Diocesan Council

[1970] – we looked at this case in the lectures on OFFER

This case makes a number of important observations about the nature of

acceptances – 1.Offeror may specify that an acceptance be provided in a

particular way, without requiring that acceptance be communicated.

2. The offerer may specify that they will not be bound unless the acceptance is

provided in a particular way. However, if acceptance is communicated in some

other way, the offeror may waive the right to insist on that precise method.

3.Where the offerer does not insist that only that one mode will suffice, any other

no less advantageous method of acceptance will conclude the contract.

Condition bringing an offer to an end.

Expressly stated or implicit in the offer may be an understanding upon which the

continued existence of the offer depends. If that understanding is no longer met,
the offer comes to an end.

Financings Ltd v Stimpson – hire purchase – car damaged – then offer “accepted”

[1962] 3 All ER 386

Many people, when they buy a car from a car dealer, do not realise that they are
in fact buying the car from the finance company who will pay the dealer the price

of the car, and then recoup the payments from the purchaser. Here, the defendant

signed a form, “offering to buy” a car on hire-purchase from the finance company.
Before the company had accepted the offer, the car had been stolen and damaged.

Not knowing of this the finance company then accepted the written offer which

had been sent to them. Defendant refused to pay the charges and the Co sued him
for breach of the hire purchase agreement. It was held that D’s offer was subject to

an implied condition that the car should continue in its undamaged state and that

on the failure of that condition, the offer lapsed.

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Death

It is said that the death of the offeror will bring the offer to an end. However, the

effect of the death of the offeree or offeror on an offer is a matter of the apparent
intention of the parties. Hence, if there is a personal element in the proposal, even

if a contract could still be performed, it is likely that the inference would be that it

is only capable of acceptance if the parties are still alive (or were in some
circumstances to remain in good health). On the other hand, an option for the

purchase of property in which there is no personal element would be exercisable

irrespective of the death of one of the parties. Carter v Hyde (1923) 33 CLR 115

Rejection of the offer

Clearly an outright rejection of an offer brings it to an end. It is usually stated that
a counter-offer terminates the offer to which it is a response on the assumption

that a counter offer always amounts to a rejection of the original offer. But is this

necessarily so? See Butler machine Tool Ltd v Ex-Cell-O Corp.

Contracts that are illusory, incomplete or

uncertain

An agreement is not binding as a contract if it lacks certainty either:

(a) because it is too vague (i.e. linguistically uncertain) or
(b) because it is obviously incomplete.

Traditionally the area of certainty in contract was very much a reflection of the

classical 19th century view of contract that parties must make their own deals.
The courts will not fill in any gaps – they did not think it was for them to perfect

an imperfect contract.

If the parties are not clear in what they meant OR
if they have left things to be agreed upon later, then the courts will say

“Sorry you haven’t really made a contract.” It was up to you to make a contract and

the job of the court is simply to enforce the contract which you have made.

In recent times there has been a change of attitude (although the prevailing view is

that the parties must have provided some formula in the contract by which the

court can determine whether the requisite certainty has been reached). The courts
have been more prepared to read into contracts terms which will make the

agreements fair and reasonable in all the circumstances. This is particularly so, if

the parties have gone some way in carrying out their agreement so that turning
back is difficult, i.e. if there has been some element of reliance. If however, the

uncertainty cannot be cured, then it may be used as another way of saying that the

parties did not intend to create legal relations. Therefore intention to create legal
relations and uncertainty are sometimes intertwined.

Illusory consideration

The hypothesis upon which this principle is based is that a promise to do

something at the sole discretion of the promisor is not a legal obligation at all. If

the promise is part of the consideration for the alleged contract, the contract
remains unenforceable as long as it is executory. If performed on the other side,

the promise remains devoid of content, although other parts of the consideration

may be enforceable.

Biotechnology Australia Pty Ltd v Pace

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(1988) 15 NSWLR 130 Court of Appeal Supreme Ct NSW

Here we had a contract of employment with an option to participate in the

Company’s senior staff equity sharing scheme. There was no such scheme at the
time, and none was brought into effect. The judge referred to the tension which

exists in the law – the desire to uphold a contract – the unwillingness to uphold

terms which are unacceptably ambiguous or uncertain. Much hinges on the fact,
and although courts will try to enforce agreements, they will not spell out the

agreement where the parties have failed to do this for themselves. Although the

provision may have been important to Dr Pace, it is too uncertain, and there is no
proper standard to assist with its resolution. Allen J dissented – at least the

company should behave honestly and reasonably, and that expert evidence could

be of some guidance as to what it would be reasonable to do.

The principle is readily applied to the payment of a bonus over and above the

ordinary salary or a commission for a one off service

Kofi-Sunkersetti v Strauss – commission to be paid at discretion of company

[1951] AC 243 Privy Council

The agreement between the parties provided that a “commission is to be paid to me

by the company which I have agreed to leave to the discretion of the company”. It
was held that the court could not determine the basis and rate of the commission.

If the court was to do so, it would involve making a new agreement for the

parties

and varying the existing agreement by transferring to the court the exercise of the
discretion vested in the company.

