Module 3: Intention consideration and capacity

Introduction
With reference to Turner and Trones (2013) fold-out flowchart account of the six essentials of a simple
contract, we examine essentials 24, being intention to create legal relations, form or valuable consideration
and legal capacity. As Atiyah (1986, p. 54) notes, the traditional view is, that contract law is largely about
the enforcement of promises, and the protection of expectations engendered by promises. But in fact, a very
large part of modern contract law depends upon the creation of obligations which do not arise from promises,
and upon the protection of reliance, rather than the protection of expectations. He cites two examples of this.
First, that consumers are generally not held liable for expectations lossesthey have, for example, the ability
to cancel bookings without having to pay compensation. And secondly that, even in business transactions.
commercial parties are often content with protection of their reliance losses in the event of breach (Atiyah
1986, p. 55). Note also that in complex multiparty commercial transactions, for the abundance of caution,
agreements often take the legal form of a deed since no commercial lawyer would wish to risk an agreement
being ineffective due to an apparent lack of consideration flowing between any of the parties.

Objectives
On completion of this module, you should be able to:
outline and apply the obligational rule of intention to enter legal relations, distinguish between social and
commercial settings, and discuss the extent to which commercial parties can avoid creating legal relations
between them
describe and apply to common fact settings, the standard rules and exceptions in relation to the requirement
of consideration in simple contracts
articulate the status rules relating to capacity to contract for those classes of persons the law deems as
lacking the capability of protecting their own selfinterest.

Readings
Textbook

Turner & Trone 2013

Chs 46

Davenport & Parker 2012

Chs 46

Intention to create legal relations

Social and domestic arrangements are not enforceable contracts: Balfour v Balfour [1919] 2 KB 571. Balfour, a
civil servant in Sri Lanka, and his wife were holidaying in England. Balfour returned to Sri Lanka without his
wife who remained in England for health reasons. The husband promised to pay his wife 30 per month until
she joined him in Sri Lanka. The reunion did not eventuate, and the parties agreed to separate. The husband
failed to keep his promise to pay and the wife sued.
Held: the promise was merely a domestic arrangement which was not legally enforceable.
A more recent decision is Riches v Hogben [1986] 1 QdR 315. Here a widow living in Australia invited her son
to come to live with her in Australia. She promised that if he would look after her she would provide a house in
his name in which she, her son and his family would live.

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The son gave up a rent-free house in England, sold his belongings and came to Australia with his family. Shortly
after moving into the new home the parties quarrelled and the mother ordered the son to leave. The house was in
her sole name. After leaving, the son sued for breach of contract.
The question was whether the parties had intended to be legally bound by the promises which they had made to
each other.
The test for intention
There must be clear evidence, on an objective test, of an intention to make a contract.
The courts will not make a contract for the parties if there is not clear evidence of intention to be bound. The
question is whether there is consensus ad idem (a meeting of minds). However the courts apply an objective test:
what construction would a reasonable observer have placed on the conduct of the parties? In the case of Riches
v Hogben above the court decided that the defendant was entitled to ownership of the house. The test the court
said was the intention of the parties which is to be inferred from the language they use and the circumstances in
which they use it ... would reasonable people regard the agreement as intended to be binding ... ?
In Smith v Hughes (1871) LR 6 QB 597 Blackburn J stated at 607 :
If, whatever a mans real intention may be, he so conducts himself that a reasonable man would believe that he
was consenting to the terms proposed by the other party, and that other party upon that belief enters into a contract
with him, the man thus conducts himself would be equally bound as if he had intended to agree to the other partys
terms.

In Clarke v Dunraven [1897] AC 59 two yachts were entered by their owners for a race and each owner
undertook to be bound by the club rules under which the owner disobeying a rule was liable for all damages
arising from it. One yacht in breach of a rule sank the other yacht. Lord Herschell commented at 63:
I cannot entertain any doubt that there was a contractual relation between the parties to this litigation. The effect of
their entering for the race, and undertaking to be bound by these rules to the knowledge of each other is sufficient,
I think, where those rules indicate a liability on the part of the one to the other, to create a contractual obligation to
discharge that liability.

Held: the owner whose yacht had damaged the second yacht was held to be liable to compensate its owner in
terms of the contract inferred from their agreeing to race under club rules.

Intention in commercial transactions and exclusions

The parties to a transaction unless prevented by statute, may include a non-enforcement term or so called
honour clause. Although since in patently commercial transacting there is a strong presumption the parties
intend to create legal relations between them, the courts will enforce such agreements unless there is very clear
and cogent evidence that that is not what is intended. The onus of proving that there was no such intention falls
on the party alleging it and the onus can be quite severe (Graw 2002, p. 100). The courts do however uphold
such clauses where their intention and effect is unambiguously established: Jones v Vernon Pools Ltd [1938]
2ALL ER 626; Rose & Frank Co v JR Crompton & Bros Ltd [1923] 2 KB 261.
Furthermore, in these days of increasingly complex, expensive, multi-party, multiphase commercial projects
with long lead-times and often extensive ongoing oversight by and close liaison with government, there is an
increased reliance upon legal instruments such as the Memorandum of Understanding to better articulate and
delimit the parties commercial and legal relations in the early phases of such projects in particular. An example
of this is the $20 billion 25 year iron ore deal that Australian entrepreneur Clive Palmer apparently obtained
under a MOU with some Chinese steel mills (The Australian 21.10.2004, p. 1).

