Elements of a Simple Contract and Misrepresentation

Part A

The case study deals with a simple contract, which is not required to be in writing. The elements of a simple contract are:

1. The parties to it must have intended to be legally bound by it.
2. There must be an offer by one party and an acceptance of that offer by the other party.
3. There must be a valuable consideration.
4. The parties to it must have the ability to contract. For example, persons 18 years of age and the mentally disabled cannot in most cases have contracts enforced against them.
5. Its terms must be sufficiently certain.( journal – article ref )

Intention of the Parties

To create a contract there must be a common intention of the parties to enter into legal requirements, mutually communicated explicitly or impliedly (Rose and Frank Co v JR Crompton & Bros Ltd).

Rose v Crompton Bros (1925)

The defendants were paper manufacturers and entered into an agreement with the plaintiffs whereby the plaintiffs were to act as sole agents for the sale of the defendant’s paper in the US. The written agreement contained a clause that it was not entered into as a formal or legal agreement and would not be subject to legal jurisdiction in the courts but was a record of the purpose and intention of the parties to which they honorably pledged themselves, which it would be carried through with mutual loyalty and friendly co-operation. The plaintiffs placed orders for paper which were accepted by the defendants. Before the orders were sent, the defendants terminated the agency agreement and refused to send the paper.

It was held that the sole agency agreement was not binding owing to the inclusion of the “honorable pledge clause”. Regarding the orders which had been placed and accepted, however, contracts had been created and the defendants, in failing to execute them, were in breach of contract.

It is open for the parties to use convey language to point out an intent or do not intent to enforce legal obligations on each other. On the other hand, this intention can be impliedly from the conditions. In this case it could be supposed that the intention was upon creating a legal obligation on Michael to Boris even though the surroundings were informal. As Latimer (2009) depicts that the courts use an objective test in making a determination about the intention of the parties. In making an objective determination of the parties, intention the court looks at the surrounding circumstances and asks if a reasonable person would regard the agreement as intended to be binding. (Latimer 2009, p 207)

An Agreement – offer and acceptance

An offer is a pledge to do or not to do something that is capable of acceptance by another person. When an offer is accepted by another person, provided that the other legal requirements for a contract are made out, a legally binding contract is formed. An offer is made by an offeror to an offeree. Baker (1996 ) depicts that when an offer is made, it may be lapsed; may well be rejected; or can be revoked prior to acceptance which is subject to any conditions attached to the offer, or possibly a counteroffer may be made, which automatically rejects the offer preceding it. These events are significant in the context of contract disputes as it is the order of events that determines the extent of any contractual relationship between the parties in the circumstances. For instance if an offer is met by a counteroffer, the original offer cannot form part of the contract, as it has been implicitly rejected at law. One then moves to the counteroffer to ascertain whether that ‘revised offer’ has been accepted. If it has, then that will form the subject matter of the contract; if not, one move to the next event in time to ascertain whether or not a binding contract has been formed, and so on.

An invitation to treat should be distinguished from an offer. An invitation to treat is an invitation for someone to make offers in respect to the particular goods or services. An invitation to treat thus cannot be accepted to form a legally binding contract.

Invitations to treat and offers should be differentiated from a declaration of intention, which is a statement that offers will be invited in the future.

Acceptance on the other hand of an offer creates a legally binding contract provided that any persisting prerequisites are satisfied. An offer may be accepted any means, however if the offer specifies the means by which it must be accepted, then only that method will suffice to perfect the formation of the contract. (Latimer, 2009)

Acceptance is usually communicated either orally or in writing. It may be inferred by the conduct of the parties. It is not open for the offeror to say that the offer will be treated as accepted by the offeree unless he hears differently from them. Mere silence and inaction is inadequate to constitute an acceptance.

Acceptance must take place while the offer is in force, namely that it has not been revoked or allowed to lapse. It must be on the same terms as the offer. Where there is a variance between the offer and the purported acceptance, the purported acceptance is treated as a counteroffer.

Furthermore, acceptance must be unconditional; that is to say for example if some further step is required, then the communication will not be considered an acceptance. For instance, if the offeree states the acceptance is subject to contract, the communication cannot be considered an acceptance as another step would be required to properly form the contract. Lastly, the acceptance must be communicated to the offeror. Communications (email, facsimile, SMS message or text message) are equally effective from the time they are received by the offeror. Acceptance made by letter may be considered effective when the letter was posted, rather than when it was received by the offeror (the ‘Postal Acceptance Rule’). As Baker (1996) illustrates that a contract is formed when the acceptor does something which indicates an intention to accept the offer (for example, sending a letter which states that he or she accepts the offer).