But could the court not have said that the discretion was as to the AMOUNT of

the payment, not as to whether a payment was to be made at all, and that in the
event of the company failing to make any payment, the court could substitute a

reasonable amount as suggested by Allen J in Biotechnology and in Way, which

follows. .

But where the discretion applies to remuneration for a job extending over a

period, a court is likely to conclude that it was never the intention of the parties

that the performer should act gratuitously.

Way v Latillar – commercial agreement not gratuitous, reasonable sum

[1937] 3 All ER 759

In the case of a commercial or employment agreement under which the promisee

provides services, the proper conclusion to be drawn is that the services or

consideration were not intended to be performed gratuitously. In the absence of
express words, it will be proper to conclude that the services were to be paid for

by reference to some standard of measurement. The usual standard is that of

reasonable remuneration based on some market or industry criteria. Where there
is a firm promise to pay, the conclusion that the consideration was illusory, will

only be drawn where no standard exists by which the promise can be valued. But

even where no objective criteria can be found, it may be possible to infer a
promise to act honestly and reasonably.

Powell v Braun – if not discretionary, then reasonable sum

[1954] 1 WLR 401 Court of Appeal UK

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A secretary was promised a bonus based on net profits of the company instead of

a salary increase. Evershed MR said that the parties did not intend the bonus to be

purely discretionary. Once determined that the payment was not discretionary,
then inevitably it means a reasonable sum. The principle of a quantum meruit or

reasonable remuneration (which comes to the same thing) applies just as much to

additional remuneration as where it is the only remuneration.

The Problem

A contract is incomplete if a vital term is not provided for and there is no way of

filling the gap that has been left.

Coal Cliff Collieries v Sijehama (1991) 24 NSWLR 1

It is established law in England and Australia that agreements to agree or contracts
to make contracts where the terms have not yet been ascertained are not legally

enforceable. Until the terms are agreed the person can withdraw from the

arrangement. May & Butcher – agreement to agree no contract at all – to be
binding there must be a concluded agreement which settles everything which is

needed to be settled and those things to be determined should not be subject to

agreement between the parties. In Australia this is settled law, see Masters v
Cameron – Booker Industries. .

The important question of course is “what are those things which are needed to be

settled”? There is much difference of judicial opinion about how particular we
should be about these things.

Masters v Cameron – subject to formal contract

(1954) 91 CLR 353 High Court of Australia (Supreme Ct WA)

An agreement was reached to sell a farming property subject to the preparation of

a formal contract of sale which shall be acceptable to my solicitors on the above

terms and conditions.

There are 2 possibilities – either we have a binding contract, or else we have a

record of the terms which have been agreed so far, and which will provide the

basis of the contract which is to be finalised.

1. The parties have finalised their agreement and intend to be bound straight away,

but intend to put it into more precise form. An assent without power to vary the

terms indicates a completed contract.

2. They have agreed all the terms, but have made performance of one or more

terms conditional upon the execution of a formal document.

3. The parties do not want to be bound until they have completed the formal
document. Here, the parties may wish to retain the right to withdraw, if agreement

cannot be reached on outstanding matters. In this case if “subject to contract”

means there are terms to be agreed, or conditions to be fulfilled, then there is no
contract until those things have been done.

The courts are ready to try to provide the missing element though they may feel

prevented from doing so where, for example, the parties specifically express the
intention that it is for them alone to agree upon that element

May and Butcher Ltd v The King (1929) [1934] 2KB 17 – discussed in

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Sijehama.

This makes it difficult to understand what effect can be given to an agreement to

negotiate

Walford v Miles [1992] 2 AC 128

Unanimously held that a bare agreement to negotiate has no legal content.

Coal Cliff Collieries v Sijehama

A statement in a “heads of agreement” for a proposed complex joint venture for a

coal mine said that the parties “would proceed in good faith to consult together

upon the formation of a more comprehensive and detailed Agreement”. Held to be
too vague or uncertain to be enforceable. Kirby – plaintiff rejected the idea that

such contracts were intrinsically unenforceable and that in some circumstances a

promise to negotiate in good faith can be enforceable. It will depend on the
construction of each particular contract.

Possible solution – a “machinery” clause

By machinery is meant a term which either deals specifically with the means of

completing the contract (eg the price shall be fixed by a third party valuer)

or provides a mechanism for resolving disputes (such as an arbitration clause).

Cases in the first category are relatively straightforward for two reasons

1. the common law long accepted that the price may be fixed by the contract, or in

a manner agreed by the contract, or determined by a course of dealings by the
parties – now enacted in the Goods Act (Vic) and Sale of Goods Act (NSW) s13

(1). This would obviously include a price fixed by the valuation of a third party

s14(1)

2. the leaving of the price to the decision of a 3rd party will usually bring with it

the implication of a formula requiring a reasonable price to be set between the

parties

Problems arise with this 2nd category, because arbitration is a means of settling a

dispute about an existing contract, and not as a means for bringing the contract

into existence.

May and Butcher v The King – see above

Whitlock v Brew – sale and leaseback, uncertainty, severability

(1968) 118 CLR 445 High Court of Australia

This was one of those sale and lease-back arrangements. A person wants to sell

property which they own to raise capital, but they still want to carry on their

business on those premises. What they can do is to sell the property to another,
subject to the purchaser allowing them to take a lease for a suitable period of time.

