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Commercial Law
Week 6: Forming a Contract

Suggested Solutions

Problem 1:

A contract creates a set of legally enforceable obligations and rights. Describe in your
own words what the effect of this means.

This statement means that a contract can be enforced in a court of law if the other party fails
to comply with their contractual obligations. If a party is misled or suffers a loss, they
are able to seek compensation.

Problem 2:

What are the requirements or elements that form a contract or bring a contract into
existence?

In order for a contract to be legally enforceable, it must adhere to certain requirements:


1. there must be an agreement;
2. the parties must intend their agreement to be enforceable; and
3. both parties must provide consideration.
AGREEMENT:
An agreement is satisfied through offer and acceptance.
INTENTION:
The parties must intend their agreement to be legally binding.
CONSIDERATION:
Consideration is the price paid for the other partys performance.

Problem 3:

Describe the second requirement or element that is necessary to turn an agreement/


arrangement or understanding into a legally binding contract? In other words, what is
the second legal requirement to form a contract and what are the two main
presumptions that arise in relation to this requirement?

The second requirement is intention. The parties must intend their agreement to be legally
binding.

The two main presumptions are:

Social and domestic agreements are presumed not to be binding (Balfour v Balfour [1919] 2
KB 571). Commercial or business agreements are presumed to be binding. These
presumptions can be rebutted by evidence to the contrary (Wakeling v Ripley (1951) 51 SR
(NSW) 183).
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Problem 4:

Does Chloe have an enforceable contract with her aunt Ada?

These facts are from the Australian case of Todd v Nicol. The case bears a remarkable
similarity to Wakeling v Ripley (in your text). Both cases are concerned with plaintiffs who
sell up and shift locations/cities to move in with older relatives based on promises to inherit
eventually under the older relatives wills.

The problem for the plaintiff Chloe is that in family or domestic arrangements, there is a
presumption in law that there is no intention to be legally bound (Balfour v Balfour).

However, this is a rebuttable presumption and the plaintiff has the onus to prove otherwise.

Where the consequences of a domestic promise are serious if acted upon, the courts may be
prepared to say that there was an intention to create legal relations.

In Wakeling v Ripley, it was held that on the evidence the parties did intend to enter a
binding and enforceable contract as the consequences were so serious. The plaintiffs gave
up well-paid jobs in England and sold their property to move to Sydney. Similarly, Chloe
quit her job as a marketing executive and sold her house in Australia to live with her aunt
Ada in Singapore free of rent.

The exchange of documents between Chloe and Ada by way of emails and the promise by
Ada to change her will adds further weight to the rebuttal of the above presumption.

Accordingly, the facts here indicate that there is a contract between Chloe and Ada. The
presumption that there is no intention to be legally bound can be rebutted because of the
serious economic consequences.

Chloe may also have a ground for action in promissory estoppel, especially if there is no
contract (Waltons Stores v Maher).

Problem 5:

ISSUE
The legal issue in this matter is whether the shop sign Annual Taxation returns for $100 is
an offer or invitation to treat.

RULE
In order to create a legally enforceable agreement, an agreement needs to be formed. One
element of an agreement is a valid offer. An offer is a clear statement of the terms on which
an offeror is prepared to be contractually bound. An offer can be contrasted with an invitation
to treat which is an invitation to another person to make an offer.

APPLY

In this scenario the sign Annual Taxation returns for $100 appears to be an invitation to
treat because it is a sign displayed in a shop window. This is consistent with the ruling in
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Pharmaceutical Society (GB) v Boots Cash Chemists which held that displays in a shop are
an invitation to treat. Therefore Nadya can argue that her sign is an invitation to treat which
invites anyone walking past to make an offer. Nadya can then ultimately accept or reject this
offer.

CONCLUSION

Based on the preceding analysis, Nadya will not be bound to do Gideons tax return for $100.

Problem 6:

As Dewi and Cheng are good friends, it first must be asked whether there is an intention to
be legally bound (Balfour v Balfour). However, as this is a commercial arrangement which is
in writing and which has serious economic consequences, it is likely to be considered that the
parties intended to be bound contractually (Wakeling v Ripley).

The next question is whether they have an agreement. Dewi offered to sell his car to Cheng
for $3000 and gave Cheng a week to make up his mind.

However, Cheng did not provide any consideration to Dewi to keep the offer open for a
week. Dewis offer is therefore not an option and may therefore be revoked at any time
(Goldsborough Mort v Quinn).

When Cheng heard from a mutual friend, Pia, that Dewi had sold the car to someone else, this
amounts to a revocation of the offer. In Dickinson v Dodds, it was held that an offer can be
revoked where a reliable third party communicates the revocation. Thus, revocation need not
be communicated by the offeror. Hearing that the car has been sold implies that the car is no
longer for sale and this amounts to effective revocation. As the offer had been revoked
before Chengs purported acceptance, there is no binding contract between Cheng and Dewi.

