First Class Law Tutor

Contract law I

CONTRACT FORMATION
A contract is said to come into existence when acceptance of an offer has been communicated
to the offeror. Formation occurs when the parties are of one mind and their individual wills
create a binding obligation (this approach has been softened by developments in the law of
estoppel, misleading conduct, negligent misrepresentation and unjust enrichment).

However a contract can be established without an identifiable offer and acceptance provided
the parties have manifested mutual asset and appear to have reached a concluded bargain.

I. Agreement (offer and acceptance)

Offer
The nature of an offer
Brambles Holdings v Bathurst City Council [2001] NSWCA 61: Offer must take form of
proposal for consideration which gives option of acceptance or rejection. A communication
which ‘uses the language of command’ and ‘peremptorily requests’ the other party to adopt a
particular course of action may not be regarded as an offer.

INVITATION TO TREAT – An offer is different from an invitation to treat, which is an

invitation to others to make offers or enter into negotiations.
Pharmaceutical society of great Britain v Boots Cash Chemists [1953, UK]: Pharmacists
supervised transactions at the cash registers but didn’t supervise the customers selection of
goods from the shelves.
Issue: whether a statutory offence of sales taking place without supervision of pharmacist had
been committed in a self-serve pharmacy?
Held: Plaintiff incorrect to argue display of goods should be regarded as an offer which was
accepted when a customer took an item from the shelf and placed it in their receptacle.
 A customer’s acceptance would not be effective until communicated to the offeror, so
a sale must on any interpretation take place at the checkout.

Goodwin’s of Newtown v Gurrey [1959, South Australia]: The appellant company displayed
TV sets in premises open to the public. The sets weren’t for sale, but their equivalents could
be ordered from the appellant and another firm would supply them.
Issue: Was the appellant offering goods for sale or merely inviting members of the public to
make an offer to buy?
Held: The D’s conduct amounted to an invitation to treat however the words ‘offered for sale’
should not be given a legal meaning but should be construed ‘in the sense in which these
words are understood in ordinary, everyday use, and particularly in commerce’. The words
should mean ‘present for sale’ or display goods for sale in a way calculated to ‘influence or
induce the public to buy their counterparts’ from the other firm.

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AGC (Advances) Ltd v McWhirter [1977, Sup. Ct. NSW]: P put a property up for sale at
auction subject to a reserve. The highest bid of $70,000 was below this reserve. P then
instructed the auctioneer to withdraw the reserve and a bid of $70,500 was made by D. P did
not accept the bid (they had concerns about D's ability to pay). The property was then
knocked down to the earlier $70,000 bidder. D claimed a contract had been formed when
they made the highest bid.
Held (Holland J): Bidders at auctions make offers that may or may not be accepted.
Withdrawal of a reserve does not change this - it does not constitute a definite offer to sell to
the highest bidder; an auction is merely an invitation to treat

Warlow v Harrison [1859, England]: 1) The defendant Harrison, who's an auctioneer

advertised the sale 'without reserve' of a mare by public auction 2) Plaintiff, Warlow attended
the auction and bid 60 guineas 3) Horse owner attended too, and bid 61G. 4) Plaintiff knew
that it was the horse owner who bid 61G, so he didn't bother bidding any higher. 5)
Auctioneer, Harrison, knocked down the hammer 3 times to the horse owner.
Held : Highest bona fide bidder at the auction may sue the auctioneer if a sale was without
reserve. There was a breach of unilateral contract between auctioneer and highest bona fide
bidder, therefore the plaintiff has the right of action against the auctioneer.
[Claim successful]

UNILATERAL CONTRACT – A unilateral contract will only arise if the offeree performs the
requested acts subjectively in reliance on the offer (Crown v Clarke). Carlill v Carbolic
Smoke Ball Co [1893, UK]: The defendants manufactured a device called Carbolic smoke
ball and in advertisements stated 100 pounds offered to anyone who contracted a cold or
influenza after using the ball in accordance with their instructions for 2 weeks.
Held: In determining whether an offer has been made, consider whether a reasonable person
in the position of the offeree would think an offer was intended, and that a binding agreement
would be made upon acceptance.
 The D’s statement regarding placing 1000 pounds in a bank account as proof of their
seriousness indicates a promise was intended.
 In this case the offer was made to the whole world and accepted by performance of
the conditions on the faith of the advertisement.
 Although acceptance of an offer must normally be notified to the offerror, the offeror
may dispense with that notification. An offer that calls for particular conditions may
be accepted by performance of those conditions.
 A reasonable construction must be placed on the advertisement which made it
sufficiently certain.
 The use of the smoke ball by the plaintiff constituted both a benefit to the defendant
and a detriment to the plaintiff, either of which would have been enough to constitute
good consideration for the promise.

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Australian Woollen Mills v Commonwealth (1954, HCA) – For a unilateral contract to arise,
the promise must be made in return for the doing of the act. 3 ways of satisfying this
requirement: 1. Whether the offeror has expressly or impliedly requested the doing of the act
by the offeree 2. Whether the offeror has stated a price which the offeree must pay for the
promise 3. Whether the offer was made in order to induce the doing of the act.
Held: AWA failed to establish a relation of quid pro quo between the Commonwealth’s
promises and AWM’s acts. The Commonwealth’s letters are statements of policy and aren’t
offers to contract (i.e. no intention to create legal relations).

BILATERAL CONTRACT – At the time of formation of a bilateral contract, the obligations of

both parties remain to be performed (i.e. they are executory).

TERMINATION OF AN OFFER: An offer ceases to be available for acceptance when it is

withdrawn by the offeror, lapses or is rejected by the offeree.
Withdrawal
An offer can be revoked anytime before it is accepted unless the offeree has given
consideration for that promise (Goldsborough Mort v Quinn). The withdrawal is only
effective once it has been actually communicated to the offeree; no exception is made for a
withdrawal sent by post.

