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Contract Lecture - Historical and Developmental Issues

Author: Dr Robert N Moles

Contract Law Homepage
A state of Injustice - table of contents
Losing Their Grip - The Case of Henry Keogh - table of contents

Types of contract

What areas of social life does contract concern itself with? Practically everything. Instances may be easier to work with than a general definition. Some of these arrangements are made informally (buying food from your local supermarket); others involve written documents, either as a matter of practice, because of the importance of the transaction or because of some statutory requirement (a charterparty, an insurance policy, or a sale of land).

We should all be reasonably familiar with the following situations and what we could learn from them about contract law:

Buying and selling - anything from a newspaper to large machinery or a fleet of ships. It is obvious that in many situations, writing is not necessary, although in situations of any significance, it may well be advisable - for evidential reasons.

Employment - legislation may sometimes require such contracts to be in writing. These contracts may also have effect after the employment ceases to prevent valuable skills going directly to a competitor. Such restrictions could be "in restraint of trade" and not allowed by legislation.

House purchase - contract can take place in stages - the agreement to buy and sell followed by completion of the formal agreement after building inspected and finance has been arranged.

Renting a property - this may be controlled by legislation to protect a tenant from eviction, or to deal with bonds (or deposits) which amount to security against loss or damage.

Obtaining of services - here (as in the other types of contract) terms may be implied by the court or by legislation. A person holding themselves out to be an "electrical contractor" will be required to have skills appropriate to the tasks which they undertake.

We will not look in detail at any one of these areas - the factors which we will look at will be the common ground from which many of these specialised areas have developed. It may well be the case that the factors we refer to in this course will have been deliberately altered by the courts or by legislation in any one of these specialised areas.

Contract and Torts

Liability in torts is imposed by the law directly on the activities of the individual. It is different from liability in contract which is based upon the voluntary undertaking of obligations by the individual. For this reason, contract law is sometimes described as a system of private law-making.

However, as we will also see, there is an element of public policy involved in contact law, and sometimes contracts are declared to exist where, on the application of normal contract principles we would not have expected to find them. Thus the distinction between contract and torts is not as great as we might initially think. Indeed, some writers have gone so far as to suggest that the distinction is breaking down altogether - Grant Gilmore - The Death of Contract.

We know that the law of negligence is essentially about the law of obligations. You are under an obligation to ensure the safety of others. The law of contract is also about obligations but they are said to be freely assumed rather than imposed obligations.

Patrick Atiyah in "Contract, Promises and the Law of Obligations" (1978) 94 LQR 193, describes the 19th century assumptions about the law of contract and the law of torts. Obligations voluntarily assumed (contract) versus obligations assumed by the law (torts). He then examines the paradigm involving the "will" theory - that the law of contract provides a framework for parties to make their own deals and with limited exceptions (illegality, fraud, incapacity) parties are free to make whatever deals they like and the courts are restricted to simply enforcing the parties' joint will.

Atiyah argues that obligations in the law of contract are often reliance based rather than exchange based. For example if a car dealer has altered the car to your specific needs, he will have a better claim against you should you call the deal off because of the detrimental reliance by the dealer. He will not be able to sell the car off to someone else as he has relied on your promise by doing something to his detriment.

The Nature of the Law of Contract

Although both areas deal with the enforcement of obligations, in contract we have to determine whether any obligation was created in the first place. The primary aspect of contract law which we will consider is what requirements are imposed for the creation of contractual obligations. We may define contract law as "law relating to agreements or promises". But not all agreements or promises are LEGALLY enforceable.

If I promise to wash your car and in return you promise to pay me $10, those promises may well amount to a binding contract. But not all promises are of a contractual nature -

e.g.: I promise to go with you to the pub for a drink - that is only a moral obligation and will not carry any legal sanctions if I break the promise. Perhaps you will not trust me in the future.

However contract, on the other hand, provides a far more powerful remedy. If someone breaks a contractual promise, it is possible to get the court to order the person to keep it (called ‘specific performance’) or to pay compensation (‘damages’) for its breach.

If the person still refuses, he / she will be in contempt of court and can be sent to prison.

