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1.Josie makes a living painting watercolour pictures and selling them from her studio located in her house.

On Sunday 19 February, Sam visits her studio and admires a painting of sunflowers. The price tag indicates it is for sale for $900. Sam offers Josie $700 for it, but Josie says that she cannot accept less than $800.

Sam indicates that would be a good price but asks Josie to hold the painting so his wife could also look at it and approve his decision. However, Sam points out that the earliest his wife could do so would be the following Tuesday, 21 February. Josie said that would be fine and gives Sam a form that reads:

I, Josie, offer to sell Sam one framed picture of sunflowers for $800. This offer shall expire at midnight on Tuesday 21 February.

Signed: Josie

The following day, Monday 20 February, Wendy, an art enthusiast, visits Josie’s studio and is very impressed by the same painting. Without haggling over the price, she buys the painting for $ 900 cash and takes it away with her.

The same day, Josie phones Sam and leaves a message on his answering machine saying that the painting has been sold for $900. Sam does not return the call, apparently unable to retrieve any messages due to the machine being faulty for the past few days.

On Tuesday 21 February, Sam told his wife about the painting and she is very enthusiastic about it. She tells Sam to go ahead and buy it for $800. At 10 am that day Sam telephones Josie and after only managing to greet her, he is cut off as Josie’s telephone goes dead due to a flat battery. Sam is unable to continue the conversation and Josie does not attempt to call him back. Instead, an hour later, Sam decides to post a letter to Josie formally accepting Josie’s offer. The letter arrives in the mail at Josie’s house on Thursday, 23 February.   

  • Advise Josie whether there is a binding contract with Sam. 
  • For the purpose of this part only, assume a contract had been formed between the parties. Explain briefly whether a breach of contract has occurred and identify the remedies that might be available. 

2.The rule in Pinnel’s case expresses the requirement for consideration in simple contracts. Generally, the rule works sensibly and fairly, but there are some situations when it does not.

Discuss this statement, and explain the circumstances in which courts see it as unfair to apply this rule.   

The Essential Elements of a Valid Contract

Whether there is a binding contract amid Josie and Sam?

If a contract had been formed between the parties, then, whether a breach of contract has occurred and what are the remedies that might be available? 

Any contractual relationship amid the parties defines their mutual rights and obligations. But, whenever any two parties are willing to form any contract then there are few legal principles that they must comply with. The same are that there should be offer, acceptance of offer, supporting consideration, party’s capability and the legal intention of the parties. 

Any contract can be initiated only when an offer is made by an offeror to an offeree. An offer is an act wherein the offeror communicates the desired terms and condition to an offeree and expects that the offeree will agree to the same without any changes.  The offeree must gain access to the terms of offer to make it complete. An offer can be oral or written.

An offer can be made to an offeree and can be kept open for specified time. The offeree must accept the offer within such stipulated offer time. Any acceptable after the said time is no acceptance in law. 

The acceptance by an offeree is the confirmation to the offer terms. An acceptable is the mirror image of an offer. If the offeree does not confirm the offer then there is revocation of offer and no later acceptable is considered to be valid in nature.

If any party wants to communicate acceptance then the same must comes within the knowledge of the offeror in order to consider it not valid. If the acceptance is made through post then it is complete there and then and is held in Bressan v Squires. But, when the same is made through telephone, fax, etc, then the same is complete only when the same comes in the knowledge of the offeror.

Now, if any offeror wants to revoke his offer then the same can be one before acceptance. A revocation when made through telephone is complete when the same is left on the answering machine of the offeree within the business hours.

When no offer is made but a person seeks offers from public then it is invitation to treat. In an invitation to treat, the desired people by relying on the terms of an auction, display of goods, advertisement, make offers to the displayer and the displayer (offeree) when agree with the offer, accepts the same then there is valid agreement between the parties and is held in Fisher v Bell.  

The combination of offer and acceptance along with consideration, intention and capacity results in contract formation.

Now, if a contract is made then the parties should follow the terms of the contract. If any party violates its terms then the contract is breached. If very important terms of the contract are violated then the main contract essence is lapsed. Such terms are called conditions and the aggrieved party can cancel the contract and sue for damages. But, when the non-essential terms are violated then such are warranties and the aggrieved party can only seek damages and the contract remains valid.

The Legal Principles Governing Offer and Acceptance

Application of law

The law is now applied to the facts of the case,

A living painting watercolor picture is made by Josie and the same is displayed at her studio with a price tag of $ 900.

Now, as per Fisher v Bell, display of goods or articles with price tags are not offers but falls within the category of invitation to treat. So, Josie is an offeree and must receive offers from public.

Contract with Sam

Now, on 19th February, Josie is visited by Sam and Sam likes the painting of Josie. Against the price tag of $ 900, Sam offered $ 700 to Josie.

Thus, an offer is made by Sam to Josie who is received by Josie, thus, the offer is complete.

Now, Josie is an offeree and she must accept the offer to make a binding contract with Sam. However, no acceptance is made by Josie; rather, she submitted that she can only accept offers which are up to $ 800.