Where the offeree has given consideration, the promise to hold an offer open is known as an
‘option’. In Goldsborough a grantor gave the option holder the right to purchase certain land
at a specific price at any time within one week of the agreement in return for 5 shillings. The
grantor’s attempt to repudiate the offer before acceptance was held to be ineffective. The
option to purchase a property is a contract for the sale of that property, conditional upon the
option being exercised within the specified time period (Griffith CJ, O’Connor J). The
remedy is specific performance of the conditional contract of sale.

Lapse
An offer expressed to be available for acceptance for a particular period of time will lapse at
the end of that period. If no period is stipulated, the offer will lapse after a reasonable time.
What period of time is reasonable will depend on the circumstances including the nature of
the subject matter and the form in which the offer was made (oral, written). The question is
how a reasonable person in the position of the offeree would interpret the offer.

Does a failure of contingent condition/changed circumstances cause an offer to lapse? A

fundamental or important change of circumstances has the effect of terminating an offer. In
Financings v Stimson the defendant signed an "offer to buy" a car on hire-purchase from a
finance company. The document had been given to him by the car dealer. The document had
a clause which said that the agreement would not be binding until it had been accepted by the
finance company. D paid the first instalment, insured the car and took it away. Being
unhappy with its performance, he returned the car to the dealer and cancelled his insurance.
The car was stolen from the dealers and damaged. Not knowing of this the finance company

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then accepted the written offer which had been sent to them. D refused to pay the charges and
the Co sued him for breach of the hire purchase agreement.
HELD: D's offer was subject to an implied condition that the car should continue in its
undamaged state and on the failure of that condition, the offer lapsed.

Rejection
Once an offer has been rejected it’s no longer available for acceptance. A rejected offer may
however later be revived or form the basis of an agreement which is inferred in the absence
of a valid offer and acceptance. The making of a counter-offer is treated as a rejection and
will extinguish the original offer.1

In a unilateral contract situation, an offer made in exchange for the doing of an act becomes
irrevocable once the act has been partly performed (Veivers v Cordingly). However this
general principle was rejected in Mobil Oil Australia v Wellcome International (1998, FCA):
an incentive scheme was operated by Mobil to improve the performance of its franchisees:
‘we will find a way to extend your tenure automatically no costs to you if you consistently
achieve 90% or better in Circle of Excellence judgings’. Some franchisees spent time and
money improving their operations to meet the 90% target but mobil abandoned scheme.
Held: Mobil had not made an offer to the franchisees as the scheme was only in a
developmental stage and too uncertain.
 A person offering to enter into a unilateral contract may be prevented (on penalty of
damages) from revoking the offer by an implied ancillary contract not to revoke. An
estoppel may arise where the offeree has acted to their detriment on assumed non-
revocation however there is no basis for any universal principle of non-revocation.
 Whether it’s unjust to revoke once offeree has commenced performance depends on:
o whether the oferror knows offerree has commenced performance
o Whether the offerree understands incomplete performance is at his own risk
o Whether the parties intended offerror should be at liberty to revoke
o Whether acts of performance are detrimental or beneficial to offerree

Acceptance
Acceptance means an unqualified assent to the terms of an offer.2 It’s an objective test, but
subjective leads to same result because there’s no contract if the parties aren’t of one mind
unless an estoppel prevents one of the parties from denying that he has agreed to the other’s
terms. If a man so conducts himself that a reasonable man would be hat he was assenting to
the terms proposed by the other party, and that other party upon that belief enters into the

1
However merely requesting information about whether there is room for movement in the agreement isn’t a
counter-offer and does not constitute a rejection.
2
Acceptance generally has effect only when communicated to the offeror. There are two exceptions: (1)
effective acceptance (where clear language supports such a construction) and (2) the postal rule where
despatching an acceptance is sufficient even where not received by the other party in actuality. The postal rule
applies where the parties must have contemplated that acceptance might be sent/effective by post. The postal
rule DOES NOT apply to instantaneous communications such as the telephone and telex communications.
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contract with him, the man thus conducting himself would be equally bound as if he had
intended to agree to the other’s terms (Smith v Hughes).

SILENCE NOT EFFECTIVE - Felthouse v Bindley (1862): a man wrote to his nephew stating
that he wished to purchase a horse and if he didn’t hear anything from the nephew he’d
consider the horse his. The nephew instructed his auctioneer not to sell the horse but didn’t
communicate his acceptance to his uncle. The auctioneer sold the horse by mistake.
 Held: no action against auctioneer possible because contract hadn’t been formed since
nephew didn’t communicate acceptance to the uncle.

ACCEPTANCE BY CONDUCT (SILENCE IN RARE SITUATIONS): Where an offeree with a

reasonable opportunity to reject an offer takes the benefit of it under circumstances which
indicate the benefits were to be paid for, it is open to hold that the offer was accepted
(Empirnall Holdings v Machon Paull Partners).

BATTLE OF THE FORMS: Where offerror and offeree send each other standard form
contracts, these are offers and counter-offers. The ‘last shot’ will prevail, provided the
recipient of the counter-offer can be taken to have accepted the terms proposed. If A sends
standard form to B, and B responds with its own standard form and then A continues with the
transaction then A can be taken to have accepted B’s terms (Butler Machine Tool) however if
A responds with a counter-offer then there’s no meeting of the minds and no contract at all.

