42 GSN412: Business Law 1
3.1 & 3.2 Introduction and offer
Additional readings
Griggs et al., (2nd edn) ch. 1, pp. 6–11.
Latimer (23rd edn), ch. 5, pp 239-248, 256-263.
Turner, [24th edn] pp 55-66
Cases
Carlill v Carbolic Smoke Ball Co. [1893] 1 QB 256
Harvey v Facey [1893] AC 552
MacRobertson Miller Airline Services v Commissioner of State Taxation
(WA) (1975) 50 ALJR 348
Pharmaceutical Society of Great Britain v Boots Cash Chemists
(Southern) Ltd [1953] 1 QB 401
Routledge v Grant (1828) 4 Bing 653
3.3 Acceptance
Additional readings
Latimer (23rd edn), ch. 5, pp263-275.
Turner, [24th edn] pp 66-71
Cases
Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256
Entores Ltd v Myles Far East Corporation [1955] 2 QB 327
Felthouse v Bindley (1862) 142 ER 1037.
Masters v Cameron (1954) 91 CLR 353
R v Clarke (1927) 40 CLR 227
3.4 Termination of offer
Additional readings
Latimer (23rd edn), ch. 5, pp275-278.
Turner [24th edn] pp 64-66
3.5 Intention to Create Legal Relations
Additional reading
Griggs et al, (2nd edn) Ch 24 (pp490-509)
Latimer (23rd edn), pp.248-256
Turner [24th edn] pp72-78
Module 3: Contracting principles (Part 1) 43
3.1: Introduction
See Griggs, G. et al., Managers and the Law, ch. 3.
Introduction
Contracts fall into two main categories:
1. Simple (or parol) contracts—which can be oral, formed by conduct or be
in writing. Simple contracts are not required to be in writing to be
enforceable. Exceptions to this rule are contracts that are required to be
evidenced in writing such as:
(a) Contracts for the sale of land or any interest in land.
(b) Contracts of guarantee.
Contracts can also be partly oral and partly written and contracts can be
formed by conduct alone.
2. Formal contracts—a deed also called a contract under seal.
This module will primarily focus on simple contracts and how they are formed
but students also need to understand the nature of a deed and when it should
be used.
See Gibson & Fraser pp 171 – 175 (see websites referred to on p 175)
44 GSN412: Business Law 1
3.2: Offer
3.2.1 Elements of a simple contract
A simple (or parol) contract must contain three elements:
1. Agreement, comprising offer and acceptance.
2. Intention to create legal relations – see module 5.
3. Consideration – see module 4.
If any one of the three elements is absent then there is not a simple
(or parol) contract.
A contract can still fail, for example, where the contract is affected by illegality,
lack of capacity of the parties, or mistake. These (and other) additional
elements are not, however, covered in this course.
A court will also try to find that there is contract and will even imply terms into
a contract in some circumstances so as to make a bargain that the parties
intended but may not have made express. The courts will look at the words and
conduct of the parties to see whether an intention to form a contract is present.
( See Vermeesch & Lindgren p98)
Element 1 — Offer and Acceptance – Agreement
The offeror makes the offer. Depending on the circumstances he/she may be a
seller or a purchaser.
The offeree is the one to whom the offer is made. Once again, depending on the
circumstances he/she may be a seller or a purchaser.
An example of an agreement would be as follows:
X says to Y:
‘I offer to sell you my motorbike for 00’
Y replies ‘I accept your offer’
(Offer + acceptance of the offer)
Element 2 — Intention to create legal relations
Social or domestic agreements usually are not accompanied by any intention of
the parties to create legally enforceable rights and obligations. For example, if a
colleague, (P) agreed with his fellow worker (Q), to drive Q’s car home after work
in exchange for Q using P’s surf skis on the weekend.
Agreements, which appear to be commercial on their face, are usually held by
the courts to be accompanied by an intention to create legal relations e.g. an
agreement for professional advice from an accountant (but if the agreement is
made in a social setting then the circumstances may provide evidence against
an intention to create legal relations).
Element 3 — Consideration
Both parties to a simple (or parol) contract must provide consideration to each
other.
Module 3: Contracting principles (Part 1) 45
Consideration can be an act, forbearance to act, promise of an act, or
promise of a forbearance to act given in exchange for any one of those 4
elements from the other party. (For example, a developer says to the owner of a
house ‘If you promise not to sell your house in the next two years, I will give
you 00’. Both parties agree to this.)
Note: The word ‘agreement’, though sometimes loosely used to mean ‘contract’,
is a technical word referring to merely one element of a simple or parol
contract.