So, there is no corresponded acceptance that is made by Josie to the offer of Sam and there is revocation of Sam’s offer.

Now, Josie offered Sam to sell the painting for $ 800 and kept the offer open till 21st February (Tuesday).

On 20th February, Josie called Sam and communicates that the painting that she intent to sell to her is sold for $ 900. However, the message that is left by Josie is not able to be heard by Sam as the machine was faulty.

Later, Sam’s wife heard about the painting and desired her express for the same. At 10 AM, Sam in order to communicate his acceptance to Josie calls her. However, before the acceptance is communicated to Josie, the telephone line is cut off.

Now, no communication of acceptance took place as the same is not heard by Josie. So, communication of acceptance is very important in order to make it complete.

However, the revocation by Josie of her offer is duly left on the answering machine of Sam and is available to Sam at his business hours. So, the revocation is deem to take place

Now, an acceptance through letter by Sam to Josie is of no relevance because the acceptable is made when the offer is revoked by Josie.  

It makes no difference when the letter arrives. There is no contract amid the two.

Contract with Wendy

On 20th February, Wendy offered Josie to buy the painting for $ 900. Josie agreed and sold the painting to Wendy.

So, there is valid offer and acceptance and a contract is concluded amid the two.

Issue 2

If a contract is assumed to be made amid Josie and Sam, then, if Josie does not provided with the painting then there breach of contract on the part of Josie.

Now, since the supply of painting is the essence of the contract and if the same is not provided to Sam then a condition is violated by Josie.

Thus, Sam has the power to cancel the contract and sue Josie for damages for breach of contract.

The Importance of Communication in Making a Contract Complete

Conclusion

 It is thus submitted that there is no contract that is established amid Josie and Sam. However, if its assumed that there exist a contract then Sam can sue Josie for breach and can cancel the contract can sue for damages.

In the leading case of Stilk v Myrick, it was held by the court that no gratuitous promise no matter how simple and pure it is, is only enforceable in law provided the same is given under seal. This principle was retreated in Williams v Roffey Bros. If any two parties want to establish a valid contract amid them then it is necessary that the promises must be supported with consideration. 

A consideration is a kind of benefit or gain or profit or some advantage which is exchanged amid the parties to support the promises. Consideration is one of the prime elements to make a contract valid and enforceable in law. Consideration need not to be monetary in nature, it can be in non-monetary in nature. It is the promisor who specifies the consideration against the promise that is made by him. In Chappell v Nestle the law behind consideration is discussed. A consideration has to be sufficient and is not required to be absolute. An illusionary consideration is invalid in law and is held in Biotechnology Australia Pty Ltd v Pace. A past consideration is no consideration and performance of existing duty is not regarded as a valid consideration in law and is held in Roscorla v Thomas.

The principles that govern consideration are also applicable when there is part payment of debt. For instance, when a debtor promise to pay part of the debt, then, the same is not a valid consideration in law when the creditors agree for the discharge of the debt. The basic justification is that no less money is capable to satisfy the requirements of the larger sum and thus cannot be hold consideration in law.

This principle was rightly established in Pinnel's Case.

In the leading case of Pinnel's, D was sued by P over a bond. It was argued by D that P on 1st October has agreed to accept £5 2/6d against £8 10s. The amount was in actual due on 11 November but P has agreed to settle the same at a reduced amount on 1st October. It was held by the court that if any person settle his claim at a reduced amount on the day when it is due, then, such settlement is not good in law. A part payment of debt against the whole amount is not valid if the transaction takes place on the day when the whole amount is due.

However, the approach is different when the part payment of the debt against the whole debt is carried on not on the day when the whole amount is due but before the said date. Such transaction is considered to be more beneficial and thus is hold to be valid in law.

The law that is established in the Pinnel's Case was later applied in Foakes v Beer. In Foakes v Beer, Dr Foakes has to pay £2,000 to Mrs Beer post judgment which Mrs Beer obtained against him in previous case. Dr Foakes indented to pay £500 instantaneously and the balance in the form of installments. Mrs Beer agreed and confirmed that no proceedings shall be carried out till the installments are paid. The payment of interest was not discussed by the parties. When all the payments were paid then Mrs Beer bought case for the recovery of interest. It was held by the court that Dr Foakes should pay interest and the part payment of debt in exchange of full settlement was not regarded valid in law.

Remedies for Breach of Contract

The principle is simple, that, if the parties intent to bring variation to the agreement amid them then the same must be supported by consideration. Thus, the simple rule of consideration that if any party is obligated to perform an existing duty, then, there is no requirement to pay extra consideration for the same. Thus, the rule laid down in Pinnel's Case and Foakes v Beer is nothing but the extension of Stilk v Myrick  case.

In Musumeci v Winadell Pty Ltd, Justice Santow submitted that no part payment of debt can be good consideration in law.

