Business Law

LAW110- Topics 5-9

Business Law in Action: Contracts Scenario and Video

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Business Law in Action: Video

Why do you need to understand contracts in the business world? In this video, Nathan Pearc the relevance of Module 3 to his professional accounting practice. Discuss your thoughts on and share how these concepts are relevant in your own professional path.

Contracts Scenario

Preview this scenario before you study Topics 5-9, so you know what you should be able to do at the end. Then, when you have completed your study of Topics 5-9, return to this scenario and follow the directions below to practise the ILAC method with other students on the forum.

Directions : When you complete the readings and activities in Topics 5-9, you should be able to conduct a legal analysis of the following scenario. All students should participate in the threaded forum discussion about this scenario. Your subject coordinator will start a thread for each of the steps in the ILAC method, and facilitate the discussion so you can practise and get feedback on using this method to analyse legal scenarios like those you will see on assessments and the exam.

Scenario : Before signing a contract for the purchase of a house located at Sesame Street, Bathurst, Ernie (the purchaser) asked Ms Bigbird (the seller) whether there were any white ants in the house. Ms Bigbird told Ernie that there were none. Ernie immediately proceeded to sign the contract to buy the house. The written

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agreement made neither reference to the oral question nor to its answer relating to white ants. Two months later Ernie discovered that the house was riddled with white ants and wishes to sue Ms Bigbird.

You have been asked to advise Ernie in this particular matter. Consider possible remedies and defences.

Topic 5: Formation

Interactive Video (9:14 minutes)

Learning Outcomes

At the completion of this topic you should be able to:

· explain the three elements of a valid contract: agreement, intention to be legally bound and consideration;

· describe the process of contract formation through offer an acceptance;

· outline the impact of estoppel on the law;

· distinguish contracts, which are intended to be legally binding, from other types of non-contractual agreements;

· explain the role performed by consideration in contract law;

· explain how problems created by consideration can be circumvented; and

· explain how international contracts differ from domestic contracts, and what treaties govern their terms.

Readings

Textbook: Chapters 6, 7, 8 and 9

Note: The textbook deals with the three elements of a valid contract in a different order than they are presented here – however it is recommended that when reading the textbook, you follow the order used in this module: ie agreement and then intention to create legal relations and then consideration.

Forum Discussion

Post your questions and thoughts to the forum as you study.

Topic Review Quiz

When you have finished the prescribed readings, taken notes, answered the exercise questions, and discussed issues on the forum, you should take the Topic 5 Review Quiz at the end of this Topic.

This quiz is a learning activity and will not affect your marks in the subject. It is designed to help you assess your understanding of key concepts from this topic before moving on to the next one. You may take the quiz as many times as you like. You should take time to review the answers to each question and study the concepts you did not understand.

A. Introduction to contract law

The law of contract is concerned with the rights, duties and obligations of parties who have entered into a legally binding agreement. This should be clearly distinguished from the law of torts which imposes obligations automatically on everyone.

The law of contract has it origins in laissez-faire philosophy. This philosophy is based on the idea that individuals should be free to contract with each other on whatever terms they wish, with minimal governmental intervention and subject only to limited restraint on the grounds of public policy (i.e. parties should not be able to enter into a contract for illegal purposes).

Fundamental to this philosophy is the notion that the parties to a contract are essentially equal and therefore can negotiate the terms of a contract so that it is acceptable to both. Accordingly, if a party to a contract enters into a bad bargain then that is considered to be their own fault as they failed to make proper inquiries or foolishly agreed to a term which was particularly harsh.

Parties entering into contracts thus have the responsibility of making whatever inquiries are appropriate to satisfy themselves in respect to the terms and subject matter of the transaction. This concept is found in law in the maxim caveat emptor, which means 'buyer beware'.

Since the late 1960's the laissez-faire philosophy has been weakened by increasing judicial and legislative recognition that parties to a contract are often not in equal bargaining positions and this may result in unfair or unconscionable contracts being entered into, often by individuals who are unable to negotiate with large corporations. Anyone who has tried to negotiate the standard terms of a mortgage with a large bank will appreciate the difficulties which a consumer will have in trying to reach an agreement which is acceptable to them, as well as to the bank.

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In an attempt to remedy some of the more serious excesses of the laissez-faire system the courts and Parliaments have developed a range of doctrines and have introduced legislation intended to protect consumers when entering into certain contracts. The equitable doctrine of unconscionability, the Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth))and the Fair Trading Acts of the various jurisdictionsare good examples of this.

Classifications of contracts

The importance of the distinction lies upon the fact that if the contract is a unilateral one, the terms of the offer will indicate that the offeror does not contemplate acceptance until performance of the act that has been called for has been completed. i.e. the reward for finding a missing item. If the offered abandons their effort half-way though, they would not be in breach of the contract.

