LAWS101 Foundations of Business Law

Week 3, Contract Law (Part 1)

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
What is a contract?

A legally binding
agreement between
two or more people

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
 Examples
Can you think of other examples?
 Does a contract have
to be in writing?
No
• In fact, most contracts are
made orally (eg by saying ‘I’ll
take this’) or by conduct (eg
when handing over a credit
card or when clicking ‘I agree’
when shopping online)

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
Elements of a
cause of
action
T H E T H I N G S T H AT P H A S T O
PROVE IN ORDER TO GET
DAMAGES
 Elements of a cause of
action in negligence
P suffered injury or
D had a legal D wasn’t as careful as loss as a
obligation to be a reasonable person consequence of D’s
careful ('breach of duty’ or negligence
('duty of care') ‘negligence’) (‘causation of
damage')
Elements of a cause
of action in contract
D broke that P suffered injury
contract because or loss as a
D and P had a
he didn’t do what consequence of
contract
he promised D’s breach
(‘contract')
(‘breach of (‘causation of
contract’’) damage')
Compare the causes of action
NEGLIGENCE BREACH OF CONTRACT

Duty of care Contract

Breach of duty or negligence Breach of contract

Causation of damage Causation of damage

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
 Focus of Week 3
When is there a valid contract?
In week 4 we will ask ‘what are the terms of
the contract’?

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
 A reasonable person would have thought that the
parties had reached an agreement
(‘agreement’)

How do you
know if you A reasonable person would have thought that the
parties intended that the agreement would be
have a enforceable by a court
(‘intention to contract’)
contract?

The parties each promised something to the other

(‘consideration’)
OR wrote the promise in a deed (a fancy legal
document signed and witnessed)

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
The ‘objective test’
• You only need to prove that a This Photo by Unknown Author is licensed under CC BY-NC-ND

reasonable person would

have thought that the parties
had reached an agreement
and had an intention to
contract (ie intended to be
legally bound)

This Photo by Unknown Author is licensed under CC BY-SA

Why are these all valid
contracts?
A reasonable person would have thought that the parties had
reached an agreement
(‘agreement’)

A reasonable person would have thought that the parties intended

that the agreement would be enforceable by a court
(‘intention to contract’)

The parties each promised something to the other

(‘consideration’)
OR wrote the promise in a deed (a fancy legal document signed and
witnessed)
Are these valid
contracts?
A reasonable person would have thought that the
parties had reached an agreement
(‘agreement’)

A reasonable person would have thought that the

parties intended that the agreement would be
enforceable by a court
(‘intention to contract’)

The parties each promised something to the other

(‘consideration’)
OR wrote the promise in a deed (a fancy legal
document signed and witnessed)
 3.4 Has an Agreement Been
Reached (offer + acceptance)?

The courts consider whether the facts, when viewed objectively as a

whole, and with regard to all surrounding circumstances, demonstrate
that, from the view of reasonable persons on both sides, a concluded
agreement has been reached. Often this is obvious because one party
has accepted another party’s offer (eg ‘Will you sell me your car for
$10,000?’ ‘Yes’)

Example: Azzi v Volvo Car Australia Pty Ltd [2007] NSWSC 319
See paragraphs 23 to 27

If the parties have not reached agreement on the terms which they
regard as essential for a binding contract, there can be no binding
agreement.

© 2019 Cousins et al: Food and Beverage Management, 5th edition,

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by Unknown Publishers
Author is licensed under CC BY-SA
Your turn
You run a café. You purchased some pastry items
from a supplier a few years ago. You started
purchasing from that supplier again 3 months ago.
They sent you a ‘supply contract’ but you never got
around to signing it. You were late making a
payment, and now they are saying that you owe
them late penalties under cl 4 of the supply
contract.

◦ Do you have a contract with the supplier on the

terms set out in the ‘supply contract’?

◦ How would you manage ‘legal risks’ if you were a

manager?

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
3.5 Intention to Create
Legal Relations
The courts must consider whether the facts, when viewed objectively
as a whole, and with regard to all surrounding circumstances
demonstrate that, from the view of reasonable persons on both sides,
the parties intended to create a contract as opposed to an informal
agreement.