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However, even in valuable commercial transacting, parties can enter into legal relations on the basis of an orally
based contract, or a contract with partly oral and partly written terms and incorporate by referenceorally or
in written termsprior agreements between the parties and other documents, public or private, as well as a
previous course of dealing between them: Miramar Maritime Corp v Holborn Oil Trading Ltd [1984] AC 676
(Carter & Harland 2002, para. 619). The combination of a MOU with subsequent contractual dealing between
the parties is considered in the following hypothetical example.
Hypothetical example
In May 200X, Nauru Fertilisers Ltd (NFL) and Brisbane Coop Ltd (BCL) entered into a detailed Memorandum of
Understanding (MOU). It provided for the monthly delivery of DAP fertiliser from Naurus central Queensland
manufacturing plant near Rockhampton by rail to BCLs warehouse in north Brisbane for one year from August
200X at a price based on the average Australian spot market price for DAP fertiliser for the previous month. The
MOU includes these two terms:
C12: The parties will enter into written monthly contracts for the supply of DAP fertiliser over the period of one
year from August 200X consistent with this MOU, unless expressly varied in those contracts.
C13: This MOU is entered into between the parties to express their intention to sell and buy DAP fertiliser for a
period of one year, but no enforceable contractual relations arise between the parties merely by the signing of this
agreement.
The two parties then failed to enter into written monthly contracts but relied instead on their MOU. The average
price for the first six standardised freight train deliveries was $2 million. However, in early January 200Y, DAP
fertiliser prices suddenly increased by 25%. In response, NFL advised BCL that it would only continue its monthly
deliveries if BCL agreed to pay a higher price for it, based on:

the average Australian weekly free market spot price per tonne for DAP fertiliser multiplied by the
standard tonnage in a freight train (which the MOU had specified) or $2.5 million per monthly delivery,
whichever amount was larger.

Brisbane Coop Ltd paid $2.6 million for DAP fertiliser deliveries in February and March. Then in late April
200Y, there was a sharp fall in DAP fertiliser prices. On taking delivery in May of the standardized volume of
DAP fertiliser, BCL advised Nauru Fertilisers Ltd it would only pay $1.8 million for it, based on the spot market
price on the actual day of delivery. Based on the average price of DAP fertiliser during the week of delivery, the
shipment would cost $2 million. But if based on the average price for the previous month of April, it would cost
$2.6 million.
The operative terms of the monthly contracts for the first six months would therefore seem to be:

That the parties have agreedexpressly or impliedlyto contract with reference to the apparently
comprehensive detailed terms of the MOU document including price so that the MOU is incorporated into
the monthly contracts and

That the remaining terms as to quantity of DAP fertiliser to be delivered and delivery arrangements and
any other terms necessary for business efficacy, are as fixed in each months oral agreement, but which
would likely be evidenced at least in part by prior, contemporaneous or subsequent documentation and
the conduct of the parties including arrangements for payment. Presumably delivering $2 million worth
of DAP fertiliser would generate documentation of some sort since third parties would be involved and
regulatory compliance would be necessary.

The effect of the January 200Y variation perhaps shouldnt be over-stated. On a minimalist approach, all it does
is expressly vary the monthly price, now $.2.5million plus, which the parties were previously fixing on the basis
of the MOU formulathe average market price of DAP fertiliser for the previous month. However, it might
constitute a quite new standing offerbut otherwise incorporating the MOU etc.to supply fertiliser for the
whole of the remaining period of the MOU at the new price formula, and which BCL seems to have accepted since
it took two further monthly shipments at that new price formula. The outcome is arguably the same which ever
characterisation best suits the material facts and objective intention of the parties.

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First, the minimum default price for the May delivery is $2 millionbased on the MOU formula as adhered to by
the parties for the first six months. There is no basis on which $1.8 million might be payable. Secondly, the new
formula pricethe average weekly price or $2.5 million, whichever amount is highersuggests that the parties
have simply not contemplated the prospect of falling or even sharply variable market prices. Nonetheless, the delay
between agreement and execution of the May200Y contract has allowed this dispute to arise. But having taken
delivery, BCL is bound to pay $2.5 million for the May 200Y delivery which it seems to have already agreed to: it
is estopped by conduct and its earlier contractual promise to pay, which NFL has relied upon. There dont seem any
grounds available on the facts for it to be able to reject the delivery, rescind the contract or vary any of the terms,
particularly the price. And even if NFL accepted $1.8 million for payment, it could later on sue for the balance,
applying the rule in Pinnels Case (1602) 77 ER 237 and Foakes v Beer (1884) 9 AC 605: that the payment of a
lesser sum is not good satisfaction for the whole. That is unless:

promissory estoppel somehow had effectthough this seems fanciful: the High Trees Case [1947];

the parties later agreed under Deed on settlement of the price at $1.8 million;

BCL paid some other inadequate but nominal non-monetary consideration recognised by the law
(e.g., a pallet of Bundaberg Rum); or

NFL accepted further part-payment from a third party: Hirachand Punamchand v Temple [1911] 2 KB 330.

However, since this is a sizeable commercial contract and the parties now seem to be contracting on the basis of
slightly non-cooperative financial self-interest, it seems most unlikely that Brisbane Coop Ltd can escape paying
Nauru Fertilisers Ltd a further $700,000plus interest for late payment, calculated at the statutory ratefor the
May 200Y standard delivery of DAP fertiliser.

Intention, parol evidence and whole of agreement clauses

The critical issue of intention is closely connected with ascertaining the ambit and contents of what exactly the
two parties have agreed toi.e., how expansive is consensus ad idem between them. The operative contract
being derived from the dual intent to enter into legal relations plus the process of offer and acceptance vis-vis the minimum key or essential termson which theres finality of agreementas required to constitute a
legal binding agreement. Bearing in mind however that contracts may be informally reached, be wholly written
or word-of-mouth or a composite of both, incorporate other public/private documents and agreements, and be
deduced from a prior course of dealing between the parties: Miramar Maritime Corp v Holborn Oil Trading
Ltd [1984] 2 All ER 326; Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61. And besides
containing express terms, have terms implied in fact and those necessary for business efficacy, and/or by law
and statute (Carter et al. 2007, Chapter 11). The case law supplies five relevant factors to be considered in fixing
the scope of a contract: intention of the parties; time of the statement; content of the statement; existence of
written memorandum; and knowledge and expertise of the parties (Carter et al. 2007, pp. 206209).
Application of the parol evidence rule is a critical aspect of a courts role in fixing the boundaries of a contract,
giving optimal coherence to the statements and acts of the parties as viewed objectively by the hypothetical
reasonable person: Hospital Products Ltd v USSC (1984) 156 CLR 41; Graw (2005, p. 207). The Australasian
courts give effect to a soft version of the parol evidence rule allowing extrinsic evidence of the course of
negotiation leading up to a final draft: Air Great Lakes Pty Ltd v KS Easter (1985) 2 NSWLR 309; ECNZ
Ltd v Fletcher Challenge Energy Ltd [2002] 2 NZLR 433. Further, post-contractual conduct is admissible to
(i)ascertain whether a contract was formed (Howard Smith v Varara (1907) 5 CLR 68), but not (ii) on the issue
of what a contract actually means (Hide & Skin Trading v Oceanic (1990) 20 NSWLR 310: Brambles Holdings
Ltd v Bathurst City Council [2001] NSWCA 61 per Heydon JA at paras. 2426).