Simple contract: Straightforward with no particular formalities and the evidence of its existence is oral or written. A simple contract may be:

a. Bilatera l-This is a promise for a promise, where the exchange of promises create the contract.

b. Unilateral- This is a promise which is accepted by doing something. It is a promise for an act.

Formal contract : These type of contracts are signed, sealed and delivered in a deed

B. Elements of a valid contract

A contract can be defined as a legally binding agreement. This serves to distinguish contracts from other types of social agreement, which are not legally binding – for example where one person agrees to go to the other's house for dinner. Contracts are fundamental to an individual's daily life. Every time we purchase something in a shop, ride in a taxi or book a room in an hotel, we enter into a contract. The knowledge that contracts are binding and that they will be enforced by the courts is the foundation of the certainty that underpins the business sector.

There are three essentials of a valid contract:

agreement

intention to be legally bound and consideration

C. Agreement (offer and acceptance) – 1st essential

Offer

The existence of an agreement obviously depends on communication between the parties. However it is important to note at the outset that communication can be by any means – by writing, by spoken words or even by actions. So, if I go into a shop and put goods down at the till, and the till-operator enters the price, takes my money and then I take the goods, we have entered into a contract even if no words have passed between us. Our agreement is implicit from, and has been communicated by, our actions.

The process by which an agreement to enter into a contract occurs is that of offer and acceptance. In this process the person who makes the offer is the offeror, the person who receives the offer is the offeree.

Thus, an offer is an undertaking by the offeror made with the intention that it will bind the offeror as soon as it is accepted by the offeree. A conditional offer is not an offer because of it were accepted, there would not yet be a contract (Macquarie Generation v CNA Resources [2011] NSWC 104) .

A contractual agreement occurs when

the offeror has communicated an offer to the offeree; and the offeree has communicated acceptance to the offeror.

It is important to note that the offer may not be as clear as one party saying to the other 'I offer to sell you my car' and the other party saying 'I accept'. Where there has been a series of negotiations involved in reaching an agreement it is sometimes necessary to consider all of the representations made to determine precisely what was offered by one party and what was accepted by the other.

Although ideally contractual liability should arise only when each party actually agrees to enter into a contract (that is, has subjective intention to offer or accept), the law has to address the question of what happens if a person appears (from an objective perspective) to agree to something even if they don't actually intend to agree or communicate agreement in error. In other words, the law has to deal with the problem posed by the fact that it is impossible to tell what is in another person's mind. For this reason, the courts adopt an objective approach in determining whether there has been offer and acceptance – ie, they ask whether a reasonable person observing the conduct of the offeror or the offeree would believe that they were making an offer or giving acceptance. As was held in Smith v Hughes (1871) LR 6 QB 597 at 607

If, whatever a man's real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he intended to agree to the other party's terms.

See also Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523, and Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 where it was held that agreement could be inferred from conduct.

The effect of this doctrine in the law of contract is that if a person appears to have made an offer or communicated acceptance (that appearance being tested according to how it would be interpreted by a reasonable person in the position of the other party), and the other party has relied on that appearance, then the first party will be taken to have made the offer or communicated the acceptance.

Offers can be expressed in writing or in words or can be implied from conduct – for example, taking groceries to the cashier at a store implies an offer to buy them. Usually (in the vast majority of cases), and offer is a bilateral offer – that is, it is made to a specific person, and the contract comes into being when the offeror receives that person's communication of acceptance.

The fact that a document is called an 'offer' is not conclusive. If the person forwarding the document states that legal liability is not intended until it is signed, the document is only an invitation to treat awaiting an offer in the form of a signature from the person to whom it is addressed.

However, in a few circumstances, the offer is a unilateral offer. This means that the offeror communicates it to a large group of people – sometimes this is said to be an offer 'to the world at large'. In that circumstance anyone who hears or reads the offer can form a contract just by doing what the offeror asks, without needing to communicate acceptance to the offeror. This is shown by Carlill v. Carbolic Smoke Ball Co [1893] 1 QB 256 in which a company offered a £100 reward to any person who caught influenza after using one of its smoke balls. After buying and using a smoke ball, Mrs. Carlill caught influenza and sued for the reward. The court held that an offer did not have to be made to a particular person – it could be made to the 'world at large' resulting in a contract with anyone who came forward and accepted it. The court also held that in such event, the usual rule that acceptance must be notified to the offeror did not apply – the offeror was taken to have agreed that anyone who did what the offer invited them to do had accepted the offer.

A publication, such as an advert, which uses words that indicate that an offer is being made to a specific person (or to the public) - for example by using the words 'for sale' – would be an offer capable of being accepted by the offeree (or by the public at large if widely published).

However, an offer must be distinguished from 'invitation to treat' (that is, an invitation to make an offer).