Example: Ermogenous v Greek Orthodox Community of SA Inc [2002]

HCA 8
◦ See from paragraph 8

Agreements that are clearly social or domestic in nature are not

normally intended to be contractual, and therefore would not
generally result in legal consequences.

For agreements that are clearly of a business nature, the courts will
generally find that the parties intended to enter into a binding
contract.

What about family businesses?

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
Your turn
Kyle’s mother told him that she would buy him a car
on his 16th birthday. Kyle turned 16 last Monday,
but he hasn’t received a new car. Is Kyle’s mother in
breach of contract?

Priya works as a waitress in her aunt’s restaurant;

and has done for several years. Her aunt usually
pays her $50 cash per 2-hour shift. This week her
aunt paid all other workers except Priya. Her aunt
said she didn’t have enough money to pay Priya this
week because of the downturn in customers due to
the pandemic. Is Priya’s aunt in breach of contract?

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
3.5 Avoiding the inference of
intention to Create Legal Relations
If you are still negotiating an agreement, it is important to avoid
incurring contractual liability

During negotiations, parties often stamp their documents ‘draft’

or expressly state that the document is ‘subject to contract’ or
‘not valid until signed,’ which is a shorthand way of stating that
they don’t yet have an intention to contract

These stamps or statements are usually effective, but ultimately,

in accordance with Ermogenous, the courts will have regard to
the whole circumstances, and in some cases, there may be
evidence that the parties did, in fact, intend to contract despite
the stamp or statement
◦ Example: Stellard Pty Ltd v North Queensland Fuel Pty Ltd
[2015] QSC 119 (‘subject to execution of the contract’)

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
 Your turn
You are negotiating to lease a new premises for your
start-up IT company. You have two options: a
warehouse in a trendy suburb, or a smaller office
space in the city, and your preferred option is the city
premises. The landlord for the warehouse premises
has sent you a draft lease and you want some changes
to the terms of the lease, in particular, you want the
option to extend the lease for a further 3 years at the
end of the first year. You have amended the lease
agreement and want to send it back to the landlord for
further comments, but you don’t want to say ’yes’ to
this agreement unless your negotations fall through
with the city premises. What should you do to protect
yourself?

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
 3.6 Consideration
Consideration is the exchange of ‘something’ for ‘something’, or a
promise for a promise, that turns the agreement into a contract.

Consideration is essential to every valid simple contract, be it

verbal, written or implied. Without the exchange of consideration
the only way an agreement can be a valid contract is if it is a formal
contract ie written in the form of a deed.

Consideration may be:

A promise for a promise

An act for a promise

Forbearance

Peppercorn consideration (less than market value)

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
 ‘Consideration’ must be a
promise to do something
that the person is not
Rules for already obliged to do
Consideration

A deed is a valid
substitute for
‘consideration’

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
Your turn
Are the following agreements supported by consideration? What is
the consequence?

◦ Michael promises to supply 40 litres of frozen yoghurt to The Good Place

Café each week for $5 per litre.
◦ Jake’s Café has been unable to pay his rent due to the downturn in business
as a result of the pandemic; his landlord promises to reduce his rent by
$1,000 per week for the next 6 months.
◦ Tahani promises not to sue Chidi for the damage he caused to her car (he hit
the car with his bike when delivering take-away food) if Chidi gives Tahani
$100 in cash.

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
 This Photo by Unknown Author is licensed under CC BY-NC-ND

What are the contract terms?

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
 This Photo by Unknown Author is licensed under CC BY-NC

This Photo by Unknown Author is licensed under CC BY-SA-NC

This Photo by Unknown Author is licensed under CC BY-NC-ND

Contract law terminology
Contract terms
• The promises that each party makes to each other

Breach of contract
• When a party has broken one of its contractual obligations (promises)

Damages
• The money that a defendant must pay to the other party to a contract as
compensation for the losses caused by their breach of contract
Elements of a cause of action in contract
• The things the injured party must prove in order to successfully sue the other
party for damages for breach of contract

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
What contract?
How do argue that there is no
valid contract?
A contract may be ‘voidable’ if:
• A party lacked capacity to contract (eg because a
minor, a bankrupt or of unsound mind),
• The contract arose out of a mistake or
• The other party acted unfairly in procuring your
agreement (eg by way of duress, undue influence
or unconscionable conduct)
• The contract is illegal

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
 3.7 Capacity
Capacity refers to the ability of a person to fully
understand, and therefore freely agree to, the rights
and obligations involved in entering a contract.

