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Essential elements of a valid contract

Question 1

Avinash is a regular visitor to a local café that provides a self-service facility where customers have the option of selecting a drink or food item from a menu displayed on a touch screen located near the counter. To select a product, a customer only has to touch an image or icon showing the desired product, and then touch a virtual ‘OK’ button to submit an order. The order is relayed to the café’s front counter where the cashiers can view it on their own screens.

Customers using the touch screen are immediately issued with a printed ticket containing an order number and the price payable which they present at the front counter for the cashier to confirm. At that point, the customers pay for their purchases and await delivery.

This system is designed to save time during peak periods and is very popular. Some customers place their orders as takeaways, while others, like Avinash, prefer to be seated and consume them on the premises. These preferences are preselected by the customers when they use the touch screen.

When Avinash reached the cashier, he paid $4 for the coffee he had ordered and then took a seat waiting for it to be served at his table.

The next morning, Avinash returned and ordered his usual cappuccino- and for the first time, a Danish pastry- using the self- service facility. The total cost was $7.50 which he duly paid. As he sat in the café consuming his drink, he bit into the pastry and struck something hard, breaking a tooth. He examined the chewed remains and found a piece of metal that had somehow been lodged in the pastry.

Avinash alerted management to this incident and demanded compensation for his anticipated dental repair. The manager expressed regret and directed Avinash to the ticket he had received which on its reverse side, contained a clause stating:

This café accepts no responsibility or liability for any injury caused to customers by consumption of food or drink sold.

In response, Avinash exclaimed, ‘I’m a consumer and I have rights!

Required

  • Explain how the contracts Avinash made with the café were formed.

You will need to address all the essential elements of a contract, as well as analyse the legal status of each step or event that led to the café supplying Avinash with its products. Refer to relevant case law. In this part, do not discuss the impact, if any, of consumer protection laws.

You may, but are not obliged to use the IRAC format for this part, given that each step or event must be analysed separately.

  • Explain whether the café is legally entitled to rely on the clause printed on the ticket to avoid liability in relation to Avinash’s injury.

For the purposes of this part you should consider both common law as well as legislation ( also confirming whether Avinash is a ‘consumer’).

Question 2

In contrast to express terms found in a contract, implied terms can arise in a variety of ways and are beneficial to at least one of the parties to the contract. Some contracts may contain both express and implied terms, but the ways in which these two types of terms operate are significantly different from one another.

Required

Discuss this statement by reference to cases and legislation, providing examples of each.

You need to justify your view as to whether these two types of terms are ‘significantly different from one another’.

In addition, include as an example in your discussion, references to the types of terms indicated in the facts of question 1.

Essential elements of a valid contract

Issue:

  • Was there any contract formation between Avinash and the café?
  • What are the essentials of a valid contract?
Relevant law 

There are four major essentials that determine the validity of a contract. These major essential elements of a valid contract are:

  • Offer
  • Acceptance
  • Consideration
  • The intention of creating a legal relationship

Offer:

An offer can be referred to as a statement of expressing the intention to bind two parties in a contractual relationship. The person making the offer is called the offeror and the person to whom it is made is called the offeree. The offer made by an offeror to an offeree must be a complete one, without any ambiguous or indefinite terms. In the remarkable case of AGC (Advances) Ltd v McWhirter it was held that where an offer is incomplete or has indefinite terms, it shall not be considered as an offer, but a mere invitation to offer.

Acceptance:

Secondly, acceptance of such offer is another essential that is required in a valid contract. It is to be noted that, after an offer is made, acceptance is the next step that follows. Only a person, to whom an offer has been made, can make acceptance of such offer. Acceptance of an offer can only be done on the terms of the offer and in case of any change in the terms of an offer it shall not constitute acceptance, but a counter offer. To constitute a valid, the acceptance of the offer must be communicated to the offeror. In the case of Hyde v Wrench, the principles of a valid acceptance had been clearly demonstrated.

Consideration:

The next essential element of a valid contract is consideration. According to the common law, in order for the contract to binding upon the parties, consideration is necessary. Consideration can be regarded as the price for the fulfillment of the contract, which the promisor has to pay to the promisee, in a contract, as held in the Carlill v Carbolic Smoke Ball case. In the remarkable case of Chappell & Co Ltd v Nestle Co Ltd, the nature of consideration was described.


Intention of creating a legal relationship:

A contract is an agreement that must be made legally binding upon the parties to the contract. It was stated by the court in the case of Carlill v Carbolic Smoke Ball that the intention of the parties to create a legal relationship would be analyzed from the view point of a reasonable person acting in the same situation as the plaintiff. In the case of Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd, it was held that for identifying the intention of the parties to create a legal relationship, an objective test must be applied.

Application

Legal status of self-service supply of food and drink

In the given case, with regards to the decision in the AGC (Advances) Ltd v McWhirter case, it can be said that the self-service facility of the café, providing a virtual menu to the customers, is an invitation to offer and the offer itself. It is merely an invitation to offer to the potential customers in the café. In this case, the placing of an order by Avinash, from the virtual menu, constitutes an offer.