Under the common law, the mere listing of a price in an advert or putting price labels on goods without the use of words such as 'for sale' do not amount to the making of an offer – they are an invitation to treat – that is, an invitation to the customer to make an offer. The reason for this rule is to protect shop owners who mis-label price-tags – if the price-tag was an offer that the customer could accept simply by picking up the item, then the contract would be binding at that moment and the shop keeper would have to accept the amount indicated. But since it is the customer who is making the offer, the shop-keeper can decline to accept if the price-tag is wrong. The operation of this rule is shown by Pharmaceutical Society of Great Britain v. Boots Cash Chemists [1953] 1 QB 401 in which an Act required drugs to be sold under supervision of a pharmacist. A pharmacy put goods on display on open shelves with price tags attached.

Customers would then select the goods and take them to the check-out counter, where the pharmacist was on duty. The pharmacy was prosecuted on the basis that by putting the goods on the shelf it had been making an offer, which customers then accepted by picking up the goods. The court held that a display of goods is an 'invitation to treat', not an offer, and thus the contract had not been entered into when the customer selected the goods. The Act had not been breached because it is the customer who offers to buy the goods, not the shop which offers to sell. The contract was formed when the customer took the goods to the till (where the pharmacist was on duty) and the pharmacist accepted the offer. If the pharmacist declined the offer, there would be no contract.

With respect to automatic vending machines, the offer is made when the proprietor of the machine holds it out as being ready to receive money. The acceptance takes place when the customer puts his or her money into the slot ( Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 ).

An offer will terminate (and thus no longer be open for acceptance) in the following circumstances:

Where the offeror has revoked the offer, which he can do at any time before acceptance by the offeree has reached the offeror (see Byrne & Co v Tienhoven (1880) LR 5 CPD 344). The offeror may revoke the offer even if he has stated that the offer will remain open until a particular date or time (The only exception to this is if the offeror and offeree have entered into a separate contract called an option contract, whereby the offeror has paid the offeree something, and the offeror has agreed to leave the offer open for a particular period).

Where it has not been accepted by the offeree within the time or in accordance with the place or method of communication (if any) stipulated by the offeror. So if an offer is stipulated to be open until 11 am on 20 October, it will lapse automatically if no acceptance has been received by that time.

Where the offer has not been accepted within a reasonable time (assuming that the offeror did not stipulate a time for acceptance). A reasonable time is considered in view of all the circumstances of the offer – e.g. a reasonable time to accept an offer of perishables will be less than that for non-perishables.

Where the offeree has made a counter-offer: A counter offer is an offer by the party to whom the original offer was made to deal with the first party on different terms. This destroys the original offer, which is thus no longer open for acceptance by the offeree. For example, in Hyde v Wrench [1840] 49 ER 132, H made an offer to sell W a plot of land for £1,000. W responded by stating that he would pay £950. W thereby made a counter-offer which vitiated the first offer by H. H rejected W's counter-offer. Because a counter-offer destroys the preceding offer, when W then contacted H saying that he would pay £1,000 after all, and H said that he no longer wanted to sell the land, the court rejected W's argument that there was a contract. There was no offer in existence for W to accept. The rule about counter-offers applies to every detail of an offeree's response. Thus, if A offers to sell B a green car, for xid- 430244_1,000, with delivery at 10 am on 3 October, and B responds 'I agree to buy your green car for

xid-430244_1,000 with delivery at 10.30 am on 3 October', that is not acceptance. It is a counter-offer. Where the death of either party has occurred before acceptance.

Acceptance

In order for there to be a valid contract the party to whom the offer has been made must accept the offer and that acceptance must be communicated to (that is, reach the mind of) the offeror (subject to the exception relating to 'offers to the world' discussed above).

Acceptance must be made in response to the offer. According to the 'mirror principle' There must be a necessary connection between the offer and the acceptance ( R v Clarke [1927] HCA 47). In addition,

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acceptance must also be unqualified, that is, there must be no further questions, with nothing further to be negotiated between the parties.

Conditional assent is not binding unless and until the offeror agrees to the condition - the condition has to be fulfilled as a prerequisite for a contract. Preliminary agreements are not contracts. The words 'subject to contract' may mean that the parties do not intend to be bound until a written contract has been prepared. There is a presumption in favour of a contract if the parties are in full agreement and are just waiting to sign a written contract in the future (Masters v Cameron [1954]HCA 72 ).