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Briefly stated, the combined effect of the parol evidence rule and whole-of-agreement or merger clauses
doesnt thwart the courts in their critical task of ascertaining the mutual intention of contracting parties and
giving it maximum effect. Or as Thomas J opined in a strong dissenting judgment in ECNZ Ltd v Fletcher
Challenge Energy Ltd [2002] 2 NZLR 433 at para. 250:
... the law should endeavour to meet the needs of commerce It should meet the reasonable expectations of
business men and women rather than require the law to meet to the possibly overly legalistic expectations of men
and women in the law. The realities of commerce should be recognised

While according to Peden and Carter (2006, pp. 12): there is no magic in the words entire agreement, their
purpose being, to underline the fact that the document is the contract.. They further observe that such terms
tend to reflect, the general commercial understanding that a negotiated document is executed with the objective
of crystallising the bargain and superseding all prior negotiations (p. 2). To recap, the parol evidence rule
articulated by Innes J. in Mercantile Bank of Sydney v Taylor (1891) and cited by Turner and Trone (2013, p. 142)
states that:
Where a contract is wholly reduced to writing, where the contract appears in the writing to be entire, it is presumed
to that the writing contains all the terms of it, and evidence will not be admitted of any previous or contemporary
oral agreement which could have the effect of adding to or varying it in any way.

In any event, as part of its four exceptions, the parol evidence rule allows a collateral verbal agreement, relating
to the same subject matter and not inconsistent with the written agreement (Turner and Trone 2013, p. 143).
Moreover, the parol evidence rule may simply be inapplicable on any given facts (though theres a certain
unsatisfactory circularity in the reasoning):
The parole evidence rule will not apply where the document in question is clearly neither the bargain nor the
memorandum of the entire agreement between the parties, and the rule should not be used to exclude evidence that
the document is not intended to integrate the contract. (Carter et al. 2007, p. 247)

What is consideration?
What is consideration in contract law? Answer: an act or forbearance of one party, or the promise thereof, is the
price for which the promise of the other is bought, and the promise thus given for value is enforceable. Certain
matters arise from this definition:
consideration is simply something of value; it is what is given in return for a promise made
consideration can be the doing of an act or the refraining from doing an act
consideration can be a promise to do or refrain from doing an act.
The following rules have developed:
(a) consideration must be present in every simple contract
(b) consideration may be executory or executedit cannot be past
(c) consideration must move from the promisee but it need not necessarily move to the promisor
(d) consideration need not be adequate
(e) consideration must not be so vague as to be illusory
(f) consideration must be sufficient in the eyes of the law.

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The features of consideration

Consideration must be present in every simple contract
Simple contracts can be wholly oral, wholly in writing or partly both. In order to enforce a promise made in
such a contract, the promise must be supported by consideration.
Consideration may be executory or executedit cannot be past
A contract is enforceable by the parties to it if the consideration therein is either executory or executed.
Consideration is said to be executory where all the parties have done is exchange promises. The exchange of
promises is valid consideration. However, unlike executory and executed consideration, past consideration is no
consideration at all. Consideration is said to be past when the promise is made after the performance of an act
and independently of it.
In Roscorla v Thomas (1842) 3 QB 234, Roscorla purchased a horse from Thomas and, after the sale had been
concluded, asked Thomas to give an assurance that the horse was sound and free from vice. Thomas gave the
assurance. Later it was found the horse was vicious and Roscorla sued Thomas for breach of warranty.
Held: that the assurance given could not be sued upon because it was made after the contract had been
completed, and therefore it had to be supported by fresh consideration of which there was none.
Similarly in Anderson v Glass (1868) 5 WW & AB 152 where an employer promised increased wage to an
employee not only for future work but also work already done.
Held: the promise to pay increased wages with respect to work completed was not binding upon the employer
because it was supported by past consideration and therefore no consideration at all.
Consideration must move from the promisee, but it need not necessarily move to the promisor

Consideration must move from the promisee

This is illustrated by Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847. Dunlop, a
manufacturer of tyres, sold them to various wholesalers who agreed with Dunlop not to sell them below the
Dunlop list price. Dew & Co, a dealer, entered into such a contract with Dunlop, and sold tyres to Selfridge &
Co who gave the required undertaking not to sell below the list price. In breach of this Selfridges sold below the
list price and were sued by Dunlop for breach of the undertaking.
Held: Dunlop could not succeed because there was no consideration for Selfridges promise. In fact Dunlop was
not even a party to the contract.