Similarly, in the given case, the acceptance of Avinash’s order by the café constitutes a valid acceptance of the offer. In this case, the Café accepted the order on the proposed terms of Avinash, which are basically the terms provided at the time of the invitation of the offer. In this case, the acceptance of the offer was communicated to Avinash by way of a printed ticket, provided to Avinash, by the Café.

In this case, the communication of acceptance was done by the issuance of the ticket , which also reflected the intention of the café to enter into a legal contractual relationship with Avinash. Based on the decision in the Air Great Lakes Pty Ltd case, it can be said that any reasonable person, placed in the situation of the offereor, would have acted in the same manner and would have intended to create a legal relationship while entering into the contract.

As to consideration, in the given scenario, the drink and food provided by the café and the price for the same by Avinash is the consideration, which can be supported by the decision in the Carbolic Smoke ball case.

Therefore, it can be stated that there was a valid contract formed between Avinash and the Café, as all the necessary essential elements were present in the contract.

Issue:

  • Does the café owe any liability for damages to Avinash?
  • Can the clause on the printed ticket be treated as a ground on which the Café can rely upon?
Relevant law

The issue in the given case is regarding the exclusion clause in a contract.  An exclusion clause is a particular term in a contract that aims to limit the liability of one of the parties to a contract. In the landmark case of L'Estrange v Graucob, the provisions regarding an exclusion clause in a contract were clearly discussed.

However, in the case of Darlington Futures Ltd v Delco Australia Pty Ltd, the court held that exclusion clauses in business contracts would be treated in the same manner as a in any other contract.

An exclusion clause, in order to be effective, must be incorporated along with the terms of the contract and it must be brought into the notice of the parties, entering into such contact. Basically, the presence of an exclusion clause in a contract, at the time of its signing, will make it effective. However, if a contract is not signed, the exclusion clause can exist in the documents, where the terms and conditions of the contract are printed. In the case of Thornton v Shoe Lane Parking Ltd, it was held that a mere representation of an exclusion clause at the back of a ticket will not limit the liability of the defendant. This was one of the remarkable judgments in the area of contract law.

Presence of an exclusion clause in the contract

According to the Competition and Consumer Act 2010 (Cth), vide section- 64A, modifications to the terms and conditions in a contract are only permissible in certain situations for providing remedies to the suppliers against claims of the customers due to the exclusion clause. However, such remedies are not available to the suppliers, where the goods and services are used for personal, domestic and household purposes. According to section-64 of the Competition and Consumer Act 2010 (Cth), it can be said that warranties and remedies granted to customers cannot be taken away by virtue of any term in the contract, and any attempt to do so will make it void.

Section 3 of the ACL provides an objective definition of consumer. It can be said that the definition of consumer is further elaborated in the section 4b of the CCA. Thus by summarizing the provisions as stated before in the acts it can be said that consumers can be defined as those individuals

  • who acquire goods and services accounting for $40,000 or less
  • who acquire goods and services for the purpose of domestic, personal and household consumption
  • Acquiring vehicles for the purpose of transporting goods on public roads
  • Acquiring goods for the purpose of resupplying them, transforming them and using them for manufacturing, repairing other goods


According to section 18 of schedule 2 of the ACL it can be said that a person who is involved in trade and commerce is not permitted to engage in a behavior which is deceptive and conduct which is misleading in nature. Section 51-59 state of the aforementioned act provides the consumers with certain guaranties in relation to supply of goods. Sections 60-64 of the ACL provide consumer guaranties in relation to supply of services. According to section 260 of the aforementioned act it can be stated that a supplier or consumer has legal obligations in case the goods and services provided to the consumers suffer from major failure in complying with the guaranties of the consumers as provided by the ACL.  

Application

In the given case, there was a contract formed between the café and Avinash when Avinash placed an order for cappuccino and the Danish pastry and the acceptance of the order was made when the café accepted Avinash’s order and issued the ticket, which is a proof of the communication of such acceptance. In this case, it must be noted that Avinash was not made aware of the exclusion clause in the ticket and therefore, it would not limit the liability of the café for any injury to its customers due to consumption of any food or beverages sold by the café.

  Therefore, as according to the decision in the case of Thornton v Shoe Lane Parking, which stated that a mere representation of exclusion clause shall not limit the liability of a party in a contract, the café cannot escape its liability towards Avinash as there was an exclusion clause, as there was a mere representation of such exclusion clause and it was not brought into Avinash’s notice, which should have been brought into the notice of Avinash by the café, as stated in the Thorton case.  

The exclusion clause would have been treated as a primary term of the contract, had it been mentioned prior to the contract formation, as it was held in the case of Darlington Futures Ltd v Delco Australia Pty Ltd. Furthermore, the food and beverages sold by the café are for personal, domestic and household purposes and the café is therefore, not permitted limited liability due to the exclusion clause. In this case, the attempt of the café will make this exclusion clause void according to section-64 of the Australian Competition and Consumer Act 2010 (Cth). 

Therefore, it can be concluded by saying that the café will be held liable against the claim of Avinash and will not be able to escape its liability by virtue of the exclusion clause, as the clause was merely represented behind the back of the ticket and was not brought to Avinash’s notice.