3.2.2 Rules relating to offer
An offer must be a final commitment to a contract should the other party
accept it. An offer consists of a definite promise to be bound provided that
certain specified terms are accepted.
1. An offer must be communicated to the offeree to be effective
This first rule simply means that the offeree must become aware of the offer
to be able to accept it. You cannot accept an offer of which you are not aware.
It does not matter how an offer is communicated, or, in the offer to the world
situation (e.g. the reward situation), how the offeree becomes aware of the offer,
so long as the offeree becomes aware prior to acceptance.
2. Only the person/s to whom the offer is made can accept the
offer
The offer might be made to one individual, whether it be a natural person or an
artificial person such as a company; or it might be an offer made to a class of
persons, e.g. any person taking Business Law in this semester; or it may be an
offer made to the whole world, such as occurs in the reward situation or in
some public advertising (which, however, usually is only an invitation to treat).
If the offer is made to one individual, then only that person can accept the offer.
If it is made to a class of persons, any person within that class can accept the
offer. If it is made to the whole world, then anyone at all can accept that offer.
The case of Carlill v Carbolic Smoke Ball Co. [1893] 1 QB 256 is authority for
the principle that an offer can be made to the whole world.
3. An offer may be revoked at will at any time prior to
acceptance
Even where the offeror makes a promise to the offeree to keep an offer open for
a specified time, such a promise will not be binding on the offeror unless the
offeree gives some consideration for the promise to keep the offer open.
Even where such consideration is given (that is, an option, see (4(a)) below) the
offeror may still legally revoke the offer at any time prior to acceptance but
such revocation though legally effective will also be a breach of the option
contract entitling the offeree to sue for damages.
Refer to Routledge v Grant (1828) 4 Bing 653.
46 GSN412: Business Law 1
4. An offer needs to be distinguished from certain things that
look like offers but are really something different
(a) Option
An option is a contract to keep an offer open for a specified period of
time.
It has all the elements of a simple contract, but it should be noted that it is
quite separate from any contract that may eventuate with respect to the subject
matter for which the option is given. The only way you will ultimately get a
contract with respect to that subject matter is if the offeree exercises the
option.
The offeree must strictly comply with any method of exercising the option that
may be specified by the offeror.
(b) Invitation to treat
An invitation to treat is an invitation to receive offers or an invitation to
negotiate.
Some examples of invitations to treat include:
(A) Goods displayed on a supermarket shelf—Customer makes offer to buy.
Cashier is free to accept or reject.
See Pharmaceutical Society of Great Britain v Boots Cash Chemists
(Southern) Ltd [1953] 1 QB 401.
(B) Goods displayed in shops
(C) Advertisements in ‘wanted to sell’ columns
(D) Auction ‘with reserve’ – Auctioneer’s request for bids is an invitation to
treat. The bid is offer—Acceptance at fall of hammer.
(F) Advertisements calling for tenders – Submission of tender is offer—A
contract is formed when the successful tender accepted.
General rule
In general, it is not the proprietor or owner who is offering to sell the customer
something. It is the customer who is offering to buy.
Exceptions to the general rule
(A) The reward situation
• Offer made to whole world
• Offer accepted by performing act required in order to receive reward.
(B) Automatic vending machines (including self-service petrol stations,
automatic car parking stations).
(C) Passenger transport —
• What is the offer?
• Acceptance when the passenger boards transport (not when they
buy the ticket)
See MacRobertson Miller Airline Services v Commissioner of State
Taxation of WA (1975) 50 ALJR 348.
Module 3: Contracting principles (Part 1) 47
(D) Auction ‘without reserve’
Advertisement is offer to sell to highest bidder
(E) Tender where announcement says that the lowest tender will be accepted
• Announcement is offer
• Lowest tender submitted becomes acceptance.
(C) Preliminary negotiations/request for information
Harvey v Facey [1893] AC 552.
H sent F a telegram: ‘Will you sell us Bumper Hall Pen (the name of an old
English property)? Telegraph lowest cash price’. F sent telegram: ‘Lowest price
900 pounds’. H sent telegram: ‘We agree to buy property for 900 pounds asked
by you’. — H thought he was accepting F’s offer to sell. F refused to transfer
and H sued claiming that there was a contract. H lost.
Held: H’s first telegram posed two questions
• Are you prepared to sell?
• What is your lowest price?
F telegraphed answer to the second question only that is, F was only supplying
information.
