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Formation and Validity of the Contract

Discuss about the Report of Australian Woollen Mills Pty Ltd.

The law of contract has assumed prominence in the commercial field for the significant role that it plays. Indeed, the applicable law in regards to this solution that this paper seeks to critically discuss, shall be one within the panoply of Contract Law. Of particular significance to note, is that in the law of contract there are essential elements that must be present in a contract for it to be binding. Apart from these elements, there are other rules that govern the formation of a contract that will be instrumental in uncovering the legal principles that will assist Paula and Sepal Co. to determine their legal position.

Tess made an offer to the Sepal Co. to buy climwits. Indeed it has been held that offer is an expression of willingness to enter into a legally binding contract (Australian Woollen Mills Pty Ltd v The Commonwealth, 1954). The offer was effective as soon as it was communicated by Tess to the company. The offer can be communicated to the offeree on behalf of the original offeror provided than there is proof of authorization (Cole v Cottingham, 1837). It has been held in Storer v Manchester City Council (1974), where the court of appeal affirmed that the offer must have an intention to be legally bound upon acceptance. It is thus submitted that the offer Tess made was a valid offer and one that is capable of acceptance even though it was made on behalf of Paula.

Sepal Co. added new terms when accepting the offer from Tess. They did not entirely agree to the terms of the offer that Tess had made. From the above sentiments, it can be legally stated that Sepal co. made a counter offer. The court in Hyde v Wrench (1840) stated that where new terms are provided in the acceptance, it is regarded as a counter offer which renders the initial offer rejected and therefore no acceptance. In the case in question there ‘was a battle of forms’ in and the court of appeal has held in Tekdata Interconnections Ltd v Amphenol Ltd (2009) that the  last offer win the battle. The last offer made by Sepal that they could supply 14000 climwitts at $16000 with a 10% discount was the final one stood. It is therefore submitted that the contract was properly accepted according to the legal principles and there was a (‘consensus ad idem’ meeting of the minds)

There must be a valid valuable consideration that may include profit, interest or benefit that is undertaken by one party. (Currie v Misa, 1875) The agreed consideration in this case was $14000 which was given to Sepal Co. The consideration was sufficient consideration within the ambits of the law because it was agreed upon based on the freedom of the contract (Chappell v Nestlé, 1960). It has also been stated in White v Bluett (1853) that consideration must be one that amounts to an economic value which in this case, the consideration was with an economic value that cannot be subjected to debate.

Rules Governing Offer, Acceptance and Consideration

Suffice to say, the court will easily presume an intention to be legally bound by a contract where the relationship of the contracting parties is one of a commercial nature and not one that had domestic or family relationship (Edmonds v Lawson, 2000). The presumption of an intention to be legally bound thus flows through to Sepal Co. and Tess in this case.

Having noted that the contract was properly formed and undertaken between Tess and Sepal Co. it is safe to say that Tess claim against Sepal in anyway because the contract was legally binding between the two. Below is an advice based on the assertions made by Paula that she demanded her earlier order which actually was to Woddo Co. and not Sepal. Co. However, the demand now is being made to Sepal Co. These assertions invite the doctrine of privity of contracts to discussion.

It has been held that a party who is entitled to enforce a contract must establish that he or she is privy (part of) to the contract and has given a sufficient consideration (Coulls v Bagot’s,1967). It thus follows that a third who is not a party to the contract is legally barred from enforcing the said contract in question. Further, the doctrine of privity is to the effect that even if the party is a beneficiary of the contract, as long as they are not a party to the contract they do have any mandate to enforce the contract (Wilson v Darling Island Stevedoring Co, 1956). Paula, though a beneficiary to the contract made by Sepal and Tess, she is still a third party who is not entitled to enforce the contract. In fact, the Sepal Co. clearly stated that they had no arrangement with Paula and only agreed to make a contract with Tess.

A valid legal argument can arise to the effect that Tess was acting as agent for Paula who was the principal and was the one to directly benefit. This introduces the relationship created by the law of agency and law of contracts as we try to circumvent the rule in the privity doctrine. For the above contract to be valid Lord Reid has established a four test requirement that must be met for Tess to be legally valid as an agent and Paula as a principal who can enforce her demands Scruttons Ltd v Midland Silicones Ltd (1961). First, the contract must clearly indicate that the benefit will be for the principal. In our case the contract ought to clearly state that the climwitts were for the benefit of Paula.

