Introduction to Contract Law
Introduction to Contract Law Contract: promise/set of promises or agreement, supported by consideration (price of a promise), that is legally binding. • Comes into existence with offer & acceptance. • Contracts are a risk allocation device. Consideration: price of a promise. • If price unrealistic, may question consent of party to a contract, misinformation/misrepresentation, degree of unconscionable intent of the other party, etc. • Consideration must be sufficient but need not be adequate – does not matter what price is. • Once there is intention and an agreement, consideration is assumed and binds promises in mutually beneficial transactions (doctrine of consideration). Doctrine of Privity: only 2 parties to a contract can have it enforced. • D v S 1932 – third party. Estoppel: legal doctrines that prevent a person from making assertions contradictory to their prior position and statements. Contract law encourages debt repayment, keeping promises and truthfulness. Dispute settlement in court is concerned with party outcomes over sanctions (compensation > deterrence). Classic Contract Law Theory Objective Theory of Contract: concerned with what parties objectively intend by their mutual exchange of promises, rather than subjective intention. • Based on external standard of ‘reasonable man.’ • Contract is a thing that is made and can be broken – it has definite parameters (fairness, justice, reasonableness). • However, there is no ‘typical’ contract and always subjective situations so difficulties with objective model. • Objective theory prevails regarding formation, construction (court can interpret contract) and interpretation of contracts. • Toll v Alphapharm – Entered into signed contract with Alphapharm to store and transport imported goods. Alleged Toll performed contract negligently, causing loss to Alphapharm. Toll sough to escape reliability by relying upon an exclusion clause however held this could not be relied on because it did not form part of the contract and because D had not been acting for Alphapharm when contract entered. • • • •
Will Theory: contract is an expression of will and when two minds meet in agreement, it is appropriate they be enforced. Promise Theory: promises should be kept and the law should enforce this. Gives effect to moral obligations embedded in a promise. Bargain Theory: a contract is a bargain that arises because of parties’ agreement and consideration given for other agreements. Reasonable Expectations: obligation to perform a contract depends on reasonable expectations induced by a promise and the disappointment that arises from breaching such promise. o Damages put party in position they expected to be in had contract been performed.
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Reliance: contracts should be upheld whenever a promisee has relied on a promise that would cause them a detriment if it is not kept. o Benefit rendered and detrimental reliance can secure agreement without promise to perform. o Cth v Amann Aviation - entered into contract with Cth government, priced contract on basis of getting second contract after this, although there was no promise of this. Cth reported to terminate contract 6 months later so Amann elected to terminate contract and sue Cth for damages with reasonably expected loss of #410,000 and reliance loss of $6.6M. § Difference between reasonable expectations and reliance: in some circumstances, expectation loss may not be appropriate basis to award damages yet in contract law it is the standard basis.
Atiyah’s Paradigm of Modern Contract Law • • •
Contract is a bilateral executory agreement (promises yet to be performed) and a mutual exchange of promises. Contract is binding because parties intend so – will creates liability and the purpose of the law is to give effect to such intention. Contract binds parties to performance or damages in lieu.
Offer
Acceptance
Intention
Stylised Contracting Process Formation Performance Negotiation → Agreement → Performance Begins → Performance Ends Is there a contract? Has the contract been performed? Critical Perspectives on Contract Law • • • • •
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Realist: courts should focus on policy objectives to decide application of legal rules. Critical legal studies approach: contract law is indeterminate and used to legitimise system and decisions. Contract as promise. Feminist: gender issues considered in evaluating legal doctrine. Relational Approach: contract law is unsuitable for resolving contract disputes because it gives insufficient emphasis to relational interests and social conditions. o E.g. employment contract. Law and economic approach: law is incomplete without an economic perspective. Sociological Approach: business people should not consult with lawyers when planning contracts or in contractual disputes.
Freedom of Contract • •
Contract law does not care about what kind of bargain is made, just that there is one and that parties have freely consented to their bargain. Can often be abused by unequal bargaining power.
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Public policy – if contract infringes public policy the contract is illegal (contract to commit a legal wrong) whereas other invalid contracts are just unenforceable. Unenforceable contracts are contracts that: o Initiate a tort/statutory breach o Prejudice administration of justice o Promote public corruption o Restraint of trade – prima facie unenforceable but can be enforced if reasonable. o Exclude court jurisdiction Statute can intervene and say a term cannot be enforced or compensation must be provided. o Courts wont enforce a contract if there is undue influence, unconscionability, unfair terms or if there are harsh exclusion and penalty clauses. o Contracts Review Act 1980 (NSW) – unfair terms. o ACL Part 2-3 – misleading/deceptive and unconscionable conduct.