Consideration

Consideration is the thing of value that one party promises for the contracting party. In Currie v. Misa (1875) Lush J. defined consideration as A valuable consideration, in the sense of the law, may consist in some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered, or undertaken by the other. Sufficiency of the consideration is measured as of the parties’ entry into the contract, not at the time for performance or at the time of trial. To measure the adequacy of the consideration at any other time would deprive the buyer of the benefit of his bargain

Promissory estoppels

Promissory estoppel has a major impact on the law of consideration. It consents to a party to recover on a promise even though that promise was made without consideration. Essentially it prevents, or estops, a person from arguing that his or her promise should not be upheld. It also requires that reliance on the promise was reasonable, and that the person trying to enforce the promise actually relied on the promise to his or her detriment. The precise legal requirements for promissory estoppel may vary between jurisdictions. (Latimer, 2009)

Capacity of the parties

A valid contract may be made by any person recognized by law as having legal personality that is natural persons, corporations and the Crown. It is now generally possible to sue the Crown as of right for breach of contract.

Conversely, the following classes of persons are in law incompetent to contract, or are only capable of contracting to a limited extent or in a particular manner as in contrast to the case study:

• Minors – The age of majority is 18 years as stipulated in the Minors (Property and Contracts) Acts 1970 (NSW).

• Mentally ill – The original rule of law was that a contract with a person of unsound mind was void, because there could be no “consensus ad idem”- meeting of minds. This was later qualified by a rule that a person could not plead his own unsoundness of mind to avoid a contract he had made.

• Intoxicated -the fact that a party was drunk when he supposed to enter into a contract may be a defense to an action on the contract; and it has been said that drunkenness is in this respect on the same footing as unsoundness of intelligence.

Certainty of terms

Means that all the requirements and stipulations for the performance of a contract must be known to the contracting parties before the contract is signed. (Marsh, S. B. & Soulsby, J. 1975) portrays that even if the offer and acceptance are apparently completed, there will still be no contract at all even if the parties have agreed upon is not certain.

Application of the aforesaid statement of law to the facts of the problem

The main issue to the case is whether it’s a contract or not, however, from the analysis it could be said that that there was a simple contract formed. Michael intended to purchase a car in order to travel back and forth to the university with greater ease. Furthermore, upon approval of his loan, he began to search for the car. In addition, Boris proposed to sell his car to Michael, which also binds to the first element of the simple contract that the parties to it must have intended to be legally bound by it. Latimer described that ‘the law presumes that persons who agree on commercial matters do intend legal enforceability’. Next paragraph discusses on the issue of offer and acceptance and counter offer related to the case study.

Michael was offered the car with the price of $2000.00 by Boris, Michael liked the condition of the car but $2000.00 was out of his budget, however, he counter offered that offer and wrote back to Boris that he would purchase the vehicle for $800.00 thus resulting in cancellation of the previous offer by Boris as Latimer stated that ‘A counter-offer (cross-offer) by the offeree (Michael) rejects (destroys) the original offer’. Now, the offer has come from Michael to Boris, in the form of counter offer and Boris has accepted the counter-offer and promptly advised Michael through the original method of communication, i.e. postal method. As seen in the case of Adams v Lindsell (1818) 1B & ALD681;106ER25058, as the offeree successfully sued for breach of contract, as the letter of acceptance was posted on the 5th September but was received on the 9th of September. The postal acceptance rule applied in this case. In addition, Latimer (2009) stated that ‘A contract is formed when the letter is posted (not when the stamp is cancelled) even if the offeror is not aware of the posting or the letter lost or is never delivered’. Therefore as the original method was through postage, it could be concluded in considering the above facts that the contract is formed. Next paragraph elaborates valuable consideration.

Consideration is the thing of value that one party promises for the contracting party. In this case executory consideration has taken place when Michael made that counter-offer to Boris; he affirmed that he would purchase the car for the value of $800.00. Boris however, losing some amount of money agreed to sell the car, for $800.00 in that consideration that he is a family and on the presumption that this transaction will take place at a later date. Promissory estoppel also can be included in here as its has been seen by the high court in Legione v Hateley (1983) 152 CLR 406 legal relations ships exists between two parties, where one promises in clear terms, such as above, where a promise has been made by Michael to Boris in clear terms. Capacity of the parties is discussed in the following paragraph.

Capacity of parties mean that the contract may be made by any person recognized by law as having legal personality that is natural persons, corporations and the Crown. It could be seen that as Michael is a university student hence 18yrs of age and in addition having his loan approved confirmed that he could enter into legal contract. Having all the conditions of the capacity of parties met, it could be argued that this part of the simple contract has been fulfilled as well. Now, we move to the next and the final leg of simple contract to come to a conclusion if the simple contract is being made or not. The certainty of terms and as the meaning suggest that Michael was certain in buying the car at $800.00 and on the other hand Boris was certain to sell his car to Michael for $800.00. So both parties were definite in their dealings which constitutes to a simple contract.