Secondly, the contract must evidence that there is an agent who is acting on behalf of the principal .Therefore, the contract between Tess and Sepal Co. ought to equally show the same, that Tess was entering into the contract as an agent of Paula.  Thirdly, it must be shown in the contract that the agent had the required legal authority to act on behalf of the principal. In our case in point, it is not in denial that Tess had an express authority inform of a letter to get the climwits on behalf of Paula, but the same was not envisaged in the contract.

Applicability of the Privity Doctrine

Lastly, it must be shown that there was a valuable consideration provided by the agent on behalf of the principal. In as much as there was a consideration given by Paula the contract did not indicate that it was from Paula. Pursuant to the above rules applied to the doctrine privity it is safe to say that Paula does not qualify as a party to the contract and therefore she is not entitled to enforce any demand in the contract.

The challenging question embedded in the entire of the facts in issue is whether Paula can bring a claim against Tess based on the letter instructing her to urgently acquire climwits for her. It can be argued that the letter that was sent to Tess did not spark an intention to create any legal relationship where the eventual result will be an agency agreement. Suffice to say an agency relationship cannot be implied in this case unless evidence is adduced to show that the act of acquiring climwitts on behalf of Paula was one that was habitual and has recurred in a manner that it gained the force of a custom. It can also be argued that, even if an agency relationship is to be construed by the letter, Tess did everything that was necessary and incidental to the way she was expected to do according to the letter and therefore Paula has no claim (Hely-Hutchinson v Brayhead, 1967).

It is a general and widely accepted principle in law that once a document or contract is signed the party signing will be bound by the terms therein whether or not he has read or understood the contents (L’Estrange v Graucob, 1934). In this case, Merco signed the contract and therefore figuratively, he is bound by the terms of the contract. However, a party will not be bound by the contract if the signature was induced by a fraudulent misrepresentation. It is thus important to note that the discussion in this part that will ultimately be advised to Merco shall uncover the fundamental precepts of misrepresentation in law.

A misrepresentation is an untrue statement that induces the other party to enter into contract which has the effects of vitiating the contract. The contract becomes voidable. The House of Lords have had the view that traditionally, English law will not require any pre-contractual good faith from the parties who eventually enter in to a contract (Walford v. Myles, 1992). However, there has been a general judicial willingness and readiness to accept the pre-contractual requirement of good faith which has eventually blossomed to the law of misrepresentation (Philips Electronique Grand Publique SA v. British Sky Broadcasting Ltd, 1995).

Ted was aware of the difficulty that Merco had with English and he made several statements which he knowingly knew to be false so as to persuade and induce Merco to sing the contract. It is thus submitted that for a misrepresentation to be actionable there are various elements that must be met for the action to be successful.

Role of Agency Law

One of the parties must have made a false assertion of fact. Ted made the assertions that many employers recommended the magazine to their migrant employees and that there were only limited number of copies of the magazine left for subscriptions. These were statements of fact which were untrue. It has been held that if a statement is substantially correct then it does not amount to an untrue statement (Avon Insurance plc. v. Swire Fraser Ltd, 2000). It is imperative to note that mere puffs cannot be regarded as untrue statements of facts (Dimmock v. Hallett, 1866). Although these statements were made by a sales person, the statements cannot be regarded as mere puffs or a ‘sales patter’.  It is worth noting that the statement must be a clear untrue statement that does not bring about any ambiguity. (Bisset v Wilkinson, 1927)

The misrepresentation must be made by a party to the contract or an agent representing the party to the contract. It is instructive to note that the contract was between Merco and Eddo Publishing Co and that Ted was a sales agent of the company. In Commercial Banking Co. of Sydney v RH Brown & Co (1972) it was held that the statement can be made by a third party who is not a party to the contract but is an agent of person or company who is a party to the contract.

The other party must rely on the untrue statement to the effect that the untrue statement will influence his or her judgment to enter into the contract. Essentially, the untrue statement must actually induce the other party to sign the contract. It has been held that inducement must not necessarily be the sole factor that led to the misrepresentation but it is also a vital factor that is taken into consideration in determining misrepresentation (Edgington v. Fitzmaurice, 1885). The statements made by Ted were inducing and actually they ended up inducing Merco sign the contract. Additionally, Ted incessantly asked Merco to sign the contract as he repeatedly made the untrue statements. However, a misrepresentation will not be actionable if it did not affect the judgment of the other party expected to sign the contract (Smith v. Chadwick, 1884). Indeed the untrue statements affected the judgment of Merco and she ended up signing the contract.