Promises and Their Enforcement

Therefore, what sets contractual promises apart from other promises is that they are supported by the power of the State through the courts. Therefore there must be some criteria by which we can indicate whether an arrangement will come within this category. In the common law, the primary test has been CONSIDERATION for establishing the necessary intent which the law will recognise, though this has not totally excluded evidence of some contrary intent (see lecture - Intention to Create Legal Relations)

The normal issues discussed here are those of whether there has been an offer, followed by an acceptance of that offer. Whether the parties provided consideration for their promises and whether they intended to create legal relations,

However, the significance of these concepts has changed over time. The origin of consideration was the causa of the Roman law - a motive for the promise and reason for its enforcement. Assumpsit was the early form of action whereby a promise was enforced because the promisee had been induced to rely on it. A more convenient remedy than the old writ of debt, whereby one had to establish an implied promise to repay, and breach of that promise.

A Brief Historical Overview

Underlying explanations for enforcement

Over the years the factors which were looked for in order to determine which promises would be enforceable, were the ideas of "reliance", "exchange" and "bargain" - all of which demonstrate reciprocity.

Consideration was essentially reliance based, and indicated an act or benefit in return for a promise. Assumpsit was closer to the modern view whereby one could show consideration for a promise by pointing to an equivalent promise as to future conduct. The causa or motive of the earlier law could be seen to be a moral consideration as well as something to which value could be attached. The value based view of consideration had led to the earlier discarding of the idea of morally based consideration.

Eastwood v Kenyon - causa and past consideration (1840) 113 ER 482

The plaintiff (executor) looked after the estate and the deceased's daughter until she became of age. He had expended money as her guardian and agent, on her upkeep and improvement of the estate. This money he had to borrow and he claimed the defendant and her husband promised to reimburse him for the costs involved. When he sought to recover in assumpsit, his claim was rejected. The consideration was entirely past, and could not be revived by a subsequent promise to pay which could only create a moral obligation. The decision that such promises were not supported by consideration, amounted to a rejection of any principle of causa. The shift was from causa as motive to benefit / detriment and exchange and expectation.

To some extent this had been mitigated by the idea that the consideration did not have to be ADEQUATE.

Thomas v Thomas - distinguish motive from consideration (1842) 114 ER 330

Plaintiff's husband, before he died said that the plaintiff should have, in addition to the provision in the will, the house and contents or £100 in lieu. After he died the plaintiff, executors and residuary legatees, entered into an agreement to transfer the house to Plaintiff, "in consideration of the desire expressed by the husband, and that Plaintiff would pay £1 towards the ground rent and keep the premises in good and tenantable repair.” One executor died and the other refused to transfer the house, although Plaintiff had been in it and paying rent for some years. Defendant argued that the only real "consideration" was to give effect to the husband's wishes. The court upheld the agreement saying that it was important to distinguish motive (causa) from consideration which involved benefit to Plaintiff and detriment to Defendant.

This case establishes that consideration must move from the promisee. Motives and desires are not an aspect of consideration, but nominal payments may be good enough.

The idea of payment for a promise was a precursor of the bargain theory. The to-ing and fro-ing of negotiations became more formally established as "offer and acceptance", which helped to identify the consideration and gave rise to an increasingly bi-lateral view of reliance based liability.

Shadwell v Shadwell - interest as consideration? (1860) 142 ER 62

Plaintiff entered into an agreement to marry. His uncle, writing to congratulate him said, "I will pay you £150 per year during my life until your income as a barrister shall reach £600 pa". When the uncle died, Plaintiff sought to recover outstanding amounts. The deceased's personal representatives argued that Plaintiff was already under a contractual obligation to marry when the uncle made the offer, and therefore Plaintiff supplied no consideration. The court took the view that the marriage was an “object of interest” to the uncle and he benefited by its taking place, thus there was consideration.

The majority judgment demonstrates that the unilateral contract analysis is often a useful way to get around tricky problems associated with promising, communication of acceptance and consideration which cannot be dealt with within the traditional rules.

Factors

I will now look in some more detail at the different factors used in the analysis of contract law - promises, exchange, reliance - and with the different assumptions that may be made regarding legal method (law as fact - law as value).

Promises

It is not uncommon to say that contract deals with promises - the employee promises to do a job of work, and the employer promises to pay wages. It is true that many contractual relationships can be "understood" in terms of promises - but it sometimes seems very artificial to say that anyone actually promised anything at the time.