Brinkibon v Stahag [1983, House of Lords]

The offeror, Brinkibon (London, England) wanted to sue the offeree, Stahag (Vienna,
Austria) for breach of contract. Acceptance of Brinkibon’s offer had been by way of telex
from London to Austria. Which jurisdiction’s law applied? The answer to this question
depended on whether the postal rule applied - if it did the contract would have been
concluded in England and English law would apply; if it did not apply then the contract
would have been concluded where the acceptance was received – Vienna.
Held: The postal rule does not apply to direct/instant forms of communication (including
telex) – as telex was used here the postal rule did not apply and the contract was formed in
Vienna. Exceptions: (1) where the message is sent or received through a third party; (2) is
sent out of office hours; or (3) is not intended to be read immediately [these situations
resolved with reference to the presumed intention of the offeror]
 The Court also observed that even though with telex the message may not be received
by the intended recipient immediately (there may be agents or other third parties who
receive the messages to be passed on to the intended recipient) a telex that goes
directly from the offeree’s business to the offeror’s business (unlike a telegram which
employs the use of a post office) should be treated as if it were an instantaneous
communication.
 If a telex is sent to an office acceptance occurs when the telex reaches the place of
business, not when it actually gets to the person it is addressed to.

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Electronic transactions act 13A Time of receipt

(1) For the purposes of a law of this jurisdiction, unless otherwise agreed between the
originator and the addressee of an electronic communication:
(a) the time of receipt of the electronic communication is the time when the electronic
communication becomes capable of being retrieved by the addressee at an electronic address
designated by the addressee, or
(b) the time of receipt of the electronic communication at another electronic address of the
addressee is the time when both:
(i) the electronic communication has become capable of being retrieved by the
addressee at that address, and
(ii) the addressee has become aware that the electronic communication has been sent to
that address.
(2) For the purposes of subsection (1), unless otherwise agreed between the originator and the
addressee of the electronic communication, it is to be assumed that the electronic
communication is capable of being retrieved by the addressee when it reaches the addressee's
electronic address.
13B Place of dispatch and place of receipt
(1) For the purposes of a law of this jurisdiction, unless otherwise agreed between the
originator and the addressee of an electronic communication:
(a) the electronic communication is taken to have been dispatched at the place where the
originator has its place of business, and
(b) the electronic communication is taken to have been received at the place where the
addressee has its place of business.3

Agreement without offer and acceptance

Brambles Holdings v Bathurst City Council: Brambles was instructed by council to increase
fees for waste disposal and remit difference to council. Brambles replied that its current
remuneration was not viable commercially and asked for an increase. From Oct 1991
Brambles charged the fee schedule recommended by council despite lack of clear agreement.
Some years later Council claimed for the additional income arising from unwritten agreement.
Held: Where no offer and acceptance can be identified it is relevant to ask whether an
agreement can be inferred, whether mutual assent has been manifested and whether a
reasonable person in the position of each of the parties would think there was a concluded
bargain. Brambles took advantage of the commercial benefits offered by the council,
knowing the basis on which the council was prepared to allow the higher fees to be charged.

Gibson v Manchester City Council [1979, UKHL]: Manchester City Council was being run
by the Conservative Party, which was running a policy of selling council houses to the
occupants. Mr Gibson applied for details of his house price and mortgage terms on a form of
the council. In February 1971, the treasurer replied,
The corporation may be prepared to sell the house to you at the purchase price of £2,725 less
20% = £2,180 (freehold)… This letter should not be regarded as a firm offer of a mortgage. If
you would like to make formal application to buy your Council house please complete the
enclosed application form and return it to me as soon as possible.

3
All these provisions are subject to any agreement to the contrary.
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In March 1971, Mr Gibson completed the application form, except for the purchase price and
returned it to the council. In May, the Labour party came back to power and halted sales. Mr
Gibson was told that he could not complete the purchase. So Mr Gibson sued the council,
arguing that a binding contract had already come into force.
Held: The House of Lords unanimously upheld the Council's appeal, so Gibson did not get
his house. Agreement only exists when there is a clear offer mirrored by a clear acceptance.
The Council's letter was not an offer: ‘It was but a step in the negotiations for a contract
which, owing to the change in the political complexion of the council, never reached fruition’.

Non-contractual obligations
Estoppel – in exceptional circumstances it may be unfair for A to withdraw from negotiations
with B, if A has led B to act on the assumption that A will enter into a contract with B.
Restitution – Sometimes require payment in respect of work done in anticipation of a contract
that fails to materialise.
Tort – in some cases negotiating parties owe each other a duty of care in the provision of
information.
Competition and Consumer Act – 1. Obligation not to engage in misleading or deceptive
conduct in trade or commerce 2. Prohibition on bait advertising

II. Consideration

Consideration requires that something must be given in return for a promise in order to make
it binding. It’s where an agreement is entirely one-sided and a promise remains unperformed
that the issue of consideration assumes central importance.

the promisee must incur a detriment or confer a benefit on the promisor

In most case the consideration given in return for a promise will constitute both a benefit to
the promisor and a detriment to the promisee. Mutual promises will provide good
consideration for each other.

that benefit or detriment must be given in return for the promise.4

The act relied on as consideration must be performed as the agreed price of the promise.
Australian Woollen Mills: Consideration, offer and acceptance are an indivisible trinity,
facets of one identical notion which is that of bargain.
 Illustrates difference between a contract (a promise to pay $100 in return for
performance of the act) and a conditional gift (a promise to pay someone $100 if they
perform a certain act).

4
The person making the promise sought to be enforced will be referred to as the promisor and the person
seeking to enforce the promise is the promisee.
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It’s also important to distinguish between an act performed as the agreed price of a promise
an act performed in reliance on a promise. An act performed in reliance on a promise will not
constitute good consideration but may give rise to an estoppel.
Beaton v McDivitt: An agreement was reached with Beaton that Beaton would occupy
the land in question and work it rent-free. The McDivitts would transfer the land to Beaton
when the rezoning and subdivision took place. Beaton took possession of the land, built a
house and a road giving access to the block and farmed the block for several years. A dispute
arose over a tai chi class held in Beaton’s house and the McDivitt’s ordered him off the land
but Beaton claimed there was a contract between the parties which entitled him to a transfer.
The bargain theory of consideration applies in Australia (amounting to a rejection of the
‘reliance’ theory); in particular, that theory requires a ‘quid pro quo’ between the parties. In
this case there was such consideration – consideration for the promise to transfer was the act
of Beaton in coming and working on the block as requested. This constituted a ‘detriment’
suffered by Beaton and that is sufficient for consideration. Ultimately however Beaton
unsuccessful due to contract being brought to end by frustration (a separate reason).

