1.

Task 1: The formation of a valid contract

There are five required elements for the formation of a valid contract. They are the
agreement, consideration, intention to create legal relations, capacity of the parties and
terms.

a. Agreement:

Agreement is the first essential element of a valid contract. It is made only when there
are an offer from the offeror and acceptance from the offeree. An offer is a definite
promise to be bound on specific terms and acceptance is the unqualified agreement to the
terms of that offer (BPP Learning Media, 2010).

The courts would determine whether an offer reached one party and the acceptance
for that offer is made by him in order to decide if an agreement is made between two
parties or not. If there is an agreement between two parties, it would bind them in the
contract (BPP Learning Media, 2010).

The offer and acceptance could provide the court the time a contract binding both
parties is formed (Elliott and Quinn, 2007), therefore any new term introduced after that
point would not be included in the contract. Only exclusion is that the two parties both
agree with the new term (BPP Learning Media, 2010). This is also one of the reasons for
the importance of the contract.

b. Consideration:

One of the essential elements is consideration. It is something of value that one party give
another in return for what is gained from him (Elliott and Quinn, 2007). Consideration
also defined as ‘the price of the other person’s promise’ (BPP Learning Media, 2010,
p.80). The exchange promise here could be money or any right, interest and benefit which
must be legal, possible and sufficient, and it must not be a past consideration (BPP
Learning Media, 2010).

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 Agreement, or the obligations must be supported by the consideration from the two
parties. If one party provide no consideration, there would be no contract, except the
contract by deed (BPP Learning Media, 2010).

c. Intention to create legal relations

If the parties make an agreement without any intention to create legal relations, which
is the willingness to be bound by the terms of the contract, that agreement would not be
consider as a contract (Elliott and Quinn, 2007).

Intention could be shown by considering their words or behaviour, or may be decided

by the courts applying two types of agreement: Domestic and social agreement or
Commercial agreement. Only with commercial agreement and some domestic agreement
that relates to property, the agreement is presumed that there is an intention to create legal
relations (BPP Learning Media, 2010).

d. Capacity

Capacity is the position of the parties to fully understand the agreement they have
entered into (BPP Learning Media, 2010).

The contract is not made if the parties do not have the capacity to do so. It could be
argued that they do not fully understand of what they are doing. There are some
categories of people that are considered to be limited in capability to enter the contract,
and are protected by the law. Minor, drunker and mental disorders are some of them.

e. Terms

The terms of the contract show the duties and responsibility of each party in the
agreement.

The parties might include in their contract whatever terms they want by making
express offer and acceptance, which called express term. However, the law, by several
legal rules, could adjust these terms. Besides, implied terms might be included in the
contract by the courts “as necessity to give effect to the presumed intentions of the
parties” (BPP Learning Media, 2010, p.114).

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The terms must be clear and complete to be included in a contract that binds both parties.
Vague terms might lead to no contract is made.

2. Task 2: Essential elements of a valid contract in business scenarios

a. Claim 1:

Issue: Is there a contract made between Lex and Paul?

Rule:

- A contract is an agreement which legally binds the parties.

- An offer is a definite promise to be bound on specific terms.

- A counter-offer is a final rejection of the original offer. If a counter-offer is made, the

original offeror may accept it, but if he rejects it his original offer is no longer available
for acceptance.

- Revocation may be an express statement to that effect or may be an act of the offeror
indicating that he no longer regards the offer as in force. His revocation does not take
effect until the revocation is communicated to the offeree.

- Acceptance is the unqualified agreement to the terms of the offer.

- The postal rule states that, where the use of the post is within the contemplation of
both the parties, the acceptance is complete and effective as soon as a letter is posted,
even though it may be delayed or even lost altogether.

Application:

On 10th January, Lex writes a letter to Paul, offering to sell Paul a car for $25,000. So
Lex’s offer communicates Paul the following day, on 11th January. This is when the offer
is made.

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 On 14th January, Paul writes back, saying that he is prepared to pay $22,000 for the
car. This is the counter-offer from Paul giving new price for the car that rejects the first
offer from Lex. Similarly, another counter-offer is made when Lex replies that he is
prepared to accept $23,500 on 18th January (see case Hyde v Wrench 1840)

On 22nd January, Paul replies, asking whether the deal includes the car stereo systems
that he saw in the car. This letter from Paul requests the information about the car,
therefore does not amount to a counter-offer (see case Stevenson Jaques & Co v McLean
1880). On 25th January, Lex answers Paul’s question and advises that he will hold the car
until close of business on 27th January but must have an answer by that time. The letter
reaches Paul on 26th January, giving a condition about the expired date of the offer.