There are four possibilities when parties have agreed on contractual terms but agree to finalise them in later contract –their agreements is subject to contract:

1. The parties are in full agreement and intend to be bound by it. However, they intend to have terms re-stated in a form which will be fuller or more precise but no different in effect

2. The parties are in full agreement on all the terms of their con tract and do not intend to change anything, but they have made performance of one or more of the terms conditional on signing the document

3. The parties do not intend to make a concluded contract unless u ntil they sign a written contract.

In each of the first two cases there is a binding contract. There is now a fourth possible meaning of preliminary agreements which is accepted as a fourth category in addition to the three set out in Masters v Cameron [1954] HCA 72:

'One which the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make further contract in substitution for the first contract, containing, by consent, additional terms (Baulkham Hills Private hospital Pty Ltd v GR Securities Pty Ltd). This means that the parties are bound by a contract so that neither party can delay performance of the contract while waiting for the signing of the formal documentation including the contract'.

Acceptance must be clear and certain; the parties must be definite about the exact terms of their contract, and if the terms are not clear and not certain there is no contract ( Scammell and Nephew Ltd v Ouston [1941] AC 251).

Generally, acceptance can be communicated by any means, irrespective of how the offer was communicated. It can be expressed or implied. If many words and /or documents have passed between the parties, it may be difficult to fix the time of acceptance ( Brodgen v Metropolitan Railway Company (1877) 2 App Cas ). However, if a certain manner of acceptance is required then it must be complied with and failure to comply will render the purported acceptance invalid.

Offers and counter offers such as purchase orders, sales acknowledgement forms and invoices may result in a contract after a 'battle of the forms'. It raises the issue of whether there is a contract and, if so, what the terms of the contract are. There are three different approaches to help work out whether there is a contract after a 'battle of the forms' and what its terms are:

1. The 'last shot' approach. The battle is won by the person who fires the last shot. There is a contract as soon as the last form is sent and received without objection. The issue is to determine, who fired the last shot.

2. The 'higher status' doctrine. This aims to clarify the obscurity of the terms. The court may give preference to a document which contains the formation of a contract or an invoice.

3. The 'global' or 'synthesis' approach . It recognises that the traditional rules of offer, counter-offer, rejection, acceptance and so on nay not always work out. Under this approach, contract law looks at the conduct of the parties and all the letters and documents between

them-even if they are imperfect or incomplete- to determine whether the parties have agreed on

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all important points (Butler Machine Tool Co Ltd v Ex-Cell-o Corporation (England) Ltd [1979] 1 WLR 401).

An exception to the rule relating to communication being effective when it reaches the mind of the offeror is the postal acceptance rule, established in the case of Adams v Lindsell (1818) 106 ER 250. This rule is to the effect that, where the offeror impliedly nominates the post as a method of communication by sending the offer in the mail, then the acceptance is effective when the offeree puts the acceptance letter in the post, not at some later date when the offeror receives the acceptance. Thus, assume that A sends B a letter offering to sell a car. B gets the letter on 1 October and posts their acceptance on 4 October. On 6 October, before receiving the acceptance, A contacts B to revoke the offer. A receives the letter on 10 October. In that scenario, there is a contract, as acceptance occurred on 4 October, so it was no longer open to A to revoke the offer on 6 October. Obviously in such circumstances it would be prudent for B to have registered their letter so as to have proof of having posted it.

Faxed acceptances are effective when read by the offeror – in other words, the normal rules, not the postal acceptance rule, applies to faxes. A contract accepted by fax is made where the acceptance is received (Reese Bros Plastic Ltd v Hamon-Sobelco Australia Pty) . Therefore,there is no contract if a faxed acceptance is not received, and there is no receipt of acceptance if:

1. The fax is received by clerical staff who have no authority to bind their principal 2.The fax machine is turned off, especially as some faxes are sent out of hours.

Emails are governed by s 14(1) if the Electronic Transactions Act 1999 (Cth), which provides that communications sent by email are effective when they reach the recipient's server (irrespective of whether the recipient has actually checked his or her email). So, an acceptance would be effective when it reached the offeror's server, even if the offeror had not opened the email. Transit risk is on the receiver of the electronic communication, not the sender of the acceptance.

Discussion Exercises

Answer the following questions:

1. Samuel received a printed advertisement in the post stating that a screwdriver set was 'on sale' at a local hardware store for a5.00. Samuel went to the store, found the item and took it to the counter. When he tried to pay for the item the cashier said that he could not sell it to him as it was the last screwdriver set left and it was required for display purposes. Advise Samuel.

2. Gina telephoned Victor on November 12 and offered to sell him 1000 super-deluxe lawn-mowers at the wholesale price of a30 a piece. On November 20 Victor purported to accept this offer by sending Gina a facsimile. However, unbeknownst to him or Gina, Gina's facsimile machine was out of order at the time. Hearing nothing from Victor Gina thought that Victor did not want to take up the offer and sold the lawn-mowers to Michelle. Victor claims that he validly accepted the offer. Advise Victor.

3. Bob telephones Mary and says 'Would you like to buy 1,000 litres of fuel at a.00 per litre to be delivered on 4 October?' Mary says 'I'll think about it'. Later that day she phones Bob and says 'I accept your offer, but with delivery on 5 October'. Bob says 'No'. Then Mary says 'OK, I accept your original offer'. Advise Bob.

