Contract Formation

LEARNING OBJECTIVES
7.1 What is a contract?
7.2 When does a contractual agreement come into existence? What is an offer? Is an advertisement an
offer? What is an acceptance? When is it effective?
7.3 How do we know whether the parties to an agreement intended that it be legally enforceable?
7.4 A promise is only enforceable if it is ‘supported by consideration’. What does this mean? Why is it
that consideration ‘need not be adequate’ but ‘must be sufficient’? How can a promise be enforced in
the absence of consideration?
7.5 Do contracts always have to be in writing and signed?
7.6 Can a child form a contract? What about someone who is intellectually disabled, mentally ill or
intoxicated?
7.7 What if the contract is for an illegal purpose?
CHAPTER 7
Contract law: formation
of the contract
James, Nickolas. BUSINESS LAW 4E, Wiley, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/uql/detail.action?docID=4748089.
Created from uql on 2019-04-06 00:52:11.
Copyright©2014.Wiley.Allrightsreserved.

CHAPTER 7 Contract law: formation of the contract 255
JOHNNY AND ASH
[Johnny is at the bar of his restaurant with Maria, an old friend. They are both drinking wine. The bar is
empty; the restaurant has closed for the evening, and Johnny appears to be a little drunk.]
Maria — So, Johnny, what do you think?
Johnny — I’m tempted, I really am.
Maria — Of course you are. I know things haven’t been going so well for you here at the restaurant
lately. I can help. The money I am offering will go a long way towards making things easier for you.
Johnny — I know, it’s true. And your offer is a very generous one — $150 000 for a 60 per cent share
in the business? That much money will really make a difference.
Maria — Exactly. So what’s the problem?
Johnny — Well, it’s just that I’ve gotten used to being the owner of The Lame Duck by myself. I’m not
sure I want to share it with anyone else.
Maria — Look, I don’t want to take control or anything like that. I just want to help you out, and make
a little money for myself along the way. You would still be in charge of the restaurant.
Johnny — I don’t know. Maybe if it was $150 000 for a 50–50 split I would do it . . . [As Johnny speaks,
Maria looks at her watch, then stands up and prepares to leave.]
Maria — Look, it’s late, I’m going to have to go. 50–50 sounds okay to me, but I’ll think about your
offer overnight. I’ll probably call you in the morning to let you know if the deal is going ahead. How
does that sound?
Johnny — What? Oh, yeah, sure, okay.
[Maria leaves the bar. Johnny sits quietly, nursing his drink. Some time passes. Johnny picks up his
mobile phone and calls Ash.]
Johnny — Ash? It’s Johnny. Were you asleep? Sorry. I just needed to talk to you about something
important. My friend Maria wants to buy into the business. I think I’m going to tell her no and try to
keep going by myself, but I wanted to run it past you first. I’m . . . sorry, just a sec, I’ve got a text . . .
[Johnny takes the phone from his ear and reads the text. He sits up straight very quickly, looking
alarmed, and returns the phone to his ear.]
Johnny — I can’t believe this! Maria just sent me a text saying that she accepts my offer, and that she
is going to get her solicitor to draw up the papers in the morning! No way!
[Johnny listens to his phone. He still looks alarmed.]
Johnny — ‘Is there a contract?’ Of course not! I didn’t sign anything! . . . What? Are you sure? Not all
contracts need to be in writing? Well, is there a contract or not?
CHAPTER PROBLEM
As you make your way through this chapter, consider whether, when Maria sent Johnny a text saying
that she accepted his offer, they formed a legally binding agreement.
Introduction
In many ways, business is all about making deals. Buyers make deals with sellers. Wholesalers make
deals with retailers, and retailers make deals with customers. Banks make deals with borrowers,
insurance companies make deals with clients, and service providers make deals with the users of
their services.
Whenever anyone makes a deal, it is essential that they be able to trust the other party to the
deal to tell the truth and do what they have promised to do. And when one of the parties to a deal

256 PART 2 Legal consequences
makes a false statement or fails to do what they promised to do, it is the law of contract that entitles
the other party to enforce the deal, to be paid compensation or to receive some other form of civil
remedy.
In this chapter we consider the rules that regulate the making of deals in Australia. In particular, we
explain how the law helps to determine whether or not a legally enforceable contract exists. In later
chapters we will consider the different types of terms of a contract, the circumstances in which a con-
tract will be unenforceable, and the consequences of breaching a contract.
7.1 Contracts
LEARNING OBJECTIVE 7.1 What is a contract?
A contract is a legally enforceable agreement.
As a general rule, for an agreement to be legally enforceable, three requirements must be satisfied.
1. There must be an agreement between two or more persons (called the parties to the contract).
2. Both parties must intend that their agreement be legally enforceable.
3. Both parties must pay a price or make a promise (this price or promise is called consideration).
Most contracts do not need to be in writing. Many contracts are made verbally and, as explained
below, some contracts are implied by the conduct of the parties.
Some contracts are formed and performed at the same time. For example, if Johnny sells a pizza to
Jin for cash, they make the contract (Johnny agrees to sell and Jin agrees to purchase the pizza) and per-
form the contract (Jin hands over the cash and Johnny hands over the pizza) at almost the same time.
With other contracts, one or both of the parties make a promise and therefore have an ongoing obligation
once the agreement has been formed. For example, if Johnny sells a pizza to Jin on credit, Johnny has
performed his part of the agreement as soon as he hands over the pizza but Jin has an ongoing obligation
to make payment at a later date. If Johnny hires Jennifer as an employee, they both have ongoing obli-
gations, including Jennifer’s obligation to work for Johnny and Johnny’s obligation to pay Jennifer. Most
contractual disputes involve this second type of contract and arise when one of the parties fails to keep
their promise.
CHECKLIST
A contract will be formed if all of the following requirements are satisfied.
◼◼ There is an agreement between the parties.
◼◼ The parties intended to create legal relations.
◼◼ Each party has provided consideration, that is, paid a price or made a promise.
ACTIVITY 7.1 — REFLECT
Think of five agreements you have made recently. Identify those agreements that you think qualify as
contracts. Do they satisfy all three requirements?
REVISION QUESTIONS
Before proceeding, ensure that you can answer each of the following questions.
7.1 What is a contract?
7.2 What are the three essential elements of a contract?
7.3 What are some of the possible forms of a contract?

7.2 Requirement 1: agreement
LEARNING OBJECTIVE 7.2 When does a contractual agreement come into existence? What is an offer?
Is an advertisement an offer? What is an acceptance? When is it effective?
To establish the existence of a legally enforceable contract, it is first necessary to show that there is an
actual agreement between the parties. An agreement is a meeting of minds, and exists when two or
more people share understanding and intention.
Many agreements are preceded by a period of negotiations. A contract does not exist until the nego-
tiations are concluded and an agreement is reached. As a general rule, if important aspects of the arrange-
ment are still being negotiated, there is no agreement and no contract.
Sometimes the existence of a finalised agreement can be deduced from the conduct of the parties.1
The
parties are clearly behaving as if they have already reached some kind of agreement. It is not necessary
to show that the parties have discussed and agreed upon every single aspect of their arrangement; evi-
dence that the parties have reached broad consensus is sufficient.
At other times the existence of a finalised agreement is less clear. One party might insist that an
agreement has been concluded, while the other party insists that an agreement is still being nego-
tiated, or that no legally enforceable commitments have been made. In these circumstances, the test
for determining the existence of an agreement is the existence of an offer by one party and an accept-
ance of that offer by the other party. An agreement is said to exist if it can be shown that one party
has made an offer and that another party has accepted that offer and communicated their acceptance.
Neither party can breach that agreement without legal consequences, provided that the other require-
ments of a contract are satisfied.
CHECKLIST
An agreement will be formed if all of the following requirements are satisfied.
◼◼ One person (the offeror) has made an offer.
◼◼ Another person (the offeree) has accepted the offer.
◼◼ The offeree has communicated their acceptance of the offer to the offeror.
The following rules relating to offer and acceptance are used to determine the precise point in time
that agreement is reached, because it is at this moment that the contract comes into existence and the
parties become legally obliged to proceed.
Offer
A person makes an offer when they express a willingness to immediately enter into a contract with the
person to whom the offer is directed. For example, when Johnny tells Jin that he is willing to sell his
pizza oven to Jin in return for $10 000, Johnny is expressing a willingness to immediately enter into a
contract with Jin and he is, therefore, said to have made an offer to Jin. In these circumstances, Johnny
is called the offeror and Jin is called the offeree.
An offer can be:
•• made in writing,
•• made verbally, or
•• indicated through conduct.
For example, if Johnny picks up a newspaper in a shop and hands the money to the cashier, he is
offering to buy the newspaper without actually saying anything.
The following rules and guidelines assist in the identification of an offer.
1 Brogden v Metropolitan Railway Co (1877) 2 App Cas 666.