In this case, the sale was to be subject to a condition that the purchaser would

then lease that part of the land at present used for the sale of Shell products to
Shell upon such reasonable terms as commonly govern such a lease. The issues

dealt with in the case were

Uncertainty The court took the view that even if the land to be subject to the lease
could be identified, and the commencement date could be determined, on no other

matter does the document indicate what the provisions are to be. “Commonly

govern” might have worked, if there were a set of reasonable terms in common

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use – but this was not the case here.

Arbitration The agreement provided for disputes to be referred to arbitration – but

this will not allow the arbitrator to force upon the purchaser such terms as are
reasonable and ought to govern the lease – this would be to alter the contract.

Even so, we could argue that this is what the parties have consented to – and

doesn’t the objective view do this in a whole variety of situations?

So if we cannot make enough sense of the lease-back provisions, can the rest of

the agreement stand if they are struck out? This is what is referred to as

Severability Clearly the person selling had no intention of granting vacant
possession without the provision for lease-back. To allow the sale to stand without

the lease would be to change the nature of the agreement which may give an

additional and considerable advantage to one of the parties, and a considerable
disadvantage to the other. They parties cannot be held to something which they

have not agreed to therefore there is no contract of sale

Such machinery will provide a resolution of the difficulty as long as it is possible
to infer that there is already a contract, notwithstanding the fact that some term in

the contract is potentially uncertain.

Court will state possible meaning

Council of Upper Hunter v Australian Chilling – more than one meaning not

uncertain

(1968) 118 CLR 429 High Court of Australia

The Council agreed to supply electricity to the Company with provision for a price

variation which would reflect changes in its own costs, with provision for
reference to arbitration in the event of a disagreement. That there is more than one

meaning does not mean that a contract is void for uncertainty. If it is capable of a

meaning, it will bear the meaning which the court thinks is its proper construction.
Only where the language is so obscure and incapable of any definite or precise

meaning, so that no intention could be attributed to the parties, would it be void

for uncertainty. If the words were meaningless, then an arbitration procedure
would not save the agreement.

It is also clear that the further the parties have pursued the agreement, the more

likely it is that the courts will imply reasonable terms to give effect to it.

Sykes v Fine Fare [1967] Denning MR. They will be more likely to strike down an

agreement which is purely executory, than one which is partially completed..

It is doubtful whether the agreement to arbitrate provides more than an incentive
to apply a formula that is implicit in the clause giving rise to the uncertainty

Meehan v Jones – subject to finance

(1982) 149 CLR 571 High Court of Australia

This case involved a contract for the purchase of property which was “subject to

suitable finance being available”. Defendant argued

1. that the condition left vital matters yet to be agreed – so what appeared to be a

“contract” was really no more than an agreement to agree.

2. that the language was so imprecise that one could not say what actions would
satisfy it

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3. that if plaintiff retains discretion as to whether they will perform obligations,

then what appears to be a contract is really illusory.

Does the “subject to finance” indicate a subjective or objective test? Is the finance
to be satisfactory to the purchaser? Or is the condition fulfilled if finance is

available which the purchaser ought to find satisfactory? In Australia and NZ, the

courts find “subject to finance” not void for uncertainty. NSW has been an
exception, and they have found the clauses void, whether objective or subjective.

– Moran v Umback [1966]

Satisfactory means “to the purchaser”. An adventurous purchaser should not be
prevented from proceeding because a reasonable person might have been more

cautious – and a cautious person should not be required to proceed if there is

genuine concern over the finance – the clause is to protect the purchaser. Whilst
one may expect a purchaser to act honestly, there may be an implication that the

purchaser will make reasonable efforts to obtain finance. To say void for

uncertainty would be draconian – many cases where agreement depends on
finance to complete.

Murphy J took the view that there is NO justification for implying that the

purchaser must act reasonably.

As is the case where a contract which might otherwise be uncertain has been

performed at least in part

Foley v Classique Coaches Ltd

[1934] 2 KB 1

A problem will arise if the machinery provided for in the contract breaks down for

reasons over which the parties have no control. The traditional common law rule
was that if the means for ascertaining the price failed, there could be no contract

Sale of Goods Acts s14 NSW

Where there is an agreement to sell goods on terms that the price is to be fixed by

the valuation of a third party and where such third party cannot or does not make

such valuation the agreement is avoided.

George v Roach – no valuation, no sale price, no agreement

(1942) 67 CLR 253 High Court of Australia

A case concerning the sale of a business in which the High Court followed s14 and
said

The value of the newspaper agency is fixed through, and by means of, a valuation

and by no other means. Unless a valuation is made the parties have not agreed
upon the sale price of the subject matter of the agreement and the agreement does

not become effective.

However the law in England has changed

Sudbrook Trading Estate Ltd v Eggleton [1983] AC 1 House of Lords

Where the parties have failed to agree on the appointment of an umpire to resolve
a difference of opinion between two valuers, the House of Lords implied an

obligation to pay a reasonable price. Lord Fraser “I see the reasoning which leads

the court to say that they will not substitute their own machinery for that of the

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parties, but the result that it leads to is so remote from what the parties intended,

and so inconvenient that there must be some defect in it.” The valuers’ profession

is more established than it was in the 19th C. Often people do not distinguish
between a sale at a fair value, and a sale at a value to be ascertained by valuers.