Post your answers to the Forum for Topic 5. You are also encouraged to read over and respond to the posts made by others in the class.

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D. Intention to enter legal relations – 2nd essential

Although often taken for granted, the law requires evidence (express or implied) that the parties intended to make their agreement legally binding. Without evidence, the law presumes that the parties intended to be legally bound by commercial or business agreements, but did not intend to be legally bound by family, domestic or social agreements. The presumptions could be summarised as follows:

1. It is presumed that parties to a business agreement intend to make a contract

2. It is presumed that parties to a family, domestic, social or voluntary agreement do not intend to make a contract.

However, these presumptions can be rebutted (i.e., shown to be incorrect) by evidence to the contrary.

In Cohen v. Cohen (1929) 42 CLR 91, a husband's agreement to pay his wife a dress allowance was held to be not binding because it was of a 'domestic' nature and the presumption was not rebutted in court.

By contrast, in Parker v. Clark (1960) 1 All ER 93, an agreement between friends was found to be a contract. An elderly couple (the Clarks) lived in a large house in the south of England and were on good terms with a middle-aged couple from Sussex (the Parkers). The Clarks wrote to the Parkers and invited them to come and live with them and share their large house. Mr. Clark's letter outlined how they would share expenses/running of the house. It also said that, if they agreed to come and live with them, the house would be left to Mr. Parker. The Clarks understood that, to do this, the Parkers would have to sell their house in Sussex. The Parkers agreed to the offer and sold their house. Disagreements between the couples eventually led to the Parkers being forced out of the Clarks' house, so they sued for breach of contract. The Court had to decide whether there was an intention to create a legal relationship? The court held that although the agreement was prima facie of a 'domestic' nature (i.e., thus, legal relations were presumably not intended) there was sufficient evidence available to rebut the presumption. Thus, the Parkers were successful. Evidence, which led the court to believe the parties intended to become legally bound, included the fact that Mr. Clarks' letter was precise and detailed; the sale of the Parkers' house was a major financial transaction entered into in reliance on the agreement, and the alteration of Mr Clark's will also indicated that he regarded the agreement as binding.

The normal position is that business agreements are presumed to be contracts. However, 'honour' clauses in commercial agreements can rebut the presumption that legal relationships were intended. In Rose & Frank Co v. J. R. Crompton & Bros Ltd [1925] AC 445 an agreement for the supply of tissue paper stated: 'This arrangement is not entered into ...as a formal or legal agreement...but is only a record of the purpose and intention of the ...parties...to which they each honourably pledge themselves...that it will be carried through...with mutual loyalty and friendly cooperation.' The agreement was terminated without the required period of notice; and the plaintiff (tissue manufacturer) sued for breach of contract. The court held that no contract existed - only an arrangement binding in an honourable pledge from which all legal consequences were excluded. It should however be noted that statutory provisions regulating contracts, such in State Sale of Goods Acts and the Competition and Consumer Act 2010 (Cth) cannot be evaded simply by the parties stating that their agreement is not a contract. If the agreement is clearly a contract as meant in such legislation, the legislation will apply.

E. Consideration – 3rd essential

Click here to open a PDF of the flow chart

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This means that each party must promise to give the other something of value to for the agreement to be a contract. The promise can be to give something, to do something or even not to do something (sometimes called a 'forebearance'). So for example, these would be contracts:

A promises B promises

To give B her car To pay A $5,000

To pay B $500 To paint A's house

Not to sell her car to anyone-else for 4 days To pay A $50

To cut B's lawn To wash A's dog

As long as each party is getting some advantage or is better off as a result of the agreement, there is consideration. The law will not, as a general rule, enforce a mere promise by one party (A) to do something or give something to the other (B) without getting anything in return. Thus if A were to promise to give B her car, but later reneged on the promise and refused to hand it over, B could not enforce the promise at law. In contrast, if B had agreed to pay $5,000 in exchange for A's promise to deliver the car then, subject to all other requirements being satisfied, the agreement would be legally enforceable.

Whilst the law requires that consideration is an element of a contract it is not concerned with the adequacy (the financial value) of the consideration. For example, a contract for the sale of a prestige car for $50 will be valid irrespective of the fact that the consideration given was less than the market value. This is shown by Chappell & Co Ltd v. Nestle & Co [1960] AC 87 in which Nestle & Co offered purchasers of its chocolates that they would sell them a music record in exchange for 1 shilling and sixpence and three chocolate bar wrappers, as part of an advertising campaign. Under copyright law, the holder of the copyright in the record (Chappell & Co Ltd) were entitled to a royalty of 6.25% of the 'selling price of the record'. Were royalties owed on 1 shilling & sixpence or 1 shilling & sixpence plus the value of 3 wrappers (which were generally thrown away as having no value, but which Nestle had obviously profited from, because customers had to buy a chocolate to get a wrapper). The court held that royalties were payable on the value of 1 shilling and 6 pence + 3 wrappers. The court said that the wrappers had some value, even if that was very small, and this had to be included in the calculation of the royalties because they were part of the consideration that Nestle had received from its customers.

