Week 3 Contract Formation 2 (Intention, Consideration, and Promissory Estoppel)

Question 1

Intention to Create Legal Relations

Question 2

Intention

Answer 2

An agreement is required to form a legally binding contract, but is not itself sufficient: more is required, including intention to create legal relations (intention to be legally bound, intention to form a binding contract, intention to contract)
The parties must intend that their agreement be legally binding
Example: An agreement to meet your friends for lunch (no contract, despite agreement)

Intention is objectively ascertained: why?
See Ermogenous case, and its discussion of presumptions
Traditional approach: presumptions for commercial, and social or domestic cases
Now: better to see these only as rough starting points

Question 3

Social and domestic agreements

Answer 3

Not our focus, but helps put the law relating to commercial agreements in context: noting too that the line between the two categories of case is not always clear

Our starting point: friends, spouses, family members, or members of religious communities might not intend to enter into contracts when making agreements (though it always depends upon the circumstances in any case)

Balfour v Balfour, and Merritt v Merritt: Agreements between spouses not binding and binding (respectively) in the context of subsisting and broken-down relationships (respectively)
Todd v Nicol: Family agreement binding where cost and inconvenience arose from relying on the promise

Question 4

Consideration

Answer 4

Agreement and intention are necessary but still not sufficient for a legally binding contract: consideration also required.

Consideration: Something given in return for a promise

Implications: Bare promises in business are not usually binding
Example: Promise to transfer premises between related entities controlled by the same individuals, one business then sold.

Usually not a problem in business agreements (usually involve money), but rules are technical and important to understand in order to secure certainty in business.

Requires: Something of value to the promisor, or a detriment to the promisee, which may be money but doesn’t have to be, and which may be an act or a promise to do something in the future

Consideration must be sufficient, but need not be adequate
Provided law recognsies consideration as having some value, it will not enquire into whether the transaction is fair or a good deal
Note terminology: ‘good consideration’
Even a ‘peppercorn consideration’ is good consideration
Example: One business entering into a long term lease with a related business, paying rental of $1 per year
Thomas v Thomas: One pound per year to live in aproperty and eventually have it transferred was good consideration

Consideration must be sufficient, but need not be adequate

Question 5

Cosnideration part 2

Answer 5

Consideration must not be so vague or illusory (ie. uncertain) so as to have no legal value at all
White v Bluett: Promise that loaned money needn’t be repaid if the borrower stopped complaining was not binding (original promise to repay stood)

Consideration must move from the promisee, but need not move to the promisor
Good consideration: Promisee agrees to give $10,000 to a friend of the promisor
Not good consideration: A friend of the promisee is arranged to give $10,000 to the promisor
Again important when arrangements are being made amongst corporate groups

Question 6

Practical benefit test

Answer 6

Contemporary application: Promise to pay a contracting counterparty extra money to complete where it appears there is a risk of non-completion

Law’s response: Practical benefit test, Williams v Roffey Bros
One party (the promisee) does not perform or is not performing their existing contractual obligations.

The other party (the promisor) makes a promise (eg. extra money) to do the work originally agreed
The promisee performs their obligations
In doing so, the promisor receives a practical benefit or avoids a detriment (eg. avoiding penalty, litigation, need to find another subcontractor)
No economic duress or fraud on the part of the promisee

Question 7

Deeds

Answer 7

Deeds: a special form of contract (‘contracts under seal’) subject to legal formalities (‘signed, sealed, delivered’), which can be binding even without consideration: why?
Deeds might be used in business contexts where consideration exists anyway (eg. a deed of release)
Deeds might be used to effect gifts (bare promises) where there is a desire from the outset by both parties to ensure the promise is legally binding

Question 8

Promissory estoppel

Answer 8

Another way in which the law may enforce promises made without good consideration, via rules of equity
Narrow application: Always better to ensure good consideration (see Crown Melbourne v Cosmopolitan Hotel)

Has sometimes applied in cases where rent reductions were promised: Central London Property Trust v High Trees House, Je Maintiendrai v Quaglia

Need more than a promise: assumption, inducement of assumption, acting/refraining in reliance, knowledge of intention to act that way, detriment if assumption not fulfilled, unconscionable action in failing to prevent damage