It is doubtful whether the law in Australia will follow the same route

Booker Industries v Wilson Parking (1982) 149 CLR 600 High Court of

Australia

In a lease for a service station and car park, a clause provided an option for a
further 3 years at rent “to be mutually agreed. If agreement could not be reached,

then the matter was to be referred to arbitration”. The court took the view that

there was clear authority to the effect that the courts will not enforce an
incomplete agreement – an agreement to agree – if the lease was simply for

renewal at “rental to be agreed” there clearly would be no enforceable agreement.

Yet parties can provide a procedure which allows even essential terms to be

determined by a 3rd party. Where the lease provides a mechanism to determine

the rent – no further agreement is required of the parties. Thus there is a valid

agreement to renew – to give business efficacy to the arrangement, it is necessary
to imply a term that the parties will do what is necessary to ensure the

appointment of an arbitrator.

If there is a mechanism or procedure to deal with the missing term, it is not right to
say that there is not a concluded contract and no reason why the court should not

order specific performance.

Possible solution – a “formula” clause

A contract will not be incomplete where a formula exists to provide the missing

term. The Sale of Goods legislation reproduces the common law rule that, where
no price is fixed by or determined in accordance with the contract, “the buyer must

pay a reasonable price” (s13(2)). But the scope of this principle is relatively

narrow.

It has been held not to apply to assist in rendering certain an option to repurchase

land at the original selling price plus and minus amounts to cover various

improvements and depreciations to the property including the chattels thereon.

Hall v Busst (1960) 104 CLR 206

The grant of an option for the purchase of land allowed for additions and

improvements to the property purchased by the grantor and a reasonable sum to
cover depreciation of buildings and property. HELD the option was not

enforceable. It is not that the word “value” is meaningless – nor is the expression

“a reasonable sum to cover depreciation”. Giving meaning to such words is what
the courts do every day. For a contract for the sale of land there cannot be a

binding contract without 3 essential elements are the subject of a concluded

agreement – the parties – the subject matter and the price. If these are fixed with
certainty, the courts will supply the rest. If the parties are silent as to price, there

can be no implication that a reasonable price is to be paid, even if the agreement is

expressed to be “for a reasonable price”.

Windeyer J dissenting said that as in Joyce v Swann (1864) the price not being

named it must be assumed they meant a reasonable price. When parties agree to

sell for a reasonable price the agreement is complete.

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In Wenning v Robinson [1964-65] NSWR 614 the Full court of the Supreme Court

of NSW after reviewing the authorities including Hall v Busst, took the view that a

contract providing for the sale, of “stock at valuation” being the stock of a clothes
shop was a valid contract.

Hall v Busst may not conform to the more modern approach of attempting to

uphold a contract if at all possible. Where a contract provides a formula instead of
a precise rate for goods or services or whatever is being supplied, the courts will

attempt to give effect to the formula in order to render the contract effective

Council of the Upper Hunter v Australian Chilling – discussed above

Where a contract appears to give a party a total discretion whether to perform, it

is possible to impose a limit on that discretion so that a court may review the

circumstances in which it might be validly exercised

Meehan v Jones (1982) 149 CLR 571 High Court of Australia – discussed above

Uncertainty

Types of uncertainty and their possible resolution

The contrast is with ambiguity. A contract is only uncertain and therefore not a

valid contract if the ambiguity cannot be resolved.

Raffles v Wichelhaus (1864) 159 ER 375

The contract was for cotton to arrive “ex Peerless” from Bombay . However, there

were 2 ships called Peerless, and each happened to be leaving the port on different
dates. The purchaser said they intended one of them and the vendor clearly

intended another. Because there were 2 ships with that name, the agreement as

expressed was incomplete. With such divergence of intention there was no
expressed agreement – no consensus.

Normally, however, the fact that there are alternative meanings which can be

attributed to a contractual document does not amount to uncertainty because the
document will bear the meaning which the court places upon it.

Stewart v Kennedy(No 1) (1890) 15 App Cas 75

The fact that a term may give rise to different meanings, does not mean it will not

be given full legal effect according to the meaning put upon it by the court.

Upper Hunter Council v Australian Chilling Co – discussed above

Goldburg v Shell Oil Co of Australia (1990) 95 A.L.R. 711

Here we had an agreement to run a business which was breached by Shell who

argued there was no contract.

The trial judge found that a contract existed between the parties notwithstanding

that they had failed to reach agreement on items of relatively minor importance.

The majority was prepared to put their faith in the finding of the trial judge.

Dissent – for a contract for a lease to be valid, it must be certain. It is uncertain if

the commencement date is not defined (Harvey, 1965). That date was not defined

because neither party knew when the current occupiers would move out. There
was consequently no contract. “In my opinion, once the date of commencement

was known by all parties to be uncertain, and this was known in March 1986,

there remained between them only an arrangement or understanding in principle

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which was not contractually binding.” NB the uncertainty appears to have arisen

after one might have thought that the contract came into being – how could this

turn a binding agreement into a non-binding agreement?