There are various types of misrepresentation; however, the one that will be suitable and actionable in the circumstances of this case is fraudulent misrepresentation. Fraudulent misrepresentation entails an untrue statement that is knowingly made without any belief in its veracity and the maker is reckless as to whether it is true or false (Derry v. Peek.1889). In fraudulent misrepresentation, the materiality of the statement of facts is not a subject in issue. It has been argued that, even where the statement of fact is not material, the misrepresentation made is actionable and the claimant is entitled to remedies.

It is submitted that if the claimant knew that the statements were untrue at the time they were being made, then there is no inducement in this case (Horsfall v Thomas, 1862). Merco was not aware of any truth in the statement as he merely a visitor to Australia and knew little about what happens there.

Principles of Misrepresentation

Merco has the following available remedies that she can seek while pursuing her action for fraudulent misrepresentation.

Rescission is an equitable remedy that has the effect of putting the parties but to their pre-contractual position. Therefore, the contact can be rescinded; however, the objection to rescind must be made promptly upon learning the true statement of affairs. Rescission will not be possible where the innocent party in a case of fraudulent misrepresentation affirms the contract even though the true statement of facts was brought to her attention. (Long v. Lloyd ,1958)

It is common knowledge that delay defeats equity and if substantial time has elapsed according to the statute of limitation then then rescission will be impossible. However it has been argued that in cases of fraud, where the true statement of facts been brought to the attention of the claimant the limitation of time will not be operative.

For fraudulent misrepresentation damages will be awarded for deceit. The award for damages serves the purpose of to put the claimant in the position he or she was before the contract was made (Smith New Court Securities Ltd. v. Scimgeour Vickers (Asset Management) Ltd, 1997).  It is, however, important to note that, for the claimant to recover damages in an action for fraud there must be proof of harm or injury suffered because of the fraudulent misrepresentation. The proper claim by Merco will be that she has suffered economic loss where she had to the bank and pay money that was a subscription fee of the magazine.

As stated above it is advised to Merco that he can have the contract set aside because misrepresentation has the effect of vitiating the contract thereby making it voidable at the option of the claimant. Merco should also not be worried because he will be entitled to any economic loss that he suffered and be able to recover any amounts of money that he paid in terms of subscription to the magazine.


Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 92 CLR 424]

Avon Insurance v Swire Fraser Ltd [2000] 1 ALL ER Comm 573

Bisset v Wilkinson [1927] AC 177

Chappell & Co Ltd v Nestle Co Ltd [1960] UKHL

Cole v Cottingham  (1837) 8 Car & P75, 173 ER 406

Commercial Banking Co of Sydney Ltd v RH Brown and Co [1972] HCA 24

Coulls v Bagots Executor & Trustee Co Ltd (1967) 119 CLR 460.

Currie v Misa (1875) LR 10 Ex 153

Derry v Peek (1889) LR 14 App Cas 337

Dimmock v Hallett (1866) 2 Ch App 21

Edgington v Fitzmaurice (1885) 29 Ch D 459

Edmonds v Lawson [2000] EWCA Civ 69

Hely-Hutchinson v Brayhead Ltd [1967] 1 QB 549

Horsfall v Thomas [1862] 1 H&C 90

Hyde v Wrench [1840] EWHC Ch J90

L'Estrange v F Graucob Ltd [1934] 2 KB 394

Long v Lloyd [1958] 1 WLR 753

Philips Electronique -v- British Sky Broadcasting Ltd [1995] EMLR 472

Scruttons Ltd v Midland Silicones Ltd [1961] UKHL 4

Smith v Chadwick (1884) 9 App Cas 187

Smith New Court Ltd v Scrimgeour Vickers (Asset Management) Ltd [1996] UKHL 3

Storer v Manchester City Council [1974] 3 All ER 824

Tekdata Interconnections Ltd v Amphenol Ltd (2009) EWCA Civ 1209

Walford v Miles. [1992] 2 AC 128.

White v Bluett (1853) 23 LJ Ex 36

Wilson v Darling Island Stevedoring and Lighterage Co Ltd  [1956] HCA 8.

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