Consideration must move from the promisee

There must be detriment to the promisee. However consideration need not move to the
promisor always: A may undertake a contractual obligation to B in return for a benefit
conferred by B on C.

Where two or more parties to a contract are regarded as joint promises, consideration may be
provide by one of them on behalf of both or all of them. A party to a contract who has not
herself provided consideration will be able to enforce a promise only if she can be regarded
as a joint promisee with the person who has provided consideration (it is possible to be a
party to a contract in which a promise is made, but still be a stranger to the consideration
given in return for that promise).

Sufficiency of consideration
Woolworths v Kelly (1991, NSW): Although inadequacy of consideration does not in itself
invalidate a contract, it may be taken into account as evidence of procedural unfairness in the
formation of a contract [e.g. as in CBA v Amadio (1983)]

Discretion as to performance
A promise will not constitute good consideration if the promisor retains an unfettered
discretion as to performance (Place Development v Commonwealth). The concept of illusory
consideration overlaps with the concept of an illusory promise, which may render a contract
uncertain.

Past consideration

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GENERAL RULE: Something given before promise is made cannot constitute good
consideration for promise.5
Roscorla v Thomas: defendant sold horse for £30 to plaintiff. Later at P’s request, D
promised that horse was “sound and free from vice”. P sought damages when horse turned
out to be “very vicious, restive, ungovernable and ferocious”.
 Lord Denman CJ: promise not enforceable because P had not consideration. Payment
of purchase price was a past consideration that did not support the later promise.

EXCEPTION: promise to pay for past services

 Where services performed at request of promisor in circumstances with implication
for payment, then performance of services by promisee will make good consideration.
o Lampleigh v Brathwait: B asked L to do all he could to secure pardon from
King for murder B committed. L unable to get pardon but expended
considerable effort in travelling to see K. B promised afterwards to pay L £100
for services.
o Where services provided at request of party, later promise to pay for those
services is binding because promise COUPLES itself with earlier request.
 Principle reformulated in 19th century to cover situations in which understanding
throughout transaction that services were to be paid for.
o Re Casey’s Patents; Stewart v Casey: plaintiff worked to promote defendant’s
patents and afterwards promised one-third share of patents.
o English Court of Appeal: plaintiff provided good consideration.
o Bowen LJ: “the fact of a past service raises an implication that at the time it
was rendered it was to be paid for, and, if it was a service which was to be
paid for, when you get in the subsequent document a promise to pay, that
promise may be treated either as an admission which evidences or as a
positive bargain which fixes the amount of that reasonable remuneration on
the faith of which the service was originally rendered”.

Existing Legal Duty Rule: arises in one-sided contract variations: where one party assumes
an additional obligation or agrees to release other party from an obligation. Beneficiary –
performing existing legal duty and claims benefit of contract modification. Modifying party –
releasing beneficiary from obligation or assuming additional obligation.
 GENERAL RULE: promise to perform existing legal duty or performance of such is
NOT regarded as good consideration eg promise to give evidence in court, promisee
is obliged by a subpoena to do so anyway.
o Stilk v Myrick: two sailors deserted ship on voyage to Baltic. Captain unable to
replace deserters, so promised remaining crew that he would divide deserter’s
wages amongst them if they would sail the ship back to London short handed.
Crew originally employed on basis that they would “do all that they could
under all the emergencies of the voyage”. Plaintiff sued to get deserter’s share.
o Lord Ellenborough CJ: desertion of small part of crew was an “emergency”.
Remaining crew were bound to complete voyage short handed, under existing
obligation. Thus, not good consideration.
 MODIFIED CONTRACTS (NO ADDITIONAL OBLIGATION ON PROMISEE) NOT
ENFORCEABLE
5
Distinguish between past consideration and executed consideration of unilateral contracts
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o Wigan v Edwards: Mason J – “The general rule is that a promise to perform an

existing duty is no consideration, at least when the promise is made by a party
to a pre-existing contract, when it is made to the promisee under that contract,
and it is to do no more than the promisor is bound to do under that contract”.
 PART PAYMENT OF DEBT DOES NOT GIVE GOOD CONSIDERATION TO
DISCHARGE THE DEBT (Pinnel’s case): If a debtor owes a creditor $100 and the
creditor agrees to accept $50 in satisfaction of the debt, this agreement will not be
binding and the creditor is entitled to recover the remaining $50.
o Foakes v Beer: debtor promised to pay a judgment debt in six-monthly
instalments in return for the creditors promise not to enfoce the judgment.
When debt was repaid, creditor successfully claimed interest.
 HELD: even if creditor’s promise could be seen as agreement to forgo
interest on debt, such promise was not supported by consideration
under Pinnel’s case rule.
 Rule has no application where debtor pays before due date or in a
different form, where several creditors jointly agree to forgo part of
each of their debts, where payment is made to creditor by third party,
or where debtor gives something other than money: “by no possibility
a lesser sum can be a satisfaction to the plaintiff for a greater sum: but
the gift of a horse, hawk or robe, etc, might be more beneficial to the
plaintiff than the money in respect of some circumstance, or otherwise
the plaintiff would not have accepted it in satisfaction”

Exceptions To Existing Legal Duty Rule

1. Fresh consideration – undertakes to do something more than he was obliged under
original contract.
o Hartley v Ponsonby: similar to Stilk v Myrick but half of crew had deserted
making it dangerous to continue. Remaining crew under no obligation to go to
sea in those conditions, and therefore fresh consideration by agreeing to
continue voyage.

