Legal Relations For Business And Corporations Law

Elements of a Contract

Discuss about the Legal Relations for Business and Corporations Law.

The case study describes an agreement between a father and his son, Richard, for the upkeep of the family compound at a weekly fee of two hundred dollars ($200). After four weeks the father reneges on his end of the bargain stating that it is Richard’s responsibility as a family member to care for the compound. He argues further that as Richard is getting ‘free board and lodging’ payment should not be required. The scenario in question gives rise to various issues under Contract Law. It is evident that an agreement was arrived at between Richard and his father, however, whether this agreement creates a contract enforceable by law is the key issue to be discussed in this paper.

Gulati (2011) believes that the essence of Contract Law is validating promises made by parties in exercise of their free will and independence. Generally, for a contract to exist an offer and an acceptance, intent to be bound by law, consideration, capacity and freedom to contract, as well as the comprehension and approval of the circumstances in place should be present (‘Elements of a Contract’ 2015). According to Andrews (2015), the ‘intent to create legal relations’ doctrine goes hand in hand with the Doctrine of Consideration, that is, the element of a price paid. As such, should a person wish to sue on a promise he must first show the element of consideration exists and that secondly the promise was exchanged under circumstances illuminating an ‘intent to create legal relations’ (Andrews 2015).

Evidence on the existence of intent can be either express, by way of words, or implied in the parties’ actions (Latimer 2012). In Grant v Bragg [2009] EWCA Civ 1228, the court recognised that “…where parties have agreed that informal agreements…should be finalised in writing, the effect is to render the parties’ dealings…subject to contract”. With regard to intention being implied by the parties actions, McHugh JA in Integrated Computer Services Pty Ltd v Digital Equipment Corp. (Aust) Pty Ltd [1988] CA 365, stated that “…a contract may be inferred from the acts and conduct of parties as well as or in the absence of their words”. This conduct should be analysed to determine consensus, this point was reinforced in Ormwave Pty Ltd v Smith [2007] NSWCA 210.

With regard to intention, agreements have been categorised into those of a social or domestic nature and those of a business or commercial nature (Gibson 2014). Social or domestic agreements are those involving family members or friends as parties in which ‘a rebuttable presumption that parties did not intend legal relations exists’ (Gibson 2014). Traditionally, agreements created under the social or domestic context were unenforceable as they were presumed, at first instance, to be lacking serious intention (Gibson 2014). It was believed that in respect of policy, contract law should not interfere in family situations as the courts would be flooded by petty family discords (McKendrick & Liu 2015).

Intent to Create Legal Relations

The decision in Ermogenous v Greek Orthodox Community of South Australia Incorporated [2001] 209 CLR 95, change the test for intention from a rebuttable presumption to an objective analysis of the conduct of the parties (Gibson 2014). According to Lord Denning in Merritt v Merritt [1970] 1 WLR 1211 courts did not attempt to adduce intention by examining the minds of the parties but rather by inquiring whether a reasonable man would consider the agreement as an intention to contract (Gulati 2011).  The leading decision in domestic arrangements, other than those between married parties, is Jones v Padavatton [1969] 1 WLR 328 CA where a daughter resigned from her job in the US and moved to London on her mother’s invitation (Furmston & Tolhurst 2010) The mother had promised to pay her $200 a month if she moved to London to study for the bar, after various attempts and failures at the examination the mother terminated the agreement and sort to repossess the house she had purchased for her daughter based on the aforementioned agreement (Stone & Devenney 2014). In this case, Salmon LJ analysed the facts rather than automatically applying a presumption and found that a valid contract was in operation although it had since expired (Andrews 2015).

In addition to the objective test, courts have also in some cases opted to respect custom as a test for the intention to create legal relations among familial parties (Lucke 1970). This was illustrated in Tarverner v Swanbury [1944] SASR 194 where an Italian immigrant and market gardener hired his son for a number of years with the promise of his sustenance and some allowance. In this case, Reed J stated that intention to contract was absent in the agreement as it observed an Italian custom that was not normally subject to legal deliberation (Lucke 1970).

