Introduction

NB REFERENCES TO "HPH" OR JUST TO A PAGE NUMBER ARE TO HEFFEY, PATERSON AND HOCKER CONTRACT COMMENTARY AND MATERIALS 8TH ED 1998 (LBC INFORMATION SERVICES)
(To be updated by July 2000)


 


Types Of Contract

What is contract about? To the lay person the answer to this is elusive. Most people do not think about contract much, unless something goes wrong and then they become aware that there is something which governs the relationship between, for example, retailer and consumer. This is certainly true of the ordinary consumer but obviously less true of people engaged in commercial activity. Yet ordinary people engage in contract every day, sometimes several times a day. Getting on a bus, buying a drink from a vending machine, taking a coat to be dry cleaned, ordering some fire wood - all these are contracts. And there are many other, more obviously commercial, types of contract as well, ranging from huge joint venture agreements to exploit some natural resource or build a highway to the partnership agreement that governs the commercial relationship between partners in a law firm to the agreement between you and your landlord to the agreement between a private company and the Commonwealth to build naval ships. And so on - a huge variety.

Let us just look at some of the smaller transactions mentioned above. Let us assume that the bus breaks down and you are late for a very important appointment. The result is that you miss out on a business deal and lose a lot of money. Can you hold the bus company liable? Probably not. Let us assume that instead of a bus you had hired a limousine, making it absolutely clear that it must be on time and that a big business deal depended on making it to the meeting on time. Does that make any difference? Assume that the bottle of drink which you bought contained a decomposed snail which made you very ill. Assume that the dry cleaner lost your coat. Assume that the firewood that was delivered was green and useless for this winter. In all these cases you have to start asking questions like: was there a contract at all? If there was, what was agreed either expressly or implicitly in each transaction? what are the terms of the deal? what remedy should be available to the aggrieved person? should the person at fault be allowed to exempt himself or herself from any liability? The law of contract answers these sorts of questions.

Your Experiences With Contract

What experiences have you had with contract? Has anyone here actually been involved in a contract dispute? If you are not sure of the answer, that does not matter - it will help to begin the exploration of what is contract if we find cases where we are not quite sure. For example, I mentioned the example of buying a bottle of drink from a vending machine and there is a decomposed snail in the bottle. Is this a contract problem? Could Mrs Donoghue have sued in contract?

The Nature Of The Law Of Contract

Promises You will see when we start our inquiry about the nature of contract that the law of contract is said to be about promises. We will have a lot to say about promising, a subject that has fascinated both lawyers and philosophers. What is a promise? This is discussed in HPH on pp 1-2. The idea of an obligation is inherent in promise. This may be, as Coote points out, an obligation to do something in the future - "I promise to deliver a ton of gravel next Friday" - or it may be an obligation about some existing or past state of affairs, such as "I guarantee that this car is in good condition."

What have promises to do with contract? Are all promises enforceable as contract promises? The answer to this is: clearly not. If someone promises, one expects him or her to keep the promise. That is the very essence of promise and sets it apart from lesser commitments. But (and this is very much the lawyer's question) what happens if someone breaks the promise? The answer is often: "not very much". There is certainly a shadow cast over that person; he or she may not be trusted in the future. The sanctions are social. Contract, on the other hand, provides a far more powerful remedy. If someone breaks a contractual promise, it is possible to get a court to order the person to keep it (called specific performance) or to pay compensation (damages) for its breach. If the person still refuses he or she will be in contempt of court and can be gaoled. So, ultimately, the thing that sets contract promises apart is that they are backed by the power of the state through the courts.

Having said that contract is about promising, it is not always easy to see contracts in this way. Sometimes one has to search for hidden promises.