You almost certainly were engaged in a contractual relationship when you got on the bus to come here this morning - but did you promise anything? You probably just put your money in the box or bought your ticket and thought no more about it. So a contract may be present when there is no explicit promising. But perhaps there may be a promise when there is no contract - I might promise to take my son or my wife to the pictures this evening - or even to have a beer with a colleague - but just because I promised doesn't mean that I can be sued for breach of contract if I fail to do these things. People may think less of me if I do not turn up as arranged, or they may criticise me, but it does not mean they can sue me successfully.

Informal and family arrangements then, even when a promise is present, have not traditionally been regarded as contractual. We will see later that the feminist critique will say that this may well fail to protect women in domestic relationships to whom promises have been made.

We might also find that some serious promises may not be enforced. I may, in all seriousness, promise to give each of you $10.00 at the end of the lecture. It may come as a great disappointment to you to realise that if I fail to do so, you will have no remedy from me in the law of contract. The same may be true if I promise to give money to a charity or to my church. However, I can make the promise enforceable if I put it in the form of a deed.

Balfour v Balfour [1919] 2 KB 571, King's Bench

This case involved a husband and wife - the husband was due to return to Ceylon where he had employment, but the wife, on medical advice was to remain in England . The husband promised to pay the wife £30-00 per month until she was able to join him in Ceylon . Later the parties separated and were divorced. The wife brought this action for the money her husband had promised her. The court said that promises such as we have here are not contracts because the parties do not intend that legal consequences should follow

Exchange

Perhaps the secret to the existence of a contract can be found in the idea of exchange - it doesn't matter whether I promise anything, but rather on what we do - I may not make you any promises when I get on the bus, but I do give you money and I expect you to do something in exchange - i.e. take me in to town on the bus. This involves an element of a quid pro quo - a something for something - which seems to appeal to our notions of fairness.

If you don't do something in return then I may be able to get my part of the exchange returned to me. In fact there is a whole area of the law which deals with this idea of a failed exchange - we call it restitution -and the fairness which is appealed to is that one should avoid an unjust enrichment a factor which we will have cause to mention later in our course on contract law. You cannot keep that which otherwise belongs to me, unless it could be said that you have earned it - an exchange is one way of earning your right to retain something. Schoolchildren call it "swapping" - grown up people call it exchange - both appeal to the same element of reciprocity - as the basis of fairness. Whilst some contracts are relatively easy to fit into this mould, others appear more difficult.

We shall see this exchange theory in the offer / acceptance" analysis. You can commit yourself by making a counter promise. You promise to deliver a ton of gravel next Friday and I promise to pay on delivery. Therefore when we make a deal, you can see the offer and acceptance aspect but you can also see that it contains within it the notion of consideration. Now what is it that makes the promise to deliver gravel next Friday enforceable? Answer: It is that I have given some consideration for it. There is something of value that I have given. The doctrine of consideration is concerned with this exchange (of promises) which occurs at the time.

Reliance

Traditionally reliance by the promisee on a promise made by the promisor was not sufficient to make a promise binding. However this is subject to qualifications because there is an increasing tendency in the law to treat reliance as sufficient.

For example, I promise to give you $20,000 and on the strength of that promise, you go and book a round the world tour. If I then go back on my promise there is nothing you can do about it even though you may have incurred great costs by relying on my promise.

Carlill v Carbolic Smokeball Co - reliance

In this well known case, a manufacturer advertised a cold remedy - which involved the inhalation of fumes from the smokeball, and said that if anyone used it and then caught influenza, they could claim a sum of money from the manufacturer. Carlill purchased the smokeball from the retailer, used it - then caught flu - and then claimed the payment from the manufacturer. It is hard to see where there might have been any element of exchange or promising between the user and the manufacturer. In this case, however, the court took the view that there was what they called a unilateral contract between these parties.

It may occur to you that the ideas of unilateral activity and exchange (which appears to be a form of bilateral activity), appear to be mutually exclusive. Yet it may be said that the person was using the remedy in reliance upon the statement made by the manufacturer. Where a person can show that they had relied upon the statement made by another, to their detriment, then they may well seek recompense from the other for that detriment - but now it looks as thought we are getting to something which looks more like a negligent misstatement - which is apparently a TORT and not a matter of contract law.