On 27th January, Paul writes to Lex, saying that he will buy the car, with stereo
system, for $23,500. This mean Paul accept the counter-offer from Lex. In addition, the
letters were posted on the day that they were written. According to the postal rule, the
acceptance is complete and effective at the time they were posted on 27th January, though
it is communicated to Lex on 28th (see case Adams v Lindsell 1818). However, Lex’s
expired date from the counter-offer that Paul accepted at that time excluded the postal
rule that he want an answer reaches him at close of business on 27th January. Therefore
the acceptance is not communicated to Lex on his expected day, as in the fact “at close of
business on the same day (27th January), Lex heard nothing from Paul”, then the
acceptance is not effective. Consequently, Lex sells the car to Max means the revocation
is made, the contract between Lex and Paul is not made, though the revocation does not
even communicated Paul before the acceptance reaches Lex.

Conclusion:

Paul could not sue Lex for breach of contract.

b. Claim 2:

Issue: What legal rights does Fiona have against her parents?

Rule:
- A contract is an agreement which legally binds the parties.

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 - 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.

- Executory consideration is a promise given for a promise, not a performed act.

- Intention to create legal relations can be defined as follows:

‘An agreement will only become a legally binding contract if the parties intend
this to be so. This will be strongly presumed in the case of business agreements
but presumed otherwise if the agreement is of a friendly, social or domestic
nature.’

- Legal relations can be defined as the willingness to be bound by the terms of the
contract.

- Capacity refers to the fact that the law regards some groups as being unable to
enter into binding contractual arrangements, because they might not be in a
position to fully understand the agreement they have entered into.

Application:
Fiona is 19 years old and is doing the Accounting course at TAFE, which mean she is
a major and sound-minded, therefore she has the capacity to enter into a binding contract.

Her parents promise her that if she gets an “A” in Commercial Law I they will buy
her a new computer system worth $5,000. The promise to buy a new computer system
from Fiona’s parents in return for an “A” from her is considered as an executory
consideration. The consideration from Fiona’s parents is the computer system. The
consideration from Fiona is an “A” in the subject. In addition, studying the subject is her
duty when she is learning the course at TAFE. However, getting an “A” in the subject is
performing more than current duty, so “A” is a good consideration from Fiona (see case
Glasbrook Brothers v Glamorgan County Council 1925). When the valuable
consideration is made, there could be a contract between Fiona and her parents (see case
Dunlop v Selfridge 1915)

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 However, the agreement is made between Fiona and her parents, so this is domestic
arrangement. Therefore, there is no intention to enter into legal relations (see case Jones v
Paravatton 1969, Balfour v Balfour 1919). As a result, no contract is created between
them.

Conclusion: Fiona could not sue her parents for breach of contract.

c. Claim 3:

Issue: What contractual rights does Plod have against Joe?

Rule:

- A contract is an agreement which legally binds the parties.

- 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.

Application:

Joe is the owner of a jewellery shop. There is a robbery and he promises to pay Plod
$1,000 if he catches the robber and recovers the jewellery, which is accepted by Plod.
This is when an agreement is made between Joe and Plod. The consideration from Joe is
the amount of 1,000 dollars in return for the capture of the robber and the property
recovered. Normally, a contract could be made (see case Dunlop v Selfridge 1915).

However, constable Plod is the police officer investigating the robbery happened in
Joe’s jewellery shop. Therefore, it is Plod’s existing duty to catch the robber and return
the lost jewellery for the shop. As a result, no consideration is given from Plod, then no
contract is formed between the two parties (see case Collins v Godefroy 1831).

Conclusion: Plod could not sue Joe when no contract is made.

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 3. Task 3: The impact of different types of contract

a. Simple contract and specialty contract

Using consideration, the contract is classified as specialty contract and simple

contract. A specialty contract (or a contract by deed) is the one in which consideration is
not obliged. Otherwise, in a simple contract (most types of contract), consideration must
be provided by both parties (BPP Learning Media, 2010).