The agreement between Richard and his father in the case study provided is one that falls in the bracket of social and domestic agreements. At first instance, it would be subjected to a rebuttable presumption that it was not meant to be legally enforceable. However, as courts have evolved to adopt objectivity in adjudging such cases, the question of intent will be answered by inferences from the conduct of Richard and his father. It is clear from the conduct of Richard’s father that this was not a matter he intended to be legally enforceable as it is every family member’s responsibility to care for the property. Should Richard decide to proceed with filing a suit to seek any remedy, he should be advised that the onus would be on him to prove that the agreement was a valid contract. He should also prove that it is not customary for parents to ‘hire’ their children in his community, where such arrangements are free of intention to contract. It is important to note that proving intent in such cases is an uphill battle for the plaintiff and the reasonable solution would be to handle the matter amicably outside of court.

Social and Domestic Agreements

Frere Bros contracted Joe, based on his prowess in the acting industry, for five years during which he was not to offer his acting services elsewhere. However, a year later, Joe engaged Pretty Pictures in an agreement to star in their film. The issue in question in this scenario is whether Joe’s actions constitute a breach of contract. This will be determined by analysing whether the exclusivity clause, restraining Joe’s freedom of employment, was valid. At face value, it would seem that there was indeed a breach of contract as Joe violated a term in the contract that he had previously agreed to. However, as will be seen, the issue of exclusivity clauses in personal service contracts is one that elicits great discourse due to its sensitive nature.

There exists, in every contract, an implied requirement that each party act in good faith so as not to hinder the contract’s execution (LaMance 2013). Employment contracts, in particular, expect good faith and fidelity from an employee in their service where fidelity simply requires an employee’s consideration for their employer’s interests (‘Contracts of Employment – The Duty of Fidelity’ 2013). Smith LJ in Robb v Green [1895] provided the first expression of this duty in its modern form as “an implied obligation of the servant to serve his master with good faith and fidelity” (Frazer 2015). The Duty of Fidelity comprises of clear elements such as the duty not to compete with the employer which has been identified in case law as illustrated in Hivac Ltd v Park Royal Scientific Instruments Ltd CA 1946 (Brooks 2001). In this case, the plaintiff’s employees worked for the defendant, who operated in the same industry, during their spare time; the spare time work was held to be a breach of contract based on the Doctrine of Fidelity (Brooks 2001).

The orthodox standing of the law with regard to breach of exclusive service clauses has been the decision in Lumley v Wagner [1852] EWHC (Ch) J96, where Lord St Leonards granted an injunction restricting an opera singer from performing at a theatre as she had contacted to perform exclusively at the plaintiff’s theatre for a period of three months (Brooks 2001). The rule in Lumley was also applied in Curro v Beyond Productions Ltd [1993] 30 NSWLR 337 to prevent a television presenter from breaching her service contract by switching to a different television channel (Latimer 2012). This rule has been keenly observed by Australian courts over the years, which have been more ‘traditional’ than the British ones (Brooks 2001).

Breaching of Exclusivity Clauses

According to Brooks (2001), with regard to restraints in the course of employment, British courts have adopted the category of ‘specified services’ over the traditional one of ‘special services’ restricted to the entertainment industry. They have opted to accept the legitimacy of exclusive service contracts on the grounds that the restriction on other employment is limited to the specific field in which the employer is concerned and that said restriction is reasonable (Brooks 2001). The test for reasonableness involves weighing the employee’s short-term loss of employment against the loss of skills to a competitor (Brooks 2001). The restraint will be enforced by a court of law if it is proved that “the employer has a genuine interest to protect” and the clause does not overreach in protecting this interest (Brooks 2001). Additionally, “an employer who wants exclusive service must obtain an express agreement to that effect” (Brooks 2001).