Implied Promises Going back to our examples, what promises were made? Some of them are not expressly spelt out but go without saying. These are called implied promises or terms and they are very common because people do not usually spell out every detail of their agreement. So in the case of the bus there would be implied promises about such basic matters as safety, that the bus will stop when requested, that the customer will pay the appropriate fare, etc. There probably is no implied promise that the bus will deliver passengers on time. In the case of the bottle of drink, there is an implied promise that it will be of proper quality, that the bottle will contain the right quantity, that the bottle itself will be safe and not liable to cut the drinker, or blow up, etc. The dry cleaner implicitly promises to look after your coat, but may try to escape that promise by using an exemption clause in the dry cleaning docket. The wood merchant implicitly promises to deliver fire wood and not wood that cannot be burnt. Promises in contract, just as in ordinary life, give rise to certain expectations. But what sets contract promises apart is that they are ultimately legally enforceable. Negotiations The contract law which we study is not just about the actual contract itself but is also about negotiations leading to a contract. If someone fraudulently tells you that a car is in good condition and on the strength of that you buy the car, there are possible remedies for you arising from the misrepresentation made by the seller. If someone leans on you to an extent that the law regards as undesirable so that you enter a contract under coercion, then it may be possible to get out of the contract. If someone during negotiations realises that you are suffering under a serious misapprehension and yet stands by and allows you to enter a contract without telling you about your mistake, a court may be sympathetic and set aside the contract. All these examples are about problems which arise out of the negotiating process.

By the way, do you think that the person who knows that you have made a mistake should speak up? Obviously opinions differ about this type of question. The law itself has fluctuated, sometimes taking a tough stance and other times being more sympathetic to the mistaken party. The point is that contract is very much a political animal, that is, it becomes embroiled in questions which turn on essentially political attitudes such as: should the law encourage cooperation or competition? should people who make mistakes be left to sink or should they be given a second chance?

Specialist Contracts Another feature of modern contract law is that many contracts nowadays have become so specialised that they are subjects unto themselves. Examples are landlord and tenant agreements, credit transactions (borrowing money), employment contracts, the relationship between companies and their shareholders - all these are very specialised contracts and are studied as separate subjects. We look at the basics of contract which are needed for a proper understanding of these other areas and for those areas of contract which have not become specialised. Contract In A Market Economy The law of contract has been a central focus for lawyers, philosophers, political scientists, economists, Marxists and others. Why? The reason is that it is at the very heart of the capitalist system, at the very heart of the market economy. It is the mechanism by which goods and services are traded in a free market economy. Contract theory is something which owes a great deal to the industrial revolution of 19th century Britain. Contract law is thus very much a political animal - the left and the right can have vigorous debates about it - and also very much an economic animal. You have experienced in the Law in Context course how various different theoretical perspectives can be brought to bear on law. Contract law is one of the most talked about areas of the law by law and economics scholars, by critical legal studies scholars, by feminist scholars. Whatever the theory that is being espoused, contract is often the focus of attention. There is a useful guide to the various theoretical perspectives in contract law in Seddon, NC and Ellinghaus, MP, Cheshire & Fifoot's Law of Contract (7 Aus ed 1997), Butterworths, ch 27.

Why The Need For Contract?

What, in your opinion, is the purpose of contract? We have already seen that contract is the lynch-pin of a market economy. As soon as complex trading and commercial transactions start to take place in a society, it is necessary to have some mechanism to make these transactions work. So, on a macro level, it serves an essential facilitative function. But what about at the micro level, that is, for the individual players? Most obviously it fixes the rights and obligations of the parties and backs them with legal sanction. In any long-term commercial relationship, contract attempts to fix the future. In an immediate exchange, such as buying a toaster, it determines who bears the risk of a faulty product. Contract also serves to concentrate the minds of the parties in deciding a number of important things, such as who bears a particular risk, who should insure against that risk, who should perform some tasks and who should do other tasks, when the tasks should be done, when they should be paid for, and so on. Negotiating a contract very much focuses attention on the future.

Promises And Their Enforcement

Because contract's principal function is to facilitate trade, the focus of attention is very much on what is legally necessary to make it work. Let us focus for a minute on what we mean by trading activity. Suppose I say to you that I want to buy your goat. You agree and so I give you the money and you give me the goat. This an immediate exchange. Incidentally supposing, instead of me giving you money, I give you a pig - what is that called? Is that type of transaction a contract? Immediate exchanges are contracts but they do not appear to involve any promises. But, as we have already seen, an immediate exchange may involve hidden promises, for example, there may be an implied promise that the goat should be free of disease. As soon as trading becomes more complicated, as it did in the industrial revolution, there is a need for a more sophisticated model of contract. Exchanges start to involve a complex of promises about the future. Contract lawyers call promises about the future - that something will be done in the future - executory promises. Sophisticated trading is about long-term relationships or at the very least performance projected into the future. It is about the exchange of executory promises.

