Chapter 7 - Contract law 1. At the end of this chapter you should understand: how to define contracts according to validity, performance and formation; how contracts can be classified; how to distinguish formal contracts from simple contracts;...
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Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 2-1 CONTRACT LAW CHAPTER Copyright â 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-2 Learning objectives At the end of this chapter you should understand: • • • • • • how to define contracts according to validity, performance and formation how contracts can be classified how to distinguish formal contracts from simple contracts the six essential elements required to make a valid contract—FROLIC what is meant by an intention to create a legal relationship and how this is determined by the law the distinction between an offer and an invitation to treat Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-3 Learning objectives (cont.) • rules with respect to offer and acceptance including the postal acceptance rule • the meaning of ‘consideration’ and the consequence for a contract lacking consideration • the rules regarding consideration • how a contract lacking consideration may be enforceable if placed in a particular form • the requirements of contracts required to be in writing and those required to be evidenced in writing Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-4 Introduction An understanding of the law of contract is of fundamental importance in the context of business practice Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-5 Valid contract An agreement made between two or more parties, giving rise to legal rights and obligations that the law will enforce Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-6 Valid contract (cont.) Intention to create legal relations Legality of object Terms: express/implied Offer Acceptance Conditions Warranties Form Consideration Exclusionary clauses Reality of consent Capacity of parties Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-7 Classifications of contracts Classifications Validity Formation Performance Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-8 Validity Validity Valid All essential elements present, therefore law will enforce on behalf of either party Void Voidable No legal effect Entitled to be rescinded by innocent party Unenforceable Illegal Essential elements present but technicality Purpose or object of prevented from being contract is illegal enforced Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-9 Performance Executed One party to contract has completed its part of the contract Executory Both parties have obligations to perform Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-10 Format Format SIMPLE • Verbal, written, implied • Consideration must pass in both directions • Statute of limitations—3 years Contract of record FORMAL • Written • Does not require consideration passing in both directions • Statute of limitations—12 years Contracts under seal (deeds) Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-13 Intention to create a legal relationship • Not all agreements give rise to legally enforceable obligations • People who make agreements must intend the agreement will give rise to a legally enforceable obligation • The law makes some presumptions about this depending whether the agreement is of a social, domestic or commercial nature Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-14 Intention to create a legal relationship (cont.) Social/domestic agreement Assumptio No intention to create legal relationship n (Balfour v Balfour) Prove Intention to create legal relationship (Todd v Nicol; Wakeling v Ripley) • Financial disadvantage leaving job • Expenses incurred in moving • Selling belongings Business agreement Intention to create legal relationship No intention to create legal relationship Presumption rebutted in contract Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-15 Offer + Acceptance = Agreement • The second element required to create a valid contract is an offer, and an acceptance of the offer • An offer is a proposal When accepted it creates a legally binding agreement—a contract • An offer needs to be distinguished from an ‘invitation to treat’ Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-16 Invitation to treat vs Offer • Invitation to treat: an invitation to people to make offers Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd (1952) QB 795 • Offer: A proposal by the offeror that, if accepted by the offeree, will create a legally binding contract • Online auctions: listings on online auction sites will be regarded as offers, not invitations to treat Smythe v Thomas (2007) NSWSC 844 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-17 Rules with respect to offer • An offer is not required to be in any particular form • The person who makes the offer is called the offeror; the person to whom the offer is made is the offeree • An offer can be made to one or more persons, even the whole world • All terms of an offer must be communicated to the offeree Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-18 Termination of an offer • Offer will lapse if: – acceptance is not made within the time stated, or – where no time is stated, if the acceptance is not made within a reasonable time, or – a counter-offer is made • Offer can be revoked at any time: – before acceptance, and – if communicated to the offeree • Offer will be terminated if rejected • Death of the offeree or offeror may terminate an offer • Offer can be terminated if a condition precedent is not met Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-19 Rules with respect to offer—termination Termination of offer Rejection Revocation Conditional offer offeree/offeror Lapse Death of Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-20 Rules of acceptance Acceptance must be communicated to offeror by an authorised person Exception: offeror waives the right to receive notification of acceptance Communication by post (postal rule): if it is agreed that post is the method of acceptance, and the letter is stamped and addressed correctly, acceptance occurs when posted Acceptance must comply with the conditions of the offer Acceptance must be in reliance of knowledge of an offer Acceptance must be unqualified Acceptance can only be made by the offeree Acceptance must take place within a prescribed time or within a reasonable time Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-21 Form and/or consideration • For an agreement to be regarded as a contract, it must either be supported by consideration or be a formal contract • This is the third element required to form a valid contract • Consideration is something done or promised by one party (the promisor) in exchange for something done or promised by the other party (mutual promises) Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-22 Promisor and promisee Promisor • Person undertaking to perform the consideration Promisee Recipient of the consideration Copyright â 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-23 Rules of consideration Can be present or future, but not past Must be of some value, but need not be adequate Must be definite, not vague Must be capable of being performed Must not be illegal or unlawful Must be more than a person is already required to do, in terms of: a) requirement by law b) compliance with contract already existing Must move from the promisee Cannot be satisfied by part payment of a debt Essential in all simple contracts Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-24 Promissory estoppel • If one party to a contract, by its behaviour, leads the other party to the contract to believe a certain state of affairs exists between them, the courts will support that state of affairs rather than the terms of the contract Elements • The promisee has altered his/her position in reliance on a new promise • It would be impossible for the promisee to return to his/her original position without detriment • It would be unfair for the promisor to renege Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-25 Contracts required to be in writing • Some contracts are required by statute to be contained in one written document • Examples: – Bills of exchange and promissory notes – Cheques – Assignments and mortgages of life insurance policies – Assignment of copyright – Contracts for marine insurance Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-26 Contracts required to be evidenced in writing • Letters passing between parties • Receipt for a deposit • Cheque signed by the purchaser Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-27 ...CONTRACT LAW CHAPTER Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev • 2-2 Learning objectives At the end of this chapter. .. accompany Barron, Fundamentals of Business Law 7Rev • 2-1 5 Offer + Acceptance = Agreement • The second element required to create a valid contract is an offer, and an acceptance of the offer • An offer... communicated to the offeree Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev • 2-1 8 Termination of an offer • Offer will lapse