Business Law - Lukes Contract with Birchall - Case Study Example

Four Step Analysis of the Case Scenario Name Institution Date Word Count: 2755 Four Step Analysis of the Case Scenario Identification of the Principle of Law: Consideration The four-step process is used in this paper to discuss the element of consideration and whether this consideration was applied in Luke’s contract with Birchall. The first step of the process is to identify the principle of law. The principle of law for this case is that there must be consideration between both parties when making a valid and legally bound contract.1 The paper seeks to examine whether there was consideration to legally enforce the contract in Luke’s scenario. Explanation of the Rule of Consideration The second step is to explain the rule of law on consideration using various authorities. According to the Law Handbook, the requirements for an enforceable contract are an offer and acceptance; intention; consideration; consent and legal capacity.2 In Australian contract law, an offer has to be made by one party for acceptance by another party.3 The offer does not need to be in person or to specific party. It could be to a group of people, a society or an individual. The offer is a statement of promise which is bound on acceptance. The acceptance may be offered in the form of an act or a statement. The intention to create a legal relation is important. It involves entering into an agreement which is legally binding. A legally-binding agreement not only demonstrates this intention but also provides the party a mechanism for enforcing the agreement in court.4 Legal capacity is an important element of a contract. Australian contract law requires that parties to a contract need to have legal capacity. It excludes people such as those with mental impairments, minors (below 18 years), corporations, prisoners or those who are bankrupt from entering into a contract. These exclusions are articulated in the Contracts of Minors clause in the Victoria Supreme Court Act 1968, Goods Act 1958, Bankruptcy Act 1966 (Cth), Corporations Act 2001 (Cth) and the Competition and Consumer Act 2012 (Cth).5 Consent is another element of a valid contract. The parties to a contract need to enter into the agreement with free well (no undue influence of duress) and also have a proper understanding of the agreement. This consent needs to be genuine because lack of a proper consent would constitute a breach of contract.6 Consideration is the key principle of law being investigated regarding contracts. Consideration refers to the price that a party pays for a promise made to or by another party.7 This price is usually something of value such as interest, benefit or right that affects a party. It may also refer to loss or forbearance by another party. The consideration should not be impossible to provide or illegal. In addition, Australian courts do not question the adequacy of consideration provided that there is some value attached to it. An example of consideration would be cash payment in return for having a lease to a house. The cash payment is the value attached to the promise of a house lease. Australian law does not question the adequacy of such a contract as long as it has some value.8 The enforcement of a contract in Australian common law requires consideration or a deed. In Dunlop Pneumatic Tire Co v Selfridge & Co [1915] AC 847, Lord Dunedin stated that consideration was an act or promise by one party whose price is bought by another party. Such a promise is enforceable. The court used this definition to determine whether there had been consideration between Dunlop and Selfridge. The court observed that consideration should be give when a promise is made or prior to making the promise. This assertion was emphasized in Mountford v Scott [1975] Ch 258. The court observed that a mutual exchange between the two parties constituted a consideration. This exchange does not have to be of equivalent value. The court observed that Mr. Scott’s £1 payment in exchange for land purchase was binding. However, the court held that the amount paid by Mr Scott as consideration was just a token payment and not a representation of the land’s purchase price. A similar assertion was made in Mermerley Investments Ltd v McGarry CA141/01 where the Court of Appeal stated that it was concerned with consideration and therefore did not to assess the comparative value of the promise between the two parties. The court decision showed that normal consideration was sufficient for establishing intention to be bound. Common law does not require consideration for sealed documents as the proof of a valid contract. This allows two people to make binding contracts that are not necessarily based on documents under seal.9 Lord Mansfield stated that consideration was not necessary for commercial or written contracts. In addition, he asserted that consideration was evidence of a party’s intention to be bound to another party.10 The House of Lords overruled this assertion in Rann v Hughes. However, the Court of Appeal in Anton Trawling Co Ltd v Smith [2003] 2 NZLR 23 had similar views as Lord Mansfield on consideration as the formal requirement for a legally-binding contract. The Court stated that consideration was a signal for the parties’ intention to be bound. The rule of law on enforcing contracts shows that some promises cannot be enforced because they lack consideration. Unenforceability of gratuitous promises is one aspect unless the promises are written in a deed. In Chambers v Commissioner of Stamp Duties [1943] NZLR 504 the court held the promise by the plaintiff’s mother to forgive his debt interest could not be enforced. The mother recorded her forgiveness in writing each year. The court held that the forgiveness had no legal intention, could not be delivered, and that the gift of forgiveness could only be made in deed or delivery. The court’s decision revealed that the intention to forgive had no effect in law and therefore could not be enforced as a contract. Similarly, firm offers can be deemed