The Formation of a Legally Enforceable Contract - Assignment Example

BUSINESS LAW STUDENT NAME PROFESSOR’S NAME COURSE TITLE DATE Question 1: Discuss and apply the element of consideration required for the formation of a legally enforceable contract Issue Whether the element of consideration may apply in the contract between Luke Gunston and Birchall’s Finance Company? Rule The classic definition of consideration is found in the case of Currie v Misa1 where Lush J stated that a valuable consideration in la consists of an interest, right, a profit or a benefit that accrues on one party for a forbearance, loss, detriment or responsibility given, suffered or undertaken by others.2 This means that a valuable consideration is given when the requirement of a benefit or a detriment is disclosed.3 Therefore consideration can be legally enforceable when it seeks to achieve something in return, and that the promisee must show that they bought the promise by doing something in return, refraining to do something or doing some act in return for it. Moreover consideration must move from the promisee as held in Coulls v Bagot’s Executor and Trustee Co Ltd4. An executed consideration is where the performance of act is done prior to the formation of a contract while an executory consideration is a promise where something is to occur in the future.5 Executory contracts are common in unilateral contract where a person acts in response to a promise by the other party. Consideration must not be past as held in Pao On v Lau Yiu Long6 and there has needs to be a nexus between the promise and the consideration made. The consideration given must be sufficient or adequate. In the case of Thomas v Thomas7 it was held that consideration means something that is of some value in the eyes of the law.8 The law does not recognize a consideration that has already been performed before the promise is made.9 In the case of Stilk v Myrick 10 the court held that here a promise to perform an existing contractual duty is made for additional payment then it does not amount or constitute a valid consideration. However the decision in Stilk v Myrick was limited in the decision of Williams v Roffey Bros & Nichols Contractors Ltd11 the Court of Appeal held that a claimant can recover the unpaid amount because eth promise made by the defendant was binding and it benefitted the defendant. In making a consideration, there has to be a pre-existing duty between the promisor and the promise as held in the case of Williams’s v Williams12. Consideration forms the basis of enforcement of a contract and without consideration there can be no binding agreement.13 Consideration may be legally enforced despite being past consideration where the act is performed at the request of the promisor14, the parties had agreed that the act was to be compensated15 and that the promise would have been legally enforceable had it been made prior to the performance of the act.16 Application In this case there exists an employment contract between Luke and Birchall’s finance. The initial agreement was that Luke would be paid $175 per annum and Luke accepts this offer. This is considered valid consideration because the letter stating the offer shows a bargain by Birchall to retain Luke in their company as held in Australian Woollen Mills Pty Ltd v The Commonwealth17. Luke took responsibilities to train junior staff and in May 2014 Alistair on noticing the excellent approach taken by Luke decided to increase Luke’s salary to $190 to be backdated to his first day at Birchalls. In the case of Pao On v Lau Yiu Long18 the court held that past consideration is not good consideration however past consideration is enforceable when performed at the request of the promisor, the parties had agreed that the act was to be compensated and that the promise would have been legally enforceable had it been made prior to the performance of the act. The request to increase Luke’s salary would have been legally enforceable had it been made prior to performance and that the request was made by Alistair. However the board refused to honour the pledge due to financial downturn in the company. Past consideration is not good consideration however there was a valid future consideration because for the unperformed acts Luke ought to be paid $190K. Question 2: Consider whether the remaining formation elements of intention and agreement have been satisfied in the scenario. Can Luke enforce the contract for the new salary package against Birchall’s? Issue i. Whether the elements of intention and agreement are satisfied in the contract between Birchall and Luke? ii. Secondly whether Luke can enforce the contract for the new salary package against Birchall? Rule An agreement that is supported by adequate consideration is prima facie evidence of intention to create legal relations19. In Rose and Frank Co v Jr Crompton & Bros Ltd20 the House of Lords held that the honour clause constituted an express intention that the agency agreement was not legally binding. In the case of Esso Petroleum Ltd v Commissioners of Customs and Excise21 the House of Lords in