2. Where the beneficiary’s promise to perform existing duty confers a practical benefit
on modifying party
Criticism:
i. Practical benefit to perform is ALWAYS identifiable.
ii. Principle provides that presence of economic duress/fraud on part of P
will prevent the practical benefit from being regarded as consideration.
But effect of duress/fraud is to render contract voidable at option of
party affected, not void.
iii. Inconsistent with bargain theory: what’s given/accepted is
beneficiary’s promise to perform, not practical benefit from
performance.
Williams v Roffey Bros & Nicholls (Contractors) Ltd [English Court of
Appeal] defendant contracted to refurbish block of 27 flats. Plaintiff agreed to
perform some carpentry work involved in refurbishment for £20000. Before
finished, P got into financial difficulties and concerned he was unable to
complete work. In order to avoid trouble/expense of finding new carpenter and
avoid incurring financial penalties under head contract for late completion, D
agree to pay the plaintiff extra £575 for each flat completed. P completed work
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on 8 more flats, but stopped when additional sum not paid. D engaged another
carpenter to work and incur 1 week penalty. P sought to enforce extra
payment, but no consideration.
 P’s right upheld as P’s promise to perform on time was benefit to D –
finishing on time and no penalty. Such benefit to D is capable of being
consideration for D’s promise.
NOT APPLIED TO PART-PAYMENT OF DEBT
Re Selectmove Ltd: Selectmove Ltd owed the Inland Revenue substantial sums
in outstanding tax and national insurance. The managing director, Mr ffooks,
met with Mr Polland, from the Inland Revenue and said he would pay future
tax as it fell due and the arrears at £1000 a month. Mr Polland said he would
have to check and would contact the managing director if it was unacceptable.
Selectmove Ltd heard nothing till a £25,650 notice came in and a threat of a
wind-up petition. Mr ffooks subsequently claimed that the Revenue had said
he could repay less.
 The Court held that even if facts found to be true, Mr Polland had not
bound the Revenue, and there was no consideration for the varied
agreement anyway: “if the principle of Williams v Roffey Bros Ltd is to
be extended to an obligation to make payment, it would in effect leave
the principle in Foakes v Beer without any application. When a
creditor and a debtor who are at arm's length reach agreement on the
payment of the debt by instalments to accommodate the debtor, the
creditor will no doubt always see a practical benefit to himself in so
doing. But that was a matter expressly considered in Foakes v Beer yet
held not to constitute good consideration in law”
Musumeci v Winadell Pty Ltd: landlord accept reduced rent from tenants in
financial difficulties. Tenant operate fruit shop, which suffered when land lord
let larger chain store.
Santow J: “practical benefit” exception accepted in Aus with 3 modifications:
- Modifying party agreed to accept less (concession), rather than pay
more.
- Only applies where promise has not been induced by “unfair pressure”.
- Where beneficiary’s performance is capable of being regarded by
modifying party as worth more than damages against beneficiary

3. Promises made to third parties – promisor incurs additional legal obligation and
confers additional legal right on the new promisee.
Pau On v Lau Yiu Long: plaintiffs agreed to acquire shares in public company on
contract which required them not to sell 60% of the allotted shares for 12 months.
Entered into second contract with shareholders of company in return for plaintiffs
performing obligations under 1st contract, in return for shareholders agreement to
indemnify the plaintiffs against any loss resulting from a fall in share price during that
12 months.
o Promise to perform an act under which promisee is already under existing
obligation to a third party to perform will make good consideration.
o Shareholders had benefit of direct obligation which they were able to enforce.
o P’s entry into main contract couldn’t be regarded as past consideration as they
had entered into it on the understanding that they would be indemnified from
any fall in the share price (falls into the Stewart v Casey exception)
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4. Compromise and forbearance to sue where made as part of a bona fide compromise to
a disputed claim
a. Wigan v Edwards: E bought from W a house that W had built. After contract E
concerned about defects in house. E – honestly but without legal right –
refused to complete transaction unless defects were rectified. W agreed to
rectify defects within one week and repair any major faults in construction
within 5 years of purchase date. W rectified some but did nothing after
completion of the transaction. E sued for breach. W claimed no consideration.
All E had done was implicitly agree to perform existing legal duty to pay for
purchase price and complete transaction.
 First question is – was there consideration for the promise made by
Wigan? General rule: a promise to perform an existing contractual duty
is not consideration.
 But this is qualified - when the promise to do what the promisor is
contractually bound to do is given by way of a benefit/compromise of a
legal claim, the promisor having asserted that he is not obliged to
perform his side of the pre-existing contract or that he has a cause of
action under it.
 But the claim must be honestly made. This prevents unfair advantage
being obtained by unscrupulous threats to withhold performance under
a contract.
 However, it does not matter that the court considers that the promisor’s
claim would have failed had it been litigated.
 Here Edwards honestly belied that they did not have to complete the
contract and although they may have been wrong regarding this, their
claim cannot be described as frivolous or vexatious.

5. Termination and replacement of original contract by new contract

Promises under seal: A contract under a seal is commonly known as a deed – it’s an
agreement recorded in a particular form, which traditionally involves sealing and delivery
 Not supported by consideration but still enforceable due to recognition of solemnity
of the form (Ballantyne v Phillott, 1961, High Court of Australia)

III. Intention to create legal relations

There’s considerable overlap between this and offer/acceptance which also requires party to
manifest intention to be legally bound.

