BUSN9123 Principles of Commercial Law

Workshop 3

Topic: Contract formation

Aims:

1. Practice legal problem solving in the context of hypothetical commercial negotiations.

2. Develop an awareness of situations where it is unclear whether a particular agreement constitutes a contract, and how to avoid potential disputes in such scenarios.

Scenario 1

Bill owns a vineyard about one-hour drive away from Adelaide. Bill agrees to sell the vineyard to Thomas. Bill and Thomas agree on a price of $1.8 million and on a number of other issues including existing stock, equipment and employees. These details are recorded in a written document titled: “Heads of Agreement”. Both parties sign the “Heads of Agreement”. Some issues, such as the transfer of distribution agreements, accounts payable and transfer of business name were not discussed and not detailed in the Heads of Agreement. The Heads of Agreement contains the following statement at the end:

“We agree this deal needs to be written up as a formal contract by solicitors”

Later, Thomas decides he doesn’t want to buy Bill’s vineyard. Bill alleges there is a contract and wants to sue Thomas for breach of that contract.

1. Is there a contract under which Bill can sue Thomas? Please focus you answer on whether there is intention to create legal relations. For this question you can assume other elements of a contract exist.

Issue – Whether the agreement has reached a point such that they intend to be legally bound such that there is a contract.

Rule – The label of the preliminary agreement is not relevant. Sometimes a preliminary agreement of this kind is binding, sometimes it is not. We need to consider the circumstances and the specific wording used in the preliminary agreement (Masters v Cameron).

Application

This scenario is similar to Masters v Cameron. In that case the agreement said “‘This agreement is made subject to the preparation of a formal contract of sale, which shall be acceptable to my Cameron’s solicitors on the above terms and conditions …’. This was held to be not binding. However, the language in this scenario is different. Bill and Thomas agreed ““We agree this deal needs to be written up as a formal contract by solicitors”. This language is not as precise as Masters v Cameron. It could be interpreted similar to that wording in Masters v Cameron, where solicitors effectively need to check/approve and could potentially alter agreement. The wording in this scenario could also be interpreted such that, what they have agreed is final and simply agreeing that it needs to be restated more formally.

Conclusion – Ultimately, intention unclear. Also, some issues left undecided. Unless parties can agree on state of negotiations, then would need court to interpret words and come to decision.

2. How could Bill and Thomas have prevented this dispute?

Thomas – Clearly document his mindset. For example use words “Do not intend for this document to be legally binding. This is subject to approval by my solicitors.”

Bill – Insist deposit. Or specify his mindset. “Do intend for this to be legally binding.”

Scenario 2

Stanley lives in Adelaide where he owns and operates a dry cleaning business from premises which he owns. Stanley’s shop fit out needs some minor repairs, mainly carpentry / handyman type work. Stanley has been meaning to get these repairs done for a while but just hasn’t got around to it. Stanley talks to his sister, Martha who is a carpenter living in Melbourne. Martha has been meaning to visit Stanley for a while to meet Stanley’s son, Chester, who was born last year. However, Martha has put off the visit because of the cost of travelling to Adelaide.

Stanley tells Martha about the repairs that he needs done to his shop fit out. Martha offers to do it for Stanley. The following conversation then takes place:

“Stanley: And how much are you going to charge me Martha?

Martha: Nothing, just pay for my airfare, give me somewhere to sleep for a few days and maybe a shot or two of whiskey.

Stanley: Ok, well I guess it would be good to see you and you will get a chance to see Chester.

Martha: Great. I will book the airfare, just pay me back when the job is done.”

Martha comes to Adelaide as planned and does the work for Stanley. Martha does an OK job. However, Martha causes a bit of trouble while staying in Adelaide. One night she raids the kitchen and drinks an entire bottle of whisky. That bottle of whisky was a gift Stanley received at his wedding and was worth $300. After doing this, Martha became very rowdy and ended up getting into an argument with one of Stanley’s neighbours.

Stanley is furious with Martha and refuses to pay for the airfare. Martha says to Stanley “we had a deal … I can sue you to get my money?”

…

1. Is there a contract under which Martha can sue Stanley?

Issue – Whether there was intention to create legal relationship.