Clearly there are tensions between the different factors in accordance with which the law of contract should be analysed. Is one basis preferable to another, or do they each represent factors which should be taken into account?

Freedom and Sanctity of Contracts

The 19th C saw the acceptance of the idea of freedom of contract - that parties were free to make whatever arrangements best suited themselves, unrestricted by notions of what was conscionable. Sanctity of contract meant that once the parties had reached agreement in terms that were clear, they should be bound by the terms of that agreement.

However, if we are at all aware of the social conditions which prevailed at that time, we will appreciate that for many people the only real freedom was to work in virtual conditions of slavery or to starve.

Substantial inroads have been made into these ideas in the second half of the 20th century, but much of the terminology remains and has a distinctly 19th flavour. This appears most notably in the significance attached to ideas of offer and acceptance and the background principle of freedom of contract. When considering these various aspects of contract law, keep in mind the way in which they have changed over time, and that they, and the law itself, will continue to change.

Standard Forms

In some situations, large organisations use forms containing "standard terms" for the completion of contracts. These may be later introduced as evidence in court of what the parties had agreed to, or what they had promised. The truth, of course, is that one of the parties had carefully written up all the detailed terms, and the other party has just accepted them - and may have had no opportunity to discuss or vary them.

In the 19th C it was common for people (including judges) to talk about "freedom of contract". Indeed, it was thought to be an essential ingredient of a contract that its terms had been "freely" agreed to. With the emergence of standard forms as a common method of completing contracts, one has to ask how much of the so-called freedom remains, when consumers may often be unaware of the detailed terms contained in their contracts, and may also be unable to negotiate amended terms if they do not like them.

Specialisms - no clear basis - is it a system?

Whenever we attempt to state general rules about contract law, we find that there are exceptions, or that on occasions those general rules do not apply. Is it a system or is it just a mess?

All this could look as though we are getting ourselves into quite a pickle. We have already suggested that we are here looking at general rules of contract and yet we have noted that they may not apply in areas which have their own special regime - employment, trade practices, sale of goods and house purchase are just some examples. We then suggest that it may be difficult to figure out whether a contract is based on promises - exchange - or reliance - and on closer examination, we find that even the basis of the distinction between contract and tort could break down. PANIC

I could now be a bad rascal and suggest that the picture could even be worse - it is not uncommon in business relations for corporations and other large commercial organisations to ignore their so-called contractual rights in favour of alternative arrangements. The knock-for-knock arrangements which exist amongst insurers - the provision of "ex-gratia payments" and private arbitrations PANIC PANIC

Underlying Assumptions Regarding Legal Method

Why worry? Why not be open about the contradictions and difficulties which may exist? After all, we (as lecturers and students) are not responsible for this state of affairs. However, we find that we may be reluctant to be as bold as this, because we are working with a particular assumption about legal methodology.

If we come to our legal studies with the assumption that all this stuff (the different legal subjects and the cases within them) should fit nicely and neatly together, then when we experience difficulty in making them fit we are likely to feel that the problem is ours - not with the material that we are dealing with. In other words, we feel some sense of personal inadequacy.

Let us not minimise the difficulties - some major legal theorists, and judges, do speak of the legal system as a system of rules. Owen Dixon - an important High Court judge tended to take this approach. (See Brian Galligan’s book - The Politics of the High Court). H.L.A. Hart, a famous Oxford legal philosopher said that law was a system of rules - and Ronald Dworkin, Hart's successor and current occupant of the Chair at Oxford, even speaks at some length of the idea of FIT. But these theorists tend to speak of the law in the most general terms, and the challenge to their ideas is coming from people who study specific areas of law and find that it doesn't all fit - suggesting even sometimes that the myths only hold up so well, because there is a hidden and undisclosed agenda - this is the area of critical legal studies or of feminist analysis of law - which attempts to articulate the values implicit in the law, but which are often not articulated by the judges themselves.