It’s an objective test but subjective intention of one party not to be bound can be effective in
defeating formation of a contract if the other party knows of that intention not to be bound.
Factors taken into account include the subject matter of the agreement, the status of the
parties to it, their relationship to one another (arms length?) and other surrounding
circumstances (e.g. payments made - ‘Where one party makes, and the other party accepts, a
money payment as consideration for a promise by the other to provide some service or
bestow some benefit, the proposition that each intended the promise to be taken seriously and
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to carry the conventional legal consequences does seem rather obvious’: Shahid v
Australasian College of Dermatologists).

PRESUMPTIONS - In most cases, the court will presume parties intended to create legal
relations unless the contract concerns family, social or domestic relations (as opposed to
commercial agreements).

Bank Brussels Lambert SA v Australian National Industries (1989) NSW: a letter of comfort
given by ANI in relation to a $5 million loan facility provided by the bank to Spedley
Securities. ANI held a controlling interest in Spedley’s parent company. ANI disposed of its
sharholding in the parent company without giving the letter’s stated notice to the bank.
Spedley went into liquidation and the bank sued ANI for damages for breach.
Issue: Did ANI manifest an intention to create legal relations?
Held: Bank entitled to damages as it’s unthinkable that a meaningless instrument would be
created in a commercial context. Much depends on the strength of the language in letter.
Non-binding commercial agreements
Rose & Frank Co v JR Crompton (1925): Distributor sued manufacturer for terminating the
distribution agreement without stipulated period of notice.
 parties can explicitly oust legal jurisdiction through a clause in the contract. Thus the
distribution agreement containing the ‘honour clause’ isn’t enforceable and the
manufacturer isn’t obliged to accept orders
 However a separate contract for each individual order placed by the distributor and
accepted by the manufacturer arises, despite the lack of enforceable written agreement.

AGREEMENTS BETWEEN FAMILY MEMBERS

Financial agreements between spouses
Balfour v Balfour: married couple had been living in Ceylon. The wife unable to return to
Ceylon from a holiday in England due to health reasons. Husband agreed to pay 30 pounds
per month until she could rejoin him. Later the wife sued to recover the money owed to her:
Held: agreement not intended to be enforceable – love and affection counts for little in courts
of law as consideration and the king’s writ not intended to run into domestic partnerships.

However the courts have been willing to find intention to create legal relations when a couple
is separated or about to separate as in Merritt v Merritt.

Financial agreements between other family members

Jones v Padavatton: Court denied that daughter should be able to enforce a promise made by
mother to pay daughter $200 per month to allow daughter to go to England and read law. The
fact that the arrangement required the daughter to give up a well-paid job in Washington and
move to England was not sufficient to rebut the presumption.

Todd v Nichol [1957] South Australia: D, a woman living in Australia, invited by letter the
P’s (the sister and niece of the D’s deceased husband) to move from Scotland to Australia to
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keep her company in her home. In return she promised to alter her will so the house would be
theirs until they died. P’s sold their belongings in Scotland and niece resigned employment.
Held: agreement contemplated a permanent arrangement and weight had to be given to an
interpretation that did not place the P’s at the whim of the D. Thus, it’s legally binding.

Commercial agreements between family members

The intention requirement will be easily satisfied whether a transaction between family
members is essentially commercial in nature. In Roufos v Brewster an arrangement between
Mr and Mrs Brewster and their son-in-law was held a legal relationship because of the
‘intermittent hostility’ between the parties, the ‘whole setting of the arrangemen’ being
‘commercial, rather than social or domestic’.

NON-COMMERICAL ARM’S LENGTH AGREEMENTS

Ermogenous v Greek Orthodox Community: where a contract is alleged to have arisen from
the engagement of a minister of religion, the onus is on the minister to demonstrate that there
was a contract and this includes the need to satisfy the court that the parties manifested an
intention to create legal relations.

GOVERNMENT AGREEMENTS
Whether an agreement entered into by a government is binding is intended to be binding
depends in part on whether the transaction is a commercial agreement or an arrangement
involving the implementation of government policy. In Australian Woollen Mills 4 factors
were determinative in the finding of an administrative, rather than contractual, scheme:
1. No statutory authority was sought for the making of the payments
2. The scheme was announced by persons who had no power to commit the Crown to
any expenditure
3. The commonwealth had no commercial interest in the purchase of wool but was
simply dealing with a problem created by war
4. The commonwealth expressly reserved the right to vary the amount of the subsidy

Administration of PNG v Leahy (1961): Leahy sought the Department of Agriculture’s help
to eradicate ticks. When the Department didn’t do the job properly, L sued for breach.
Held: No binding contract made as the Department was merely performing a social service
and providing gratuitous assistance in execution of its policy to eradicate ticks.

Placer Developments v Commonwealth: Cth and Placer had agreement to form timber
company in PNG. Cl 14 of agreement said if customs duty payable on importation of timber
into Australia, then Cth would pay a subsidy to Placer at a rate to be determined by Cth.
Placer sought to enforce the agreement:
Held: Cl 14 unenforceable as it’s an illusory promise. Dissenting judges held that the
agreement was intended to create legal relations: 1. Had an essentially commercial character
2. Parliament had approved the agreement and appropriated funds to meet the obligation.

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PRELIMINARY AGREEMENTS: A preliminary agreement will be binding if it appears the

parties intended it to be binding. Masters v Cameron (1954, HCA): The parties had a written
memorandum signed by both parties recording the vendor’s agreement to sell and the
purchasers to buy. The document said that ‘the 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, and to the giving of possession on or about 15th day of march 1952’. Both parties
behaved as though the transaction was proceeding but no further document was signed. When
the purchaser ran into financial difficulties he refused to complete the transaction.
 The use of expressions such as ‘subject to contract’ indicate that the parties have done
no more than establish a basis for a future agreement, and that the preliminary
agreement isn’t intended to be binding.
 On these facts there was no binding agreement since the solicitors had to approve the
agreements. The purchaser was entitled to return of his deposit.