The courts protect the one executing the deed, which intends to bind him to the contract.
Therefore contract by deed must be in writing, must be signed, sealed and the proof from
witness is compulsory. Contract by deed includes: Lease for three years or more,
conveyance or transfer of a legal estate in land and a promise not supported by
consideration (BPP Learning Media, 2010).

However, a simple contract could be in writing but might also be oral. However, some
contract must be in writing and some must have written evidence:

 Contract must be in writing: Transfer of shares, sales or disposition of an

interest in land, bills of exchange and cheques, consumer credit.
 Contract must have evidence in writing: guarantee.

The contract that is in writing could be divided into signed contract and unsigned
contract. The party that signed the contract is held to have accepted all the terms though
he could have not read the document. Nevertheless, each party must be aware of the terms
only before or at the time the contract is made (BPP Learning Media, 2010).

b. Consumer and non-consumer contract

A consumer contract is the agreement between the parties when one of them is
consumer. A consumer then is described as ‘a natural person who, in making a contract to
which these regulations apply, is acting for purposes which are outside his business’ (BPP
Learning Media, 2010, p.129).

In order to protect the consumer, the UCTA (Unfair Contract Terms Act 1977) and
Regulations 1999 applied to only the consumer contract. However, while UCTA included

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the companies in the definition of consumers, the Regulations 1999 consider human
beings as the only consumers in the contract (Elliott and Quinn, 2007).

c. Unilateral and bilateral contract

Bilateral contract is created when the parties are bound by that contract and the terms then
become obligated with all of them. Contracts are mostly bilateral.

Unilateral contract is formed when only one party promise the other to give a benefit, or
right that is become obliged terms in the contract. That party is the only one bound by the
contract. The other parties could whether make acceptance, which is usually by conduct,
but if they do, the bound party is compulsory to return his consideration.

There is an impact of these two types of contract on the advertisement. Advertisements

are often the invitations to treat, and these advertisements are for a bilateral contract.
When a party promotes something using advertisement, and he express his willingness to
be bound by it, the advertisement would then become an offer. Moreover, this sort is the
advertisements for a unilateral contract (Elliott and Quinn, 2007).

4. Task 4: The difference among condition, warranties and innominate terms

Based on the importance of the terms, they are classified as conditions, warranties and
innominate terms.

Condition is a term which is vital to the contract, going to the root of the contract
(BPP Learning Media, 2010). If there is a breached condition, it would cause significant
consequence for the innocent party (Elliott and Quinn, 2007). Whereas, failure in
performing a warranty could lead to no highly important impact, when warranty is a less
important term, it does not go to the root of the contract, but is subsidiary to the main
purpose of the contract. Where the consequence of breach of the term is vague, which
could be either serious or trivial the court will categorise it as innominate, also called
intermediate or indeterminate (BPP Learning Media, 2010).

If there is breach of a condition, the court would then enable the innocent party to
terminate the contract and also to claim damages (BPP Learning Media, 2010). For

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example, Madame Poussard’s failure to perform on the opening night of the shows was
breach of condition, as in the case Poussard v Spiers 1876. Therefore the producer was
able to treat the contract as discharged and claim the singer for damages. Different from
the condition, breach of a warranty only lead to the right of the party not in breach to
claim damages (Elliott and Quinn, 2007). Being unable to the show preparation before the
opening is breach of warranty, for instance (see case Bettini v Gye 1876). Only when the
actual effect of the breach of an intermediate term is known, the court would base on that
to decide the right of the innocent party (BPP Learning Media, 2010). If the effects of
breach of indeterminate term are serious, the term would be decided to be treated as a
breached condition. In the other hand, if the consequences of breached term are minor,
the term would act as a warranty (Elliott and Quinn, 2007). For example, in the case
Hong Kong Fir Shipping Co Ltd v Kawasaki Kisa Kaisha Ltd 1962, the consequence of
the breach is not so serious (the delay of twenty weeks out of the total 24 months of ship
charter) as it is treated as breached warranty.

In conclusion, there are the differences in the importance of the terms, the
significance consequence of those breached terms and the rights of the innocent party
among conditions, warranties and innominate terms.

5. Task 5:

Claim 4:

Issue: Could Hoe sue against the Airline in spite of the exemption clause on the ticket?

Rule:

- A contract may be defined as an agreement which legally binds the parties.

- ‘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’.

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- Exclusion clause: A clause in a contract which purports to exclude liability altogether
or to restrict it by limiting damages or by imposing other onerous conditions. They are
sometimes referred to as exemption clause.