Contracts and torts are popular areas for them to look at. Only by understanding these other unarticulated issues, they suggest, can we hope to understand the apparent contradictions within legal discourse. Then, by explaining them in this way, we can also relieve ourselves of the sense of inadequacy - we appreciate that the contradictions are in fact real and not just a failure of our understanding. See the materials on Legal Theory

But how is it that people can work with ideas and not make important features of those ideas explicit? Well, just think of how easy it is for people to come to the study of law, and accept a model of how the law works before they have examined much of the evidence. Many assume that the law is a system of rules and principles - if you are clever enough and know the right books to look in then you can find these rules. Then once you know the facts of a case, all that has to be done is to determine the rule that the facts fall under, and hey presto, you have your legal answer.

Formalist (law as fact)

That the law consists of legal facts or rules which can be clearly stated is a very powerful and widely accepted view, and upon it stands much of the prestige, status and expertise of lawyers. But it is probably quite wrong.

You may well have come to law school because you want to have the same sort of professional status and expertise as your colleagues in the faculty of medicine. If judges and legal theorists adopt this view and political scientists spend a good deal of time discussing it - (Galligan - Politics of the High Court) – surely it can't be all that wrong? Introductory books on legal method speak of precedents being binding - and even of the mechanics of finding the precedents. This view has its parallels in science and mathematics. There are also important constitutional arguments to say that it should be so in law - Parliament makes the law and the unelected judges apply it.

Anti-formalist (law as value)

On the other hand, there are those who would say that formalism is dead. That judges and lawyers are not involved in finding the rules, but in making them. That law is not a science but a process of social negotiation, with the judges as arbiters of disputes and of the law.

They may well be guided by the past decisions of other judges, but they may also turn the law on its head when it seems right to do so. As Lord Denning, a famous British judge once said, "I think the job of the judge is to pick those precedents that are rightest, and to discard the rest". An Australian judge, Lionel Murphy said on one occasion that he thought precedent was so important that he tried to make sure he used it at least once every year. These debates are distant reflections of debates in other disciplines concerning the nature of human knowledge.

In science, Ludwig Fleck, The Genesis and Development of a Scientific Fact
Karl Popper Conjectures and Refutations
Michael Polanyi Personal Knowledge
They all take a less deterministic view of science than others have done previously.
Morris Kline wrote a book in mathematics called Mathematics - the Loss of Certainty
Berger and Luckman wrote a book in the social sciences called The Social Construction of Reality.
E.H. Carr raises similar issues in his book What is History?

So we can see that the sort of formalist / anti-formalist law as fact / law as value law is discovered / law is made, debates which take place in law, are paralleled in other disciplines. Whether your joint degree covers these areas, or those of psychology, linguistics or literature or history, you will find that similar issues emerge.

Co-existing tensions?

If you look at what the judges do and say and take it all at face value, together with the assumption that it is all part of a neatly ordered and well-fitting whole, then it won't be too long before you are a certifiable case.

Greig and Davis point out in their book Contract Law, that legal developments often take place for practical reasons and only later is a rationalisation sought - the judges have to deal with the problem in hand - they don't have the time to write a textbook or a learned treatise on the matter, and to regard their legal judgments as if they were, may be misleading. The rationalisations developed later may distort as much as explain. But of course we might say that what is "practical" may well depend on one's moral and political outlook as much as it does on legal learning. Greig and Davis go on to point out that, "The moral underpinning of the law is as relevant today as in the earliest days of contract." Aren't questions of reliance and expectation dependent on our view of what is reasonable?

We may occasionally, through the course, speak of the rule of law being such and such, but you must not be misled by this into thinking that there are no counter examples to be found. Sometimes they are very explicit - I'll tell you in due course about the Parol Evidence Rule - and then go on to list some 13 exceptions to it - so many in fact that some have said that any case can either come under the rule or one of the exceptions as you wish. In other words, the rule and the exceptions do not forbid anything and allow everything. In what sense is it true to say then that a rule exists requiring certain conduct?

OR Co-dependencies?

We may come to the view that these claims represent competing values around which the law is formed - issues of promise, reliance and exchange are important, but no one factor prevails over and to the exclusion of the others. Perhaps they all have to be seen within a network of wider values - to what extent were the parties equal and was it reasonable for them to rely on each other?

We look at this specifically, later on when we look at equality of bargaining power and questions of unconscionability, but these issues will also occur in the cases much sooner. These values may be held in tension and not lead to consistent outcomes - the judges may well weigh the different factors differently which explains why we often have more than one judgment being delivered in a particular case.