Consideration need not necessarily move to the promisor

While it is true to say that consideration must move from the promisee, it is not imperative that it move to the
promisor. In Official Trustee in Bankruptcy v Arcadiou (1985) 8 FCR 4, Troodia Arcadiou (the bankrupt) gave
a mortgage over her property to the respondents, her son and daughter-in-law. The circumstances leading to the
granting of the mortgage were as follows:
the bankrupts husband was a builder who wished to borrow money from a finance company
the security for the granting of the loan consisted of two properties, one of which belonged to the
respondents
before the respondents would agree to execute the mortgage documents, they indicated that they would need
to take a mortgage over the bankrupts property to the value of $50 000 to protect their own interest
accordingly, a mortgage was granted by the bankrupt over her property in Mildura.
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Subsequently, Troodia Arcadiou was declared bankrupt and the trustee in bankruptcy sought to have the above
mortgage declared void on the basis that no valuable consideration was received by the bankrupt (the promisor)
from the respondents (the promisee) for the granting of the mortgage over her property.
Held: that the giving of a mortgage by the respondents over their Werribee property to the finance company
constituted consideration for the mortgage given to them by the bankrupt over the Mildura property, even
though the bankrupt derived no benefit from the arrangement and all the moneys were disbursed to the
bankrupts husband. There was no doubt that the son and daughter-in-law gave consideration for the mortgage
of the Mildura land.
Consideration need not be adequate
Consideration may be of very little value, and the courts will not inquire into whether such value adequately
reflects the value of the promise made to the promisee. An example of the application of this rule is Chappell &
Co Ltd v Nestle Co Ltd [1960] AC 87.
Nestle Co Ltd manufactured chocolate bars and in an effort to boost sales offered the public a selection of
records, one of which could be chosen for the price of one shilling and sixpence, plus the wrappers of three bars
of chocolate. One of the records offered was Rocking Shoes, the copyright for which was held by Chappell &
Co. Copyright fees were 6.5% of the retail price, which Nestle & Co said was 1/6d (ignoring the value of the
wrappers which were from chocolate bars at 6d each). Chappell & Co. contended the 6.5% was payable on 1/6d
plus the value of the chocolate bars, a further 1/6d.
Held: the House of Lords found in favour of the plaintiffs. The value of the chocolate wrappers at 6d each were
part of the consideration.
Consideration must not be so vague as to be illusory
The nature of the consideration must be definite. Any consideration that is so nebulous as to be illusory will not
be accepted as sufficient: White v Bluett (1853) 23 LJ Ex 36. Here a father promised his son that he (the father)
would absolve the son from any money owed by the son to the father if in return the son promised not to bore
his father with the complaint that he, the son, had been treated more harshly than his brothers.
Held: the sons promise did not constitute such consideration as the law would recognise, it was too vague.
Consideration must be sufficient in the eyes of the law
The cases here usually involve one of the following:
moral obligations
promises not to sue
performance of a public duty imposed by law
performance of an existing contractual duty owed to the promisor
performance of an existing contractual duty between the promisee and a third party.
We will consider each of these in more detail.
Moral obligations to perform a promise
A moral obligation is not sufficient consideration. In Eastward v Kenyon (1840) 11 Ad & El 438, on the death
of her father Sarah Sutcliffe was left as sole heiress of his estate. Eastward, her guardian, spent money on her
education and estate, which Sarah agreed to repay upon her attaining her majority. Subsequently she married,
and her husband Kenyon made the same promise.
Held: there was a moral but not a legal obligation to reimburse, there was no consideration.
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Promises not to sue

Can a promise not to sue or to abandon a legal action already commenced be sufficient consideration? Provided
certain conditions are met, the answer is yes.
In Hercules Motors Pty Ltd v Schubert (1953) 53 SR (NSW) 301, Schubert purchased a car from Hercules
Motors. A short time later Schubert complained about faulty paint work. At first he demanded a new car,
however, he later agreed to a repaint that would put the car into a brand-new condition. The repaint was not
satisfactory and Schubert sued Hercules. Hercules agreed there was no consideration for this promise.
Held: that the promise was enforceable, the consideration for it being Schuberts compromise in foregoing his
claim for a new car. A party who claims they have given up a claim to a cause of action in return for a promise
which has been breached must prove:
1. that the claim was reasonable
2. that they honestly believed in the likelihood of its success and
3. that they have not concealed anything from the other party which may affect the validity of the claim.

Performance of a public duty imposed by law

Where a person is obliged by law to perform a certain duty, the promise by him/her to perform that duty
cannot constitute consideration for a promise made in exchange for that performance. For example, in Collins
v Godefroy (1831) 109 ER 1040, the plaintiff, Collins, had been summoned to give evidence in which the
defendant was a party, the latter promising Collins six guineas for his attendance at court. The defendant failed
to honour his promise and the plaintiff sued.
Held: the action failed for lack of consideration on the part of the plaintiff. Appearing as a witness in answer to a
summons was a public duty.
Performance of an existing contractual duty owed to the promisor
This is not additional or new consideration unless the promisee provides something beyond their existing
contractual duty to the promisor in which case the extra may be good consideration. A comparison of two cases
illustrates these principles.
In Stilk v Myrick (1809) 2 Camp 317, Stilk was a member of a crew which had signed on for a voyage from
London to the Baltic and return. During the voyage two seamen deserted, and the captain promised the
remaining crew that if they worked the ship back to London he would divide the deserters wages amongst them.
Upon return the captain reneged on his promise.
Held: the crew had contracted to crew the ship anyway including assisting further in the case of an emergency
on voyage. There was accordingly no additional consideration and Stilks claim failed.
A different conclusion was reached in Hartley v Ponsonby (1857) 7 E & B 872. Ponsonby was captain of the
ship Mobile, which had a crew of 36 men. Upon arrival at Port Phillip, 17 of the crew deserted leaving only
19 men to work the ship back to Bombay. Of the 19 only five were able seamen including Hartley. The captain
promised an extra 40 if Hartley would assist in getting the ship back to Bombay. Hartley agreed and the ship
returned to Bombay. The captain refused to honour his promise.
Held: Hartley had done more than he was contractually obligated to do, and accordingly this provided the
consideration on which he could successfully sue.
The same rule will apply where the promise is to do less than the existing contractual obligation. For example,
where A owes B $500 due on a certain date. On the due date A says she can only pay $300 with the balance by
instalments if B promises not to sue. B agrees, but then sues for the balance. In such a situation, A cannot hold
B to her promise not to sue for the balance, because she has given no additional consideration. The rule was