Completeness: The failure of parties to deal with matters in a sufficiently certain way indicate
that the parties do not expect to be bound (Anaconda v Tarmoola Australia).

The fact that a proposed formal contract is intended to include further terms won’t prevent a
preliminary agreement from being binding, provided those further terms can be settled
without agreement between the parties. Godecke v Kirwan (1973) 129 CLR 629: Godecke
(purchaser) and Kirwan (vendor) entered into a written agreement for the sale of land which
provided, in cl 6, that, if Kirwan required it, Godecke would execute a further agreement
containing the terms of that agreement and any other as determined by Kirwan's solicitors
(within reason). Kirwan subsequently refused to proceed with the sale. The Trial Judge held
the agreement was not binding.
Held Walsh J: A binding agreement may be made leaving some important matter to be settled
by a third party or even, in most cases, by one of the parties.
 The parties set out all the principal terms governing the sale of land, including ‘an
obligation to execute a formal contract’ and a promise by Godecke to ‘execute, if
required …, a further agreement’. Walsh considered that requirement should be
‘limited to permitting the insertion of covenants and conditions not inconsistent with
those contained in the offer’ and such additional conditions needed to be reasonable –
in an objective sense. This was not an ‘agreement to agree’ on additional provisions –
but an agreement by Godecke to accept additional provisions if reasonably required.
 This was, therefore, not a case ‘in which all the terms of the contract had not been
settled’. A binding agreement had been made [Appeal allowed]

IV. Certainty

An offer will only be effective if it identifies with sufficient certainty the terms of the
proposed contract. The courts will fill in the gaps and resolve ambiguities where possible.

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There are three requirements: (1) the contract must be sufficiently complete; (2) the agreed
terms must be sufficiently certain and clear the parties can understand their rights and
obligations and the courts can enforce them; and (3) the promises made by the parties must
not be illusory.

There are two ways to save an agreement that’s uncertain: (1) where a particular term is
incomplete, uncertain or illusory it may be possible to sever the offending term or part and (2)
where an uncertain, incomplete or illusory term has been inserted for the benefit of one of the
parties that party may waive compliance with the offending term and enforce the remainder.

COMPLETENESS: Completeness requires consideration of (1) the importance or essentiality

of the term; (2) why the term has been left out: did the parties fail to reach agreement on the
issue, deliberately defer agreement or simply fail to put their minds to the issue and (3)
whether the agreement remains wholly executory or has been wholly or partly performed on
one side.

Essential terms
a term without which the contract cannot be enforced; depends on the nature of the contract
and the circumstances of the case, e.g. in a lease the commencement date and rent are
essential. The more novel and complex an agreement is the less likely a court will feel
competent to fill in gaps.

ANZ v Frost Holdings (1989, Sup Ct Victoria): Frost submitted a proposal to ANZ which was
accepted ‘in principle’ but subject to changes. ANZ subsequently advised Frost it did not
wish to proceed; Frost claimed breach of contract.
Held: There was no agreement on essential terms. Where a ‘relevant or critical term’ requires
future agreement it is not enforceable.
 It is ok to agree that part of a contract will be settled by a third party (or by a third
party arbitrator if parties cannot agree) – because all the matters between the parties
have been settled.
 Here there was absence of agreement ‘concerning the style, size, quality and price of
the proposed calendar’.

May and Butcher v The King [1934]: The obligation to pay a reasonable price will only be
inferred if the contract is silent as to price. However if the parties have agreed to set the price
themselves in the future, a court will not imply a price as this would be inconsistent with their
intention.

Executed contracts
The courts are less likely to find an agreement incomplete if it has been wholly or partly
performed. In Foley v Classique Coaches the court implied a ‘reasonable price’ for petrol
where the agreement didn’t specify a price after performance of the agreement by the

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Defendant for 3 years (during which time they had bought petrol from the P as per
agreement). This meant that the D could not argue the agreement was not binding.

Machinery for settling a term

Parties may make a valid contract that defers agreement on an essential term if they provide
an effective mechanism for supplying the term in the event they fail to reach agreement.
However if a third-party refuses or is unable to carry out the task of settling the essential term
then the agreement is avoided. In George v Roach the High Court held that an agreement was
ineffective when part of the purchase price was to be fixed by a nominated valuer who
refused to carry out the task.

Formula for settling a term

Parties may also specify a formula for settling a term or terms of their agreement which can
be applied by a court in the event of a dispute (if the court finds it’s sufficiently certain).

CERTAINTY: A contract may fail because a particular term is so vague and imprecise that the
courts cannot attribute a meaning to it. As with incompleteness, uncertainty is more likely to
affect a contract that remains wholly executory.

Reasonableness
The standard of reasonableness can often be employed to provide completeness and certainty
that would otherwise be lacking.
Whitlock v Brew (1968, HCA): there was a contract of sale for a parcel of land that included a
Shell petrol station. The land was sold on the condition that the purchaser would grant a lease
of part of the land to the Shell Company ‘on such reasonable terms as commonly govern such
a lease’. The purchaser claimed the contract was void for uncertainty and sought to recover
his deposit.
Held: There was no evidence that there were any terms for a lease that could be regarded as
standard or reasonable, but even if there were the parties had not agreed on the vital questions
of rent and the term of the lease. Clause couldn’t be severed.