Banque Brussels (1989)

The whole thrust of the law today is to attempt to give proper effect to

commercial transactions. It is for this reason that uncertainty, a concept so much
loved by lawyers, has fallen into disfavour as a tool for striking down commercial

bargains. It the statements are appropriately promissory in character, courts should

enforce them when they are uttered in the course of business and there is no clear
indication that they are not intended to be legally enforceable.

Severance of an inessential and uncertain term

Even if a particular term is so ambiguous that a meaning cannot be attributed to it,

the contract will not fail if the term in question can be discarded without affecting

the substance of the transaction

Life Insurance Co of Australia v Phillips – extrinsic evidence

(1925) 36 CLR 60 High Court of Australia (from Supreme Ct Victoria)

This case involved some insurance policies which had complicated provisions for
making loans. The plaintiff brought an action claiming that the policies were

induced by misrepresentation and that they were void.

The case for admitting extrinsic evidence there was that there be more than one
meaning, or that there be ambiguity. This allows that wherever there is ambiguity,

evidence can be admitted to show the intention of the parties. Unless both parties

understood the words in the same sense, there is no consensus and no contract.
This proposition is not warranted on principle or by authority. Most documents are

capable of more than one meaning.

The general rule however is that extrinsic evidence is not allowed to prove that the
intention of the parties was other than as appeared on the face of the document.

That the words are capable of more than one meaning is not enough to allow for

such evidence. Even if the provisions relating to the loan were uncertain, they
could be severed from the rest of the contract which was not uncertain.

When a contract contains a number of stipulations one of which is void for

uncertainty, the question of whether the whole contract is void depends on the
intention of the parties to be gathered from the instrument as a whole. If divisible,

the void part may be separated from the rest and does not effect its validity.

Nicolene Ltd v Simmonds [1953] 1 QB 543

Contract void if severance not possible

Severance is not possible where the term is an integral part of the consideration
upon which the contract is based. Whitlock v Brew – discussed above

Absurdity ignored in favour of obvious meaning

A common fault is the inclusion or omission of a negative with the result that a
contract or part of it has the opposite meaning of what was intended. A court may

give the contract its intended meaning where that is obvious whether or not it

involves the insertion or exclusion of a word. In other words it is not based upon
grammatical severance (exclusion) of a particular word or clause.

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Fitzgerald v Masters (1956) 95 CLR 240 High Court of Australia (Supreme Ct

NSW)

Booker Industries v Wilson Parking – (1982) 149 CLR 600

Conditions Precedent and Subsequent – Contingent and Promissory

Perri v Coolangatta Investments – precedent to contract, or performance?

(1982) 149 CLR 537 High Court of Australia (Court Appeal, Sup Ct NSW)

This involved an agreement for the sale of property subject to the purchasers

completing a sale of their own property. The vendors became increasingly
concerned about the delay in completing, and served a notice to complete and

then terminated the contract. Some time later, the purchasers said they were

willing to go ahead, and eventually they sold their property. They, in turn asked
for SP of the contract of sale.

Mason pointed out that there was a difference between a condition precedent [to

the contract] and a condition subsequent [to the contract] – the latter allowing for
termination of the contract if it is not fulfilled. The courts tend to favour a

construction which sees the condition as being a condition subsequent rather a

condition precedent – or to put it another way, which sees the condition as being
precedent to performance, rather than as precedent to the contract. The judge,

very interestingly, gives the strategic reason underlying this point of view. It is

because it gives the courts greater scope in adjusting the rights of the parties. Why
is this? Well, if the condition is a condition precedent – and not fulfilled – there is

only one outcome – no contract. But if it is a condition subsequent, then (all other

things being equal) there will be a contract, but one which has been breached in
some way. The courts then can provide a remedy commensurate with their view

of the seriousness of the breach. There was a clear statement here that the court

will not find a condition to be a condition precedent (to a contract), unless the
document plainly compels this conclusion.

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Networked Knowledge – Contract Law

Casenotes

Carlill v Carbolic Smoke Ball Co. [1893] 1 QB 256; [1891-1894] All E.R. Rep.

127, Court of Appeal

[This version of the judgment has been edited by Dr Robert N Moles

Underlining where it occurs is for editorial emphasis]

Contract Law Homepage

A state of Injustice – table of contents

Losing Their Grip – The Case of Henry Keogh – table of contents

The defendants were the manufacturers of an influenza remedy, the carbolic

smokeball. In a newspaper advertisement the defendants offered £100 “reward” to

any person contracting influenza having used the remedy in accordance with the

company’s directions. The advertisement also stated that the defendants had

deposited £1000 with the bank to show the sincerity of their offer. The plaintiff on

the faith of this offer bought and used the remedy in accordance with the

directions, but shortly after, contracted influenza.

In demonstrating the versatility of a good counsel, D argued that:

1. The transaction was a bet under the Gaming Act – not enforceable.

2. The transaction was an illegal policy of insurance.

3. The advertisement was a mere “puff” – never intended to create legal relations.

4. There was no offer to a particular person and that one cannot contract with

everyone.

5. If there was an offer, P failed to notify the acceptance.

6. The terms of the offer were too vague in failing to specify when the influenza

should be contracted.