H’s telegram: ‘We agree to buy property for 900 pounds asked by you’ was an
offer only (that is, an offer to buy), not an acceptance. This offer by H had never
been accepted by F; therefore there was no contract. The telegram by F (owner)
was not an offer but merely a preliminary statement as to the minimum price
he was prepared to accept.
48 GSN412: Business Law 1
3.3: Acceptance
An offer can be accepted, revoked, rejected or it can lapse. Of these
circumstances, it is only where the offer is accepted that a contract is formed.
3.3.1 Rules relating to acceptance of an offer
1. Acceptance must be a complete and unqualified acceptance
of the terms of the offer
Distinguish between a counter offer and a condition precedent.
(a) A counter offer actually changes the terms of the original offer, or adds
something to it. The effect of a counter offer is to destroy the original offer
and substitute a new offer in its place. The original offer is destroyed for
all time, never to be revived, except by way of a fresh offer, for example,
offer: ‘I offer to sell you my car “as is” for 00’. Response: ‘I accept
subject to your fitting four new tyres to the car’. This response is a
counter offer.
(b) A condition precedent is something standing outside the terms of the
agreement, but on which the existence of a contract depends. With a
condition precedent, there never will be a contract until such time as that
condition is fulfilled. It may attach itself to the offer or to the acceptance,
for example, Offer: ‘I offer to sell you may car as is for 00’. Response: ‘I
accept subject to my solicitor’s approval within 14 days’. This response is
a condition precedent.
Phrases such as ‘subject to contract’, ‘subject to inspection’, ‘subject to
approval’, ‘subject to my solicitor’s approval’ are usually examples of conditions
precedent.
The leading Australian case with respect to subject to contract clauses is:
Masters v Cameron (1954) 91 CLR 353 — High Court of Australia.
Note
Counter offer. Offeree is capable of promising to fulfil the obligation imposed
by the counter offer.
Condition precedent. Whether or not the condition is fulfilled is outside the
control of both of the parties to the negotiations i.e. fulfilment of the condition
is in the control of a third party. Where an agreement is subject to a condition
precedent, either party may end the agreement up until such time as the
condition is fulfilled.
Module 3: Contracting principles (Part 1) 49
2. Mode of acceptance must be in accordance with the
requirements of the offeror
Where the offeror stipulates a particular mode of communicating acceptance:
(a) If the mode is stipulated as the only acceptable mode, then the offeree
must use that mode.
(b) If the mode is not stipulated as the only mode, then the offeree is entitled
to use any method which is not less advantageous to the offeror. If the
offeree does choose to adopt a different mode of acceptance, then he/she
takes the risk of any delay or loss that might occur.
(c) In descending order of advantage to the offeror, the methods of
acceptance are:
• Face-to-face
• Telephone
• Fax
• Telex
• Telegram
• Post
3. Where no mode of acceptance is stipulated, mode should be
appropriate to the circumstances
Where the offeror has not stipulated any particular mode of communicating
acceptance, then the offeree can use whatever mode is ‘reasonable’ in the
circumstances of the particular case —look at the way in which the offer was
communicated to give an indication of what is acceptable as a means of
acceptance.
4. Acceptance must be made in reliance on the offer
Offeree must have knowledge of offer in order to accept it. However, acceptance
must also be made in reliance on the offer.
The best example of this is the case: R v Clarke (1927) 40 CLR 227.
5. General rule: Acceptance must be communicated to the
offeror by or on behalf of the offeree to be legally effective
As a corollary of this rule it should be noted that mere dispatch is not
sufficient. ‘On behalf of’ means that the person communicating the offeree’s
acceptance must be acting as a duly authorised agent of the offeree — see
Powell v Lee (1908) 99 LT 284 (G & F at p199).
Place where contract formed
A contract is deemed by the law to be made at the place where the acceptance
is received by the offeror.
50 GSN412: Business Law 1
Time when contract formed
The time at which the contract is made is when the communication is received
by the offeror.
In the cases of telex and fax, acceptance is deemed to have taken place when
the acceptance actually reaches the offeror that is, it is not necessary that the
offeror have read the acceptance fax or telex).
See Entores Ltd v Myles Far East Corporation [1955] 2 QB 327 (G & F at p200 –
201).
Exceptions
There are two exceptions to the second limb of the general rule, that is, that
acceptance must be communicated to the offeror to be effective:
(a) The offeror may waive the right to communication of acceptance.
Because communication of acceptance is required for the benefit of the offeror,
then the offeror can dispense with notice to him/her if he/she thinks it
desirable. Offeror may dispense with notice either expressly or impliedly from
the circumstances of the case.
Offeree must still perform some overt action to indicate that he/she has
accepted offer (for example, positive conduct).