If Cheng had paid Dewi $50 to keep the offer open, Cheng and Dewi would have entered into
a separate contract called an option which makes an offer irrevocable before the agreed
deadline (Goldsborough Mort v Quinn). By selling his car to Ethan, Dewi breaks the option
contract and Cheng may therefore sue Dewi for damages.

Problem 7:

You are an accountant/adviser and you need a new mobile phone. You walk into the
Telstra shop on the corner of Swanston and Bourke Street Melbourne. The salesperson
tells you to buy the latest Samsung Galaxy model. It is better than the Apple I Phone
coming out soon and cheaper. You are not convinced and speak to your friend. He tells
you that his sister, Ivy, wants to sell her Samsung Galaxy phone. You send Ivy an email
"I hear that you want to sell your Samsung Galaxy. If it is in good condition and if the
price is right, I would like to buy it. Please advise me as soon as possible". Ivy replies
by email "The phone is in excellent condition and is cheap at $700". You email Ivy
back and say "I accept your offer and will buy the phone for $700". However before
reading your email Ivy receives an email from another person who offers her $800 for
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the phone. Ivy sells the phone to the other person for $800.

(a) Is there a contract between Ivy and you for the phone?

ISSUE

The legal issue in this matter concerns the contractual elements of offer', acceptance and
the postal acceptance rule.

RULE

In order to have a valid agreement, there must be a clear offer (compared with a request for
information) and acceptance must be communicated to the offeror (Powell v Lee (1908) 24
TLR 606). One exception to this general rule is the postal acceptance rule which provides
that a contract is formed as soon as the offeree posts the letter of acceptance to the offeror
(Adams v Lindsell (1818) 106 ER 250). However, if the communication concerns email as an
instantaneous method of communication, the accepted view is that the postal rule does not
apply to email communications, and the email must be actually received to be effective.

APPLY

Your statement "I hear that you want to sell your Samsung Galaxy. If it is in good condition
and if the price is right, I would like to buy it. Please advise me as soon as possible" lacks
the quality of a definite undertaking to be bound. It does not therefore amount to an offer.
The statement is more likely to be regarded as a mere expression of interest and Ivys
response a supply of information, as in Harvey v Facey. Accordingly, your statement I
accept your offer and will buy the phone for $700 may be construed as an offer in which
case no agreement has been formed.

On the other hand, if Ivys response The phone is in excellent condition and is cheap at
$700" is construed as an offer, it is likely you have formed a binding contract with her.
Given your acceptance was sent to Ivys specified email address, under s 14A(1) of the
Electronic Transactions Act 1999 (Cth) the communication was received when it became
capable of being retrieved by Ivy.

The facts also state that Ivy received an email from another person offering $800 for the
mobile phone which Ivy accepted. Ivy has therefore entered into two contracts for the sale of
her mobile phone, one contract between her and you and a second contract between her and
another person. Ivy will be in breach of whichever of these two contracts where she fails to
deliver the mobile phone.

CONCLUSION

Based on the preceding analysis, there is a valid agreement between Ivy and you only if
Ivys response is considered an offer. Otherwise, no contract has been formed.

(b) How might your answer be different (if at all) if the conversation between Ivy and
you by email was as follows:

Hi Ivy, I would like to buy your Samsung Galaxy for $700, please let me know
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by email. Two days later you change your mind and purchase the latest Apple I
Phone from a shop. The same day you receive an email from Ivy which reads
Great. Its yours.

Is there a contract between Ivy and you?

In these circumstances your email may be deemed an offer. However, it seems by


purchasing an Apple iPhone you intend to revoke your offer. Revocation is not effective
until communicated (Byrne v Van Tienhoven) to the offeree. Accordingly Ivys acceptance
is valid and a contract has been formed.

(c) Would your answer to (b) above be any different if you chose not to read Ivys
email but instead delete it?

As Ivy and you conducted your communication by email, it can be implied that your email
addresses were specified. Thus, under s 14A(1) of the Electronic Transactions Act 1999
(Cth), Ivys email accepting your offer is considered to have been received by you when it
became capable of being retrieved by you. It is therefore irrelevant that you deleted Ivys
email of acceptance rather than reading it. You are still deemed to have received the
acceptance, and a contract will therefore have been formed.

Problem 8:

How would you describe consideration? Giving examples from case-law, what different
forms can consideration take or not take?

Consideration is the price paid for the other partys performance of a contract. Consideration
can take many forms including payment of money, provision of goods, provision of a
service, undertaking of an onerous obligation or refraining from doing something.

