Henry, Tina, and Jenny are the directors of Bikes Pty Ltd, a company that imports bicycles from Europe for resale in Australia. Tina and Jenny authorise Henry to enter into contracts, on behalf of Bikes Pty Ltd, with European bicycle suppliers. Henry signs a supply agreement with European bicycle supplier, Wheels Ltd. Bikes Pty Ltd places an order with Wheels Ltd for the supply of 500 bicycles to meet anticipated demand in Australia during the upcoming summer months.

Wheels Ltd terminates the agreement and refuses to ship the bicycles. The directors of Bikes Pty Ltd are all shocked and disappointed because the company has already spent over $10,000 in advertising to market the bicycles in Australia. They threaten to sue Wheels Ltd for breach of contract but are directed to a clause in the agreement that states:

This written agreement is not intended to be a formal or legal agreement, but a honourable pledge between Wheels Ltd and Bikes Pty Ltd.

Tina and Jenny cannot believe Henry could be so careless as to sign an agreement containing a clause like this. They are also concerned that their reliance on Henry may also amount to carelessness on their part.

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