7. There was no consideration flowing from the plaintiff.

HELD – Lindley LJ

His Honour rejected the first two arguments as not worthy of serious attention. He

held in respect of the following points that:

The claim that the advertisement was “mere puff” was inconsistent with the

statement that £1000 had been deposited in the bank as proof of the defendant’s

sincerity.

While the offer was made to the world at large, the offer was accepted only by

those performing the stated conditions.

The nature of the offer is such that notice of acceptance need not be given, only

notice of performance. Generally acceptance should be notified, but in this case

the defendant waived this requirement.

The terms were sufficiently certain. The advertisement should be read as requiring

that influenza be contracted within a “reasonable time”.

The argument that the plaintiff provided no consideration was rejected. Firstly,

there was the benefit to the defendant of the plaintiff’s purchase, though not

directly from the defendant. Secondly, the inconvenience to the plaintiff of

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undergoing the remedy.

Bowen L.J

His Honour indicated that the court should “read the advertisement in its plain

meaning, as the public would understand it”. His Honour was in broad agreement

with Lindley LJ. In particular, in relation to point 5, His Honour commented that,

as an ordinary rule of law, an acceptance should be notified to the person who

makes the offer “in order that the two minds may come together”. But because of

the nature of the offer, this case forms an exception to this rule.

Smith LJ was in broad agreement

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Poole:

Contract Law

ANSWERS – SELF TEST – ENFORCEABILITY OF PROMISES– INTENTION TO
CREATE LEGAL RELATIONS, CONSIDERATION, PROMISSORY ESTOPPEL
AND DURESS

1. What is the effect of including an “honour clause” in a written agreement? (2)
An “honour clause” has the effect of rebutting the normal presumption of an intention
to create legal relations in a commercial agreement (1). Its effect is to render the
agreement binding in honour only so that it will not be a legally binding contract. (1)

2. What is the consideration to support a unilateral promise? (1)
The consideration to support a unilateral promise is performance of the act
requested (Carlill v Carbolic Smoke Ball). (1)

3. Why were the chocolate wrappers held to be part of the consideration in Chappell
v Nestle? (1)
The chocolate wrappers were held to be part of the consideration because they were
requested by Nestle i.e. submitting the chocolate wrappers was part of the act they
requested in exchange for their promise. (1)

4. Pao On v Lau Yiu Long is authority for two propositions relating to what can
constitute consideration. Explain these propositions (4).
(a) Pao On is authority for the previous request device i.e. the past consideration rule
can be avoided if it is possible to find a previous request which carried with it an
understanding or implied promise to pay (or give some protection)(1). Any act or
promise which follows thereafter will not be past consideration in relation to that
implied promise or understanding. The later express promise will merely fix the
amount of the payment or the exact form of protection (1).
(b) Pao On is also authority for the fact that performance or promising to perform an
existing contractual duty owed to a third party can be a good consideration to
support a promise (1).
Therefore the Ps’ promise to perform the contractual duty owed to the Fu Chip
Company (to retain some of the shares for one year) could be a good consideration
to support the Ds’ (majority shareholders’) promise to indemnify them against losses
in that period. (1)

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5. What was the difference between the approach of the majority of the Court of
Appeal in Ward v Byham and the approach of Denning LJ in that case? (2)
The majority of the CA in Ward v Byham sought to establish that the promisee had
provided consideration by going beyond her legal duty (1), whereas Denning LJ
considered that the mere performance of an existing legal duty should be a good
consideration if it was, as here, of factual benefit to the promisor. (1)

6. Are the following true or false statements? [6]. [1 point for each statement
correctly identified as true or false]

(a) The result of Williams v Roffey is that it is no longer necessary to provide
consideration to support an alteration promise if duress is absent.

False
(b) Williams v Roffey is authority for the fact that an alteration promise is

enforceable if there is a factual benefit arising to the promisee.
False (not factual benefit to promisee and not all alteration promises)

(c) Williams v Roffey is authority for the fact that an alteration promise to pay
more money is enforceable if there is a factual benefit arising to the
promisor from making that promise.
True

(d) Williams v Roffey has no application to promises on the formation of
contracts.
True

(e) Promissory estoppel has no application to promises on formation of
contracts.
True

(f) Promissory estoppel only applies where there is no consideration to
support an alteration promise.
True (although it will tend only to be utilised in respect of alteration
promises to accept less which are not supported by consideration.
This is because alteration promises to pay more are likely to be supported
by consideration if factual benefit is easily demonstrated, e.g. Coote’s
argument. In some cases this may turn on whether factual benefit is
identified subjectively or objectively).

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7. Can an alteration promise be enforced in the absence of consideration? (2)
Yes, if it is either (a) in a deed (1) or (b) the promisor is prevented from going back
on his promise because of the operation of the doctrine of promissory estoppel (1).
[Note: compare the position in New Zealand which suggests that an alteration
promise may be enforceable based solely on the promisee’s reliance on that promise
– Antons Trawling Co Ltd v Smith, CA of New Zealand, 2003].

8. What are the requirements to found the defence of promissory estoppel? (3)
(i) Promise to forgo (alter) rights under an existing contract (1) i.e. alterations only.
(ii) Intended to be acted upon and in fact acted upon (no requirement of detrimental
reliance) (1)
(iii) Inequitable for the promisor to go back on his promise (1).
[The promise or representation must also be clear and unequivocal]

9. What is the strongest case authority for the fact that promissory estoppel only has
suspensory effect? (1)
Tool Metal Manufacturing v Tungsten Electric – authority of the House of Lords. (1)
This is the strongest authority here and therefore there are no points for any other
authority cited.