But, this rule is not applicable when the part payment is made not in the form of money or when the part payment is made before the due date. Thus, when there is an executor promise amid the parties and one of the parties accepts to take lesser of money for the settlement of a greater amount then the rule does not support the existing duty principle amid the parties. However when the promises are executed in nature and lesser sum of money is accepted against full settlement then it is not a valid consideration in law as a smaller amount cannot discharge whole of the debt. '

The Pinnel's Case is a long standing rule but has been criticized by eminent judges. Even though several criticisms are received and thus there is a need to bring changes to the said rule. In Couldery v Bartrum, the rule was criticized by Sir George Jessel wherein he submitted that a creditor is permitted to take ‘a horse, or a canary, or tomtit’ for the settlement of his claim but is not permitted to take ‘19 shillings and sixpence in the pound’. The same was considered as nudum pactum. 

Lord Fitzgerald further submitted that though Pinnel's Case was a landmark case and was applied in hundreds of cases but now the time has come that the decision that is laid down in the leading case must be now overturned and requires re-consideration.

In Williams v Roffey Bros & Nicholls (Contractors) Ltd, it was held by the judges that if one party promises to undertake a task on behalf of another party and the first party if believes that in order to complete the task some extra payment must be made by the second party, then, the promise cannot be considered as lack of consideration as the extra payment is supported by the practical benefit that is received by the second party. It is analyzed that if part payment is not considered to be a good consideration for the settlement of the whole payment, then, the position of the promisor will always be uncertain and unstable as it is the promisor who has to prove that it is the promisee who has accepted the part payment in settlement of full and this proof is very difficult to establish.

It is thus submitted that there is a need for the re examination of the rule laid down in Pinnel's Case.  Thus, there are few exceptions which are established wherein the rule of Pinnel's Case is not applicable. The same are:

Part payment of the debt by the third party – when a creditor accepts the part payment of money for satisfaction of the full amount when the part payment is made by the third party provided the debtor is relived from any obligation to pay the full amount and is held in Hirachand Punamchand v Temple.

In cases of composition agreements – a composition agreement is an agreement amid the group of creditors and a debtor wherein a percentage of debts is agreed to be received by the creditors for full settlement. In such situation, no individual creditor is permitted to bring a case against the debtor for the recovery of the balance amount and is rightly held in Wood v Robarts. If the suit is permitted then it is a kind of fraud that is taken by an individual creditor upon the other creditors.

Promissory estoppel – As per High Trees House Ltd, if one party has undertaken an action on the promise made by the second party then the second party is not permitted to o back from his words.

Thus, the rule in Pinnel’s case expresses the requirement for consideration in simple contracts as without the presence of consideration such contract are not enforceable. But, the rule works sensibly and fairly, but there are some situations when it does not especially when there is Part payment of the debt by the third party, composition agreements and promissory estoppel.

References

Books/Articles/Journals

Gillies, Peter, ‘Business Law’ (Federation Press, 2004).

Giancaspro, A, Mark, ‘For Your consideration: Old Rules, Practical benefits and a new approach to contractual variations’ 2014) school of law, The University of Adelaide.

Latimer, Paul, ‘Australian Business Law 2012’ (CCH Australia Limited, 2012).

Mole, Robert, ‘contract law case notes’ (2017).

McKendrick, E and Liu, Q, ‘Contract Law: Australian Edition’ (Palgrave Macmillan, 2015).

Case laws

Associated Newspapers Ltd v Bancks [1955] HCA 24.

Biotechnology Australia Pty Ltd v Pace (1988).

Bettini v Gye (1876).

Bressan v Squires [1974] 2 NSWLR 460.

Byrne & Co v Leon Van Tienhoven (1880)

Brinkibon v Stahag Stahl und Stahlwarenhandelsgessellschaft mbH  [1983] 2 AC 34.

Chappel v Nestle [1960] AC 87.

Couldery v Bartrum (1881) 19 Ch D 394.

Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256.

Crown v Clarke (1927) 40 CLR 227.

Foakes v Beer (1883-84).

Fisher v Bell [1961] 1 QB 394.

Hirachand Punamchand v Temple [1911] 2 KB 330.

High Trees House Ltd [1947].

Musumeci v Winadell Pty Ltd. (1994) 34 NSWLR 723.

Pickfords Ltd v Celestica Ltd (2003).

Pinnel's Case [1602].

Roscorla v Thomas (1842).

Stilk v Myrick [1809] EWHC KB J58.

Williams v Roffey Bros [1990] 2 WLR 1153.

Wood v Robarts (1818).

Online Material

Julie Clark, ‘Australian contract law’ (2012) < https://www.australiancontractlaw.com/law/formation-agreement.html>.

Julie Clark, Australian contract law – consideration’ (2016) < https://www.australiancontractlaw.com/>.

The studentlawyer , ‘Is accepting less ever desirable?’ (2012) < https://thestudentlawyer.com/2012/08/08/is-accepting-less-ever-desirable/.

The Law Teacher, ‘ Part Payments of debts’ (2017) https://www.lawteacher.net/lecture-notes/contract-law/consideration-lecture-2.php.

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