It is also not relevant when the consideration is to be given: In some contracts the consideration is exchanged at the same time the contract is made (for example, when you buy something in a shop), and this is called 'executed consideration'. However, in other contracts, it may be agreed that consideration will pass between the parties (i.e. the contract is actually performed) some time after it is made (for example, when a builder agrees to build a house, and the customer receives the keys and the builder receives the money a year after the contract was entered into) – this is called 'executory consideration'.

Consideration must move from the promisee. The person who wants to enforce a promise must pay for the promise, though there is no need to pay for it in person. Payment can be made through an agent. In Dunlop Pneumatic Tyre Co Ltd v Selfriedge & Co Ltd [1915] AC 847, Dunlop, a tyre manufacturer, sold its tyres to dealers who undertook to allow a 10 per cent discount from the plaintiff's list price when reselling the tyres to retailers. The dealers agreed that when sold tyres to any retailer he would obtain from them a written undertaking that they would observe the plaintiff's price. Dew & Co, a dealer, entered into a contract with Dunlop. It sold tyres to Selfridge & Co, who undertook to abide by Dunlop's recommended price and Dunlop then brought and action against them for breach of the undertaking. The legal issue was whether Dunlop could enforce an agreement to which it was not a party? it was decided that Only the

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parties to an agreement could sue on the contract. Dunlop had not provided consideration for Selfridge's promise and was not a party to the contract between Dew and Selfridge.

Similarly, in Coulls V Bagot's Executor and Trustee Co Ltd [1967] HCA 3, A husband granted mining rights to a company to mine his land. In return a royalty was to be paid to himself and his wife. The wife provided no consideration for the agreement. When the husband died, the company stopped paying the royalties and the wife attempted to enforce the agreement. The High Court held that while consideration must move from the promisee, where the promise is made to promises jointly, consideration need only move from one of them for the promise to be enforceable. She was entitled to royal payments.

Note that because the doctrine of consideration requires that each party promise to give something in exchange for something the other person will give them, past event cannot be counted as consideration. So if A washes B's car on Monday, and then on Tuesday A and B agree that, because A washed B's car, A will pay B $25, that is not a contract, because A is not getting any advantage now or in the future in exchange for promising to pay B $25. In Roscorla v Thomas [1842] 3 QB 234, Roscorla purchased a horse from Thomas. After the sale was completed, Thomas promised him that the horse was in good condition and not vicious. The horse was vicious. The legal issue was whether there was consideration to support the promise that the horse was not vicious? it was decided that the seller's promise was not binding. It was made after the sale had been completed and the buyer had given nothing in return for it.

There is an important exception to the requirement that there be consideration in order to create a valid contract. This is where the contract is made 'under seal'. Contracts which are made under seal are called deeds. It is no longer necessary that an actual wax seal be affixed to a deed. However, it is still necessary that they are:

1. signed by the person making the deed;

2. witnessed by a person who is not a party to the deed;

3. either a seal is affixed or the document is expressed to be a deed.

All contracts which are not under seal are called simple contracts and require consideration to be legally enforceable.

Where a party to a contract promises to do something that they are already obliged to do either at law or under another contract with the promisor, then they will not have given anything in addition under the contract which will constitute consideration. A promise to do something one is already legally bound to do has no value because it is not giving anything extra – for example, the fire brigade has a duty to protect people's houses from fire, so if a person who owned a house agreed to pay the fire brigade $500 in exchange for the fire brigade coming to put out a fire, that would not be a contract, because the owner of the house is not getting any consideration – they already had a right to ask the fire brigade to put out the fire. This principle was applied in Stilk v Myrick (1809) 2 Camp 317; 170 ER 1168, in which the crew of a ship had agreed to work for a specified sum. After some of the crew deserted, the captain agreed to pay the remaining crew members more than the agreed wage. However, when they tried to enforce this agreement, the court said that there was no contract, because the captain was not getting any consideration in exchange for the increased wage, as the work the ship's crew did was what they were originally obliged to do.

However, if someone who already has a duty to do something for you does do something extra, there will be a contract. This is shown by Glasbrook Bros. v Glamorgan County Council [1925] AC 270. During a miner's strike in South Wales, in 1921, a colliery manager applied for police protection and insisted they provide a live-in garrison. This was agreed, providing the colliery paid the associated costs of £2,200. When order was restored, the manager refused to pay, claiming there was no consideration - i.e., police were only doing what they were legally bound to do. Judgment was given for the police because, although police are bound to give protection, here they had done something extra, above and beyond their normal duties, for the benefit of the coal company by setting up a camp at the mine.