The offeree
Sometimes an offer is made by one person to another, and sometimes an offer is made by one person to
a group of people. Depending on the particular wording of the offer, the offer can be accepted by either
the first person to respond or by anyone from the group who responds.
There is no limit to the number of people to whom an offer can be made and, in fact, it is said that an
offer can be made to ‘the world at large’.2
For example, if Ash puts up a poster offering a reward for the
return of her lost cat she is making an offer to pay the reward to anyone in the world who finds the cat.
CAUTION!
An advertisement promoting a product at a particular price may appear to be an offer to the world at
large, but it is more likely to be categorised as an invitation to treat and not an offer at all . . . even if the
advertisement uses the word ‘offer’. ‘Invitation to treat’ is explained below.
Acceptance, rejection or revocation
If the offer is accepted, an agreement (and possibly a contract) comes into existence from that moment.
If the offer has not already been accepted, the offer may be rejected by the offeree. For example, Jin
may decline Johnny’s offer to sell the pizza oven to her for $10 000. If that is the case, the offer is ter-
minated and Jin cannot later change her mind and accept the offer. (She can, however, approach Johnny
and make an offer herself, which Johnny is not obliged to accept.)
If the offer has not already been accepted or rejected, the offeror is entitled to revoke their offer. For
example, if Jin has not yet accepted or rejected Johnny’s offer to sell the pizza oven for $10 000, Johnny
can change his mind and withdraw the offer. As long as Johnny makes it clear to Jin that the offer has
been revoked, Jin can no longer accept the offer.
An offeror is entitled to revoke their offer even if they have promised to keep the offer open for a
particular period.3
There is, however, an important exception: if the offeree has provided consideration
for the offeror’s promise to keep the offer open (e.g. by paying a deposit), the offeror cannot withdraw
their offer until the period has expired. If the offeree has paid a deposit, a separate contract comes into
existence, sometimes referred to as an option, and the offeror breaches that contract if they withdraw
the offer before the promised deadline. For example, if Johnny offers to sell the pizza oven to Jin for
$10 000 and at Jin’s request Johnny promises to keep that offer open until 5.00 pm, Johnny can change
his mind and sell the oven to someone else before 5.00 pm unless Jin has paid a deposit, in which case
Jin has an option and Johnny must keep the offer to Jin open until 5.00 pm.
Goldsborough Mort & Co Ltd v Quinn (1910) 10 CLR 674
Quinn offered to sell his land to Goldsborough Mort & Co Ltd (GMC) and promised to keep the offer open
for one week in return for GMC paying to Quinn a deposit of fifty cents. Before the week had expired Quinn
informed GMC that he was revoking his offer and selling the land to someone else. GMC then accepted the
offer and sued Quinn for breach of contract. The court decided that because GMC had paid Quinn to keep his
offer open for one week Quinn was not permitted to withdraw the offer, which meant that when GMC accepted
the offer a contract was formed. Quinn had breached the contract by selling the land to someone else.
CAUTION!
Even if the offeror has promised to keep the offer open for a particular period, they are entitled to revoke their
offer at any time prior to acceptance . .. unless the offeree has paid the offeror to keep the offer open.
2 Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256.
3 Dickinson v Dodds (1876) 2 Ch D 463.

If the offer is not accepted, rejected or validly revoked, it will lapse after the expiry of a reasonable
amount of time. What is ‘reasonable’ will depend on the circumstances.
Ramsgate Victoria Hotel Co Ltd v Montefiore (1866) LR 1 Ex 109
On 8 June Montefiore made an offer to Ramsgate Victoria Hotel Co Ltd (RVH) to purchase shares in that
company. More than 5 months later, on 23 November, RVH wrote back to Montefiore accepting the offer
and informing Montefiore that the balance owing on the shares was now due. Montefiore refused to pay
and RVH sued him for breach of contract. The court decided that there was no contract because there
was no agreement. Montefiore’s offer had lapsed before RVH accepted it because more than a reason-
able period of time had lapsed.
Requests for information
It is important to differentiate between the making of an offer and a mere request for information. For
example, if Jin emails Johnny and asks if Johnny is willing to sell his pizza oven for $8000, Jin is likely
to be seen to be merely asking for information rather than making an offer to buy Johnny’s oven.
Similarly a response to a request for information is not an offer. If Johnny replies to Jin’s email and
says that the lowest price is $10 000, this is unlikely to be seen as an offer by Johnny to sell the oven at
that price.4
Advertising and advertisements
Despite the fact that many advertisements on television, in magazines, on posters and on the internet use
the word ‘offer’, most advertisements are not offers. As explained earlier, an offer is an expression of
willingness to immediately enter into a contract with the person to whom the offer is directed. If every
advertisement placed by Johnny was a legal offer, he would immediately enter into a contract with every
person who accepted the offer by responding to his advertisement, and once the advertised product was
sold out he would be in breach of contract with every customer who missed out.
Instead, most advertisements are deemed to be ‘invitations to treat’ rather than offers to the world at
large. An invitation to treat is an invitation to another person to make an offer. If Johnny advertises
his vegan pizzas on television, the advertisement is an invitation to treat, which invites members of the
public to come to his restaurant and offer to purchase a pizza. The customer is the person who makes the
offer and it is then up to Johnny to decide whether or not to accept that offer. There is no legally enforce-
able contract between Johnny and the customer until Johnny decides to accept the customer’s offer. This
applies to most transactions involving the buying and selling of products.
There are exceptions to this general rule. Sometimes the wording of an advertisement makes it clear
that the advertiser is, in fact, willing to enter into a legally enforceable contract immediately upon
acceptance of the advertised offer (i.e. the advertisement is an offer to the world at large). For example,
an advertisement that states that the business only has a certain number of products in stock and that
these products will be sold to the first few customers is an offer rather than simply an invitation to treat.
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, bron-
chitis, 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
4 Harvey v Facey [1893] 1 AC 552; [1893] UKPC 1.

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 direc-
tions 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 advertise-
ment made it clear that CSBC was willing to enter into legal relations with anyone who accepted the
offer of the reward.
ACTIVITY 7.2 — RESEARCH
Look through a magazine, through a newspaper, or on the internet and provide an example of (1) an
advertisement that is an invitation to treat, and (2) an advertisement that is a legal offer.
Catalogues and price lists, like most advertisements, are likely to be invitations to treat rather than
offers.5
The display of a product in the window of a shop or on the shelves of a shop is also an
invitation to treat rather than offer. This means that the contract is not formed until the customer
offers to buy the product and the cashier accepts the offer.6
This view appeals to common sense.
If the display of a product was really an offer, and the customer accepted that offer by picking the
product up from the shelf, a contract would be formed at that point and the customer would not be
permitted to return the product to the shelf if they changed their mind. This is clearly impractical and
unrealistic.
If you pay for and download a song from iTunes, who makes the offer and who accepts the offer?
Auctions and tenders
At an auction, the call for bids is an invitation to treat.7
The bidders are offerors, and there is no agree-
ment and no contract until the auctioneer accepts an offer on behalf of the seller. This means that if the
auction is ‘without reserve’ (i.e. there is no minimum price that must be reached before the seller is
obliged to sell the product) and the auctioneer refuses to sell to the highest bidder, there is no contract
and the auctioneer cannot be sued for breach. However, in these circumstances the court is likely to
decide that there is in fact a second contract, called a collateral contract, between the auctioneer and all
of the bidders to the effect that the auctioneer will sell to the highest bidder, and the auctioneer could be
sued for breach of this collateral contract.
5 Partridge v Crittenden [1968] 1 WLR 1204.
6 Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401.
7 Payne v Cave (1789) 3 TR 148; 100 ER 502.