Rule – The starting point for business/commercial relationship is that there is an intention to create a legally enforceable agreement, while starting point for family/social is that there is no intention to create a legally binding relationship. Beyond this need to consider objectively state of affairs and dealings, and whether circumstances show intention to create legal relations. This involves considering what a reasonable person would have understood the parties intention to be (Ermogenous v Greek Orthodox).

Application –

The facts lie somewhere in between social/domestic relationship and business agreement.

Facts suggesting intention to be legally bound – commercial aspect

• Even though brother and sister, the agreement involves Martha’s trade/profession as a carpenter.
• Similarly, the work relates to the dry-cleaning business which brings expectation that work would be of a certain standard.
• Martha clearly indicate concerns about cost of travel
• There is some form of contractual negotiations.

Facts suggesting no intention – family aspects

• They are siblings
• Stanley didn’t direly request Martha to the work the “negotiations” arose during a preuly family discussion about Martha visiting Stanley.
• Payment involved whisky, and airfare reimbursement. The consideration very relaxed and informal.
• Little Chester was arguably main reason for visit, not the work to be done.

Conclusion – Ultimately, could be argued either way. The facts don’t clearly point towards one outcome over another. Additional evidence would be needed. Burden of proof would be on person trying to enforce contract making the outcome difficult, given it was an oral contract.

Note: it is possible to take a particular line of reasoning and favour one argument over the other.

2. How could Martha and Stanley have prevented this dispute?

Properly documenting if intended to be legally binding and clearly state intention.

Contract formation cases:

Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256

The advertisement by Carbolic Smoke Ball Co (CSBC) promised that their product, the ‘Carbolic Smoke Ball’, would ‘positively cure coughs, cold in the head, cold on the chest, catarrh, asthma, bronchitis, hoarseness, loss of voice, sore throat, throat deafness, snoring, sore eyes, influenza, hay fever, headache, croup, whooping cough and neuralgia’. It further promised that ‘£100 reward will be paid by the Carbolic Smoke Ball Company to any person who contracts the increasing epidemic influenza, colds or any disease caused by taking cold, after having used the ball three times daily for two weeks according to the printed directions supplied with each ball. £1000 is deposited with the Alliance Bank, Regent Street shewing our sincerity in the matter’. Mrs Carlill used the product according to the directions and (perhaps not surprisingly) still caught the flu. However, when she contacted CSBC to claim the reward, they denied that they were legally obliged to pay the reward. Mrs Carlill sued the company for her £100 reward. The court considered whether or not a contract existed between CSBC and Mrs Carlill. In determining if there was an agreement, the court decided that the advertisement was more than a mere invitation to treat. It was a legal offer to the world because the wording of the advertisement made it clear that CSBC was willing to enter into legal relations with anyone who accepted the offer of the reward. CSBC argued that even if their advertised reward was a legal offer, Carlill had not communicated her acceptance of that offer. The court decided that since this was a unilateral contract it was not necessary that acceptance be communicated prior to performance. Mrs Carlill had accepted the offer by buying and using the smoke ball as directed, and that was sufficient. CSBC claimed that their offer of a reward was ‘mere puff’ and clearly not intended to be taken seriously. The court disagreed, deciding that the wording of the advertisement, including the statement that ‘£1000 is deposited with the Alliance Bank, Regent Street showing our sincerity in the matter’, indicated that the offer of a reward was intended to be a legally enforceable one and not mere puffery.

Ermogenous V Greek Orthodox Community of Sa Inc (2002) 209 CLR 95

Ermogenous was the Archbishop of the Greek Orthodox Church in Australia from 1970 until 1993. When his employment was terminated, Ermogenous claimed annual leave and long service leave entitlements that he had not received during his 23 years of service. The church denied liability, claiming that there was no enforceable contract because the agreement was a religious one and, therefore, not intended to be legally binding. The High Court of Australia disregarded the traditional presumptions and instead simply considered the arrangement from the perspective of the objective observer. It concluded that the agreement was intended to be legally enforceable.