The doctrine of consideration creates a problem in cases where someone wants to release someone from all or part of a debt. Such an agreement obviously gives no advantage to the releasor, and thus if the other party seeks to enforce the promise by the releasor, they will be unable to, as they themselves gave nothing in return. This is shown by Foakes v Beer (1884) 9 App Cas 605. Dr Foakes owed Mrs Beer a debt of £2090 plus £360 in interest. Mrs. Beer agreed to let Dr Foakes off the £360 interest if he paid the £2090, which he did. However, Mrs Beer then sued Dr Foakes for the £360. Was there a contract, enforceable by Dr Foakes?

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The court held that Dr. Foakes had paid only the amount he was legally obliged to pay Mrs. Beer; so her promise in relation to the additional sum was not binding because there was no consideration from him (i.e., he did not give her anything in exchange for not being obliged to pay interest). Thus, her promise was not a contract and he was liable to pay the additional 360 pounds.

There are however exceptions to the rule that an agreement to accept a lesser sum of money than is owing is not a binding contract. The parties can ensure that they have a binding agreement if:

they put the agreement in a deed;

the agreement requires the debtor to give the creditor something (no matter how trifling its value) in exchange for the creditor agreeing to let the debtor off part of the debt; and

the creditor agrees to take part payment on an earlier day than the full payment was due (the theory here is that the creditor has received an advantage in the form of interest that he can earn on the lesser amount paid early).

Problems raised by the issue of consideration have also been significantly eliminated by the doctrine of estoppels, which has been used by the courts to require a person to comply with a unilateral promise unsupported by consideration from the other party in certain limited circumstances. The doctrine originated in Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130, in which the owner of an apartment block in London was anxious to keep tenants during World War II. In order to do this they told their tenants that he would reduce the rent for the duration of the war. After the war was over he raised the rent to what it had been, but also sued the tenants for the rent that had not been paid. The tenants argued that the owner was bound by its promise to reduce the rent. The owner said that he had received no consideration for the promise and so no binding contract concerning a reduction of rent existed. The court held that it was reasonable for the tenants to rely on the owner's representation, and they had done so (by arranging their financial affairs on the assumption that the rent would not be reclaimed). The owner was therefore estopped from raising the argument relating to consideration, and the promise he had made to reduce the rent was enforceable against him. Arguably cases such as Stilk v Myrick and Foakes v Beer would be differently decided today in light of the doctrine of estoppel.

The doctrine of estoppel was accepted into Australian law in Walton's Stores Ltd v Maher (1988) 164 CLR 387 - although unlike in the Central London case, this case did not involve absence of consideration but rather the issue of whether one party had acted in such a way as to lead another to believe there was a contract. In this case, W Ltd had negotiated a contract with Maher in terms of which Maher would demolish a building on a plot of land, build a new one and then lease it to W Ltd. The contract was in writing but had yet to be signed. W Ltd's lawyers told M that W Ltd's director would sign the contract, and W Ltd's director knew that his lawyer had said this to M. Based on this representation, M began the demolition job. W Ltd's directors knew that the demolition had begun. A few months later he was contacted by W Ltd's lawyers to say that W Ltd had decided not to enter into the contract, and so would not be paying M anything. The court held that it was reasonable for M to have believed, because of the statement by W Ltd's agent (the lawyers), that W Ltd had agreed to the contract. W Ltd were therefore estopped from arguing that they had not agreed to the contract and were liable to pay damages to M. They knew that M had relied on the belief that there was a contract and has suffered detriment by incurring expense, yet W Ltd had allowed that situation to carry on. Brennan J listed what he considered to be the essential elements of an action for promissory estoppel. These were:

1. that the plaintiff assumed that a particular legal relationship existed between the parties or that a particular legal relationship would exist between them, and in the latter case;

2. that the defendant would not be free to withdraw from that expected relationship; that the defendant induced that assumption or expectation;

3. that the plaintiff acted or abstained from acting in reliance on the assumption or expectation;

4. that the defendant knew or intended that the plaintiff act or abstain from acting in that manner;

5. that the plaintiff's action or inaction will cause it detriment if the assumption or expectation is not fulfilled; and

6. the defendant failed to avoid that detriment.

Reliance on estoppel was successful in:

Foran v Wight (1989)168 CLR 385, where even though the purchasers failed to tender performance and were not ready to settle at the date of settlement, the vendor's failure to perform an essential term by the

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due date was sufficient to enable the purchasers to rescind for repudiation or anticipatory breach and recover the deposit.