10. What is the approach of the Australian courts to the enforcement of promises, as
illustrated by Waltons Stores (Interstate) v Maher? (2)
The Australian courts adopt a flexible approach using estoppel in its widest sense in
order to prevent “unconscionable” conduct by the promisor. (1) This means that they
are not circumscribed by technicalities such as the need to only use the doctrine
defensively (not as a cause of action) and only to use it in relation to alterations (not
formation). (1) It is unclear what is meant by “unconscionable” conduct – see, e.g.
the decision in Tanwar Enterprise Pty Ltd v Cauchi, noted Casebook (7th) at 167.

11. For what propositions of law is Combe v Combe the authority? (2)
Combe v Combe is authority for the fact that in English law
(a) promissory estoppel cannot be used in relation to formation of a contract in order
to enforce a promise despite the absence of consideration; (1) and

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(b) it can only be used as a defence to an action to recover the balance (go back on
a promise to accept less in full satisfaction) and cannot be used as a cause of action
i.e. to enforce compliance with the promise. (1)

12. How does the enforceability of alteration promises to pay more differ from the
enforceability of alteration promises to accept less in English law? (4)
As a general rule, alteration promises to pay more and promises to pay less must
both be supported by consideration if they are to be enforceable.
However, W v R applies to promises to pay more, thus making it easier to find this
consideration since it can arise if there is a factual benefit to the promisor in making
the promise to pay more (1). Coote argues that this means that there will always be
a factual benefit in these circumstances and the promise will always be enforceable
by consideration. If the promise is supported by consideration there is no need to
rely on promissory estoppel and its requirements seem better suited to promises to
accept less. (1)

W v R does not apply to alteration promises to accept less (Selectmove) so that the
consideration must be fresh consideration moving from the promisee. (1) However, if
there is no consideration, then the promisor may nevertheless be prevented from
going back on his promise using the defence of promissory estoppel (1) (N.B.
promissory estoppel only has suspensory effect whereas consideration makes the
promise binding for all time. In addition whereas promissory estoppel cannot found a
cause of action, the presence of consideration will do so).

13. What is the effect of duress on a contract? (1)
Duress renders the contract voidable i.e. liable to be set aside by the party affected.
(Remedy of rescission applies subject to the bars). (1)

14. What must be shown to establish a claim based on economic duress? (6)
(a) Pressure or threat affecting business or financial interests (1) N.B. Need to show
the causal link between the pressure and the contract, Huyton v Peter Cremer.
(b) That threat/pressure must amount to a coercion of the will (1) i.e. no realistic
choice but to agree because very serious consequences if do not do so. (1)
(c) Pressure or threat must be illegitimate. (2)
(d) Victim must protest at the time or shortly thereafter. (1)

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15. What is the significance of the decision in CTN Cash & Carry Ltd v Gallaher Ltd?
(3)
It addressed the question of whether so-called lawful act duress can amount to
illegitimate pressure. (1)
Clearly, it may be illegitimate if there is a threat to take lawful action but the
advantage, which it is sought to obtain, is illegitimate (per Lord Scarman in The
Universe Sentinel). In the absence of some sort of illegitimate purpose in making the
lawful threat, it is now clear that in the context of arm’s length dealings between two
commercial enterprises, it is unlikely that a threat of lawful action will amount to
duress (1) (particularly where the party making the threat believes his demand is
perfectly lawful). (CTN Cash & Carry). This would introduce too much uncertainty
into commercial transactions. (1)
Of course, this leaves open the question of whether a threat of lawful action against
a consumer by a large commercial concern could be illegitimate pressure in some
circumstances (e.g. an unconscionable threat of lawful action).

Points scored [maximum of 40] =

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ANSWERS – SELF-TEST – PRIVITY OF CONTRACT AND THIRD PARTY RIGHTS

1. What is the doctrine of privity of contract? (2)
The doctrine of privity of contract determines who may enforce the contract and
provides that only the parties to a contract may enjoy the benefits of that contract (1)
or suffer burdens under it (1).

2. What were the two difficulties in establishing an argument that the contracting
party in fact contracted as agent for the third party? (2)
The 2 difficulties in establishing the agency argument were
(a) establishing that the third party (principal) gave authority to the agent to act in
that capacity. (1)
(b) establishing that the principal provided consideration to support the promisor’s
promise. (1) Example is Dunlop Pneumatic Tyre v Selfridge.