Questions we shall have to ask are "to what extent should certainty be valued over flexibility?" Should the consistency of the legal system overall, win out against justice in the individual case?" These are important questions which go well beyond the law of contract, but which are as important to the law of contract as to any other area.

Perceptions and Values of the Reader

It might also depend on your own values - a conservative person might emphasise the "rule of law" aspects and play down the exceptions - another may say that fairness and justice are so important that the rules should be changed when those goals would not otherwise be achieved. A Marxist might say "the law" is all a bit of a charade, and it really has much more to do with the underlying economic relations.

Its probably wrong to say that at any time the law exclusively embodies one or the other view - promise and reliance, precedent or change - it may be that at any time, the need for one as opposed to the other seems to be more pressing and one view may be predominant, but if we look carefully at any area of law over any period of history, we can see the continuing tension between these ideals. We seem to find it easier to accept that great changes in the law came about 100 or 500 years ago, but more difficult to contemplate the possibility that we may be in a period of yet more significant changes. Why should that be?

I have only mentioned the difficulty in establishing the rationale for contract law, and the different approaches in legal method, because if we can bear these factors in mind when we come to reading the contract cases, we will not then be so put off by the apparent confusion, and we may even be able to make sense of it.

Look at Both Sides of the Issues

When considering any aspect of contract law, we should always look at it from both sides. To explain the position of the plaintiff, one must appreciate how the defendant might respond. To some extent the idea behind the exchange of pleadings is to bring out these aspects of the pros and the cons of the issues. A famous criminal lawyer told me that he had earned most of his money from the pros and the cons.

An Example

We should appreciate that in corporations law, most of the relationships between directors and shareholders are governed by the law of contract. In corporate law the idea of looking at both sides is given clear backing when s 592 of the Corporations Law 1990 says that directors and others involved in a company's management will be liable for debts incurred by the company at a time when there are reasonable grounds to expect that the company will not be able to pay its debts as and when they become due.

There are 2 defences under ss 2

1. the debt was incurred without the director's authority or consent OR

2. at the time when the debt was incurred the directors did not have reasonable cause to expect that the company would not be able to pay its debts

Consideration of these defences is necessary when contemplating an action under the section. According to Wright J in Clements v Bower (1990) 8 ACLC 178, at 188

no report or recommendation could properly be made as to the institution of proceedings for breach of s 556 ss 1 unless the existence or non existence of the statutory defences provided by ss 2 was also considered and evaluated.

He goes on to say that the investigators would be in dereliction of duty if they did not consider those defences. So too, you as students would be in dereliction of your duties if you suggest that someone can be sued for breach of contract without considering what defences might be available to them. We can see then that when asked in an exam or essay to "advise Stephanie" or "advise John" as to their rights, one can only do so by also stating the rights and claims of the others involved.

The "Australianisation" of contract law

Some people take the view that until recently, Australian contract law has been too dependent on the law of the old country ( Britain ). At a time when so many of its citizens now come from widely diverse backgrounds and cultures, it might be fitting for Australia, now that there are no longer appeals to the Privy Council, to be more forthright in determining its own contract law whether or not it happens to accord with the English law of contract.

We should therefore as we go through this course consider how relevant or necessary are the English cases which we refer to and whether we have appropriate Australian examples to work from. Fred Ellinghaus of Melbourne University Law School takes the view that the whole law of contract can be successfully taught using only recent Australian High Court cases. You should think as you work through these materials whether you agree with that view and whether you would like to see more comparative material. Should we be discussing the extent to which our contract law is in line with that of our near Asian neighbours?

Codification?

In your materials you will see that we have included the Code of contract law. This was written by Fred Ellinghaus of Melbourne University Law School and Ted Wright of the Victoria Law Reform Commission. It is not an enacted Code, but one which was devised for the purposes of discussion.

It is intended to simplify and streamline the law of contract so as to make clearer and more efficient. Much of the Code is based upon the premise that the underlying rationale of contract law is to give effect to "fairness" and avoid "unconscionability". Some say that trying to reduce a complex area like contract law to a single principle is to OVER simplify - what do you think? We should consider as we go through these materials the extent to which these aspects of morals and fairness have become more important in the Australian contract law of recent times.

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