- Notice: Each party must be aware of the contracts’ terms before or at the time of
entering into the agreement if they are to be binding.

- Consistent dealings: An exception to the rule that there should be prior notice of the
terms is where the parties have had consistent dealings with each other in the past, and the
documents used then contained similar terms.

- Contra proferentem rule: In deciding what an exclusion clause means, the courts
interpret any ambiguity against the person at fault who relies on the exclusion. Liability
can only be excluded or restricted by clear words.

- A crime is conduct prohibited by the law. The State is the usual prosecutor in a
criminal case because it is the community as a whole which suffers as a result of the law
being broken. Personal guilty of crimes are punished by fines or imprisonment. In a
criminal trial, the burden of proof to convict the accused rests with the prosecution which
must prove its case beyond reasonable doubt.

Application:

Hoe purchased an airline ticket to travel to Perth, which contained an exemption

clause. Therefore, the consideration from Hoe is his payment and the acceptance of the
company’s exclusion clause in return for the flight and services on flight from the airline
and there is an unsigned contract between the two parties (see case Dunlop v Selfridge
1915).

The exemption clause exclude the company’s liability for any loss that may occur to
the passenger’s luggage during the time that it is out of his/her possession. There are two
circumstances:

 The first situation is that this is the first time Hoe using the service provided by
the airline company. Therefore, if the exemption clause does not reasonably draw
to Hoe’s attention, it could not be included in the contract, and therefore Hoe may

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 sue the company for any loss that may happen with his luggage (see case
Chapelton v Barry UDC 1940). However, if the exclusion clause is easily noticed
and read, it becomes an integral part of the contract (see case Thompson v LMS
Railway 1930).
 The second circumstance is that Hoe has been customer of the airlines for a period
of time, so there is a consistent dealing and Hoe is assumed to know about the
exclusion clause. Therefore, the clause is also included in the contract (see case J
Spurling Ltd v Bradshaw 1956).

On arriving at the airport, Hoe handed over his luggage for inclusion on his flight.
Before Hoe’s luggage was load on the plane, an airline employee cut open the bag, stole
the valuables inside then threw the bag away. The act of the employee to steal the bag is
considered as a crime. Therefore, if Hoe has any absolute evidence against the employee
or he is captured because of stealing Hoe’s property, then the employee would be
punished by fines or imprisonment. Furthermore, according to the contra proferentem, the
exemption clause would be understand as the company exclude their liability to the
accidental loss of customer’ luggage that it is out of his/her possession (see case Hollier v
Rambler Motors 1972). Besides, it is the company’s negligence in selecting employees,
so the fault is not considered as accident. Therefore, the company cannot exclude their
liability for the lost of Bob’s luggage.

Conclusion:

In spite of the exclusion clause, Hoe could sue the airline company

6. Task 6

Claim 5:

Issue: What contractual rights does Bob have against Super Cleaning Pty?

Rule:
- A contract is an agreement which legally binds the parties.

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 - 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.

- Condition: a term which is vital to the contract, going to the root of the contract.

- Implied term: a term deemed to form part of a contract even though not expressly
mentioned. Some such terms may be implied by the courts as necessary to give
effect to the presumed intentions of the parties. Other terms may be implied by
statute, for example, the Sale of Goods Act.

- Sale of Goods Act 1979, s. 14(2) provides that: Goods are of a satisfactory quality
if they ‘meet the standard that a reasonable person would regards as satisfactory’,
taking account of any description of the goods, the price and the other relevant
circumstances.

- Supply of Goods and Services Act 1982, section 13 provides that ‘where the
supplier is acting in the course of a business, there is an implied term that the
supplier will carry out the service with reasonable care and skill’.

- Exclusion clause: A clause in a contract which purports to exclude liability

altogether or to restrict it by limiting damages or by imposing other onerous
conditions. They are sometimes referred to as exemption clause.

- Notice: Each party must be aware of the contracts’ terms before or at the time of
entering into the agreement if they are to be binding.

- Consistent dealings: An exception to the rule that there should be prior notice of
the terms is where the parties have had consistent dealings with each other in the
past, and the documents used then contained similar terms.

- If a person wished successfully to exclude or limit liability for loss caused by

negligence the court require that the word ‘negligence’, or an accepted synonym
for it, should be included in the clause.