Only sane, sober, adults have full capacity to enter

into a contract. People who lack full legal capacity to
enter into contracts include:

Minors (unless the contract is for necessaries)

People who are mentally unsound

People who are intoxicated

Corporations (in specific circumstances)

Bankrupts

© 2019 Cousins et al: Food and Beverage Management,

This5th
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by UnknownGoodfellow Publishers
Author is licensed under CC BY-SA-NC
 Capacity
Contracts for the Supply of Necessaries

Contracts for necessaries are contracts for goods or services

deemed necessary to maintain the minor’s particular lifestyle –
those a minor is accustomed to having in their life and are
deemed necessary.

EXAMPLES: -

food

clothing

accommodation

medical treatment

education

If the minor already has an adequate supply of such goods and

services, they will not be considered necessaries because the
minor’s specific requirements have already been met.

© 2019 Cousins et al: Food and Beverage Management, 5th edition,

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Author is licensed under CC BY-SA
 Minors
The age of “majority” in Australia is 18 - when a young person is no
longer considered a child and the law recognises their ability to
make their own decisions and be responsible for their own actions.

Apart from exceptional circumstances, an agreement with a minor

may be unenforceable against them and is voidable by the minor.
The minor, on the other hand, may enforce the contract against the
adult.

There following contracts between a minor and an adult fall within

a special, ‘exceptional’ category:

Cash contracts

Contracts for the supply of ‘necessaries’

Beneficial contracts of service (as opposed to trading contracts)

This Photo by Unknown Author is licensed under CC BY-ND

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
 People who are of
Unsound Mind and
Intoxicated Persons
If a person is of unsound mind or is intoxicated due
to drugs or alcohol and they enter into a contract for
non-necessary items, the contract is voidable by the
person if:
That person can show that she or he did not
understand what they were doing as a consequence
of their condition and;
The other party was aware of that condition and;
They withdraw from the contract within a reasonable
time of their regaining their sanity or sobriety.

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
 Bankrupts
A person who has been declared bankrupt has limited
legal capacity to enter into certain contracts:

A bankrupt must disclose their bankruptcy when

applying for, or buying, goods or services on credit or by
cheque for a sum greater than $5,068 as at 4/9/2012
(CPI indexed).
If the bankrupt trades under any other name than their
own, they must inform everyone with whom they deal
that they are a bankrupt.
A bankrupt cannot remain in a partnership.
A bankrupt cannot be a company director or have a
management role without the permission of the court.

© 2019 Cousins et al: Food and Beverage Management, 5thThisedition, Goodfellow

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Author is licensed under CC BY
 3.8 Genuine
Consent
Genuine consent means that all parties to the contract honestly
and genuinely agree to the terms of the contract.

Without consent there is no agreement and therefore the

contract may be either void or voidable.

Genuine consent may be absent because of:

Mistake

Fraudulent or innocent misrepresentation

Duress

Undue Influence

Unconscionable conduct
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© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
 Mistake
A ‘mistake’ must be distinguished from an error of judgment.
Two types:
Mistake of law - does not make a contract void
(Mistake of fact - Makes the contract void in the following circumstances:
Common mistake - both parties have made the same mistake about the existence of
something fundamental to the contract.

Mutual mistake - both parties make a mistake but each makes a different mistake.
Unilateral mistake - one party makes a mistake of fact, but the other party knows, or
ought reasonably to know of the mistake, and does not inform the mistaken party.
Non est factum – One party believes that the document they signed is radically and
fundamentally different from the actual document signed and there is an absence of
negligence

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
 Misrepresentation
Genuine consent will be absent from a
contract that has been entered into due to
a misrepresentation.

A representation is a statement of fact. A

misrepresentation is a statement of fact
that is untrue.

A misrepresentation occurs when a person

is induced to enter a contract because of
reliance on a false statement of fact, as a
consequence of which they suffer loss.

Three types:

Fraudulent (deliberate) misrepresentation.

Innocent misrepresentation.

Negligent misrepresentation.

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
Misrepresentation

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
 Diagram: Types of duress

DURESS

To person To goods Economic duress

Duress

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
 Duress to person
Duress to the person occurs when there is actual physical
violence or the threat of physical violence to obtain consent to a
contract.