Conclusion and Remedies

In conclusion it could be held that a simple contract has been form by Michael to his uncle Boris in his dealings to purchase a car. All the elements of the simple contract have been fulfilled. However in remedy, we could look further at Michael’s current age as not stated in the case study, since minors of less that 18yrs cannot enter into a contract. Another remedial action could be refuted on the number of days given by uncle to Michael to consider the purchase. One week was given, however, looking at the transactions from the case study; one can say Michael has called within a week and cancelled agreement.

Part B

This question concerns the area of misrepresentation. A misrepresentation is an incorrect statement of fact made by one contracting party that is relied on by the upset party, which tempts him to enter the contract, and as a result of which he suffers loss. The statement must be of fact, not law. A statement of opinion is not actionable unless it can be proved that the view was never indisputably held. A verdict of misrepresentation allows for a remedy of rescission and sometimes compensation depending on the type of misrepresentation. For an action to be successful, some criteria must be met in order to prove a misrepresentation. (Latimer, 2009)

These include:

• A false statement of fact has been made,

• The statement was directed at the suing party and

• The statement had acted to induce the suing party to contract.

A misrepresentation may be fraudulent as being deliberately dishonest within the definition of fraud laid down in Derry v Peek, negligent that is made carelessly without having checked the facts, but not necessarily negligent within the twisted meaning of the word or an innocent such as a genuine and innocently made mistake.

Fraudulent Misrepresentation

Fraudulent misrepresentation was defined by Lord Herschell in Derry v Peek (1889) as a false statement that is “made (i) intentionally, or (ii) without belief in its truth, or (iii) recklessly, careless as to whether it be true or false.” Therefore, a fraudulent representation is the basis of the tort of deceit, and the remedy of injured party is not action but action in the tort of deceit. (Latimar, 2009)

Negligent Misrepresentation

This is a false statement made by a person who had no reasonable grounds for believing it to be true. Misrepresentation Act 1972 (SA) does not require the representee to establish a duty of care and reverses the burden of proof. Once a party has proved that there has been a misrepresentation which induced him to enter into the contract, the person making the misrepresentation will be liable in damages unless he proves he had reasonable grounds to believe and did believe that the facts represented were true. The Fair Trading Act incorporates the equivalent to s52 of the Trade and Practice Act but strikes at ‘persons’ not just ‘corporations’.

Innocent Mispresentation

This is a false statement which the person makes honestly believing it to be true. It is made in good faith; hence there is no remedy for innocent misrepresentation in tort. (Latimar, 2009)

Application of the aforesaid statement of law to the facts of the problem

Having delineated the key principles, it could be implied that the case is a misrepresentation. Alfred (The statement was directed at the suing party) entered into a written contract to purchase a clock from Benjamin for $2000.00. Benjamin verbally advised that the clock was 285 years old (The statement had acted to induce the suing party to contract), which is called representation. However, the written contract makes no reference to the age of the clock Later, Alfred finds out that the clock was only 28 years old and worth less then $2000.00 (A false statement of fact has been made)and this constitutes to misrepresentation. As seen in the case of Vettese v Kemp (2000) sasc154: (2000) 77sasr 53106, ‘the purchasers were awarded damages under s 7(1) of the South Australia Act against their vendors for the misrepresentation of the vendors’ agent that implied, incorrectly that the approval was sought from the council for the retaining wall’. Following this case, Alfred may claim damages for fraudulent misrepresentation in the tort of deceit. The purpose of damages is to restore the Alfred to the position he occupied before the representation had been made. (Latimer, 2009)

In fraudulent misrepresentation, the test of isolation in deceit is that the Alfred may recover for all the direct loss incurred as a result of the fraudulent misrepresentation by Benjamin, regardless of foreeseability: such as seen in Doyle v Olby (Ironmongers) Ltd (1969) 2 QB 158 where The claimant, Doyle, purchased a business from the defendant, Olby, as a result of a several fraudulent misrepresentations relating to the profitability and operations of the business. He suffered loss and was awarded the actual damages. Alternatively, Alfred may claim damages for negligent misrepresentation under s174 (1) of the Misrepresentation Act 1972 at common law and would be awarded with damages.

Conclusion and Remedies

In conclusion it could be seen that Alfred was being wrongfully made to enter into the written contract with a direct false statement about the clocks age. That fact has tempted Alfred to enter into the written contract to purchase that clock. In addition a false statement was being made in the written contract. This has been the case of misrepresentation and Alfred may claim damages for fraudulent misrepresentation in the tort of deceit. Remedies for misrepresentation are rescission and a claim for damages under the tort of deceit. The rescission restores Alfred and Benjamin to the positions they were before entering into the contract and a claim damages for genuine losses that are recoverable such as in this case $2000.00.