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applied in Pinnels case (1602) 77 ER 237 in which the court stated that payment of a lesser sum on the day in
satisfaction of a greater, cannot be any satisfaction for the whole ....
The rule in Pinnels case was applied in Foakes v Beer (1884) 9 App Cas 605. A judgment for 2090 had been
made in Mrs Beers favour in respect to a debt owed to her by Dr Foakes. Dr Foakes needed time to pay, so Mrs
Beer agreed to accept an immediate payment of 500 with the balance by instalment. She also promised not to
charge interest. When the debt was paid she then sued for the interest.
Held: her promise not to take further action on the interest was not supported by any consideration, and
Dr Foakes would have to pay the interest.
Exception to the rule in Pinnels case
The rule in Pinnels case, namely, that payment of a lesser sum cannot, without something in addition, be
satisfaction for the total debt has been much criticised. As a result certain exceptions to the rule have been
created. The exceptions apply in the following circumstances:
1. those circumstances where the principle of promissory estoppel applies, and
2. those circumstances where the creditors action in going back on their promise constitutes a fraud on a
third party.
Promissory estoppel
First, a general comment regarding the status of legal, i.e., common law doctrines and remedies and those of
equity. Despite the enthusiasm of proponents like Lord Denning, the Judicature Act 1873 (UK)as replicated
in Australia didnt affect a fusion of those two separate bodies of law. Rather such Acts simply enabled the more
efficient administration of justice by giving the courts, i.e., the judicature system joint jurisdiction of law and
equity to end the grossly inefficient system of separate courts for common law and equity matters. Meagher et
al. (1992, p. 46) cite Windeyer J in Felton v Mulligan (1971) 124 CLR 367 at 392 for the proposition that, [T]he
true position in Australia of a court exercising a fused jurisdiction of law and equity may be likened to that of
a State Court in which the same proceedings exercise State and Federal jurisdiction. And so, legal and equitable
rights are distinct, equity presupposes the law (expressed in the maxims equity follows the law and that where
the equities are equal the law prevails), and the fused legal/equity jurisdiction of the courts upholds and
enforces their separate status. Applied to contract law, that requires one first to ascertain what the legal/common
law rights of the parties are, then secondly, to consider how relevant doctrines and remedies in equity law might
suspend, override or trump those rights. However this area is complicated a little by there being various types of
estoppel both in common law and equity: common law estoppel governs representations of existing fact, whilst
representations of future intention (or fact) are more or less the domain of equity estoppel.
Gratuitous promises and bargains dont create legal rights and arent enforceable, i.e., such a promissor can
resile or depart from them with impunity. Conversely, having entered into a contract compliant with contract
law including mutual consideration requirements (Currie v Misa (1875) LR 10 Ex 153) the parties are
bound to adhere to all its terms and conditions. Any subsequent variation of that contract, e.g., a lease must
contain further mutual consideration, as must any accord and satisfaction, although consideration neednt
be commercially adequate so that nominal consideration will suffice: Thomas v Thomas (1842) 2 QB 851.
Without supplying good or even nominal consideration, a party may be in the same position as the tenant in
JeMaintiendrai Pty Ltd v Quaglia & Quaglia [1980] 26 SASR 101 per King CJ at 102:
The appellants promise to reduce the rent has no contractual force because it was made without consideration.
The acceptance of a sum of money which is less than that legally due is non binding and does not extinguish
liability for the balance unless there is fresh consideration: Foakes v Beer. The evidence does not disclose fresh
consideration. The respondents case therefore rests upon an estoppel to which the facts are alleged to give rise.

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Because a rigorous application of the rule in Pinnels case might lead to injustice, Lord Denning developed the
principle of promissory or quasi-estoppel, which he laid down in Central London Property Trust Ltd v High
Trees House Ltd [1947] KB 130.
In 1939, the plaintiff leased a block of flats to the defendant at a rental of 2 500 per annum. Because of the
outbreak of war the defendant had trouble filling the flats, and so the plaintiff agreed to accept half the rent, but
no period was stipulated for which the reduced rent was to apply. The defendant paid the reduced rent for five
years, but by late 1945 the flats had filled up, and the plaintiff sued for the full rent for the second half of 1945.
Held: the plaintiff was entitled to the increased rent from the latter part of 1945.
However, by way of a very important obiter dicta, Denning J indicated that had the plaintiff sued for the arrears
for the years 19401945 it would have failed, because of the agreement to reduce the rent in 1940. This was so,
even though the defendant had not provided any consideration for the plaintiffs promises to accept the lower
rent. Denning J justified this by way of equitable estoppel with the following words:
Where one party has by his words or conduct made to the other party a promise or assurance which was intended
to affect the legal relations between them and to be acted on accordingly, then once the other party has taken him at
his word, and acted on it, the one who gave the promise or assurance cannot afterwards be allowed to revert to the
previous legal relations as if no such promise or assurance had been made by him, but he must accept their legal
relations subject to the qualifications which he himself has introduced, even though it is not supported in point
of law by any consideration but only by his word.

Six important points arose:

1. The principle of promissory estoppel only applies where the parties have an existing contract and the
promise is to vary or discharge that contract.
2. The principle is a shield, not a sword: it can only be used as a defence to a promisors claim that they are
not bound by their promise or assurance.
3. The principle does not affect the rate that every simple contract requires consideration.
These three points are illustrated by Combe v Combe [1951] 2 KB 215. During divorce proceedings, Mr Combe
promised that after the divorce he would pay his former wife an allowance of 100 per annum, free of tax.
After the divorce MrCombe paid 25 only, with no further payments. In 1950, Mrs Combe brought an action
claiming 675, being the arrears of payment at the rate of 100 per year for six and threequarter years.
Held: the wife could only sue if there was consideration, there was in fact none. Thus the principle of
promissory estoppel did not assist Mrs Combe because she was using it:
as a sword not a shield, and
to create a contract, not in regard to a promise to vary an existing contract.
4. The principle only applies if it would be inequitable to allow the promisor to go back on their promise.