Contracts for personal service are not usually subject to the doctrine of specific performance (Latimer 2012). This is because the effect of such a remedy would force the party in breach to either execute their end of the bargain or starve (Sullivan & Hilliard 2016). This point was illustrated in Warner Brothers v Nelson [1937] 1 KB 209 where the courts granted injunctions rather than specific performance orders as remedies for breach of exclusivity clauses(Sullivan & Hilliard 2016). Lord Cairns in Doherty v Allman [1878] 3 App Cas. 709 stated that where parties, at a reasonable price, who are well aware of the circumstances in question, agree to prohibit a particular act or omission, then the work of an equitable court, through an injunction, would be to simply enforce the agreement, that the particular act or omission is prohibited (Riley 2012). Additionally, where a term in a contract creates a requirement, which if infringed, renders said term valueless and ineligible for compensation then damages in such a case are likely to be inadequate (Riodan 2004).

In the case study provided, Frere Bros made it expressly clear in their contract with Joe that they required exclusive service by ensuring he promised to work with only them for a period of five years. Additionally, Pretty Pictures is a business operating in the same industry as Frere Bros and as such they are competitors. Joe’s skill as one of the best actors in the industry would give Pretty Pictures a competitive advantage over Frere Bros. This goes to show that Frere Bros does, in fact, have a genuine interest to protect by restricting Joe from contracting with other film production companies. With this is mind it is clear that Joe has breached his duty of fidelity to Frere Bros. As a remedy of damages would be inadequate and that of specific performance highly prejudiced against the actor, Frere Bros can only seek an injunction to stop Joe from contracting with Pretty Pictures.

References

Andrews, N., 2015, Contract Law, Cambridge University Press.

Brooks, A., 2001, ‘The Limits of Competition: Restraint of Trade in the Context of Employment Contracts’, UNSW Law Journal, 24(2), 346-381.

Frazer, A., 2015, ‘The Employee’s Contractual Duty of Fidelity’, The Law Quarterly Review, 131(1), 53-77.

Furmston, M. & Tolhurst, G.J., 2010, Contract Formation: Law and Practice, Oxford University Press, Oxford.

Gibson, A. & Fraser, D., 2013, Business Law 2014, Pearson Education, Australia.

Gulati, B., 2011, ‘“Intention to Create Legal Relations”: A Contractual Necessity or An Illusory Concept’, Beijing Law Review 2(3), 127-133.

LaMance, K., 2013, ‘Contract Good Faith and Fair Dealing’, in Legal Match, viewed 5 September 2016, from https://www.legalmatch.com/law-library/article/contract-good-faith-and-fair-dealing.html.

Latimer, P., 2012, Australian Business Law, CCH Australia Ltd.

Lucke, H.K.,  1970, ‘The Intention to Create Legal Relations’, The Adelaide Law Review, 3(4) 419-430, viewed 5 September 2016, from https://www.austlii.edu.au/au/journals/AdelLawRw/1970/1.html.

McKendrick, E. & Liu, Q., 2015, Contract Law: Australian Edition, Palgrave Macmillan.

O’Sullivan, J. & Hilliard, J., 2016, The Law of Contract, Oxford University Press.

Riley, J., 2012, ‘Sterilising Talent: A Critical Assessment of Injunctions Enforcing Negative Covenants’ , Sydney Law Review, 34(4), 617-635, viewed 5 September 2016, from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2244676.

Riordan, J., 2004, ‘Equitable Remedies’, Jaani Net Resources, 1-13, viewed 5 September 2016, from https://www.jaani.net/resources/law_notes/contracts/13_Equitable_remedies.pdf.

Stone, R. & Devenney, J., 2014, Text, Cases and Materials on Contract Law, Routledge.

The Law Handbook, 2016, Elements of a Contract, viewed 5 September 2016, from https://www.lawhandbook.org.au/07_01_02_elements_of_a_contract/.

TWN Solicitors, 2013, Contracts of Employment-The Duty of Fidelity, viewed 5 September 2016, from https://www.twmsolicitors.com/news-and-blogs/contracts-of-employment-the-duty-of-fidelity/.