In Hamer v Sidway an uncle promised his nephew money if the nephew promised not to
gamble, smoke or drink until he turned 21. The uncle died and the executor refused to pay.
The court held forbearance by the nephew was good consideration.

Consideration does not need to be adequate (Thomas v Thomas (1842)) but it does need to be
sufficient (i.e. it must have some legal value).

Consideration cannot be too vague: White v Bluett (1853); Placer Development Ltd v
Commonwealth (1969)

Consideration will not be acceptable if it is past consideration (Roscorla v Thomas) or if it


is for an existing contractual obligation: Stilk v Myrick (1809)

Problem 9:

Saanvis father, Mohammed, promises Saanvi that if she studies hard and obtains a
high distinction for her Commercial Law course at RMIT, he will give her $1,000.
Saanvi and Mohammed sign a written agreement to this effect. Saanvi spends all her
free time studying Commercial Law and receives a high distinction. Saanvi asks her
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father for the money he promised but he refuses saying you havent done anything
that youre not already required to do. Your high marks should be enough reward.

Can Saanvi take successful legal action against her father?

ISSUE

The legal issues in this matter involve intention and consideration.

RULE:

Intention:

Social and domestic agreements are presumed not to be binding (Balfour v Balfour [1919] 2
KB 571). These presumptions can be rebutted by evidence to the contrary (Wakeling v Ripley
(1951) 51 SR (NSW) 183).

Consideration:

Consideration does not need to be adequate (Thomas v Thomas (1842)) but it does need to be
sufficient (i.e. it must have some legal value).

Consideration cannot be too vague: White v Bluett (1853); Placer Development Ltd v
Commonwealth (1969)

Consideration will not be acceptable if it is for an existing contractual obligation: Stilk v


Myrick (1809)

APPLY:

The problem for Saanvi is that in family or domestic arrangements, there is a presumption in
law that there is no intention to be legally bound (Balfour v Balfour). However, this is a
rebuttable presumption and the plaintiff has the onus to prove otherwise. If this can be
overcome, the next matter Saanvi needs to address is consideration.

Mohammed may argue that the agreement was not valid due to a lack of consideration from
Saanvi. He could argue that his daughter has done no more than what was already expected
of her (i.e. to study in her free time and obtain a HD): Stilk v Myrick (1809). However, the
counter argument Saanvi would raise is that she did not have a prior obligation to get a HD as
prior to the agreement she could have failed, passed or received any other outcome available
in her studies. Saanvi could argue that due to the agreement she spent all of her free time
studying and did in fact achieve a HD so she has fulfilled the requirements of the contract.

CONCLUSION

Saanvi may be successful in taking action against her father to enforce the agreement.
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Problem 10:

Katies boss has promised her an extra $500 for each of three weekends that she has worked. This is
to make up for the shortfall in staff caused by the resignation of two other staff members.
For Katie to have a contractual right to the extra money, she must show that she is doing something
more than what her existing employment contract requires. Under Stilk v Myrick, if a promisee does
no more than perform their existing contractual duties, they are not providing sufficient consideration
for a promise of extra payment.
However, Katie worked on weekends. This appears to be more than what her employment contract
requires. In Hartley v Ponsonby, it was held that doing something in excess of ones existing
contractual duties is good consideration for a promise for extra payment. We need further
information on the precise terms of her employment contract to see whether the weekend work falls
within her agreed work load.
Katie may also possibly have a claim in promissory estoppel which operates as an exception to the
requirement for consideration. Under promissory estoppel, a person can be stopped from going back
on their word where:
(a) the promisor intended the promisee to act in reliance on their promise,
(b) the promisee suffered some detriment when acting in reliance on the promise, and
(c) it would be unconscionable for the promisor to break their promise.
For Katie to make a claim for the extra $500 per weekend worked based on promissory estoppel, she
would need to rely on the Australian doctrine of promissory estoppel, as established in Waltons
Stores v Maher This allows a party to use promissory estoppel as a cause of action (a sword).
The English version of promissory estoppel, as established in Central London Property Trust v
High Trees, only allows promissory estoppel to be used as a defence (a shield). This would not be
effective in Katies situation as she is seeking to make a claim for payment, not defend an action.

Problem 11:

ISSUE

The legal issue in this matter is whether you can rely on the doctrine of promissory estoppel
to enforce your agreement with James Fitzgerald.

RULE:

Promissory estoppel deals with representations or promises as to future matters. It prevents a


promisor from reneging on promises that they have made where it would be unconscionable
or unfair for them to do so. Promissory estoppel operates in favour of a promisee where the
promisee has relied on a promise and would suffer some detriment if the promisor went back
on their promise.