This was the decisive factor in D & C Builders Ltd v Rees [1965] 3 All ER 837. The plaintiff had performed
certain work for Rees, but the latter had not paid. Knowing D & C Builders were in financial difficulty, Mrs
Rees offered to pay 300 in full settlement of the account which was 482. Because of their precarious
financial position, D & C Builders accepted the amount offered and issued a receipt in completion of the
account. Later they sued for the balance.
Held: they were entitled to the balance. Lord Denning MR stated:
In applying equitable estoppel, however, we must note the qualification. The creditor is barred from his legal rights
only when it would be inequitable for him to insist on them. Where there has been a true accord, under which the
creditor voluntarily agrees to accept a lesser sum in satisfaction, and the debtor acts on that accord by paying the
lesser sum and the creditor accepts it, then it is inequitable for the creditor afterwards to insist on the balance in the
present case there was no true accord. The debtors wife held the creditor to ransom. The creditor was in need of
money to meet his own commitment, and she knew it.

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5. The promisor can resile from their promise by giving the promisee reasonable notice of their intention to do

so. In other words the principle does not prevent a promisor reverting to the legal relationship as envisaged
in the actual contract.

6. The promisee must act on the belief induced by the other party. This requirement has caused considerable

argument, mainly on the question of whether the principle requires that in reliance on the promise made,
the promisee must alter their position in a detrimental way. Lord Denning suggests that proof of detriment
is not necessary, but in Australia proof of detriment does seem necessary as shown by the case of Je
Maintiendrai Pty Ltd v Quaglia (1980) 26SASR 101.

Here the defendant was a lessee of a shop in the plaintiffs shopping centre. As many of the other shops in the
centre were often empty, the plaintiff agreed to reduce the rental due under the defendants lease for an indefinite
period. The defendant paid the reduced rent for 18 months. When the landlord found the tenant was about to
vacate the premises, he sued the tenant for the arrears.
The central issue was whether the tenant could use the principle of equitable estoppel as a shield against the
landlords claim. Held: that the tenant could be so protected. The judges further stated that the principle of
promissory estoppel was a part of South Australian law, and that detriment was an element of that principle.
King CJ said:
A person who promises or states his intention to another not to enforce or insist upon his legal rights is not
estopped from resiling from that position and reverting to the strict legal position, unless his doing so would result
in some detriment and therefore injustice to that other.

The High Court of Australia had its first opportunity to discuss the principle of promissory estoppel in Legione v
Hateley (1983) 57 ALJR 292. The parties had entered into a contract for the sale of land, the settlement date for
which was July 1 1979. The contract also provided that, in the event of one of the parties defaulting, the other
was obliged to serve him with a notice requiring that the default be remedied within a 14-day period, and that if
the notice was not complied with, the contract should be rescinded upon the expiry of the period.
The purchasers defaulted because they could not settle on July 1. Accordingly the vendors served the 14-days
notice which was to expire on August 10 1979. On August 9 the purchasers solicitor phoned the vendors
solicitor to advise that the ANZ bank would give finance to the purchasers who would be able to settle on
August 17. A secretary answered and replied: I think thatll be all right but Ill have to get instructions. In fact
the vendors refused to proceed and said the contract was rescinded on August 11.
Held: that the contract was properly rescinded. For the purchasers to have succeeded with promissory estoppel
two rules had to be complied with:
the representation must be clear and unequivocal, and
as a result of acting on representation the other party must have been placed in a position of material
disadvantage.
The secretarys response did not satisfy this criteria.
The first of the six points above regarding estoppel, is now under review in Australia following Commonwealth
of Australia v Verwayen (1990) 170 CLR 394. The relationship between parties need not be contractual , it can
be eg. litigation-based, and relate to future as well as existing facts. In protracted litigation, Verwayen suffered
financial and personal detriment relying on the Commonwealths misleading assurances as to its likely future
conduct. That is, in his action for negligence concerning the collision with loss of life of two naval ships, it
wouldnt rely on either of two possible defences: that it owed sailor Verwayen no duty of care, and/or that the
action was barred under the Statute of Limitations. Due to his reasonable reliance and detriment, according to
the High Court, the Commonwealth could not later change its mind and seek to rely on those defences. So, an
estoppel, whether common law or equitable, may be founded on a future as well as a present fact (Carter &
Harland 2002, p. 153).

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And so to sum up, the common law principles of estoppel only apply to representations of existing fact, not
future conduct: Hughes v Metropolitan Railway Co (1977) 2 AC 439; Grundt v Great Boulder Pty Gold Mines
Ltd (1937) 59 CLR 641, as approved of and applied by Mason and Deane JJ in Legione v Hateley [1983]
HCA 11 at paras. 16. Although, they expressed the view it was arguable given judicial ingenuity that, that
a statement of intention with respect to a future occurrence could amount to a statement of present fact. An
unsatisfactory, indeterminate version of promissory estoppel under equity law is now more or less good law
in Australia, the product of a long series of not altogether harmonious case law including Hughes, Grundt,
Central London Property Trust Ltd v High Trees House Ltd [1947] 130, Ajay v RT Briscoe (Nigeria) Ltd [1964]
1 WLR 1326, Legione v Hateley [1983] HCA 11, Walton Stores (Interstate) Ltd v Maher [1988] HCA 7, and
Commonwealth v Verwayen [1990] HCA 39the implications of this last case still being debated, with Meagher
et al. (1992, p. 405) asserting that it lacks a clear ratio decidendi. In Legione v Hateley, at para. 6, Mason and
Deane JJ said that:
there is strong authority in equity for a limited doctrine of promissory estoppelrepresentations (or promises)
as to future conductrestricted to precluding departure from a representation by a person in a pre-existing
contractual relationship that he will not enforce his strict contractual rights.