Council of the Upper Hunter County District v Australian Chilling & Freezing Co Ltd [1968]
HCA: Council entered into a contract to supply ACF with electricity. Clause 5 stated "if the
Supplier's costs shall vary in other respects than has been herein before provided the Supplier
shall have the right to vary the maximum demand charge and energy charge ..." Council
sought to increase its charges, but ACF alleged the clause was void for uncertainty, placing
reliance on the term ‘supplier’s costs’. The NSW SC agreed and the Council appealed.
Held - Barwick CJ: A contract is not automatically void for uncertainty just because it may be
construed in more than one way:
‘As long as it is capable of a meaning, it will ultimately bear that meaning which the courts,
or in an appropriate case, an arbitrator, decides is its proper construction: and the court or
arbitrator will decide its application. The question becomes one of construction, of
ascertaining the intention of the parties, and of applying it.'
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A ‘narrow or pedantic approach’ to interpretation should not be taken - it is clear that

Australian courts will be slow to find an agreement void for uncertainty. In this case there
was no uncertainty even though there may be scope for disagreement about what constituted
suppliers costs in individual cases.

Agreements to negotiate
Coal Cliff Collieries v Sijehama: a promise to negotiate in good faith may be enforceable so
long as the promise is clear and part of an undoubted agreement between the parties.

United Group Rail Services v Rail Corporation NSW: The NSW Court of Appeal upheld a
clearly worded dispute resolution clause which included an agreement to ‘meet and undertake
genuine and good faith negotiations with a view to resolving the dispute’
Held: such a promise doesn’t prevent the parties from acting self-interestedly, but simply
requires ‘an honest and genuine commitment to the process of negotiation for the designated
purpose’. The parties must not have ulterior motives in negotiating.

ILLUSORY PROMISES: Biotechnology Australia Pty Ltd v Pace: Pace entered into an
employment contract with Biotechnology which provided that he would have ‘the option to
participate in the company's senior staff equity sharing scheme.’ There was no such scheme
in existence at the time of contract or at any time during Pace’s employment. Pace sued for
breach of contract.
Held (Kirby P): The distinction between illusory terms and uncertain terms was described by
the High Court in Placer as follows:
“… a promise to pay an unspecified amount of money is not enforceable where it expressly
appears that the amount to be paid is to rest in the discretion of the promisor and the
deficiency is not remedied by a subsequent provision that the promisor will, in this discretion,
fix the amount of the payment. Promises of this character are treated … not as vague and
uncertain promises - for their meaning is only too clear - but as illusory promises ….”

Where a third person is given power to (and does) resolve any ambiguities in an agreement
then the agreement will not be too uncertain - but that was not the case here and the term was
far too uncertain to be enforced. It depended entirely on the decision of one of the parties
(Biotech) to provide an equity scheme and there was no 'external standard' the court could use
to try and resolve the ambiguity. Even if the term was not illusory it was uncertain – how
many shares, what class of shares, what options would exist, what rights would attach? The
term was, therefore, unenforceable.
Held (McHugh JA): On the issue of whether the consideration was illusory, it will be
‘illusory if its payment or fulfillment depends upon an unfettered discretion vested in the
promisor. Thus a promise by the Commonwealth that it will pay a subsidy “of an amount or
at a rate determined by the Commonwealth from time to time” is an illusory consideration’.
Similarly, the promise of an employer to pay such sum of money as they deem right in
exchange for work performed will be illusory.

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In employment contracts, however, where there is a promise to remunerate normally

the court will apply a ‘reasonable remuneration’ standard based on market criteria, subject to
terms specified by the parties.
In addition, even if the ‘promisor retains a discretion, the consideration will not be
illusory if the discretion must be exercised within specified parameters.’
In this case, however, consideration was illusory, as it was solely within Biotech’s
discretion and there were no objective standards.

A contract won’t be illusory if important matters are left to be determined by a third party or
if subsidiary matters are left to be determined by one of the parties. In Godecke v Kirwan a
clause allowed the vendor’s solicitors to add terms unilaterally. This was upheld. The
vendor’s solicitor’s could only add terms that were consistent with those set out in the offer
and were reasonable in an objective sense.

Meehan v Jones (1982, HCA): a contract for sale of land was made subject to receiving
approval for finance on satisfactory terms and conditions. Vendor argued that the phrase was
meaningless as it left execution to the discretion of the purchaser.
Held: Purchaser’s obligation was enforceable. The purchaser was required to find finance
satisfactory to them but was required to act honestly and reasonably. Gibbs CJ held that the
agreement is analogous to an option, which is a contract conditional on the grantee giving
notice of exercise of the option.

[If an uncertain, illusory or incomplete provision exists, the below can be used to save
the remainder of the contract]

SEVERANCE: Severance refers to whether the court can infer an intention that the agreement
should be valid in the absence of the relevant provision. If such an intention can be inferred,
then the offending provision can be severed, leaving the remainder of the agreement
enforceable.
Fitzgerald v Masters: a contract for the sale of a half-interest in a farm set out the essential
terms but included a clause which purported to incorporate the ‘usual conditions of sale in
use or approved by the Real Estate Institute of NSW relating to sales by private contract of
lands held under the Crown Lands Act’. This clause was meaningless because there were no
such terms.
Held: clause severable because it was merely an appendage to the agreement. It was clear that
the parties intended the agreement to subsist even if the clause should fail.

WAIVER: it is possible for an uncertain, incomplete or illusory provision in a contract to be

waived by the party for whose benefit that clause was inserted. Where a contract for the sale
of a house is made subject to the purchaser obtaining finance for example, the purchaser may
choose to proceed with the transaction even if finance has not been obtained from that lender.

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Grime v Bartholomew (NSW): a party cannot waive an uncertain clause that’s essential to a
contract because the uncertainty means the parties failed to reach an agreement at all. Since
there’s no contract, no right of waiver can arise.
In Bradford v Zahra on the other hand, a purchaser successfully waived the benefit of an
uncertain ‘subject to finance’ clause and thereby removed the uncertainty. It may also be
possible to waive the benefit of a failed machinery provision (see above), provided it is
entirely for the benefit of one party and is not essential to the operation of the agreement.

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