determining whether there was a contract for the sale of goods, they had to determine whether the customers had intended to enter into a binging legal relationship. The House of Lords held that the offer of a coin was collateral contract to buy petrol rather than money with a majority of the judges deciding that there was an intention to create legal relations.22 In the case of Ergenous Greek Orthdox Community of South Australia Inc23the High court was to determine whether the Community and the Archbishop had demonstrated an intention to create an employment contract and whether the Archbishop was to be paid the accrued entitlements. The High court held that there was a contract of employment and that the Archbishop was entitled to his employment benefits. The case of Ergenous Greek Orthdox Community of South Australia Inc24 the court alluded to instances where the courts may infer a presumption of intention taking into consideration the subject matter, the legal status of the parties, the parties’ relationships to infer intention of the parties. Therefore the test of establishing intention is focusing on the outward manifestation of the parties’ intentions25. A contract is regarded as a class of obligations where parties voluntarily assume a legally enforceable duty.26 A legally binding agreement or contract is formed when there is an offer, an acceptance, consideration flowing from the offeree, there is an intention to create legal relations, there is capacity of the parties to contract, certainty of terms and the contract is legal.27 In the case of Mildura Office Equipment & Supplies Pty Ltd v Canon Finance Australia Ltd28 the court stated that the fundamental tenets of a valid contractual agreement must show with certainty that the parties had accepted the terms of the contract, there was an intention to create legal relations and that there was a relationship quid pro quo in terms of consideration and promise. However in the case of Ormwave Pty Ltd v Smith29 the court were of the opinion that in determine whether there is a contract the precise acceptance nor a precise time of offer and acceptance to be identified. What happens when there is breach of contract, can the innocent party enforce the contract? Specific damages are granted by the courts to order the guilty party to enforce and carry out their obligations under the contract30. Specific damages will not awarded in instances where damages are inadequate remedies31, where the parties have not mutually agreed and where it is inequitable to award specific performance. There other remedies available including recession, repudiation, damages and injunctions. Application There was a valid offer made to Luke by Alistair Birchall of Birchall Finance at a salary of $175K per annum on the 05/11/2013. Luke validly accepted the terms of the offer and replied to Alistair Birchall on 05/11/2013 accepting to resign to work on the company. In May 2014 Alistair made an offer to Luke to increase his salary to $ 190K backdated to his first date. Luke accepted these terms and thanked the board members. As stated Mildura Office Equipment & Supplies Pty Ltd v Canon Finance Australia Ltd32 Luke and Birchalls agreement has all the elements of a contract that is a valid offer and acceptance and from the conduct of the parties it infers their intention to be bound by the new terms of the contract. The relationship between Luke and Birchall is that of an employer-employee relationship. The repudiation of the contract by the board of Birchall depicts a clear breach of contract. A breach of contract thus entitles Luke to recover damages for breach of the terms of the contract to be paid $190K for the remainder of his employment and this amount was to be backdated to the first day of its employment. As held in Ergenous Greek Orthdox Community of South Australia Inc33 Luke is entitled to be paid $190K under the new contractual terms and this will have to be backdated to the first date of his employment because from the conduct of the parties, it can be inferred they intended to create a binding agreement with sufficient consideration. Works Cited Atiyah, P.S. Essays on Contract. Oxford: Clarendon Press, 1986, Print. Charman, Mary. Contract Law. London: Routledge, 2013. Print Radan, Peter., Gooley, John., and Vickovich, Ilija. Principles of Australian Contract Law: Cases and Materials. Sydney: Lexis Nexis, 2009. Print. Trietel ,G. The Law of Contract. 13th edn. London: Sweet & Maxwell, 2011. Print. Cases Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424 at 457 Edwards v Skyways Ltd [1964] 1 ALR 494 Cogent v Gibson (1864) 33 Beav 557 Currie v Misa (1875) LR 10 Ex 153, 162 Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 119 CLR 460 Chappel & Co Ltd v The Nestle Co Ltd [1960] AC 87 Edwards v Skyways Ltd [1964] 1 ALR 494 Esso Petroleum Ltd v Commissioners of Customs and Excise [1976] 1 All ER 117 Lampleigh v Brathwait (1615) Hob 105 Pao On v Lau Yiu Long (1980) [1979] 3 All ER 65 Re Casey’s Patents, Stewarts v Casey (1892) 1 Ch 104 Williams Rofey Bros & Nicholls Contractors Ltd [1990] 1 All ER 512, CA Read More