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Contract Law Case Studies

Contract Law Case Studies

Contract law is made up of a variety of regulations and laws enacted to enforce promises made under certain conditions. A contract is a legally binding agreement which requires parties to honour any promises made to another party. Contracts are entered into every day by individuals and businesses alike. A legally binding contract can be as simple as a transaction carried out by purchasing a loaf of bread from a convenience store, or as complex as a million dollar, hundred page credit agreement made between two businesses.

How are contracts formed?

  1. Agreement – The first step towards establishing a valid contract is an agreement of some sort, usually consisting of an offer made by one party which is accepted by another party or parties. To be legally binding, the contract must be based on an agreement which is not ambiguous, vague, or incomplete. All parties involved must reach consensus on the agreement.
  2. Consideration – This consists of the price or cost requested by and paid to whichever party has made the offer, in exchange for them performing what was offered. Consideration in this form is required for a contract to be legally binding.
  3. Intention to create legal relations – All parties to the contract must possess the intention to enter into a legal relationship through that contract. Consideration (price/payment) is usually evidence enough of this intention, though not always. This intention can be detailed in the terms of the contract.
  4. Capacity – Under law, some persons do not have the ability to enter into enforceable contracts. In this case, the ability to enter a contract or not is known as ‘capacity’, which is based on perceived vulnerability to exploitation. Minors and people affected by psychoactive substances such as alcohol, for example, do not have the legal capacity to enter a legally binding contract (with some exceptions, usually for simple contracts such as minor transactions).
  5. Formalities – Some types of contracts are subject to certain formalities. For example, a contract for the sale of a house must be issued in writing in order to be legally binding.

Agreement – AGC (Advances Ltd) vs McWhirter, Supreme Court of NSW (1977) 1 BLR 9454

This case relates to the first requirement of any legally binding contract, agreement. In this case, the plaintiff had put up a property for sale at auction, subject to a reserve. The defendant made a bid of $75,000 which was the highest bid. When this bid was not accepted by the plaintiff (based on concerns over the defendants ability to pay), the defendant claimed a legally binding contract had been entered when they made the highest bid.

In this case, the court ruled that bidders at auctions are entitled to make offers, but that offer does not need to be accepted by the seller. Therefore, auctions act as an invitation to treat. This means that agreement was not reached, as the seller refused the bidder’s offer. Therefore a legally enforceable contract was not entered in this case on the basis of lack of agreement.

Capacity – Blomley vs Ryan (1956) 99 CLR 362

This case involved the sale of a farm by Ryan to Blomley. At the time the contract was entered, Ryan was suffering from prolonged and excessive alcoholism. Blomley knew this but went ahead with the contract. Ryan tried to call off the sale but Blomley took him to court, seeking specific performance (an order from the court to carry out the contract).

In this case, it was found that Blomley was aware of Ryan’s persistence problem with alcoholism, and the court noted that Ryan was ‘seriously affected by drink’ when the contract was entered. It was subsequently found that Ryan therefore lacked the capacity to enter a legally binding contract in this case, especially seeing as Blomley was aware of Ryan’s impairment and sought to benefit from it.

Intention to create legal relations – Air Great Lakes Pty Ltd vs KS Easter (Holdings) Pty Ltd, Supreme Court of NSW (1989) 2 NSWLR 309

This case involved the proposed sale of an airline to Easter by Air Great Lakes. Air Great Lakes claimed to have entered into a contract with Easter, which Easter subsequently refused to honour. Air Great Lakes sought damages from Easter, who claimed that they did not intend to create a legally binding agreement and that Air Great Lakes was aware of this.

The court found that the contract was not to be imposed as Air Great Lakes was aware of the fact the Easter did not intend for the agreement to be legally binding.

The above cases illustrate the importance of contract law, in that misunderstandings in this area can have costly consequences. It is the obligation of parties to ensure that they are aware of what constitutes a legally binding agreement should they seek to enter an agreement that is enforceable. For this reason, it is advisable that anyone seeking to create an important or valuable contract should have that contract drafted or reviewed by a contract lawyer to ensure it is legally binding and able to be enforced.