In Legione v Hateley, Mason and Deane JJ cited Ajay v RT Briscoe (Nigeria) Ltd with approval and reduced
promissory estoppel to two central elements (though their second element arguably equates to the 2nd and 3rd
parts of the 3 part Ajay case equation):
the representations must be precise and unambiguous; and
citing Dixon J in Thompson v Palmer (1933) 49 CLR at 547, that estoppel by representation will not
operate, unless, as a result of adopting it the other party will have placed himself in a position of material
disadvantage if departure from the assumption is permitted.
The three part verbal equation formulated by the Privy Council in Ajay v RT Briscoe (Nigeria) Ltd was
cited with approval and applied by King CJ in Je Maintiendrai, as well as subsequent Australian cases. The
requirements being that:
the promisee having altered its position (i.e. a mere High Trees type promise being insufficient)
on giving adequate formal or informal notice the promissor can retract the promise allowing the other
sufficient time to resume their original position and
the promise only becomes final and irrevocable if the promise cannot resume his position i.e. without
detriment.
Exactly what constitutes detriment or material disadvantage is subject to dispute. However there is a consensus
that it must be substantial, non-trivial and considerably more than the nominal consideration permissible in
contract law because, as Deane J observed in Commonwealth v Verwayen [1990] HCA 39, it lacks mutuality and
hasnt been bargained for as the cost of the promise. And so identifying the components of that detriment is vital
to establishing promissory estoppel.

Fraud on a third party

The courts will not allow a creditor who has agreed to accept a lesser amount as full settlement of their debt to
sue for the remainder if to do so would amount to a fraud on a third party. This principle is clearly illustrated in
the following case.
Hirachand Punamchand v Temple [1911] 2 KB 330, the plaintiffs, a firm of money lenders, lent Temple the
sum of 3 600 rupees. When the debt was not repaid the plaintiffs sought payment from the debtors father, Sir
Richard Temple. Sir Richard sent a cheque for 1 500 rupees stipulating that it was in full settlement of the debt.
The plaintiffs cashed the cheque and then sued the defendant for the balance.
Held: under such circumstances the debt is gone, because it would be a fraud upon the stranger who pays part of
the debt in discharge of the whole, that an action should be brought for the balance.

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Performance of an existing contractual duty between the promisee and a third party
Can a promise to perform a contractual obligation be consideration to support a promise made by a person who
is not a party to that contract?
In Shadwell v Shadwell (1860) 142 ER 62, the plaintiff, who was engaged to be married, notified his uncle of his
intended marriage. The uncle promised to make certain payments to the plaintiff once the marriage had taken
place. A dispute arose about some of the payments which were outstanding at the time of the uncles death, and
the plaintiff sued to recover those payments.
Held: he was successful because it was a benefitdetriment situation. The plaintiff had, in reliance on his uncles
promise, entered into a contract of marriage, and incurred pecuniary liabilities as a result. He could accordingly
recover from the estate.

Capacity to contract
Certain classes of persons do not enjoy full contractual capacity either because of age or mental condition.
The law protects such people by paternalistically imposing a set of status rules governing their presumed lack
of ability to protect their own selfinterest in transacting with or being imposed upon by others. Examples are
minors (infants), mental defectives and drunkards. Another class of persons have limitations placed on their
ability to enter into contracts. Examples are bankrupts, outlaws, and criminals. The law here provides protection
to the community from such people.
Corporations can have their contractual capacity limited by what is contained in the objects clause of their
memorandum of association and by statute. However, nowadays, corporations have by default, full legal
capacity to contract.
Infants (minors)
A person ceases to be an infant in the eyes of the law on the day preceding his or her eighteenth birthday.
Formerly the age of majority under the common law was 21, but this was reduced to 18 by the Age of Majority
Act 1974 (Qld).
Contracts of minors may be classified as:
(a) those which at common law are valid and bind both the infant and the other contracting party
(b) those which are valid unless and until they are repudiated by the infant
(c) those which are void or unenforceable.
Contracts binding on both infant and the other party

Necessaries
Contracts for necessaries are binding on minors because they encompass things without which the minor cannot
reasonably exist. Necessaries are those things without which an individual cannot reasonably exist in the society
in which he or she lives. They include food, clothing, medical care and shelter. Alderson B. in Chapple v Cooper
(1844) 13 M & W 252 gave a rather complete definition
Things necessary are those without which an individual cannot reasonably exist. In the first place, food, raiment,
lodging and the like ... Again, as the proper cultivation of the mind is as expedient as the support of the body,
instruction in art or trade, or intellectual, moral and religious information may be a necessary also.

In this case a contract by a widow (a minor) to pay for her husbands funeral was held to be binding as a contract
for necessaries.
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Whether a thing is a necessary depends upon the following:

1. Is the thing capable of being a necessary? This is a question of law.
2. Can the thing be properly regarded as a necessary for this particular infant? This is question of fact.
The Sale of Goods Act 1986 (Qld) brings out two important points:
1. to be necessary the thing must be suitable to the condition in life of the infant, and
2. he or she must actually require that particular item at the time of sale and delivery.
The onus of proving that the goods were necessaries at the time of sale and delivery rests on the supplier. All
useful articles and services may be necessaries, but items of mere ornament or luxuries will rarely be treated
as necessaries even if the infant comes from a well-to-do family. In Nash v Inman [1908] 2 KB 1, Nash, a
SavileRow tailor, sued Inman for clothes supplied to him when he was an undergraduate at Cambridge. Inman
already had an adequate supply of suitable clothes.
Held: the additional clothes supplied were unnecessary.

Contracts for the infants benefit

An infant is bound to pay a reasonable sum for his or her education or in training for a profession or trade. But
the contract must be of benefit as a whole to the minor as shown in Leng & Co Ltd v Andrews [1909] 1 Ch 763.
Andrews, a minor, on entering the employment of a Sheffield newspaper, agreed not to become connected with
another newspaper within twenty miles of Sheffield.
Held: the agreement was more onerous than beneficial, and therefore not binding on Andrews.
However in Roberts v Gray [1913] I KB 520, Gray was an infant, being trained as a professional billiard player.
He agreed with Roberts to go on a joint tour during which Roberts would instruct and help him.
Held: Roberts was awarded damages for Grays refusal to carry out the contract.
Contracts which may be repudiated
These are binding only until the minor repudiates the contract, either during infancy, or on, or within a
reasonable time after, attaining majority.
In Davies v BeynonHarris (1931) 47 TLR 424, an infant took a lease of a flat shortly before becoming of full
age. Three years later he was sued for arrears of rent.
Held: the defendant was liable, because the lease, being voidable not void, had not been repudiated within a
reasonable time of his turning 21 (his majority) and was therefore binding on him. In Nicholson v Nicholson
[1952] NZLR 53, a separation agreement made when Mrs Nicholson was nineteen years of age was held to be
voidable, not void. It had not been repudiated by Mrs Nicholson during infancy or upon attaining her majority.
She could therefore use the agreement as the ground for divorce.
Contracts void at common law
Contracts void at common law are:
(a) contracts for the repayment of money, including a bank overdraft
(b) contracts for the supply of goods other than necessaries, and
(c) accounts stated.
It has long been a principle of common law that money lent to a minor cannot be recovered.

