LAW1100 Lecture 7 notes 01 2011

Edith Cowan University2011LEGAL FRAMEWORK ILECTURE NOTESNote to reader: these lecture notes are compiled for the purposes of the unit LAW1100 Legal Framework I and are selective in nature and scope. The notes are for academic purposes only.Lecture 7Law of Contract: 2nd & 3rd essentials of Contract INTRODUCTIONThis lecture continues the discussion on the formation of a contract and examines remaining two essentials needed to create a valid simple contract: an intention to create legal relations, and consideration.On successful completion of this lecture, you should (within the scope of the course) be able to: ∙identify and describe the presumption made by the Courts for business agreements and the presumption for domestic agreements in relation to the 2nd essential∙define consideration as a legal concept∙distinguish and describe executory, executed and past consideration∙describe the rules as to considerationSECOND ESSENTIAL- intention to create legal relationsThe Law requires evidence of some intention (express or implied) to become bound in a legally enforceable contract. That is, an intention that should either party breach the agreement then the other will have a right to seek a remedy in the Courts.The courts make two resumptions, which are rebuttable on evidence to the contrary.First, parties to a commercial or business agreement are presumed to intend to be legally bound. Note that commercial or business agreements can occur in a wide variety of circumstances – such a situation does not need to have parties who are professional traders or are in a particular business - a business agreement can arise between individuals buying and selling goods privately.Second, there is a presumption for family, domestic or social agreements that the parties do not to intend to be legally bound. The terms …family‟ and …domestic‟ are often used interchangeably and relate to certain arrangements between family members; the term social relates to certain arrangements of a friendly or social nature - eg sporting or social clubs etc (but note the possibility of agreements of a business nature between family members). Note : both presumptions can be rebutted – that is, can be shown as false in the face of evidence presented to the contrary.THIRD ESSENTIAL - ConsiderationConsideration is an “act or forbearance of one party, or the promise thereof, being the price for which the promise of the other is bought” (Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847 at 855). It is thus a …price‟ paid for a …promise‟ –something in return for something. Consideration provided is often, but not always, money or goods or services;however, good consideration is also a promise to pay or supply things, or even a promise not to do something.Each party must give something for the something provided by the other party. The something provided by each party can be a promise, an act or a forbearance to do an act (such as the forbearance to sue which means to abandon a claim that could have otherwise been legally made)). For example, Bill and Jack agree that Bill will pay Jack $100. There is consideration by Bill (promise to pay $100) but none by Jack in return - therefore no contract. Alternately, Jack and Jill agree that Jack will pay Jill $100 to paint Jack's garage. Hence, there is consideration by Jack (a promise to pay $100) and by Jill (a promise to paint Jack's garage). Note - as we have seen, a deed is a special form of written contract that is legally binding even though there is no consideration. - it derives its validity from its form, not the presence of consideration.Types of considerationExecutory consideration is consideration promised but not yet given. For example, Jill's promise to paint Jack's garage amounts to executory consideration as it has yet to be performed.Does a deposit have to be paid for a contract to be binding? The answer is no - when consideration is executory, a contract comes into existence as soon as promises exchanged - not at any later date when promises are performed, part performed or honoured.Executed consideration is consideration given or performed. For example, Bill finds and returns Ben's lost dog in response to Ben's promise to pay a reward to anyone doing so. Here, the action in finding and returning the dog as stipulated in the offer can be seen as consideration performed at the time the contract is entered into; hence, the consideration is executed. Ben‟s consideration remains executory until he pays the reward.Past consideration is actually a contradiction in terms because “past consideration is no consideration”. Past consideration relates to past actions or promises that do not relate to the present agreement. For example, Jack's and Jill's agreement that as Jill painted Jack's garage one year ago, Jack will pay Jill $100. Here, there is consideration by Jack (promise to pay $100) but no consideration by Jill - only a past consideration (i.e. the painting of the garage one year ago). Hence, Jill gives no …something‟ for Jack's promise - what Jill gave was in the past and doesn't relate to the present agreement. There is an e xception to rule that “past consideration is no consideration” when there is a request for services that carries with it an implied promise to payRules as to considerationThe primary rule is that consideration must be sufficient but need not be adequate. In other words, the 'something' must have some 'value' and as long as it does, it doesn't matter how little. Providing the consideration is real, its value is irrelevant. For example, if the market rent for a house is $10,000 per year, then by agreement the payment of $100 per year instead (i.e. "peppercorn rent") is good and sufficient consideration (although clearly not adequate).Whether the parties enter into a poor deal or not (e.g. the sale of property at cost or below "giveaway" price) does not concern the Common Law of Contract because consideration need not be adequate as long as there is at least some consideration present.Examples where consideration is not sufficient:Where there is a promise to perform an existing public duty,consideration will not be sufficient. For example, if Guy promises to pay Doll $100 for Doll to only do her existing public or legal duty (e.g. a police officer to uphold the law or a fire-fighter to fight fire) and Doll performs the work, she cannot successfully sue Guy in contract. Doll has provided no consideration (as she has only done what she was to do anyway) and thus there is no contract. In other words, Doll has provided no value as all she has done is what she was always required to do by law without any further payment being offered. Doll must provide, by agreement, sufficient consideration - something of value in addition to her existing duty - to support Guy‟s promise to pay.Similarly, where there is a promise to perform an existing contractual duty, consideration will not be sufficient. In other words, a promise to perform a duty already imposed by contract cannot be sufficient consideration. Again all that the offeree would be doing is what he was already required to do anyway. He would be providing