Contract law problem question – requirements for contract

Scenario 1: Is Ernie liable to supply antique books to Anita?

Scenario 2: Is Ernie obliged to sell the books to Bert at a lower price?

Scenario 3: Is Ernie liable to pay Sally the bonus?

Scenario 4: Is Ernie liable to pay his son?

Rule (Law):

A contract is an agreement made between two or more people that creates legal rights and obligations that are enforced by the courts. Contract law in Australia generally consists of Common law principles, equitable principles and statue law. A contract contains 6 elements out of which the 3 essential elements are intention, agreement and consideration. With either one of these elements missing, the contract would be void. The other 3 elements of a contract are capacity, consent and legality. (Miles et al, 2015, p.293)

An agreement maybe recognised as a contract if, at the time the parties entered into it, they intended to be legally binding. i.e. there was an express or implied understanding by the parties that their agreement was enforceable by the courts in the event there was a breach of dispute. The agreement to be legally binding is known as Intention, which is an essential element in the contact. In general, there are two presumptions related to intention. In domestic or family or social agreements it is presumed the parties do not intend to create legal relations bounded (Ross & Frank Co v Crompton Bros Ltd [1925] AC 445 and Balfour v Balfour [1919] 2 KB 571). However, in the case of business or commercial agreements, it is presumed that the parties intend to create legal relations (Air Great Lakes Pty Ltd v KS Easter Pty Ltd [1989] 2 NSW LR 309). (Miles et al, 2015, pp.315-316)

The second essential element of a contract, Agreement, is made up of offer and acceptance. An offer is the indication by one person to another of his or her willingness to enter into a contract with the other on certain terms (2nd ed, Butterworths, 1991). Invitation to treat has the same concept. An invitation to treat is not an offer but in fact an invitation to others to make an offer. As such, an invitation to treat cannot be accepted (unlike an offer). The party who responds to an invitation to treat is, in reality, the party who is making the offer. An example of invitation to treat is goods on display in shops/goods on shop shelves. This can be seen in the case of Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401 and Fisher v Bell (1961) 1 QB 394. (Miles et al, 2015, pp.331-332)

The third essential element of a contract, Consideration, is something of value that is given by the parties to each other under their agreement and this converts the agreement into a contract. One of the many rules relating to consideration is that consideration can be in the present or the future, but not the past. The law views past consideration as having no value at all (Roscorla v Thomas [1842] 3 QB 234). (Miles et al, 2015, p.351, 356 & 357)

Capacity means the amount of legal ability a person had to enter into a contract. A contact may not be valid if either or both parties lacked legal capacity at the time the contract was made. In some situations, the party may not lack capacity totally but may have limited mental capabilities to negotiate a legal agreement. Minors or children under the age of 18 years and mentally ill people are some examples of people with limited mental capabilities. Any agreement made with such a party would be void by law. (Miles et al, 2015, p.365-367)

Real or genuine consent is another important element of a contract. A requirement of all contracts is agreement consisting of the consent of one party to the proposal made by another. Parties must enter into their agreements voluntarily and of their own free will. One of the mistakes that might take consent away is the common mistake. One example of a common mistake is an agreement to sell non-existent goods (ie goods that had perished without the knowledge of the parties). According to the s 11 of the Sale of Goods Act 1923 (NSW), if there is a sale of goods and the goods, without the seller’s knowledge, have been perished at the time of the making of the contract, the contract is void (McRae v Commonwealth Disposals Commission [1950] 84 CLR 377). (Miles et al, 2015, p.377-378)


In the first scenario, the goods to be sold i.e. the antique books were non-existent because of the burning down of the warehouse. At the time the contract was made, neither Ernie nor Anita was aware that the warehouse had burnt down. Hence, this is an example of a common mistake and according to the Sale of Goods Act (1923), the contract should be considered void.

In the second scenario, there is an invitation to treat. Bert had requested to buy the book and had initiated the contract. Here, Ernie has the right to sell the book at the price mentioned or at any price that he wishes to sell the book. Hence, the wrong price mentioned on the sticker is irrelevant. Ernie had also mentioned it earlier to Bert that the price of the book was $35. Therefore, Ernie has the right to reject Bert’s claim and it not liable to sell the book at $3.5.

In the third scenario, the payment of the bonus to Sally was for an activity that added value to Ernie’s business. However, the task was done in the past. According to the rule of consideration, incidents of the past do not support the contract by law. Therefore, Ernie has the right not to pay Sally as he was rewarding her for something she had done in the past not something done in the present or something she was going to do in the future.

In the fourth scenario, the contract is suppose to be between Ernie and his son. As this is a family agreement, they are presumed to be not binding. Also, since Ernie’s son is only sixteen years of age, he is a minor and considered to have the lack of capacity to enter into a contract by law. Therefore, the contract is voidable due to both these reasons and Ernie is not liable to pay his son.

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