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In Cowern v Nield [1912] 2 KB 419 Nield, an infant, carried on business as a hay and straw merchant. Cowern
paid 36 for hay and clover but on delivery refused to accept it because of its condition. Cowern sued for
damages for breach of contract or for the return of 36 as monies paid on a consideration that had wholly failed,
but he was unsuccessful. However in Doyle v White City Stadium Ltd [1935] 1 KB 110 it was held that an infant
boxer was bound by a contract incorporating the rules of the Boxing Board of Control. The contract as a whole
was for the infants benefit.
An adult who supplies necessaries to an infant at the request of the infant, and upon the infants promise to
repay, is entitled to recover the amount spent from the minor. The adult stands in the same position as a trader:
Ellis v Ellis (1698) 1 Ld Raym 344.
In the case of lending money to a minor an adult who does so cannot recover at common law: Earle v Peale
(1711) 1 Salkeld 332 where it was stated [the money] may borrowed for necessaries, but laid out and spent at
a tavern. However equity has mitigated the common law rule, so that a lender can recover from an infant if the
loan was actually on necessaries.

Aliens
Aliens have the same contractual capacity as Australian citizens, but they may not take a majority shareholding
in certain public companies. In wartime, enemy aliens are subject to incapacities and cannot make a contract
with an Australian citizen or take proceedings in Australian courts, even on a contract made prior to the war:
Porter v Freudenberg [1915] 1 KB 857.

Corporations
A corporation (company) is a legal entity separate and distinct from the persons who compose it. A companys
contractual capacity is limited by the objects clause of its memorandum of association, and by statute: Ashbury
Railway Carriage & Iron Co v Riche (1875) LR 7 HL 653. The memorandum of the company gave it power
to make and sell railway carriages. The company contracted to purchase a railway concession in Belgium. The
articles of the company purported to give the company power to extend its business beyond the memorandum
by special resolution. The company passed a special resolution to ratify the purchase.
Held: that the contract was ultra vires (beyond the powers) the company and void.

Mental disability
Contracts made with a person suffering mental disability are valid and binding unless it can be shown that at the
time the contract was made, the insane person was wholly incapable of understanding the nature of the contract
and that the other party was aware of the condition: Imperial Loan Co v Stone [1892] 1 QB 599. The Imperial
Loan Co sued Stone on a guarantee which he had made. Stone said that at the time of signing the guarantee he
was insane and incapable of understanding what he was doing. The jury accepted this, but also found that the
company were aware that when Stone signed the guarantee he was insane.
Held: the defendant was liable under the guarantee. Accordingly to plead insanity successfully a party must prove:

(i) that at the time of the contract they were disabled to the point where they could not understand what
they were doing
(ii) the other party knew, or ought to have known of the disability.
Drunken persons
The law is similar to those suffering mental disability. If a person is in such a state of intoxication that they
cannot appreciate the nature of what they are doing and the other party knew or ought to have known of the
condition, then the contract is voidable: Matthews v Baxter (1873) LR 8 Ex ch 132. Here the defendant, while
grossly intoxicated, attended an auction. He was the successful bidder in a contract to purchase land and houses.
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At the time of the auction it was obvious he was drunk. After he sobered up he ratified and confirmed the
contract. Later he changed his mind and refused to proceed with the purchase.
Held: the defendant was liable because he had ratified the contract when sober.

Bankrupts
When a person is adjudicated bankrupt all property rests in the assignee. A bankrupt cannot enter into contracts
involving more than $500 without permission of the assignee.

Sovereign and diplomatic immunity

Foreign sovereigns and diplomatic representatives are entitled to immunity from suit in courts. They cannot be
sued in an Australian court unless they submit to the jurisdiction of the court.

Outlaws and criminals references

Under common law a person declared an outlaw was no longer recognised as a person. The law withdrew all
protection, rights and privileges. Thus an outlaw could not sue or be sued. A person once under sentence of death
legally became an outlawbeyond the pale of the law: Dugan v Mirror Newspapers Ltd (1979) 53 ALJR 166.
DArcy Dugan had originally been sentenced to death for attempted murder. This was commuted to life
imprisonment. During the term of his imprisonment a Sydney newspaper published what Dugan alleged were
defamatory statements about him. He sued.
Held: that Dugan was technically and legally a non-person. As an outlaw he had no rights to sue. The case
was accordingly dismissed.

References
Atiyah, PS 1986, Essays on contract, Clarendon Press, Oxford.
Carter, JW & Harland, DJ 2002, Contract law in Australia, 4th edn, LexisNexis Butterworths, Chatswood.
Carter, JW, Peden, E & Tolhurst, GJ 2007, Contract law in Australia, 5th edn, Lexis-Nexis Butterworth, Sydney.
Graw, S 2002, An introduction to the law of contract, 4th edn, Law Book Co, Sydney.
Graw, S 2005, An introduction to the law of contract, 5th edn, Law Book Co, Sydney.
Loke, F 1996, Cost of cure of difference in market value? Toward a sound choice in the basis for quantifying
expectation damages, Journal of Contract Law, vol. 10.
Meagher, RP, Gummow, WMC & Lehane, JFR 1992, Equity: doctrines and remedies, 3rd edn, Butterworths,
Sydney.
Peden, E & Carter JW 2006, Entire Agreement and Similar Clauses, Journal of Contract Law, March, vol. 22.
Turner, C & Trone, J 2013, Australian Commercial Law, 29th edn, Law Book Co., Pyrmont.

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