Balfour v Balfour[1919] 2 KB 571

Mr and Mrs Balfour were married in 1900. They spent the first 15 years of their marriage living in Ceylon. The Balfours were in England from November 1915 to August 1916 on vacation. Towards the end of the vacation, Mrs Balfour received advice that she should remain in England for treatment of her rheumatic arthritis. On 8 August 1916, before returning to Ceylon, Mr Balfour agreed to send Mrs Balfour a monthly allowance of £30 until she could rejoin him. Mr Balfour later asked to remain separated. In 1918 Mrs Balfour sued for payment of the £30 per month on the basis of the agreement. Was the agreement between Mr and Mrs Balfour reached on 8 August 1916 legally binding? The court decided that the agreement between the Balfours was not a legally enforceable contract but merely an ordinary domestic arrangement. There was no intention to create legal relations and Mrs Balfour could not sue for the alleged breach of it. The Court was of the view that mutual promises made in the context of an ordinary domestic relationship between husband and wife do not usually give rise to a legally binding contract because there is no intention that they be legally binding. In other words there is no intention that one party will be able to take action for breach of the agreement by the other if they fail to perform.

Wakeling v Ripley (1951) 51 SR (NSW) 183

Ripley was an elderly and wealthy widower who required domestic assistance in his large home in New South Wales. He sought to persuade his sister and her husband (the Wakelings) to move from England to Australia to look after him. The Wakelings made it clear to Ripley that moving to Australia would require them to make significant sacrifices, including Mr Wakeling abandoning his salaried position at Cambridge University and his pension. Mr Wakeling sought assurances from Ripley as to what Ripley could offer to his family for the future. In May 1945, Ripley wrote to the Wakelings urging them to come as soon as they could and giving the Wakelings information as to the contents of the house, which he referred to as theirs. He wrote again in October 1945 attaching a copy of his will in which he left the bulk of his estate to the Wakelings. On the basis of this correspondence, the Wakelings agreed to come to Australia. They sold their property in England and Mr Wakeling resigned from his position at Cambridge. The Wakelings arrived in Australia in early 1947 and lived with Ripley throughout that year. A number of misunderstandings arose between the Wakelings and Ripley that resulted in Ripley selling the house and altering his will. The Wakelings commenced legal proceedings seeking to recover damages from Ripley for breach of the alleged contract between them. Was the agreement between Ripley and the Wakelings a legally binding contract? The court decided that there was a definite and binding contract. The correspondence between the parties regarding the arrangements as well as the seriousness of the move for the Wakelings demonstrated that the parties intended to be legally bound by the agreement.

Rose & Frank Co v JR Crompton & Brothers Ltd [1925] AC 445

Rose & Frank Co (RFC) was appointed as the sole agent for the sale in the United States and Canada of tissues for carbonising paper manufactured by UK companies J R Crompton & Brothers Ltd (JRC) and Brittains Ltd. A written agreement was entered into between all three parties dated 8 July 1913. The agreement had a 3-year term, subject to termination on the giving of 6 months notice. The agreement included the following ‘honourable pledge’ clause: This arrangement is not entered into, nor is this memorandum written, as a formal or legal agreement, and shall not be subject to legal jurisdiction in the Law Courts either of the United States or England, but it is only a definite expression and record of the purpose and intention of the three parties concerned, to which they each honourably pledge themselves with the fullest confidence — based on past business with each other — that it will be carried through by each of the three parties with mutual loyalty and friendly co-operation.

In August 1918 the agreement was renewed for a further 3-year term on the same terms and conditions. The second term was due to expire on 31 March 1920. In early 1919 a dispute arose regarding RFC’s performance. JRC and Brittains then terminated the arrangement without notice in mid 1919. RFC sued JRC and Brittains for breach of contract. Did a legally binding contract exist between RFC, JRC and Brittains that was breached by the failure by JRC and Brittains to give 6 months notice of termination? The court decided that the agreement between RFC, JRC and Brittains was not a legally binding contract because the ‘honourable pledge’ clause showed that the agreement was intended to be binding in honour only. Consequently, JRC and Brittains were not legally obliged to give 6 months notice of termination and their termination of the arrangement without notice was valid and effective.

Masters v Cameron (1954) 91 CLR 353

Cameron agreed to sell his farm to Masters. They signed a written agreement that contained the following clause: ‘This agreement is made subject to the preparation of a formal contract of sale, which shall be acceptable to my Cameron’s solicitors on the above terms and conditions …’. The court decided that the circumstances indicated that Cameron did not intend to be legally bound until a formal contract of sale was prepared because the agreement gave Cameron’s solicitors the power to considerably alter the terms of the agreement.