Smythe v Thomas (2007) 71 NSWLR 537
Thomas listed an antique fighter plane for sale by auction on eBay. The reserve price was $150 000. There
was also an option for a purchaser to ‘buy now’ for $275 000. The only bidder was Smythe, who lodged a
bid of $150 000 20 seconds before the auction closed. Smythe received the standard message from eBay:
‘Congratulations, the item is yours, please pay now.’ Thomas, however, refused to sell the plane at that
price, arguing that there was no contract: the listing on eBay was an invitation to treat, Smythe’s bid was an
offer, and Thomas had not accepted the offer. The court decided that there was a contract. When Thomas
listed the plane on eBay he agreed to be bound by eBay’s terms and conditions, according to which the
seller was obliged to enter into a contract with the bidder who lodged the highest bid at or above the reserve
price before the auction ended. Unlike a traditional auction, in an online auction the listing is an offer and not
merely an invitation to treat. Thomas was obliged to sell the plane to Smythe at the reserve price.
An advertisement calling for tenders is an invitation to treat.8
A person who submits a tender is making
an offer, which may or may not be accepted by the person who called for the tenders. Once again, if
the call for tenders states that the highest/lowest tender will be accepted, a failure to accept the highest/
lowest tender will be a breach of a collateral contract.
Rather than an invitation to treat, a vending machine such as a ticket machine or a drink machine
is said to be a standing offer by the owner of the machine. When the customer puts the coins into the
machine and makes a selection, the customer is accepting the offer and it is at that point that the contract
is formed.9
8 Spencer v Harding (1869-70) LR 5 CP 561.
9 Thornton v Shoe Lane Parking [1971] 2 QB 163.

When you go to the cinema, who makes the offer and who accepts the offer?
Acceptance
When the offeree indicates by words or by action that they are willing to immediately enter into a legally
enforceable contract with the offeror on the terms offered, they are said to accept the offer.
The following rules and guidelines assist in the identification of a valid acceptance.
The offeree
Only a person to whom the offer was addressed (the offeree) can validly accept the offer. For example, if
Johnny makes an offer to Jin to sell his pizza oven, and Xue (a third party) attempts to accept the offer, Xue’s
attempted acceptance will be no more than an offer to Johnny by Xue, which Johnny may or may not accept.
As stated earlier, it is possible for an offer to be made to a group of people, and even to the ‘world at
large’, in which case anyone in the group, or anyone at all in the latter case, can accept the offer.
Unqualified acceptance
The offeree must accept the offer without qualification. If the offeree modifies the terms of the offer in
any way, they are not accepting the offer. Rather, they are making what is called a counter offer. Con-
sider, for example, the following exchange of text messages between Jin and Johnny:
Johnny — ‘Will you buy my oven for $10 000?’
Jin — ‘Yes, but I will only pay $9000.’
In this example, there is no agreement and no contract because the offer by Johnny has not been
accepted by Jin. Jin has made a counter offer, which Johnny may or may not accept. Negotiations may
consist of an offer, a counter offer, a counter-counter offer, and so on, with neither party legally com-
mitted until one party accepts without qualification the other party’s previous offer.
The making of a counter offer is effectively a rejection of the original offer and as such the original
offer cannot subsequently be accepted.10
Just as a request for information is not an offer, a request for further information in response to an
offer is not a counter offer.11
Communication of acceptance
The agreement is not complete until the offeree communicates their acceptance to the offeror.
Powell v Lee (1908) 24 TLR 606
Powell applied for the position of headmaster with a school. The school board decided to appoint
Powell, but did not immediately inform him of the decision. A member of the board, without the authority
of the board, told Powell that the board had accepted his offer of employment. The board subsequently
changed its decision and appointed another person as headmaster. Powell sued the board claiming
that a contract had already been formed. The court decided that there was no agreement between
Powell and the board. The board had not communicated its acceptance and an agreement is not formed
until acceptance of the offer is communicated to the offeror. The communication by the board member
acting without authority was invalid.
10 Hyde v Wrench (1840) 3 Beav 334; 49 ER 132.
11 Stevenson, Jaques & Co v McLean (1880) 5 QBD 346.

This also means that to enforce the agreement the offeree must show that they have effectively com-
municated their acceptance to the offeror. In face-to-face negotiations this is usually not a concern, but
when the parties are negotiating at a distance it becomes necessary to establish that the offeror has in fact
received the offeree’s acceptance.
If the offeror specifies the way that acceptance must be communicated, the acceptance is not valid
unless it is communicated in this manner or in an alternative manner that is just as prompt and no less
advantageous to the offeror.12
For example, if Johnny makes an offer to Jin and states ‘reply by email’,
the offer is effectively accepted if Jin communicates her acceptance directly to Johnny by telephone but
not if she communicates her acceptance by posting a letter. If Johnny makes it clear that the reply can be
communicated by email only, Jin must communicate her acceptance in this way.
An offeror can waive the requirement that communication be accepted, but cannot insist that a failure
to respond is acceptance.13
For example, if Johnny offers to sell his pizza oven to Jin for $10 000 and
Johnny tells Jin that if he does not hear from Jin by 5.00 pm he will assume that Jin has accepted
his offer, Jin can still enforce the agreement if Johnny refuses to provide the oven, but Johnny cannot
enforce the agreement if Jin refuses to pay.
Why is it that an offeror is not able to insist that a failure to respond is acceptance?
There are three important exceptions to the requirement that the offeree communicate their acceptance
to the offeror.
The first is where there is an ongoing commercial relationship between the parties. In these circum-
stances, a failure to respond to an offer that is similar to previously accepted offers and that was previ-
ously accepted effectively by silence can amount to an indication of acceptance, and the agreement can
be enforced by either party.14
(See the facts of this case described earlier.) 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.
R v Clarke (1927) 40 CLR 227
The government of Western Australia offered a reward of £1000 to anyone who provided information
leading to the capture and conviction of a man wanted for the murder of two police officers. Clarke was
arrested and charged with the murders and he provided information that led to the arrest of another
man who was subsequently convicted of the murders. Clarke was released and he claimed the reward.
The court decided that he was not legally entitled to the reward. The reward was a legal offer, but when
Clarke provided the information he was not doing so in order to accept the offer; he was doing so to
clear his own name. Clarke admitted that when he gave the information to the police he had forgotten
about the reward. The court explained that a person cannot accept an offer by conduct unless they are
acting in reliance on the offer.
12 Tinn v Hoffmann & Co (1873) 29 LT 271.
13 Felthouse v Bindley (1862) 11 CB NS 869; 142 ER 1037.
14 Boyd v Holmes (1878) 4 VLR(E) 161.

The second exception relates to unilateral contracts. A unilateral contract is a contract where the
offeree’s acceptance and performance are the same thing. The best example of a unilateral contract is an
offer of a reward: if Ash puts up a notice offering a reward to whoever finds her lost cat, Jin’s finding and
returning of the cat is both acceptance of the offer and performance of her side of the bargain. Jin does
not need to communicate her acceptance of the offer prior to her performance.
The third exception relates to contractual negotiations that are taking place through the post. If it is
reasonable in the circumstances for the offeree to reply to the offer by post, then the offeree’s acceptance
is effective, and the contract is formed, as soon as the offeree posts the letter of acceptance, not when the
offeror actually receives the letter.15
This is known as the postal rule. The postal rule applies even if the
letter is delayed in the post and even if the letter of acceptance never arrives.
Adams v Lindsell (1818) 1 B & Ald 681; 106 ER 250
Lindsell made an offer to sell goods to Adams in a letter posted on 2 September. The letter was incor-
rectly addressed and Adams did not receive the letter until 5 September. Adams immediately wrote back
accepting the offer. On 8 September Lindsell, assuming that Adams was not going to respond, sold the
goods to someone else. Lindsell received Adams’ acceptance on 9 September. Adams sued Lindsell for
breach of contract. The court decided that there was a contract between Adams and Lindsell: Adams’
acceptance was effective on 5 September and the contract was formed on that date.
The postal rule applies only to acceptances; it does not apply to offers and revocations.16
For
example, on 1 March Johnny sends a letter to Jin offering to sell his pizza oven to Jin for $10 000.
On 2 March Johnny writes again to Jin saying he has changed his mind and revoking the offer. Jin
receives the letter of offer on 3 March and immediately writes back accepting the offer. Jin receives
the letter of revocation on 4 March, and Johnny receives the letter of acceptance on 5 March. Is there
a contract between Johnny and Jin? The acceptance took place on 3 March when Jin posted the letter
of acceptance. The revocation did not take place until 4 March, when Jin received the letter of revo-
cation. Therefore, the offer was accepted before it was revoked, the revocation was ineffective, and a
contract was formed on 3 March.
How can the postal rule be justified? In your answer, consider the courts’ traditional preference for
enforcing rather than voiding contracts.
The postal rule applies only to postal communications and telegrams. It does not apply to methods
of instantaneous communication such as telephone calls and faxes.17
If an acceptance is sent by one of
these methods, it is not effective and the contract is not formed until the acceptance is actually received
by the offeror.
The question of whether or not the use of the internet or email is a method of instantaneous communi-
cation and, therefore, beyond the scope of the postal rule has not yet been answered decisively by the
courts. The better view seems to be, however, that the postal rule does not apply to the internet or email,
and electronic communications must be actually received to be effective.
The offeror can choose to override the postal rule by expressly stating that the offeree’s acceptance
must be actually received by the offeror to be effective.
15 Henthorn v Fraser [1892] 2 Ch 27, 33.
16 Byrne & Co v Leon Van Tienhoven & Co (1880) 5 CPD 344.
17 Brinkibon Ltd v Stahag Stahl Und Stahlwarenhandelsgesellschaft mbH [1983] 2 AC 34.