In Waltons Stores v Maher, the Australian High Court held that promissory estoppel may be
used as a cause of action (a sword) to enforce an otherwise non-binding promise.
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A promise will be enforceable using promissory estoppel if all of the following requirements
have been met:

1. The promisor intended the promisee to rely upon a clear and unambiguous promise.
2. The promisee has, in fact, relied upon the promise by changing their circumstances,
and if the promisor does not keep their promise, the promise will suffer a material
disadvantage.
3. It would be unconscionable (unfair) for the promisor to break their promise.

APPLY:

In applying these criteria to your case, it would appear that you have a valid claim.

First, James intended you to rely upon his promise that you could lease the premises for a
fixed term of 5 years. Second, you have in fact relied upon that promise, and if that promise
is not kept, you will suffer material damage. Here you have relied upon the promise as you
have filled in and paid for the appropriate changes with ASIC, contacted your client base
informing them of the changes, and have contacted and paid for an architect to refurbish the
interior. Finally, it would be deemed unconscionable (unfair) for James to break his promise
to you.

CONCLUSION

For the above reasons it could be deemed you have a valid contract with James due to the
doctrine of promissory estoppel.

Problem 12:

The legal problem for Aaron is that there is no written evidence of his parents promise to
transfer part of their farm to him. It will be recalled that some contracts are not enforceable
in court unless there is evidence in writing of the contract. Specifically, under s 126 of the
Instruments Act 1958 (Vic) (the Victorian reenactment of s 4 of the Statute of Frauds 1677),
a contract for the sale or disposition of an interest in land cannot be enforced unless it is
evidenced in writing. Accordingly, the oral agreement between Aaron and his parents is
unenforceable under statutory principles as the relevant formality requirements have not been
complied with.

However, it is necessary here to consider the application of the doctrine of promissory


estoppel. Under certain circumstances, promissory estoppel provides a promisee with
equitable rights in relation to a promise even though there is no consideration to support the
promise or where the formalities of making a contract have not been fulfilled. Significantly,
the Statute of Frauds and similar provisions (as in the Instruments Act 1958 (Vic) s 126)
prescribing formalities affecting proof of contract does not apply when an equity is created by
estoppel (Waltons Stores v Maher). Thus, promissory estoppel operates independently of any
statutory writing requirements.

Promissory estoppel deals with representations or promises as to future matters. It prevents a


promisor from reneging on promises that they have made where it would be unconscionable
or unfair for them to do so. Promissory estoppel operates in favour of a promisee where the
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promisee has relied on a promise and would suffer some detriment if the promisor went back
on their promise.

It is useful here to distinguish between the English and Australian doctrines of promissory
estoppel. Under English law, promissory estoppel may only be used as a defence (a shield)
to prevent the promisor from reneging on a promise not to enforce their strict contractual
rights (Central London Property Trust Ltd v High Trees House Ltd). The Australian High
Court, however, has radically broadened the operation of promissory estoppel. In Waltons
Stores v Maher, the Australian High Court held that promissory estoppel may be used as a
cause of action (a sword) to enforce an otherwise non-binding promise.

Thus, the narrow doctrine of promissory estoppel (the High Trees case) would not assist
Aaron because, as indicated earlier, it can only be used as a defence to stop action on a
preexisting contract. However, the broader Waltons Stores doctrine of promissory estoppel
may provide Aaron with an equitable remedy. Using the Waltons Stores case as precedent,
the promisee must show that they acted in reliance on a promise to their detriment and that it
would be unconscionable for the promisor to renege on their promise.

In applying these criteria to Aarons case, it would appear that Aaron has a valid claim.
Indeed, the facts of Aarons case bear a number of similarities with those of Waltons Stores.
First, Aaron assumed that a legal relationship would exist, given that a contract was being
drawn up by lawyers to give effect to the promise. Second, his parents were responsible for
this assumption, having told Aaron that a contract was being arranged by their lawyers to
give effect to the transfer. Third, Aaron acted in reliance on this assumption by staying and
working on the farm and by obtaining a bank loan to finance the construction of a new house.
Fourth, his parents intended Aaron to act on this assumption, having promised to transfer part
of their farm to him if he continued to work on the farm. Fifth, Aaron suffered detriment
acting pursuant to this assumption, including working on his parents farm and taking out a
loan to build a new home. Sixth, his parents failed to act to avoid Aarons detriment. They
let Aaron assume that their promise to him would be fulfilled even though they intended to
give the property to their daughter.

Accordingly, Aaron may make a claim for a part of his parents farm using the Waltons
Stores doctrine of promissory estoppel.

Finally, it is also worth noting that Aaron may also have a claim for compensation under s 18
of the Australian Consumer Law on the basis of an action for misleading or deceptive
conduct by his parents.