For example, imagine running a supermarket. Every single item on those shelves is procured by contract. One of the essential features of a good supermarket - one that will attract the customers - is that the shelves should be fully stocked with a wide variety of goods. Imagine what it would be like trying to run a supermarket without the certainty which contract gives, namely, the assurance that the various items will arrive on time and according to a carefully worked out schedule.

Legal Enforceability This, in turn, requires us to focus on the question: what is required to make a promise binding? In practical terms how can I be sure that your promise is going to stick, legally? I might also be interested in the question: how am I going to be sure that the other party will think that I am genuine. It is just as important that my promises should be taken seriously as it is for me to be assured that your promise is legally enforceable. If I cannot make a contractually binding promise then no-one will do business with me. An example is minors - people under 18. Their ability to trade is severely curtailed by the law. No trader would enter into a business relationship with a minor because his or her promises may be unenforceable. All this goes to show that it is important for trading that people should be able to make legally enforceable promises as well as being assured that the other party's promise is legally enforceable.

So, what should be the criterion of legal enforceability? There are a number of possible ways in which a legal system could answer this question.

Solemnity For example, it may be that the law would say that solemnity is the key. If there is a well-known way of making legally enforceable promises, for example, that they should be intoned in a solemn voice with the person who is making the promise facing south and standing on one leg - then there would be a way, recognised by law, of making enforceable obligations. Our system of law does in fact have something like that, namely, a way of making promises binding by following a certain ritual. It is called a deed under seal. A deed is a document which has to be in a certain form and which must be signed, sealed and "delivered". Sealed nowadays means buying a little red seal from a law stationers - it used to involve melting sealing wax and imprinting the warm wax with a seal, often part of a ring. It is not even necessary to use a seal. It is sufficient to draw a circle and put the letters "l. s." in the circle. These stand for "locus sigilii" - the place of the seal. Delivered now means very little. It is not necessary to physically deliver the deed to make it binding. Delivery is more about the intention which accompanies the execution of the document. It must be intended that deed is for the promisee's use and benefit. This invariably goes without saying. (For the formalities required for making a deed, see Seddon N and Ellinghaus M, Cheshire & Fifoot's Law of Contract (7th Aus ed) para [4.1] footnote 5).

There was a stage in the historical development of the law of contract where it was argued, particularly by Lord Mansfield, that enforceability should turn on whether or not the promise was in writing. Writing is not the same as a deed which requires more than just writing. Lord Mansfield's idea was rejected in the end in a case called Rann v Hughes with the result that, since then, contracts are perfectly enforceable without any writing, although we shall see there are limited exceptions to that. But basically the position is that writing is not essential for most contracts, however large and important they are. As far as the law of contract is concerned it is possible to order a F111 aeroplane over the telephone. Of course, as a matter of business practice it is not sensible to do this.

Reliance What other criteria might a legal system develop for making promises legally binding? Possibly another basis would be reliance. If you have made a promise to me upon which I have relied, then there is an argument of fairness that you should not be able to go back on it. For example supposing I promise a large sum of money to a charity which then relies on my promise and makes contracts with builders, architects and so forth to build a new building. Is my promise binding? Should it be binding? We will see that traditionally the law of contract did not adopt this criterion but that this traditional position has changed quite radically in recent times. We will be studying the doctrine of estoppel which has been transformed by the High Court. Estoppel is very much about reliance - its key ingredient is detrimental reliance. We will have a lot to talk about on this theme of reliance. Exchange A fourth possible basis for making promises legally binding is exchange, that is, that a promise is only binding if it has been giving in exchange for something. This is in fact the traditional basis for legal enforceability of promises in our legal system. A bare promise - a one-way promise where, for example, I simply promise to give you my goat - is not legally enforceable. (But remember, if it is put in a deed then it can be legally enforced.) Contrast the bare promise - usually called a gift promise by lawyers - with an exchange promise: I will give you my goat in exchange for you giving me a pig. We are talking about promises here. So the deal is I promise to deliver my goat to you, say, next Wednesday if you promise to deliver the pig on the same day. There is an exchange of promises. This is what the doctrine of consideration is all about. We will spend some time examining the doctrine of consideration which has some somewhat mysterious aspects to it.