LAW IN CONTEXT: LAW AND TECHNOLOGY
Making agreements online
The internet has made it easier for a busi-
ness to enter into agreements with customers
regardless of time differences, geographical
locations and national borders. Parties can
make an online agreement by exchanging
emails. A website may advertise goods or ser-
vices that the customer can purchase by com-
pleting and transmitting an online order form.
When are online agreements formed?
If a customer orders goods or services through
a website, is the business contractually bound
as soon as the order is received? The website
is likely to be treated in the same way as an
advertisement (i.e. as an invitation to treat rather than an offer), and an enforceable contract will not be
formed until the business accepts the customer’s offer. It is, however, advisable that the business take the
extra precaution of specifying on its website that the descriptions of the products are not offers in the legal
sense of the term, and that once the customer transmits an order it must be accepted by the business before
there will be a contract. Once the order is accepted by the business and that acceptance is received by the
customer, the contract is formed.
When is an electronic communication such as an email ‘received’? Section 14A of the Electronic
Transactions Act 1999 (Cth) — and the equivalent sections in the State electronic transactions legislation
— establishes basic rules for the time of receipt of an electronic communication. These rules depend
on whether or not the receiver has told the sender to send the electronic communication to a particular
information system. Where the receiver has specified an electronic address, and the communication is
sent to that electronic address, s. 14A(1) states that the communication is ‘received’ when it becomes
capable of being retrieved by the receiver. In all other cases s. 14A(2) states that the electronic com-
munication will be received when it is capable of being retrieved by the receiver, and the receiver is
aware that the electronic communication has been sent to the particular address. The term ‘aware’ does
not mean that a communication must be actually read by the receiver: a receiver who knows, or should
reasonably know in the circumstances, of the existence of the communication would be considered to
have received the communication. For example, a receiver who is aware that the communication is in
their email inbox but who refuses to read it would be considered to have received the communication.
Where are online agreements formed?
Jurisdiction is one of the most complex and confusing areas of the law relating to online contracts. What
happens if the online agreement is between a business and a customer residing in different countries? If
a dispute arises under the online agreement, whose law will apply to resolve the dispute? In the absence
of express agreement between the parties regarding relevant jurisdiction, the dispute can only be settled
under Australian law if the contract was formed in Australia. Therefore, the most important issue is where
the agreement was formed. A contract is usually deemed to be formed in the place where the acceptance
is received. If an Australian business responds to an overseas customer’s offer by sending its acceptance
to the customer, then the contract will be formed in the jurisdiction of the customer.
A business can, and should, avoid uncertainty about the issue of jurisdiction by stipulating in the
terms of the contract which law will apply in the event of a dispute. In most online contracts it will be
the business that will dictate the terms of the contract. If the contract is made via a website, the busi-
ness should have a page dedicated to the terms governing the transaction. To effectively rely upon
those terms, the website should be structured so that it is impossible for a customer to offer to buy the
product without first viewing those terms. The terms page should have an acknowledgement button that
will indicate that the customer has had the opportunity to read those terms and agrees to be bound by
them. If the contract is made via email, the email from the business should contain the terms. In both
cases the business should include a ‘jurisdiction clause’, making it clear that the law governing the
transaction will be that of its jurisdiction and not the jurisdiction of the customer.

Conditional agreements
Sometimes the parties appear to have finalised negotiations and reached agreement, but they have
expressly agreed that the agreement is a conditional one.
If the parties have specified that the agreement will not be legally enforceable until the happening of
a certain event, the condition is known as a condition precedent. For example, the agreement between
Johnny and Jin that Johnny will sell his pizza oven to Jin may be conditional upon Jin successfully get-
ting a loan from a bank within seven days of the date of the agreement. Until Jin gets the loan, the agree-
ment is conditional. Note that Jin is obliged to take all necessary steps to satisfy the condition.
If the condition precedent does not specify a time in which it must be satisfied, it must be satisfied
within a reasonable time.18
If the parties have specified that the agreement is enforceable immediately but will cease to be enforce-
able upon the happening of a certain event, this is known as a condition subsequent. For example, the
agreement between Johnny and Jin that Johnny will sell his pizza oven to Jin may be expressed to be
conditional upon Jin not being evicted from her own business premises; if Jin is evicted the agreement
ceases to be enforceable and comes to an end.
REVISION QUESTIONS
7.4 What is an agreement, and why is it important to know exactly when an agreement was reached?
7.5 What is an offer, and how can an offer be made?
7.6 Explain the distinctions between acceptance, rejection and revocation of an offer.
7.7 In what circumstances can a promise to keep an offer open be enforced?
7.8 When will an offer lapse?
7.9 What is the difference between an offer and a request for information?
7.10 What is the difference between an offer and an invitation to treat?
7.11 At what point is the contract formed when a person (a) buys goods in a supermarket; (b) buys
goods at an auction; and (c) buys goods by tender?
7.12 What is acceptance, and who can accept an offer?
7.13 What is the difference between an acceptance and a counter offer?
7.14 When will silence amount to acceptance?
7.15 In what circumstances will an acceptance be valid, even though it is not communicated to the
offeror?
7.16 What is the postal rule, and when does it apply?
7.17 What is a conditional agreement?
7.18 What is the difference between a condition precedent and a condition subsequent?
7.3 Requirement 2: intention
LEARNING OBJECTIVE 7.3 How do we know whether the parties to an agreement intended that it be
legally enforceable?
Not every agreement is a contract. If Johnny offers Sam a job and Sam accepts the offer, the agreement
between Johnny and Sam is likely to be a contract. But if Johnny offers to meet Ash for lunch and she
accepts the offer, the agreement between Johnny and Ash is not a contract because neither of them
intended the agreement to be a legally enforceable one. This is the second requirement for a contract: the
parties to the agreement must intend the agreement to be legally enforceable.
In deciding whether or not the second requirement is satisfied, the court does not ask the parties what
they actually intended. Rather, the court looks at the conduct of the parties from the perspective of an
18 Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537.

objective observer and asks whether the parties were behaving in a way that indicated that they intended
the agreement to be legally enforceable.
Presumptions
In applying the above objective test, the courts have traditionally made two important presumptions relating to:
1. social or domestic agreements, and
2. commercial agreements.
Social or domestic agreements
The first presumption is that if the agreement was made in a social or domestic context, the agreement
was not intended to be legally enforceable. In other words, if an agreement was made between two
friends in a social setting, or between members of a household such as a brother and sister or a husband
and wife, the court will presume that it was not intended to be a contract.
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 rheu-
matic 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 dom-
estic 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.
It is not the case, however, that friends and relatives cannot make contracts with each other. The court
will presume that an agreement between friends or family members was not intended to be a contract,
but it is possible to rebut this presumption. This means that one of the parties can seek to convince the
court that, given the particular circumstances of the agreement, the parties appear to have intended it to
be a legally enforceable arrangement.
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.

If two friends buy a lottery ticket and agree to share the prize money equally if the ticket wins, is that
agreement likely to be enforceable as a contract?
Commercial or business agreements
The second presumption is that if the agreement is made in a commercial or business context, the court
will presume that it was intended to be legally enforceable.19
It is possible for the presumption to be rebutted by evidence that the parties to the commercial agree-
ment behaved in such a way that it was clear that they did not intend their agreement to be legally
enforceable. For example, a written commercial agreement may contain a clause to the effect that the
agreement is intended to be binding in honour only.
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 con-
ditions. 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.
A comfort letter is a letter from a third party assuring a lender about the borrower’s ability to repay
the loan. Depending upon the wording of the letter, the assurance by the third party may be a legally
enforceable promise,20
or it may be no more than a non-binding statement of policy or intention.21
In 2002, the use of these two presumptions was called into question by the High Court.
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.
Whether the presumptions will in future be abandoned entirely is not yet clear.
19 Edwards v Skyways Ltd [1964] 1 WLR 349.
20 Gate Gourmet Australia Pty Ltd (in liq) v Gate Gourmet Holding AG [2004] NSWSC 149.
21 Kleinwort Benson Ltd v Malaysia Mining Corp Bhd [1989] 1 WLR 379.