Distinction between a Contract and a Tort
TORT
CONTRACT
action imposed
intention voluntary
Terms of Contracts • • •
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Can be said, written or implied. Promote reasonable expectations and supplement contracts. Type of terms: o Terms implied by virtue of usages of trade and commerce o Terms implied in fact o Terms implied by law (default rules) Terms may be incorporated by reference not just in document/contract signed. Can sometimes gap-fill e.g. implied date of practical completion if not specified.
PART 1: Formation Agreement FORMATION PROCESS: 1. Agreement – offer and acceptance. 2. Certainty – sufficient meaning to words, contract is sufficiently complete and there are no illusory promises. 3. Consideration – price of promise. 4. Intention – objectively intend to create legal relations.
Will Theory: contract is an expression of will and when two minds meet in agreement, it is appropriate they be enforced. Promise Theory: promises should be kept and the law should enforce this. Gives effect to moral obligations embedded in a promise. Bargain Theory: a contract is a bargain that arises because of parties’ agreement and consideration given for other agreements. Reasonable Expectations: obligation to perform a contract depends on reasonable expectations induced by a promise and the disappointment that arises from breaching such promise. o Damages put party in position they expected to be in had contract been performed.
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Reliance: contracts should be upheld whenever a promisee has relied on a promise that would cause them a detriment if it is not kept. o Benefit rendered and detrimental reliance can secure agreement without promise to perform. o Cth v Amann Aviation - entered into contract with Cth government, priced contract on basis of getting second contract after this, although there was no promise of this. Cth reported to terminate contract 6 months later so Amann elected to terminate contract and sue Cth for damages with reasonably expected loss of #410,000 and reliance loss of $6.6M. § Difference between reasonable expectations and reliance: in some circumstances, expectation loss may not be appropriate basis to award damages yet in contract law it is the standard basis.
Atiyah’s Paradigm of Modern Contract Law • • •
Contract is a bilateral executory agreement (promises yet to be performed) and a mutual exchange of promises. Contract is binding because parties intend so – will creates liability and the purpose of the law is to give effect to such intention. Contract binds parties to performance or damages in lieu.
Offer
Acceptance
Intention
Stylised Contracting Process Formation Performance Negotiation → Agreement → Performance Begins → Performance Ends Is there a contract? Has the contract been performed? Critical Perspectives on Contract Law • • • • •
• •
Realist: courts should focus on policy objectives to decide application of legal rules. Critical legal studies approach: contract law is indeterminate and used to legitimise system and decisions. Contract as promise. Feminist: gender issues considered in evaluating legal doctrine. Relational Approach: contract law is unsuitable for resolving contract disputes because it gives insufficient emphasis to relational interests and social conditions. o E.g. employment contract. Law and economic approach: law is incomplete without an economic perspective. Sociological Approach: business people should not consult with lawyers when planning contracts or in contractual disputes.
Freedom of Contract • •
Contract law does not care about what kind of bargain is made, just that there is one and that parties have freely consented to their bargain. Can often be abused by unequal bargaining power.
• •
•
Public policy – if contract infringes public policy the contract is illegal (contract to commit a legal wrong) whereas other invalid contracts are just unenforceable. Unenforceable contracts are contracts that: o Initiate a tort/statutory breach o Prejudice administration of justice o Promote public corruption o Restraint of trade – prima facie unenforceable but can be enforced if reasonable. o Exclude court jurisdiction Statute can intervene and say a term cannot be enforced or compensation must be provided. o Courts wont enforce a contract if there is undue influence, unconscionability, unfair terms or if there are harsh exclusion and penalty clauses. o Contracts Review Act 1980 (NSW) – unfair terms. o ACL Part 2-3 – misleading/deceptive and unconscionable conduct.
Distinction between a Contract and a Tort
TORT
CONTRACT
action imposed
intention voluntary
Terms of Contracts • • •
• •
Can be said, written or implied. Promote reasonable expectations and supplement contracts. Type of terms: o Terms implied by virtue of usages of trade and commerce o Terms implied in fact o Terms implied by law (default rules) Terms may be incorporated by reference not just in document/contract signed. Can sometimes gap-fill e.g. implied date of practical completion if not specified.
PART 1: Formation Agreement FORMATION PROCESS: 1. Agreement – offer and acceptance. 2. Certainty – sufficient meaning to words, contract is sufficiently complete and there are no illusory promises. 3. Consideration – price of promise. 4. Intention – objectively intend to create legal relations.