The terms and conditions in a contract basically mean the rights and obligation of the parties to a contract. In every valid contract there are two sets of such terms, which are necessary to operate the binding relationship binding the parties. They are called the express and implied terms of contract.

As held in the case of Wilson v Best Travel, an expressed term in a contract means a term which is clearly mentioned in the contract and to which the parties have agreed upon while entering into the contract.

Conditions:

It is to be mentioned that conditions are those terns of the contract without which the contract would have no meaning. Therefore, it can be said that conditions of the contract are the primary terms and the non-fulfillment of the same by either of the parties would result in breach of the terms of the contract. In case of a breach of the conditions of a contract the aggrieved party has the right to repudiate the contract and claim damages.

Warranty:

Warranties are the less important terms in comparison to the conditions of the contract. It is to be mentioned that non fulfillment of the warranties by either of the parties to the contract does not give the aggrieved party to repudiate the contract. However such aggrieved party has the right to claim compensation or damages for the breach of the warranties by the other party. In the case Wallis Sons and Wells v Pratt the court held that any party could make change the warranties into conditions for the purpose of claiming damages from the other party.


Intermediate terms

It can be said that intermediate terms fall between conditions and warranties. These terms are classified into either warranties or conditions depending upon the seriousness of the consequences of the breach of such intermediate terms. It can be said that the innocent party’s remedies are decided by the court in view of the seriousness of the consequences of the breach. In the case Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd it was held by the court that the intermediates terms have the characteristics of warranties at certain times and conditions at other times.   

Moreover, there are several types of expressed terms in a contract. They are:

  • Displayed terms- Expressed terms need not be necessarily discussed by the parties. The terms of a contract can be incorporated in a written form, which may be displayed on notice boards or tickets, as it was held in Thornton v Shoe Lane Parking Ltd.
  • Pre- Contractual statements-Statements, made prior to the formation of a contract are difficult to access or examine. For assuming these statements it is necessary to assess and categorize them individually under the following categories:  
  1. Collateral contract- Pre- contractual statements can initiate a collateral contract and in case it has been established, both the main and the collateral contract exist together.
  2. Term of a contract- As stated in the case of Ellul and Ellul v Oakes,the court stated that the intention of the parties to form a legal relation must be ascertained by application of an objective test, it can be stated that for a pre-contractual statement to be established, it is necessary that the parties had intended such statement to be promissory and legally binding upon them.   
  3. Representation- Pre- contractual statements can be treated as representation of terms, but in cases, where such representations are false, parties to the contract shall be entitled to remedies.
  • Incorporated terms while dealing- Express terms can be incorporated in a contract, even before the contract formation, based on the dealing of the parties. According to the decision in the case of Henry Kendall &amp & Sons v William Lillico & Sons Ltd,the parties to a contract must have a regular dealing over a reasonable period, which can be considered as reasonable, prior to the contract formation. In such cases, the contract terms which are the latest are usually incorporated.

In a contract, implied terms are those, which are not expressed or agreed upon by the parties, but it is believe to be added by the courts and the statutory provisions. According to the remarkable case of The Moorcock, it was held that an implied term is attached to a contract by the courts when the implementation of such terms are necessary for fulfilling the other terms in a contract and for keeping the contract valid. It must be assessed from a the view point of a reasonable person for finding whether a reasonable person would have known about the existence of such implied term. The court, in the case of Shirlaw v Southern Foundries, the court held that implied term cannot be added to a contract just because it is fair to do so. 

In the given case, the contract between Avinash and the Café was formed when Avinash placed the order for the food and the café accepted it by issuing the printed ticket, which is the proof of such acceptance. The order was placed on the terms of the terms of the invitation to offer and was also accepted on the same terms. Therefore, in this case, the contract terms were clearly expressed.

Conclusion

It can be stated that there are two types of contract terms; implied and the expressed terms. Implied terms are those which are assessed by courts and statutes and are not expressed, but necessary for carrying out the expressed terms and expressed terms are those, which are clearly specified and agreed upon by the parties. After analyzing both types of contract terms, it can be stated that the contract terms in the given case are clearly expressed.

AGC (Advances) Ltd v McWhirter(1977) 1 BLR 9454

Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd [1989] 2 NSWLR 309

Carlill v Carbolic Smoke Ball[1893] 1 QB 256

Chappell & Co Ltd v Nestle Co Ltd[1960] AC 87

Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500

Ellul and Ellul v Oakes (1972) 3 SASR 377

Henry Kendall &amp & Sons v William Lillico & Sons Ltd [1969] 2 AC 31

Hyde v Wrench[1840] EWHC Ch J90

L'Estrange v Graucob [1934] 2 KB 394

McKendrick, Ewan. Contract law: text, cases, and materials. Oxford University Press (UK), 2014.

Shirlaw v Southern Foundries [1939] 2 KB 206

The Moorcock (1889) 14 PD 64

Thornton v Shoe Lane Parking Ltd. (1971) 1 All ER 686

Willmott, Lindy, et al. "Contract law." (2013)

Wilson v Best Travel [1993] 1 All ER 353

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