Preliminary agreements
Sometimes parties who have been negotiating a deal appear to have reached an agreement, but the agree-
ment is expressed to be ‘subject to’ some other event, such as ‘subject to the written agreement being
approved by our solicitors’. Does this mean that the agreement is not intended to be legally enforceable?
The answer is that it depends on the circumstances and the wording of the agreement. There are at least
four possibilities.
•• The parties do not intend the agreement to be legally enforceable until the condition is satisfied.
•• The parties intend the agreement to be legally enforceable immediately and simply propose to have
the agreement restated more formally.
•• The parties intend the agreement to be legally enforceable immediately, but it is not intended to be
performed until the condition is satisfied.
•• The parties intend the agreement to be legally enforceable immediately, but they also intend to make
another agreement that will eventually be substituted for the first agreement.22
In the first situation the parties to the negotiation can change their minds about the agreement prior
to the condition being satisfied. In the other three possible situations, however, the agreement is already
legally enforceable and the parties cannot change their minds.
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 consider-
ably alter the terms of the agreement.
‘Mere puff’
A promise made to customers in a business context will not be enforceable if the business can show that
the promise was clearly not intended to be taken seriously by customers. Such promises are sometimes
referred to as ‘puffery’ or ‘mere puff’ by the courts, and are not legally enforceable. For example, a tele-
vision advertisement may contain an apparent promise by a car manufacturer that their car is capable
of turning into a giant dancing robot, or of flying, or of surviving a fall from a cliff, but these sorts
of promises are clearly not intended to be taken seriously and will not be legally enforceable by the
promisee.
(See the facts of this case that were described earlier.) 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.
Advertising and other pre-contractual promises by businesses are now closely regulated by the
Australian Consumer Law (the ACL).
22 Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 at 628.

ACTIVITY 7.8 — RESEARCH
Find another example of a television advertisement that contains a promise that is clearly not intended
to be taken seriously.
REVISION QUESTIONS
7.19 How do the courts decide whether or not the parties to an agreement intended that the agreement
be legally binding?
7.20 What presumption regarding intention will a court make about an agreement reached in a social
or domestic context?
7.21 How can this presumption be rebutted?
7.22 What presumption regarding intention will a court make about an agreement reached in a
business or commercial context?
7.23 How can this presumption be rebutted?
7.24 Is an agreement made ‘subject to’ some other event intended to be legally binding?
7.25 What is ‘puffery’ or ‘mere puff’?
7.4 Requirement 3: consideration
LEARNING OBJECTIVE 7.4 A promise is only enforceable if it is ‘supported by consideration’. What
does this mean? Why is it that consideration ‘need not be adequate’ but ‘must be sufficient’? How can a
promise be enforced in the absence of consideration?
An agreement is not a contract unless both parties to the agreement have paid, or promised to pay, a price.
The contribution of each party to the agreement is called consideration. If Jin wishes to enforce her agree-
ment with Johnny, she can only do so if she has provided consideration. Consideration can take the form of:
•• the payment of money,
•• the provision of goods,
•• the provision of a service,
•• the undertaking of an onerous obligation,
•• refraining from doing something (e.g. agreeing not to sue), or
•• a promise to do any of these things.
Most agreements consist of one, and often both, of the parties contributing a promise to the agreement. A
borrower promises to repay the money that they have borrowed; a manufacturer promises to deliver a certain
quantity of products; an employee promises to show up for work and carry out particular tasks and an employer
promises to pay the employee. If the promisee (the person to whom the promise is made) has not provided con-
sideration to the promisor, then the promise is merely a gift and as a general rule legally unenforceable.
‘Bargains can be enforced but gifts cannot.’ How can this legal rule be justified?
For example, if Johnny offers to give Jin his pizza oven and Jin accepts his offer, the agreement between
Johnny and Jin is not a legally enforceable contract because Jin has not provided any consideration in return
for Johnny’s promise. It is a gift by Johnny to Jin. However, the agreement between Johnny and Jin is a con-
tract and Jin can legally enforce Johnny’s promise if Johnny promises to give Jin his pizza oven in return for:
•• Jin paying Johnny $10 000,
•• Jin giving Johnny her car,

•• Jin painting Johnny’s house,
•• Jin agreeing to guarantee a loan to be taken out by Johnny,
•• Jin agreeing not to sue Johnny, or
•• Jin promising to do any of these things.
(See the facts of this case that were described earlier.) CSBC promised to pay a reward to anyone who
used their ‘smoke ball’ and still caught the flu. Had Carlill provided consideration for CSBC’s promise?
She paid for the smoke ball, but that was consideration for the smoke ball itself, not for the promise
of a reward. The court decided that Carlill had provided consideration: she suffered the inconvenience
of using the product according to the instructions. As the court explained, consideration includes ‘any
act of the plaintiff from which the defendant derives a benefit or advantage, or any labour, detriment or
inconvenience sustained by the plaintiff, provided such act is performed or such inconvenience suffered
by the plaintiff with the consent, either express or implied, of the defendant’.
CAUTION!
Consideration is not a price paid in addition to the bargain, it is each party’s part of the bargain. If
Johnny has promised to sell his oven to Jin for $10 000, Johnny’s promise to sell the oven is enforceable
by Jin because Jin has provided consideration for Johnny’s promise. The consideration is Jin’s promise
to pay for the oven. Jin does not need to show that she gave Johnny something in addition to her
promise; her promise to pay the $10 000 is the consideration.
Consideration must move from the promisee but not necessarily to the promisor.23
For example, if
Johnny agrees to give Jin his pizza oven in return for Jin paying $10 000 to Johnny’s mother Jenny, there
is still a valid contract: the consideration is moving from Jin. However, if Johnny agrees to give Jin his
pizza oven in return for Jin’s friend Xue paying $10 000 to Johnny, Jin does not have a contract with
Johnny because the consideration did not move from Jin.
Consideration need not be adequate
The law of contract does not require each party to pay a fair or adequate price, only a price of some legal
value. The requirement that each party contribute to the arrangement is satisfied as long as each party
pays some consideration, no matter how inadequate or small in value. For example, if Johnny promises
to give Jin his pizza oven in return for Jin paying him $50, the $50 is still consideration and the agree-
ment is still a contract, even though $50 is not a fair or adequate price for the oven.
Thomas v Thomas (1842) 2 QB 851; 114 ER 330
The executors of Mr Thomas’s estate promised to let Mrs Thomas live in Mr Thomas’s house for the rest of
her life in return for Mrs Thomas paying rent of £1 per year. When Mrs Thomas later sought to enforce the
promise, the executors argued that there was no contract because Mrs Thomas had not provided adequate
consideration. The court decided that there was a contract. The consideration of £1 per year in return for the
right to occupy the house was clearly not adequate, but it was still of legal value and, therefore, sufficient.
Thus, the court is uninterested in inquiring into the adequacy of the consideration provided by each
party, and even the most trivial payment or promise will qualify as sufficient consideration provided it
has some legal value.24
23 Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847.
24 Chappell & Co Ltd v Nestlé Co Ltd [1960] AC 87.