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 - The basic purpose of Unfair Contract Terms 1977 (UCTA) is to control the use of
clauses excluding or limiting liability for breach of contract, particularly where
one of the parties is a consumer.

- Ss 6 to 7 UCTA: A consumer contract for the sale of goods, hire purchase, supply
of work or materials or exchange of goods cannot exclude or restrict liability for
breach of conditions relating to description, quality, fitness and sample implied by
the Sales of Goods Act 1979 and the Supply of Goods and Services Act 1982.

- A consumer is defined as ‘a natural person who, in making a contract to which

these regulations apply, is acting for purposes which are outside his business’.

Application:
“Bob takes his best dinner suit to the local dry cleaner known as Super Cleaning Pty
Ltd to have his suit dry cleaned. As it is a special job he is charged extra and told that the
suit will be ready in one week.” So, the cleaner agrees to provide their cleaning service in
return for the payment and extra from Bob. Therefore, there is a consideration between
Bob and the cleaning company. Moreover, it is also the time that a contract is made
between them (see case Dunlop v Selfridge 1915).
Later, Bob returns to collect the suit which has shrunk 4 sizes after cleaning. “He asks
Super Cleaning Pty Ltd for $750 which is the cost of a new suit, but is told to look on the
back of his receipt where he reads the words “All care but no responsibility taken for any
loss or damage to clothing left for cleaning”. He had not realised that those words were
there.” There are three scenarios in this case, and the first two circumstances occur when
it is the first time Bob use the service of the company.
- The first scenario is that the words “See back” are not printed on the front of the
receipt. Therefore, the exclusion clause is not reasonable to communicate Bob in
his receipt before or at the time the contract is made, and so is not an integral part
of the contract (see case Chapelton v Barry UDC 1940). As a result, Super
Cleaning Pty Ltd has liability for Bob’s suit, and Bob could successfully claim
compensation for breach of contract.
- If on the front of the receipt printed the words “See back”, the exemption clause is
adequately communicated to Bob and therefore is accepted to be a term of the

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 contract, though Bob does not read the receipt (see case Thompson v LMS
Railway 1930).
- The final circumstance is that Bob has been a customer of Super Cleaning Pty Ltd
for five years. If in five years, he only used the cleaning service of Super Cleaning
Pty for few times, there would be no evidence to show that Bob knows about the
exclusion clause as a continuing term of the contract unless he is aware
sufficiently about it (Hollier v Rambler Motors 1972). However, if he had
reasonably frequent use the service in five years, the consistent dealing is applied
or Bob should be noticed of the exclusion clause because of previous dealings.
Therefore, the clause would be seen as a valid terms of the contract (J Spurling
Ltd v Bradshaw 1956). To summary, if only Bob knows about the exclusion
clause or has reasonably frequent dealings in the pass, the exemption clause is
included in the contract.

Then, the exclusion clause must be considered to be applied in this case or not.

The exclusion clause states “All care but no responsibility taken for any loss or
damage to clothing left for cleaning.” The words “All care” and the loss due to
“negligence” is not mentioned, so the exclusion clause means they are not liable for loss
or damage to clothing only due to accident, according to the negligence rule (see case
Alderslade v Hendon Laundry 1945). In other words, liability for damages due to
negligence is not excluded from the contract.

 Bob takes his suit to the cleaner to have it dry cleaned. So if the suit shrank four
sizes due to negligence, for example it is washed with water or is soaked, the
exclusion clause then is not applied to exclude the company’s liability.
 If Bob’s suit was cleaned with reasonable care, but it still shrank four sizes, the
exclusion clause could be applied when the failure to clean the suit is not a
consequence of negligence. Besides, the company did not breach the implied term
that they would put reasonable care and skills in their job, though the cleaning
service is done unsuccessfully. However, the cleaned suit cannot be worn by Bob
again, so the unsuccessful cleaning becomes breach of condition relating to the
satisfactory quality, or the merchantable quality in the Sale of Goods Act 1979

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 (see s14(2)). Besides, Bob is a consumer so there is a consumer contract between
the two parties. Therefore, the exemption clause is void (see ss 6 to 7 UCTA in
quality and suitability).

Conclusion:
Bob could sue Super Cleaning Pty Ltd for breach of condition.

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REFERENCE

1. BPP Learning Media (2010) Business Essentials: Business Law, London, 2nd edt.

2. Elliott, C. Quinn, F (2007) Contract Law, Pearson Longman, London, 6th edt.

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