Most common case is offer of a reward for return of lost property or giving of
information (for example, Carlill v Carbolic Smoke Ball Co. [1893] 1 QB 256) (G
& F at pp191 – 192).
In a case such as this, a person does not have to notify his/her acceptance to
the offer before he/she performs the condition. The completed performance of
the required conduct constitutes the acceptance of the offer and the
consideration for the promise in the offer.
Even though the offeror may waive the right to communication of acceptance,
the offeror cannot say that silence will be deemed to be consent (for example, ‘If
I don’t hear from you within 14 days I will assume you have accepted my offer’).
For a case example, see Felthouse v Bindley (1862) 142 ER 1037 (G & F at
p198).
2. The postal rule (or postal acceptance rule).
The postal rule does not apply automatically just because parties are using the
post — must decide whether it is applicable in any particular case.
If the postal rule is applicable, then acceptance is effective (and the contract is
formed) the moment a letter of acceptance is posted or a telegram of acceptance
is lodged. It makes no difference that the letter or telegram is delayed in being
delivered or is never delivered. Loss in these circumstances is borne by the
offeror.
However, there are five pre-conditions that have to be established for the
postal rule (sometimes referred to as the post box rule) to apply. These are:
(a) The rule only applies to acceptances.
(b) It does not apply to offers, counter offers, revocations.
Module 3: Contracting principles (Part 1) 51
(c) The rule only applies to letters and telegrams. It does not for example
apply to telexes — see Entores Ltd v Myles Far East Corporation [1955]
2 QB 327.
(d) The rule only applies where the letter or telegram is correctly addressed.
(e) The rule only applies where the use of a letter and/or telegram is regarded
as an acceptable mode of acceptance.
(f) The postal rule must not have been negatived (that is, excluded).
(g) Offeror can expressly exclude the postal rule by requiring actual
communication of acceptance or the postal rule can be excluded by
inference from the circumstances of negotiation.
(h) The offeror may negative the application of the postal rule while still
allowing the post to be an appropriate method of acceptance. In these
circumstances, the general rule requiring actual communication of
acceptance would be applicable.
Examples where postal rule negatived
1. ‘accept by notice to me’
2. ‘I await your reply’
3. ‘I await to hear from you’
4. ‘If you wish to accept my offer, your written reply should reach me on or
before 20 March’
5. ‘If you wish to accept my offer, your written reply should be in my hands
on or before 20 March’
6. Offer by fax and no method of acceptance prescribed.
(In the final example, since the offer was made by fax and no method
prescribed for acceptance, it is likely the court would find any method of
acceptance sufficient providing the general rule of communication to the offeror
applies, therefore the postal rule does not apply should post be used to
communicate acceptance.)
52 GSN412: Business Law 1
3.4 Termination of Offers
3.4.1 Introduction
Sometimes a proposal made by a person does not evolve into an agreement. It
is not carried through by the action of one party. Under what circumstances
can an aggrieved party do something about it? Alternatively, how can one party
terminate an offer that has been validly made without legal repercussion?
How do we know a person who enters into an arrangement intends to uphold
his or her part of the bargain? If there is no intention, there is generally not a
valid contract. In some cases the law will presume an intention exists so as not
to defeat a contract.
The second element of a simple contract is also examined in this module,
namely, intention to create legal relations. We will examine the circumstances
where lack of intention will terminate an arrangement and also where the
courts have decided on the facts of the matter, that intention and therefore, a
contract exists.
3.4.2 Termination of offer
3.4.2.1. Revocation
(a) General rule — An offer may be revoked, without penalty, at any time
prior to acceptance.
(b) Revocation of offer has no effect until communicated to offeree.
Note: The Postal Rule does not apply. See for example, Byrne v Van
Tienhoven (1880) 5 CPD 344.
(c) Revocation of offer may be communicated by the offeror or by a
reasonably reliable source.
Would a reasonable person be persuaded of the truth of the information?
An objective test is applied see Dickinson v Dodds (1876) 2 Ch D 463.
3.4.2.2. Rejection
(a) Usually outright rejection
(b) May be rejection through a counter offer
Distinguish
(i) Counter offer—where original offer is destroyed
and
(ii) Mere acknowledgement of offer and mere enquiry about offer (that is, a
request for information)—the original offer remains on foot. See Stevenson
Jacques v McLean (1880) 5 QBD 346.
Module 3: Contracting principles (Part 1) 53
3.4.2.3. Lapse
1. Death
(a) Of offeror. General rule is that the offer continues until offeree
receives notice of death.