‘A transaction will be enforced even if the price payable is not a fair one.’ How can this legal rule be
justified?
Consideration must be sufficient
Consideration will be sufficient if it has some legal value. Examples of insufficient consideration include
a vague promise, past consideration, and a promise to do something one is already legally obliged to do.
A vague promise
If the price paid by the promisee is a vague promise by the promisee to do something or refrain from
doing something, this is insufficient consideration. ‘Vague’ here means uncertain or of no legal value.
For example, if Johnny promises to give Jin his pizza oven in return for Jin’s promise to ‘be nice’ to him
or to pay a ‘fair price’, Jin’s vague promise is insufficient consideration and Johnny’s promise is there-
fore unenforceable by Jin.
White v Bluett (1853) 23 LJ Ex 36
A father promised to waive a debt that was owed to him by his son. In return, his son promised to stop
complaining to the father that the father treated his other sons more favourably. The court decided that the
son’s consideration was insufficient and the father’s promise was therefore unenforceable by the son.
Placer Development Ltd v Commonwealth (1969) 121 CLR 353
Placer Development Ltd (PDL) entered into an agreement with the Commonwealth according to which
PDL would produce timber products in Papua New Guinea and import them into Australia. In return the
Commonwealth would pay to PDL a subsidy in relation to the customs duties payable on the timber ‘of an
amount or a rate determined by the Commonwealth from time to time’. The court decided that the agree-
ment was unenforceable because the consideration payable by the Commonwealth was too vague.
Past consideration
If the price paid for a promise was paid by the promisee before the promise was made (past consideration) it
is insufficient consideration. For example, if at the end of a particularly busy shift Johnny promises to pay his
employee Cathy a $50 bonus in return for Cathy’s hard work, his promise is not legally enforceable because
Cathy has not provided sufficient consideration. Cathy’s hard work during the shift is insufficient consider-
ation because it was a price paid before Johnny made the promise. If, on the other hand, Johnny had promised
Cathy at the beginning of the shift that if Cathy worked hard Cathy would be paid a $50 bonus, Johnny’s
promise would be legally enforceable because Cathy’s hard work would be sufficient consideration.
Roscorla v Thomas [1842] 3 QB 234; 114 ER 496
Roscorla purchased a horse from Thomas at an auction. Immediately after the sale Roscorla asked
Thomas about the condition of the horse. Thomas promised that the horse was ‘sound and free from
vice’. When the horse turned out to be quite vicious, Roscorla sued Thomas for breach of contract. The
court decided that Thomas’ promise was not legally enforceable because Roscorla had not provided
sufficient consideration. Payment of the purchase price by Roscorla was not sufficient consideration
because that had occurred before Thomas’ promise was made, and was therefore past consideration.

‘A price paid before a promise is made is not sufficient to make the promise enforceable.’ How can this
legal rule be justified?
It is not always the case that a promise made after consideration is paid is unenforceable. Sometimes
the consideration was paid because the payer expected a legally enforceable promise to be made at a
later date. If the consideration was paid at the request of the person who subsequently made the promise,
the consideration is not past consideration, and the promise will be legally enforceable.
Ipex Software Services Pty Ltd v Hosking [2000] VSCA 239
Hosking and the controller of Ipex Software Services Pty Ltd (ISS) negotiated an arrangement whereby
Hosking would transfer to ISS his own software business in return for some shares in ISS. Hosking
transferred his business to ISS and it was only after the transfer was completed that the controller of
ISS gave Hosking a formal offer of 5 per cent ownership. The controller failed to keep his promise and
Hosking sued to enforce it. The controller argued that the consideration for the promise — Hosking
transferring his business — was past consideration. The court decided that although Hosking had trans-
ferred his business before the promise was made, he had done so at the controller’s request and in
expectation of a formal promise. The controller’s promise was legally enforceable by Hosking.
A prior legal obligation
If the price paid by the promisee is the fulfilment of a prior legal obligation (i.e. something that the
promisee was already legally obliged to do) this is insufficient consideration.
The promisee’s legal obligation may be one that is owed as a public duty or as a contractual duty. For
example, if Johnny’s business premises are broken into and he promises to pay the police officer a small
reward if she is able to apprehend the criminal, Johnny’s promise is not legally enforceable because the
police officer’s consideration for that promise — apprehending the criminal — was something that she
was legally obliged to do anyway as a police officer.
Stilk v Myrick (1809) 2 Camp 317; 170 ER 1168
When two of the sailors on a voyage from London to the Baltic Sea deserted their positions, Myrick,
the captain of the ship, could not find replacements for them. He promised the remaining sailors that
he would share the deserters’ pay with them if they got the ship back to London safely. When Myrick
failed to keep his promise, the crew sued him for breach of contract. The court decided that the cap-
tain’s promise was not legally enforceable because the crew had not provided sufficient consideration in
return for the promise. Getting the ship home safely in an emergency situation didn’t count as sufficient
consideration because that was something the sailors were already contractually obliged to do.
If Johnny engages Gary to repaint his premises and halfway through the job Gary threatens to stop work
unless Johnny agrees to pay him more money, is Johnny’s promise to pay Gary more money legally
enforceable? Explain your answer.
However, if the promisee does something beyond their legal or contractual duty, the consideration will
no longer be insufficient and the promise will be enforceable.

Hartley v Ponsonby (1857) 7 El & Bl 872; 119 ER 1471
Seventeen crew members deserted ship in Melbourne. To encourage the remaining 19 sailors to sail the
ship back to Liverpool, the captain promised to pay them extra wages. When the ship made it back to
Liverpool, the owners of the ship refused to pay the extra wages. The court decided that while sailing
the ship was part of the crew’s existing contractual duty, returning the ship with only half a crew was
not. The captain’s promise was legally enforceable because the crew had done more than what they
were contractually obliged to do and therefore provided sufficient consideration.
The rule that fulfilment of a prior contractual obligation is not sufficient consideration leads to a sur-
prising conclusion in some circumstances. Consider the following scenario: Jin owes Johnny $10 000 for
the oven. When the time comes to pay, Jin does not have enough money. Johnny generously promises
that if Jin pays $8000, Johnny will waive payment of the other $2000. Can Johnny later change his mind
and insist that Jin pay the other $2000? Johnny has promised to waive the $2000, but has Jin provided
consideration for Johnny’s promise? Jin did pay $8000, but this was fulfilment of a prior contractual
obligation, since she already owed Johnny $10 000. Johnny can therefore change his mind and break his
promise to waive the $2000. Part payment of a debt is not sufficient consideration for a promise by the
creditor to waive payment of the balance of the debt. This is known as the rule in Foakes v Beer.
Foakes v Beer (1884) 9 App Cas 605
On 11 August 1875, Beer obtained a court judgment against Foakes in the amount of £2090 and 19 shillings.
Beer was also entitled to interest on the judgment debt until it was paid. The interest was deemed to be part
of the judgment debt. On 21 December 1876, Beer and Foakes entered into a written agreement whereby
Beer agreed to give Foakes time to pay the £2090 and 19 shillings and promised not to ‘take any proceed-
ings whatever on the said judgment’. Foakes’ consideration for the agreement was stated to be payment of
£500 in partial satisfaction of the judgment debt. The agreement also provided that half yearly instalments
were be paid by Foakes ‘until the whole of the said sum of £2090 and 19s shall have been fully paid and
satisfied’. The agreement did not specifically mention the issue of the interest. Foakes made the instalment
payments in accordance with the agreement to a total of £2090 and 19 shillings. However, he refused to
pay interest. On 1 July 1882, Beer sued Foakes for the interest. Foakes insisted that Beer could not sue for
payment of the interest because she had promised not to enforce the debt, and the interest was part of the
judgment debt. The court decided that the agreement of 21 December 1876 was not legally enforceable.
Because the interest payable formed part of the judgment debt, Foakes had paid an amount less than the
debt owed. In the absence of any consideration by Foakes for Beer’s promise not to enforce the judgment
debt if Foakes repaid the £2090 and 19 shillings, it was not a legally binding agreement.
Have you ever owed money to somebody who then decided to forgive the debt? When? Can they still
change their mind and insist that you repay the money? Why?
A debtor will have provided sufficient consideration for the creditor’s promise to waive the balance
of the debt if:
•• the debtor makes the part payment earlier than the originally agreed due date,
•• the debtor makes the part payment in a different currency,
•• the debtor accompanies the part payment with additional consideration such as the provision of a
service, or
•• the part payment is made by a third party rather than the debtor.25
25 Hirachand Punamchand v Temple [1911] 2 KB 330.