The violence or threat may be directed towards the coerced party

or their family.

The person who has allegedly suffered the duress must prove:

The duress interfered with the free exercise of a coerced party’s

will.

The duress prevented the parties from meeting and negotiating

on equal terms.

As a result of the duress the coerced party did not genuinely

consent to the contract.

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
 Duress to
goods
Where a party is coerced into
entering a contract because of
threats to seize or destroy
property, the contract is voidable
on the grounds of duress to
goods.

Where illegitimate economic

pressure is exerted on business
people to enter a contract, it may
be voidable on the grounds of
economic duress. An economic
threat is one that, if put into
effect, would cause monetary loss
to the party entering the contract.

© 2019 Cousins et al: Food and Beverage Management, 5thThisedition, Goodfellow

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Author is licensed under CC BY
 Undue Influence
Undue influence is the improper use of influence by a dominant party to obtain
consent to a contract by the weaker party, which will benefit the dominant party.

If the defendant occupied a legally recognised position of influence over the plaintiff,
there is a presumption of undue influence, e.g:

Parent and child.

Trustee and beneficiary.

Doctor and patient.

Solicitor and client.

Guardian and ward.

Religious advisor and devote.

The defendant can rebut the presumption by proving the plaintiff understood the
contract and entered it voluntarily, otherwise the contract is voidable at the option
of the innocent party.

© 2019 Cousins et al: Food and Beverage Management, 5thThisedition, Goodfellow

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Author is licensed under CC BY
 Unconscionable Conduct
A contract may be voidable on the grounds of
unconscionable conduct if the plaintiff can prove:

They had a special disadvantage or disability at the time

of entering the contract; e.g. poverty, need, sickness,
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age, illiteracy, etc.
This special disadvantage or disability substantially
lowered their ability to protect themselves.

The defendant must have known or should have known

of the disability and has taken advantage of it.
The actions of the defendant were unconscionable.
Eg Commercial Bank of Australia v Amadio [1983] 151
CLR 447

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5thPhoto
edition, Goodfellow
by Unknown Publishers
Author is licensed under CC BY-NC
3.9 Legality of Object
A contract that has an unlawful purpose (or object) will be classified as
either void or illegal.
A contract which only affects the parties to the contract is merely void.
A contract whose effects spreads beyond the contract itself is illegal.

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
 Contracts Illegal under Common Law
Examples include:
• Contracts to commit a crime or tort.
• Contracts which hinder the administration of justice.
• Contracts which are sexually immoral.
Legality of • Contracts which adversely affect the relationship of
Object one country with another.
• Contracts which encourage unnecessary litigation.
• Contracts to defraud public revenue.
• Contracts which promote corruption in public life.
• Contracts in restraint of trade, unless exceptional.

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
Summary
An agreement will be a 'contract' if: (a) a
reasonable person would have thought hat
the parties reached an agreement
('agreement'), (b) a reasonable person A party may be able to avoid making a A gift will only be enforceable if it is written
would have thought that the parties legally binding contract by making in the form of a deed (otherwise there is no
intended that the agreement would be negotiations 'subject to the contract' ‘consideration’)
legally enforceable, (c) the parties promised
something to each other under the
agreement (or put the promise in a deed)

A contract may be void or voidable if:

•A party lacked capacity to contract (because of age,
mental illness, bankruptcy)
•A party to the contract didn't 'genuinely consent' to A party who ‘breaches’ a term of a contract
the agreement (because of misrepresentation, (by failing to do what they promised) can be
duress, undue influence or unconscionable conduct sued for damages for losses and injuries
by the other party)
caused

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
What should you do now?
Read Read Chapter 3, up to 3.10 p265

Tutorial Attend the tutorial or complete the tutorial questions

Lecture Listen to the weekly lecture

Tutorial Complete your weekly tutorial questions (and check your answers in the tutorial)

Prepare for your AT1 Revise your tutorial questions for Weeks 1, 2, 3
Quiz week Complete the active learning activities for Weeks 1, 2, 3

Weekly check-in Complete your weekly check-in by Sunday 5pm

© 2019 Cousins et al: Food and Beverage Management, 5th edition, Goodfellow Publishers
Have a great week!