(b) Exception. Where offer contains an element personal to offeror (for
example, where offer to paint a portrait or give a series of concerts).
(c) Of offeree. General rule is that the offer lapses automatically.
(d) Exception. Where option has been offered, can be accepted by
estate of offeree (unless personal).
2. Lapse of time
(a) Where time limit specified in offer—Offer lapses when that time
expires.
(b) Where no period specified—Offer lapses after a reasonable time
which will depend upon the nature of the offer and subject matter
e.g. Ramsgate Victoria Hotel v Montefiore (1866) LR 1 Exch 109 ( G &
F at pp195).
3. Failure of a condition precedent attaching to the offer.
54 GSN412: Business Law 1
3.5 Intention to create legal relations
3.5.1 Introduction
As we have seen, to create a binding simple contract the following elements are
required:
(a) an agreement – i.e. a valid offer and acceptance;
(b) consideration; and
(c) intention to create legal relations.
In this module, we discuss the last of these elements.
3.5.2 Presumptions
Parties will not be bound by their promises and acts unless they intended to
enter into commercial arrangements. The law has created presumptions to
assist in determining whether such an intention present.
3.5.2.1. Objective test
Would a reasonable person think that the parties intended to be bound? See
Carlill’s case (the court does not apply a subjective test of what the parties say
was their intention).
Courts apply certain presumptions regarding domestic/social agreements on
the one hand and commercial agreements on the other.
3.5.2.2. Two presumptions
(a) In social or family/domestic arrangements, there is a presumption against
legal relations being intended.
(b) In commercial/ business arrangements, there is a presumption that legal
relations are intended.
3.5.2.3. Rebuttal of presumptions
(a) Social or family arrangements
Onus of rebutting the presumption is on the person claiming that legal
relations were intended. Further sub-divide social/family agreements into:
(i) Husband/wife arrangements
The court will find no legal relations intended if at the time of the
agreement the marriage has not broken down—Balfour v Balfour
[1919] 2 KB 571.
The presumption will be rebutted and the intention to create legal
relations will be implied if after the marriage has broken down the parties
enter into some agreement— Merritt v Merritt [1970] 1 WLR 1211.
Module 3: Contracting principles (Part 1) 55
A marriage has not necessarily broken down because husband and wife
are physically separated. (See Balfour v Balfour). A marriage can be
broken down even though husband and wife are not physically separated.
(See McGregor v McGregor (1888) 21 QBD 424.)
(ii) Other social/domestic agreements
The presumption may be rebutted where the commitment is fairly large
and/or the consequences to the plaintiff of a breach of the defendant’s
promise are very serious or where, what appears to be a family or social
arrangement involves serious legal steps (for example, changing a will;
transferring property) having serious legal consequences for example, see
Todd v Nicol (1957) SASR 72.
Queensland case: Riches v Hogben (1986) 1 Qd R 315 (Full Court of
Supreme Court of Queensland) (Now called the Court of Appeal) See
Appendix A (vi).
Note that where the whole setting of the arrangement is commercial
rather than social or domestic, then it is more likely that the courts will
view an apparent social or domestic arrangement as commercial.
Example
Where family members each conduct their own separate business and an
arrangement is entered into relating to these businesses.
(b) Commercial agreements
Onus of proving that no legal relations intended is on the person saying
there was no intention — that onus much more difficult to prove than
rebuttal of domestic presumption. When will the presumption that legal
relations are intended be rebutted?
(i) It will be rebutted by a sufficiently strong inference drawn from the
circumstances of the case and the conduct of the parties
For example, if the government is involved: Australian Woollen Mills
Pty Ltd v Commonwealth (1954) 92 CLR 424.
Quantities of wool were purchased on the basis of an announced
subsidy scheme. The government later withdrew subsidy. A dispute
arose concerning the amount payable. The High Court held that the
announcement of a subsidy was not a legal offer that gave rise to a
binding contract.
(ii) Where parties agree not to be legally bound
For example, honour clauses — these clauses provide a specific
expression of the parties’ intention to exclude legal consequences:
See Jones v Vernon’s Pools Ltd [1938] 2 All ER 626. See also Rose
and Frank Co. v Crompton and Bros. Ltd [1925] AC 445.
An honour clause can be used in any agreement whether social,
domestic or commercial to safeguard against such agreement being
enforceable in the courts as a contract. A simple honour clause may
be as follows: ‘The rights and obligations under this agreement are
intended by the parties to be binding in honour only and are not
intended to give rise to legally enforceable rights or obligations
under a contract’.
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