The creditor’s promise will also be enforceable if:
•• the agreement to waive the balance is in the form of a deed, or
•• the agreement satisfies the practical benefits test, or
•• the doctrine of promissory estoppel is applicable to the situation.
These last three exceptions to the rule are considered in more detail later below.
Deeds
A deed is a formal contract. It is a written contract that has been signed by the parties before a witness
and ‘sealed and delivered’ (a requirement satisfied by particular wording rather than the actual affixing
of a seal and formal delivery) or is expressed to be a deed. Examples of deeds include:
•• deeds of release (where one person releases another from a debt),
•• deeds of sale (where one person sells property to another),
•• deeds of mortgage (where one person lends money to another in return for security over real property),
•• deeds of guarantee (where one person undertakes to repay a creditor upon default by the debtor), and
•• powers of attorney.
In seeking to enforce a deed it is not necessary to show that the promisee provided consideration for
the promise. The enforceability of a deed is determined by reference to its form, not whether or not it
satisfies the basic requirements of a contract.
Contracts that are not in the form of a deed (i.e. the majority of contracts) are known as ‘informal’
contracts or ‘simple’ contracts.
Practical benefits test
Performance of a prior legal obligation may amount to adequate consideration if the ‘practical benefits
test’ is satisfied. The requirements of this test are as follows.
1. One of the parties to a contract has legitimate reasons for not performing their obligations under the contract.
2. The other party responds by altering the contract, e.g. by promising to reduce the amount payable by
the first party.
3. The first party performs their obligations under the contract in reliance upon the other party’s promise.
4. The other party receives a benefit or avoids a detriment.
For example, Jin has a contract with Johnny according to which Jin will purchase Johnny’s pizza oven for
$10 000. Jin’s attempts to set up her own restaurant are unsuccessful, and Jin tells Johnny that she will be
breaching the contract and not purchasing the oven. Johnny has already purchased a new oven on the assump-
tion that Jin will be buying the old one. Johnny tells Jin that if she goes ahead with the purchase she can have
the oven for $6000 instead. Ordinarily, Johnny’s promise to waive $4000 would not be legally enforceable:
Jin has not provided any consideration for Johnny’s promise, since performing the contract was something
she was already legally obliged to do. But since the requirements of the practical benefits test are satisfied,
Johnny’s promise is enforceable and he cannot change his mind and insist that Jin pay the full $10 000.
Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723
Winadell owned the shopping centre in which Musumeci ran a fruit shop. Winadell leased another shop in
the centre to a competitor of Musumeci, causing Musumeci to experience such a decline in trade that they
were going to have to close their shop and terminate (breach) their lease. Winadell promised to reduce
the amount of rent payable by Musumeci to encourage them to stay in the centre. When Winadell later
changed its mind, Musumeci sought to enforce the promise. Had Musumeci provided adequate consider-
ation for Winadell’s promise to reduce the rent? The court decided that (1) Musumeci had a legitimate
reason for terminating the lease, (2) Winadell had responded by promising to reduce the rent payable by
Musumeci, (3) Musumeci had stayed in the centre in reliance upon that promise, and (4) Winadell had
received a practical benefit (or avoided a detriment) in that the centre remained fully tenanted. According
to the practical benefits test, Winadell had to keep its promise to reduce the rent payable by Musumeci.

Promissory estoppel
Until now it has been said that unless a promisee has provided sufficient consideration for the promise,
the promise is not legally enforceable (unless it was contained in a deed). However, the courts have
recognised that in some situations this will lead to an unjust result. To address the situations where the
common law requirement that all promises be supported by consideration leads to an injustice, the courts
of equity developed the doctrine of promissory estoppel.
According to this doctrine, a promise will be legally enforceable, even if the promisee has not pro-
vided consideration for the promise, as long as the promisor intended the promisee to rely upon the
promise, the promisee has relied upon the promise, and it would be unconscionable (unfair) for the
promisor to break their promise.
CHECKLIST
If the promisee has not provided consideration for the promise, the promise will still be enforceable
using promissory estoppel if all of the following requirements are satisfied.
◼◼ The promisor intended the promisee to rely upon a clear and unambiguous promise.
◼◼ The promisee has, in fact, relied upon the promise by changing their circumstances, and if the prom-
isor does not keep their promise, the promisee will suffer a material disadvantage.
◼◼ It would be unconscionable (unfair) for the promisor to break their promise.
Promissory estoppel can be used to prevent a party to a contract from enforcing their contractual
rights.
Central London Property Trust Ltd v High Trees House Ltd [1947] 1 KB 130
High Trees House Ltd (HTH) leased a block of flats in London from Central London Property Trust Ltd
(CLPT) under a 99-year lease. During World War II many of the flats were vacant and HTH was unable
to pay the rent. CLPT agreed to halve the rent for the duration of the war. When the war was over, CLPT
restored the rent payable to the full amount, but also insisted that HTH pay the arrears of rent. The court
decided that CLPT was not entitled to break its promise that the rent payable during the war would be
halved, even though HTH had not provided any consideration for the promise. To allow CLPT to break
its promise in these circumstances would have been inequitable and unfair. CLPT could not recover the
arrears of rent from HTH.
Promissory estoppel can also be used to prevent a party from denying that a contract exists in the first
place.
Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387
Mr and Mrs Maher owned commercial property in Nowra. In mid 1983, negotiations commenced
between the Mahers and Waltons about the lease of the property by Walton Stores (Interstate) Ltd. To
meet Waltons’ requirements, the Mahers agreed to demolish an old building on the property and erect a
new one that met Waltons’ specifications. Waltons advised the Mahers that it required the new building
to be completed by 15 January 1984. An agreement was subsequently reached for an extension of time
to complete the work. On 21 October 1983, the term of the lease and the rent having been agreed, the
solicitors for Waltons sent the solicitors for the Mahers a draft agreement for lease. On 1 November
1983, the Mahers’ solicitor informed Waltons’ solicitor that the demolition of the building on the property
had commenced and requested amendments to the agreement. On 9 November, the Mahers’ solicitor
informed Waltons’ solicitor that the Mahers required the agreement to be concluded in the next day or
two otherwise it would not be possible for the Mahers to complete the new building in time. Waltons’

solicitor orally advised the Mahers’ solicitor that he had verbal instructions from Waltons about the
amendments the Mahers had sought and that he would get formal instructions. That night Waltons’
solicitor sent an updated agreement incorporating the amendments with a letter that confirmed that he
believed formal instructions would be forthcoming and that he would let the Mahers’ solicitors know the
following day if any amendments were not agreed to. On 11 November, the Mahers’ solicitors forwarded
the amended deed executed by the Mahers to Waltons’ solicitors. In early January 1984, the Mahers
commenced construction of the new building in accordance with the plans and specifications approved
by Waltons. On 19 January, Waltons’ solicitors advised the Mahers’ solicitors that Waltons did not
intend to proceed with the lease. The Mahers sued Waltons seeking a declaration that a binding agree-
ment existed as well as specific performance of the agreement or damages. Was Waltons ‘estopped’
from denying the existence of a binding agreement that it would lease the property? The court decided
that Waltons could not deny the existence of a binding agreement to lease the property even though no
contract had been formally concluded. The court reached its decision on the basis of the equitable doc-
trine of promissory estoppel. Waltons had made an implied promise that the formal agreement would
be signed and the Mahers had relied upon Waltons’ promise and would suffer material disadvantage if
the promise was not kept. It would be unfair for Waltons not to keep its promise in these circumstances.
Maher was entitled to use the doctrine of promissory estoppel to compel Waltons to keep its promise.
According to the court at 407–8:
The appellant’s inaction, in all the circumstances, constituted clear encouragement or
inducement to the respondents to continue to act on the basis of the assumption which
they had made. It was unconscionable for it, knowing that the respondents were exposing
themselves to detriment by acting on the basis of a false assumption, to adopt a course
of inaction which encouraged them in the course they had adopted. To express the point
in the language of promissory estoppel the appellant is estopped in all the circumstances
from retreating from its implied promise to complete the contract.
The doctrine of promissory estoppel can thus be relied upon by the promisee both as a defence against
a legal action brought by the promisor (‘a shield’) and as a basis for a legal action against the promisor
(‘a sword’).
ACTIVITY 7.14 — APPLY
Recall the earlier example where Jin owed Johnny $10 000 and Johnny agreed to accept $8000 in
repayment of the debt. In what circumstances can Jin use the doctrine of promissory estoppel to
prevent Johnny from suing to recover the remaining $2000?
If the court decides that the requirements of promissory estoppel are satisfied it can make an order that
the promisor keep their promise (i.e. specific performance) or an order that the promisee be compen-
sated for the disadvantage suffered as a result of relying upon the promise (i.e. damages).
Giumelli v Giumelli (1999) 196 CLR 101
A son left school at the age of 15 to work on his parents’ farm on the assumption that he would receive
part of the property in return. The parents later refused to transfer the land to him because they disap-
proved of his second marriage. The son sought to enforce his parents’ promise. The court decided that
the requirements of promissory estoppel were satisfied: the parents had made a promise intended to
be relied upon by the son; the son had relied upon the promise to his detriment by not pursuing other
employment opportunities; and it would be unconscionable for the parents to now break their promise.
However, instead of compelling the parents to keep their promise and transfer the property to the son,
the court ordered the payment of damages as compensation.