unenforceable when there is no consideration in a deed. In the case of Dickson v Dodds (1875-1876) LR 2 Ch D 463, the plaintiff asserted that Dodds breached contract by selling property to another buyer despite an earlier promise to sell to the plaintiff. The Court observed that it could not enforce Mr. Dodd’s decision because there was no consideration from the plaintiff. This is because the promise was a nudum practicum, not binding and therefore could be withdrawn at any point in time. Application An agreement is legally enforceable if consideration can be proven. This consideration refers to the price that a party pays for a promise made to or by another party.11 The question in the case scenario is whether there was consideration between Luke and Alistair. Alistair praised Luke’s performance and recommended a salary increase which would be backdated to Luke’s first day at the organization. The conversation between Alistair and Luke suggests that there was a promise of intention to increase the latter’s salary package. However, board members failed to honour the pledge by claiming that it could not afford the salary package owing to the financial downturn. Alistair’s promise seems to have been made informally. There is no mention of a written agreement between Alistair and Luke showing Alistair’s promise and Luke’s acceptance of the same. Consideration is required to enforce a promise as a contract. Luke’s lawyer would need to understand that a claim in a contract cannot be made when the promise is gratuitous. If the matter was to be taken to court, the defendant could plead equitable estoppel.12 This means that the gratuitous promise made by Alistair cannot be enforced unless it was made in the form of a written deed. However, there is no reason not to enforce the promise made by Alistair. This is because the promisor had the intention to act on the promise by increasing Luke’s salary package. Alistair’s advice to Luke was an intention to be bound to the salary increment promise and therefore Luke had reasonable expectation that the promise would be enforced by the firm. Luke’s lawyer could argue that there was intention to be bound to enforce the promise rather than argue consideration. The doctrine of consideration may not be enforced in a court of law because the offeror did not make the promise as a contract. In Stilk v Myrick (1809) 2 Campbell 317, the crew members sued their captain for failing to pay them the extra wages that he had promised. The Court held that the promise by the captain could not be enforced since the crew members had already been bound by their employment contract. Therefore, the crew members were required to bring their ship to safety irrespective of the captain’s promise. A similar argument could be made in Luke’s case. Alistair made the promise for a higher salary package based on Luke’s performance and extra responsibility in training junior staff on his debt recovery strategy. The court could hold that Luke was bound by his employment contract and therefore cannot enforce the promise by Alistair. The court could hold that Luke was already performing his employment obligation. This pre-existing duty principle suggests that the acceptance of the promise has no legal consequences to Alistair. Conclusion There is a need to develop a flexible method for consideration. This flexibility would allow the court to enforce contracts based on consideration so long as there is intention to be bound to an agreement or contract. Luke may not have strong standing on the doctrine of consideration but may have greater legal standing on the principle of intention in Common law. (B) Identification of the Principle of Law The principles of law for this case are that there must be an intention to be legally bound and an acceptance of an offer when making a contract. These two principles are essential to a contract.13 This section seeks to examine whether there was intention and an agreement which could enforce Alistair’s promise to Luke. Explanation of Intention and Accepance An acceptance may be offered in the form of an act or a statement. It occurs when a party agrees to an offer through an act or a statement. This statement must be communicated in a clear manner to the offering party. Otherwise, the law will not deem a party as having accepted an offer if there is no express denial. The Competition and Consumer Act 2010 (Cth) and the chapter 12 of the Consumer Guarantees articulate the legal requirements for an acceptance in a contract. These requirements protect consumers from misleading offers or purchases.14 Various cases demonstrate the requirement for acceptance in contracts. In Crown v Clarke (1927) 40 CLR 227, the Western Australian government had made a monetary offer for information that would lead to the arrest of people who were suspected of murdering two police officers. Clarke was subsequently arrested and made a statement which contributed to the arrest and conviction of others. He claimed the government’s reward upon his release. The Court held that Clarke’s act did not constitute acceptance. The Court observed that Clarke provided information because he wanted to secure his release and not because he had accepted the offer for the government’s reward. The Court’s decision showed an acceptance needed to have been in exchange for the offer. The fact that Clarke did not expressly state that his information was in exchange for the government’s offer showed that an acceptance needs to be communicated unequivocally to the offeror. Similarly, silence cannot constitute an acceptance of an offer. This is because silence does not demonstrate that the bargain between two parties to a contract has been completed. The Court of Appeal held similar assertions in Felthouse v Bindley (1862) 142 ER 1037. The Court ruled that the Felthouse did not bargain the offer of a horse by the sale date which meant that he had not bound himself to the offer by his nephew. Worth noting is that the rules of acceptance are guided by the Electronic Transactions (Victoria) Act 2000. The legislation