no additional something for something.For example, if Peter owes $10 to Paul and if Paul agrees to accept $5 from Peter in full satisfaction then Paul can seek the unpaid $5 from Peter later. In this case, Peter has no binding agreement with Paul (to pay $5 in full satisfaction of debt) as he has provided no consideration. All that Peter has done is to discharge part of an obligation that he already owed. There needs an additional something by way of consideration regardless of how little value. For example, the payment of a lesser sum prior to the due date can provide the additional something.Self test exercises – Lecture 7Multiple choice questions1. Able promises Baker a sum of money as a gift. Baker readily agrees to this. Is the third essential of contract (Consideration) satisfied?a) yes, because Baker accepted.b) no, because Baker does not provide …something‟ in returnc) yes, because Baker must have done something in the past to justify the giftd) no, because Baker should not receive a gift unless he is a registered charitye) none of the above2. Echo promises to repair Foxtrot‟s car for nothing. The car is repaired as promised.Later, Foxtrot promises $20 for the repair work, but then changes his mind andrefuses to pay. Which of the following most appropriately reflects the legal position of the parties?a) Foxtrot must pay because he must live up to his promisesb) Foxtrot need not pay because the repair of the car is past consideration and as such is noconsiderationc) Foxtrot must pay because the repair of the car is sufficient to bind him to his promised) Foxtrot need not pay because $20 is not adequate consideration for car repair worke) none of the above3. Consideration promised but not yet performed is consideration which isa) executedb) executoryc) executived) executablee) execrable4. Which of the following best illustrates the case of Stilk v Myricka) past consideration is sufficient considerationb) a promise to perform an existing contractual obligation is not sufficient considerationc) parties to a social agreement do intend to be legally boundd) performance (by agreement) that is above and beyond a public duty may be sufficientconsideratione) none of the above5. In which of the following is the case of Woodward v Johnson most associated in thisunit?a) rules to establish a valid offerb) rules to establish whether or not an intention to create legal relations existsc) rules to establish a valid acceptanced) rules to establish whether or not consideration is sufficiente) rules to establish the effect of a counter offer on a contract6. Mighty and Tough are brothers. Mighty enters into an agreement with Tough,whereby Tough is to assist Mighty with his home chores one morning, and Mighty is to prepare Tough his favourite meal. Tough does his part, whereas Mighty changes his mind and refuses to provide a meal. Which of the following statements best reflects the facts given?a) Whilst Mighty‟s consideration is executory and Tough‟s consideration is executed, theagreement is unlikely to be a contract due to a lack of intention to be legally boundb) Mighty‟s consideration is executed and Tough‟s consideration is executory; theagreement is a family agreement and thus there is an intention by the parties to be legally boundc) The parties do intend to be legally bound as it is a business agreement; both Mighty‟s andTough‟s consideration are executory as the contract has not been fully performedd) The parties do not intend to be legally bound as it is a family agreement and neither haveprov ided adequate consideration for the other‟s promisee) The parties do intend to be legally bound as it is a family agreement but both parties‟consideration is past.7.Which of the following is a rebuttable presumption made by the Courts?a) that parties to a business agreement intend to become legally boundb) that parties to a commercial agreement intend to become legally boundc) that parties to a domestic agreement do not intend to become legally boundd) that parties to a household agreement do not intend to become legally bounde) all of the above8. Which of the following best defines consideration as a general legal concept as used inthe unit?a) an act or forbearance of one party, or the promise thereof, being the price for which thepromise of the other party is boughtb) a performance of a public duty showing consideration to a person in need.c) the legal provision of goods or services in return for some previous action by the otherpartyd) the lawful payment in money for goods or services at market value onlye) the clear expression of kindness in gifting of money, goods or services by a person to acharity.9. Past consideration isa) no consideration at allb) executed considerationc) executory considerationd) adequate consideratione) none of the above10. Alan‟s house is being robbed. He makes a plea to the police officers who are about to enter the house that he will give “$100 to the first police officer who apprehends the robber”. Bob, a police officer, hears Alan‟s plea, a nd is the first to arrest the wrongdoer. Would Alan likely have to pay Bob $100 under contract law?(a) no, because $100 is inadequate consideration for what is being asked and thus isinsufficient consideration(b) no, because Alan‟s promise is not matched by Bob‟s action and thus there is no…something for something‟(c) no, because Bob was only doing his duty and has not provided sufficient considerationto bind Alan to his promise(d) yes, because Bob has accepted Alan‟s offer and Alan must keep his word to Bob(e) yes, because $100 promise and the work done by Bob are both recognised by law as ofsufficient value11. Which of the following is Lampleigh v Braithwait most associated with in this unit?a) the requirements of duty of care in negligenceb) the performance of a pre-existing contractual duty is not sufficient considerationc) an exception to the …past consideration‟ ruled) an offer can be made to the world at largee) the postal rule of acceptance12. Alan and Bob enter into a contra ct whereby Alan supplies …X‟ goods to Bob and Bobis to pay Alan $500 on supply of those goods and $500 in one month‟s time. Alan supplies the goods and Bob pays $500. Exactly one month later, Alan says to Bob:…pay $250 now and I‟ll cancel the rest of your debt for the goods‟, to which Bob readily agrees. Is Alan bound by his promise in contract?a) no, as the $250 is part of an existing contractual debt which is insufficient considerationb) no, as Alan cannot relieve a debt obligation without it being in the form of a deedc) yes, as Alan must keep his promise to Bob under common lawd) yes, as Bob has provided sufficient consideration in the form of his promise to pay $250e) none of the aboveShort Answer QuestionsQuestion 1Courts make two presumptions about the intention of parties to be legally bound. Describe these presumptions, citing case authority wherever possible to support your answer.Question 2Define consideration as a legal concept.Question 3What is the difference between executed consideration and executory consideration?Question 4“Consideration needs to be sufficient but need not be adequate.” Briefly explain this statement.。