The doctrine of promissory estoppel can only be used to enforce a promise in a relatively narrow
range of situations, and it is still the general rule that a promise must be supported by consideration to
be legally enforceable.
REVISION QUESTIONS
7.26 What is consideration?
7.27 What is the difference between a gift and a bargain?
7.28 What does it mean to say that consideration need not be ‘adequate’ but must be ‘sufficient’?
7.29 Will a vague promise amount to consideration?
7.30 What is past consideration?
7.31 Will a promise to do something one is already legally obliged to do amount to consideration?
7.32 In what circumstances will part payment of an existing debt be consideration for a promise to
waive the balance?
7.33 What is a deed, and what is the difference between a deed and a simple contract?
7.34 What is promissory estoppel?
7.35 What does it mean to say that promissory estoppel can be used as both a ‘shield’ and
a ‘sword’?
7.5 Formalities
LEARNING OBJECTIVE 7.5 Do contracts always have to be in writing and signed?
At common law, as long as an agreement fulfils the other requirements of a contract, the physical con-
tract itself does not have to satisfy any formal requirements. Contracts do not have to be in writing or
signed, and can be made verbally or even implied by conduct.
However, there is legislation that requires certain contracts to be ‘in writing’ (i.e. all of the terms must
be in writing) and signed in order to be effective and enforceable. These include:
•• arbitration agreements,26
•• assignments (i.e. transfer) of copyright, designs and patents,
•• assignments of life insurance policies,27
•• bills of exchange and promissory notes,28
•• cheques,29
•• consumer credit contracts,30
•• hire-purchase contracts,31
and
•• transfers of shares.32
Other legislation provides that if certain contracts are not ‘evidenced in writing’ they will not be
enforceable. This means that one or more documents must exist that prove the existence of the contract
26 International Arbitration Act 1974 (Cth); Commercial Arbitration Act 1986 (ACT); Commercial Arbitration Act 2010 (NSW);
Commercial Arbitration Act (National Uniform Legislation) 2011 (NT); Commercial Arbitration Act 1990 (Qld); Commercial
Arbitration Act 2011 (SA); Commercial Arbitration Act 2011 (Tas); Commercial Arbitration Act 2011 (Vic); Commercial
Arbitration Act 2012 (WA).
27 Life Insurance Act 1995 (Cth) s 200.
28 Bills of Exchange Act 1909 (Cth) s 8.
29 Cheques Act 1986 (Cth) s 10.
30 National Credit Code 2009 (Cth) s 14.
31 National Credit Code 2009 (Cth) s 9.
32 Corporations Act 2001 (Cth) s 1071B.

and include the names of the parties, the subject matter, the consideration payable and the signature of
the party against whom the contract is being enforced. These types of contracts include:
•• contracts for the transfer of land or an interest in land such as a lease,33
•• contracts for the sale of goods for more than $20 (Western Australia and Tasmania only),34
and
•• guarantees.35
If, for example, there is a contract between Johnny and Jin to the effect that Johnny will sublease
part of his restaurant to Jin, but the contract is not evidenced in writing and signed, the contract is not
enforceable by or against either party.
Even when a contract is not required by law to be in writing or signed by the parties, such formalities
may still be desirable:
•• to encourage deliberation and reflection and to emphasise that the transaction has significant legal consequences,
•• to ensure the availability of reliable evidence about the existence of the contract,
•• to ensure the availability of reliable evidence about the terms of the contract, and
•• to indicate that the agreement was intended to be legally enforceable.
LAW IN CONTEXT: LAW AND TECHNOLOGY
Electronic contracts
The Electronic Transactions Act 1999 (Cth) and the various equivalent State Electronic Transactions Acts
provide that a transaction is not invalid just because it took place by means of one or more electronic
communications. The following legal requirements can now be met in electronic form unless the legis-
lation specifically provides otherwise:
• a requirement to give information in writing,
• a requirement to provide a signature,
• a requirement to produce a document,
• a requirement to record information, and
• a requirement to retain a document.
REVISION QUESTIONS
7.36 What types of contracts are required to be in writing and signed in order to be legally enforceable?
7.37 Even if a contract is not required to be in writing and signed, why is it often a good idea to
satisfy this formality anyway?
7.6 Capacity to contract
LEARNING OBJECTIVE 7.6 Can a child form a contract? What about someone who is intellectually
disabled, mentally ill or intoxicated?
A contract will only be enforceable if both of the parties have the legal capacity to enter into contracts.
As a general rule, a person will not have legal capacity to contract if they are:
•• a minor, or
•• a person lacking intellectual capacity.
33 Civil Law (Property) Act 2006 (ACT) s 201; Conveyancing Act 1919 (NSW) s 54A; Law of Property Act 2000 (NT) s 62;
Property Law Act 1974 (Qld) s 59; Law of Property Act 1936 (SA) s 26; Mercantile Law Act 1935 (Tas) s 6; Conveyancing
and Law of Property Act 1884 (Tas) s 36; Instruments Act 1958 (Vic) s 126; Property Law Act 1958 (Vic) s 53; Law Reform
(Statute of Frauds) Act 1962 (WA) s 2; Property Law Act 1969 (WA) s 34.
34 Sale of Goods Act 1896 (Tas) s 9; Sale of Goods Act 1895 (WA) s 4.
35 National Credit Code 2009 (Cth) ss 8, 9; Mercantile Law Act 1962 (ACT) s 12; Law of Property Act 2000 (NT) s 58;
Property Law Act 1974 (Qld) s 56; Mercantile Law Act 1935 (Tas) s 6; Instruments Act 1958 (Vic) s 126; Law Reform
(Statute of Frauds) Act 1962 (WA) s 2.

Note that for the purposes of contract law, a corporation is treated as a legal person and has the legal
capacity to enter into and enforce contracts.36
This is because a corporation has ‘separate legal person-
ality’. Note also that partnerships, trusts and unincorporated associations (e.g. sporting clubs) do not have
separate legal personality and are therefore unable to enter into and enforce contracts in their own name.
Minors
A minor is a person under the age of 18 years.37
As a general rule, minors can enter into contracts.
However, while such contracts are enforceable by the minor, they are not enforceable against the minor.
This is because of the recognition that minors should usually be protected from the consequences of
their ignorance and inexperience. On the other hand, the law also recognises that people who deal with
minors sometimes do so to benefit the minor, and that it is appropriate in such cases to view the contract
as legally enforceable by both parties.
The three types of contract that may be enforceable against minors are:
1. contracts for necessaries,
2. beneficial contracts of service, and
3. contracts where the minor acquires a continuing interest or undertakes a continuing obligation.
Contracts for necessaries
Necessaries include food, clothing, accommodation, medical treatment and education. Luxuries are
excluded. A minor can be compelled to pay a reasonable price for the provision of goods or services,38
if they are:
•• capable of being classified as necessaries (a question of law), and
•• necessary for the minor in the particular circumstances (a question of fact).
Bojczuk v Gregorcewicz [1961] SASR 128
Gregorcewicz, a minor, lived and worked in Poland. She wished to emigrate to Australia. Bojczuk, a rela-
tive in Australia, loaned her the money for the trip. Gregorcewicz did not repay the money and the court
decided that Bojczuk could not enforce Gregorcewicz’s promise to repay the money because the con-
tract was for the provision of money for an international trip, something that was not capable of being
classified as a necessary.
Courts have traditionally taken into account the minor’s lifestyle, social background and social status
in deciding what is ‘necessary’ for them.
CAUTION!
It is not the case that children cannot form contracts. Children can form, and enforce, contracts. Certain
contracts with children, however, will not be enforceable against the child.
Beneficial contracts of service
If the contract is one where the minor is engaged to provide a service but the contract is such that it
is for the benefit of the minor, it will be enforceable against the minor. Examples of such beneficial
36 Corporations Act 2001 (Cth) s 124.
37 Age of Majority Act 1974 (ACT) s 5; Minors (Property and Contracts) Act 1970 (NSW) pt 2; Age of Majority Act 1974 (NT)
s 4; Law Reform Act 1995 (Qld) s 17; Age of Majority (Reduction) Act 1971 (SA) s 3; Age of Majority Act 1973 (Tas) s 3;
Age of Majority Act 1977 (Vic) s 3; Age of Majority Act 1972 (WA) s 5.
38 Sale of Goods Act 1954 (ACT) s 7; Sale of Goods Act 1923 (NSW) s 7; Sale of Goods Act 1972 (NT) s 7; Sale of Goods Act
1896 (Qld) s 5; Sale of Goods Act 1895 (SA) s 2; Sale of Goods Act 1896 (Tas) s 7; Goods Act 1958 (Vic) s 7; Sale of Goods
Act 1895 (WA) s 2.

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