3. In what circumstances under the Contracts (Rights of Third Parties) Act 1999 can
a third party rely on an exemption clause in a contract to which he is not a party? (3)
How does this differ from the previous position at common law? (4)
A third party (i.e. a person who is not a party to a contract containing an exemption
clause) may enforce that clause under s.1(6) of the Contracts (Rights of Third
Parties) Act 1999 if either (a) the contract expressly states that the third party shall
have this right of enforcement (1) or (b) the exemption clause purports to protect the
third party and (on a proper construction of the contract) there is nothing to indicate
that the contracting parties did not intend the term to be enforceable by that third
party (s.1(1)(2)). See Nisshin Shipping v Cleaves (2003) for explanation of s.1(1)(b)
and s.1(2). (1)
In addition, the third party must be expressly identified in the contract either by
name, or as a member of a particular class or description e.g. “independent
contractors” but need not be in existence at the time the contract was entered into
(s.1(3)).(1)
This test inevitably limits the scope of the legislation and the position of third parties.
However, with time it was envisaged that contracts would be drafted so as to give
third parties protection via an express right to enforce (s.1(1)(a)), where this was the
parties’ intention. This doesn’t appear to have happened and, if anything, parties are
contracting to avoid the Act’s application.

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At common law the third party could potentially have used Lord Reid’s criteria in
Scruttons v Midland Silicones, as applied by the PC in New Zealand Shipping v
Satterthwaite in order to rely on an exemption clause. Thus it would have to be
established that:
(a) The main contract made it clear that the third party was intended to be protected
by the clause.
(b) The main contract made it clear that the contracting party was acting as agent for
the third party for the purpose of obtaining the benefit of the clause.
(c) The contracting party must have had authority from the third party to act as his
agent.
(d) The third party must have provided consideration for the main contract promise of
exemption. (2)

The agency link has now disappeared under the new legislation but factor (a) above
is still relevant. (1) Problems had existed at common law with the application of (c)
above in cases where the third party was not in existence at the time the main
contract was entered into. This limitation has now been expressly removed by s.1(3)
of the 1999 Act. (1)

4 What is the significance, if any, of Jackson v Horizon Holidays? (2)
Jackson (as refined by Lord Wilberforce in Woodar v Wimpey) is authority for the fact
that a contracting party who, for reasons of convenience, contracted for the benefit of
others may be able to recover damages to compensate him for not only his own loss
but also the loss suffered for the others for whose benefit he contracted (1). This
type of contract is said to be a “contract calling for special treatment”. (1)

5. How does the HL in the St Martin’s Property appeal reach its conclusion that
substantial damages are available to a person who has not suffered loss? (3)
The original owner of the land is the party to the building contract and although he
successfully transferred ownership of the land to the new owner, he did not succeed
in transferring the benefit of the building contract. Since privity requires that a person
be a party to a contract in order to recover damages for breach, AND it is only
possible to recover damages for loss actually suffered by that party, the original
owner was technically only entitled to recover nominal damages for breach. The new
owner, who had suffered the loss, was not a party to the contract. (1)

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The St Martins Property principle allows the original owner to recover substantial
damages (for the benefit of the new owner) on the basis that it was contemplated all
along that the property (on which the building work was taking place) might be
transferred to another person (who would not be a party to the building contract) but
who would suffer the loss in the event of defective performance. (2) [“Narrow ground”
principle]

6. Explain Lord Griffiths’s “broad ground” for decision in the St Martin’s Property
Appeal? (4)
Lord Griffiths was stating that where the contract broken is a contract for the supply
of work and materials (1), the promisee does not need to show that he retains a
property interest in the subject matter of the contract at the date of the breach in
order to be able to recover damages for the breach (2). The loss suffered by the
promisee is the fact that he does not receive the performance for which he
contracted (1) – and it does not matter whether he owns the goods in question.

7. Explain the collateral contract and the way in which it has been used to avoid
privity problems. (3) Is it likely to be relevant following the 1999 Contracts (Rights of
third Parties) Act? (2)
The collateral contract essentially amounts to the creation of a contract between
persons who are not parties to the main contract in order to impose liability e.g. for
statements/promises made. (1) The consideration for this contract is the making of
the main contract. (1) Examples include Shanklin Pier v Detel and the collateral
contract between e.g. car dealers and customers covering statements made by the
dealer which induce the hire purchase contract between the customer and the
finance company. The making of the hire purchase contract is the consideration for
the collateral contract. [(1) for an example].

Following the 1999 Act the significance of the collateral contract device will be
reduced only if the third party is covered by the Act and can enforce the provision
directly, i.e. expressly identified in the contract by name, a class member or by a
particular description and only if the test of enforceability is satisfied (s.1(1)-(3)) – i.e.
it must be clear that the parties’ intended this third party to be able to enforce a
particular provision or purported to give him some benefit (2). That may be unlikely in
the typical scenario in which the collateral contract is useful, e.g. statements by car
dealers when the contract is between the customer and the finance company.

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8. Can the promisee still pursue an action for breach of contract where a third party
has enforceable rights under the 1999 Act? (2) How does the Act deal with the
priorities question? (3)
Yes, the promisee can still pursue an action for breach despite the fact that a third
party may have enforceable rights under the 1999 Act (1) since s.4 states that
section 1 does not affect any right of the promisee to enforce any term of the
contract. (1)

On the priorities question, the Act prohibits double recovery by promisee and third
party in respect of the same loss (1). Section 5 states that where the promisee has
already recovered a sum in respect of the third party’s loss, the recovery allowed to a
third party must be reduced to take account of this sum(1). However, there is no
express provision requiring the promisee to hold this sum on trust for the third party
(1). This may be because this would arise at common law.

Points scored [maximum of 30] =

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© Jill Poole, 2006. All rights reserved.

• business law c19-c28END
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