asserts that where electronic mail has been recognized by the offeror as a means of acceptance, then this acceptance is deemed to have been made when the e-mail has been sent to the recipient. The law does not contemplate when the email is seen or read by the recipient.15 On a unilateral agreement, an offer cannot be revoked after performance has started and not yet completed. The Court held in Daulia Ltd v Four Milibank [1978] 2 All ER 557 that an acceptance occurs when the act that the offeror has requested has been initiated. The acceptance cannot be revoked once it has been embarked upon. Conversely, the Court held in Mobile Oil v Wellcome International [1998] FCA 2005; (1998) 81 FCR 475 that there was no rule on the revocation of unilateral offers once performance has commenced. The intention to create a legal relation is an important element of a contract. Common law asserts that a contract cannot exist just because two parties have an agreement.16 There must be an intention to enter into an agreement which is legally binding. A legally-binding agreement not only demonstrates this intention but also provides the party a mechanism for enforcing the agreement in court.17 Commercial agreements need to provide rebuttal intention in their agreement. This legal relation is not necessary for social or domestic agreements such as an arrangement between friends or sibling. The contractual intent to enter into an agreement is important in Common law. In Air Great Lakes Pty Ltd v Ks Easter (Holdings) Pty Ltd [1989] 2 NSWLR 309, the Supreme Court held that the law takes into account the subjective intention between two parties when determining the existence of a contract. This intention could be proved using statements made by the parties, outside material or a written agreement.18 Further literature shows that the intention of two parties determines whether an agreement can be termed as an agreement or a deed. If the intention is to create a deed, the contract would need to comply with provisions of a written deed such as the opening statement would need to use language that is consistent with a deed.19 A deed would create binding obligations for the party where no consideration has been made. This suggests that a deed does not refer to having a consideration. Application Luke made an acceptance to Alistair’s offer in a statement where he expressed his thanks for the salary increment. The assumption is that Alistair heard Luke’s statement and that Luke had unequivocally stated that he had accepted the offer of a higher salary package from the firm. There is no mention of whether Luke made the acceptance in writing as that would have provided the documentation to prove that there had been intention on Alistair’s side. This documentation would have been used such as in the case of Air Great Lakes Pty v Ks Easter Holdings [1989]. If both assertions hold true, then Luke can claim that he communicated his acceptance clearly to the firm and that the firm’s revocation was a breach of contract. Luke would also argue that Alistair’s promise was an intention to enter into an agreement which was legally binding. His lawyer would assert that the firm could not revoke the offer since he had embarked on home ownership. The lawyer would cite Daulia Ltd v Four Milibank [1978] 2 All ER 557 where the Court held that an acceptance occurs when the act that the offeror has requested has been initiated. The acceptance cannot be revoked once it has been embarked upon. Luke would only need to prove that there was intention and that he had accepted the offer to enforce the promise made by Alistair. The only drawback with this approach is that there was no deed between the two parties. A deed would have created a binding obligation for the party assuming that no consideration has been made. This suggests that a deed does not refer to having a consideration. A legally-binding deed or agreement would demonstrates that Alistair had the intention to enter a contract with Luke and also provide each party with a mechanism for enforcing the agreement in court.20 Conclusion Luke could claim that Alistair’s promise had a legally-binding intention and that he had expressed his acceptance of the salary increment in a clear manner. The challenge with using intention and acceptance in court is that Luke cannot argue that there was consideration for the promise made by Alistair. The paper proposes that Luke should argue intention and acceptance. References List of Cases Air Great Lakes Pty Ltd v Ks Easter (Holdings) Pty Ltd [1989] 2 NSWLR 309 Anton Trawling Co Ltd v Smith [2003] 2 NZLR 23 Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 Chambers v Commissioner of Stamp Duties [1943] NZLR 504 Crown v Clarke (1927) 40 CLR 227 Daulia Ltd v Four Milibank [1978] 2 All ER 557 Dickson v Dodds (1875-1876) LR 2 Ch D 463 Dunlop Pneumatic Tire Co v Selfridge & Co [1915] AC 847 Felthouse v Bindley (1862) 142 ER 1037 Mermerley Investments Ltd v McGarry CA141/01 Mobile Oil v Wellcome International [1998] FCA 2005; (1998) 81 FCR 475 Mountford v Scott [1975] Ch 258 Stilk v Myrick (1809) 2 Campbell 317 Other Sources Australian Contract Law. “Consideration.”Last modified June 2012. http://www.australiancontractlaw.com Australian Contract Law. “Agreement.” Last modified June 2012. http://wwww.australiancontract.law.com/law.formation-agreement.html Lambiris, Michael and Laura Griffin. First principles of business law 2013. Australia: CCH Australia, 2013. Field, Andrew. “Facilitating electronic commerce.” The Law Institute Journal 74, no. 10 (2001), 73. Fitzroy Legal Service, “Elements of a contract.” The Law Handbook. Last modified June 30, 2013. http://www.lawhandbook. org.au/handbook/ch12s01s02.php 2013 Manefield, Tim and David Lipworth. “Agreement vs. Deed.” LegalTalk Alert, no. 12 (2010), 1-2. McKendrick, Ewan. Contract law: Text, cases and materials. Oxford, UK: Oxford University Press, 2014. Valente, Dena. “Enforcing promises: Consideration and intention in the law of contract.” Dissertation, University of Otago, New Zealand, 2010. Read More