Giumelli v Giumelli (1999)196 CLR 101, where the plaintiff left school aged 15 to work on his parents' farm and became a partner in the family business at 17, working without salary and for pocket money. When his family failed to honour the promise to subdivide the farm, he was able to rely on promissory estoppel

Blazely v Whiley (1995) 5 Tas LR 254, where the defendant had moved into the plaintiff's house, paying the plaintiff's mortgage plus rent in the belief that they would be able to purchase the property for less than market value.

F. International contracts

Specific issues need to be considered when a contract is entered into across national boundaries. Choice of law

The first, and perhaps most important, issue to be considered is whose law will govern the contract ?

Imagine the CEO of a company registered in France signs a contract with the CEO of a contract registered in the UK while both are attending a conference in Hong Kong, for the construction of a sugar refinery in Brazil. If litigation ensues, which jurisdiction's law will apply in determining the dispute? The parties are to some extent free to specify in the contract whose law will apply, but if they do not the issue will be determined by applying the principles of private international law (also known as 'conflict of laws'). Most countries adopt the principle that, it is the place where a contract is entered into whose law applies – so in the example given, any dispute would be determined applying the laws of Hong Kong. That would mean that a French court hearing the case would have to ascertain what the law of Hong Kong is on the point at issue.

International sale of goods

There are a number of questions which parties to an international contract for the sale of goods need to consider when entering a contract, including when risk passes (that is, whether the loss occasioned by damage or destruction of the goods is borne by the buyer or the seller); who is responsible for arranging customs clearance; who must bear the costs of freight et cetera. In order to promote uniformity in international sales, a treaty known as the Vienna Sales Convention came into force in 1988. Signatories (including Australia) undertook to enact its provisions into domestic law, and each jurisdiction within Australia has done so (see, for example, the Sale of Goods (Vienna Convention Ac ) 1986 (NSW)). The provisions of the Convention now provide a set of default rules governing international sale contracts in the absence of the contracting parties agreeing otherwise.

International transportation of goods

Because all international sales of goods involve transportation of goods, conventions have been drafted governing the rules that apply to carriage of goods by sea (the Hague-Visby Rules of 1968 and the Hamburg Rules of 1978),parts of which were enacted into Australian law by the Carriage of Goods by Sea Act 1991 (Cth). Similarly, the Warsaw Convention of 1929, governing air-transportation, have been adopted into Australian law by the Civil Aviation (Carriers Liability) Act 1959 (Cth).

Topic 5 Review Quiz

Topic 6: Legal Validity and validity of consent

Learning Outcomes

At the completion of this topic you should be able to:

· explain why a contract may be void from the start or may be declared voidable by a court on application by a party in certain instances;

· describe the remedy of rescission and explain when the right to claim it may be lost;

· explain the concept of contractual capacity, and how it may be limited by minority, intoxication or mental illness;

· distinguish which contracts have to be entered into in a particular way;

· explain the effect of illegality on contracts;

· explain why a contract may be voidable if a party's consent was unfairly obtained;

· explain how misrepresentation, duress, undue influence and unconscionability may vitiate consent; and

· explain how mistake by the parties in relation to what they were agreeing to may invalidate a contract.

Readings

Textbook: Gibson, Chapters 10, 11 and 12

Discussion Task - 'The price of beauty'

Watch the video below, which resembles the case of Louth v Diprose, and discuss whether you consider ‘love’ and, or ‘infatuation’ to be a vitiating factor.

Post your thoughts to the Forum for Topic 6. You are also encouraged to read over and respond to the posts made by others in the class.

Can’t wait to read your comments.

Original video at: https://www.youtube.com/watch?v=6WPo7LIA5mk (https://www.yout ube.com/watch?v=6WPo7LIA5mk)

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Topic Review Quiz

When you have finished the prescribed readings, taken notes, answered the exercise questions, and discussed issues on the forum, you should take the Topic 6 Review Quiz at the end of this topic.

This quiz is a learning activity and will not affect your marks in the subject. It is designed to help you assess your understanding of key concepts from this topic before moving on to the next one. You may take the quiz as many times as you like. You should take time to review the answers to each question and study the concepts you did not understand.

A. Factors affecting legal validity

Sometimes, although there is an agreement between the parties which satisfies the three essentials for a contract, the law may make the contract invalid. In this Topic we will examine rules relating to capacity, legality and form and the effect they can have on a contract.

The following terms are relevant to this area of the law:

void - a contract which is a nullity, does not exist, has no legal effect; and voidable - a contract which can be 'rescinded' by a party.

The concept if rescission is an important one, relevant to this Topic. When a party wants to rescind a contract, they are asking the court to end the contract and to put the parties back in the same position they were in before the contract was entered into – so each party must give back to the other anything they received. The effect of this remedy is to put everything back to where it was, as if the contract never existed. The person seeking rescission is referred to as the 'innocent' party, in the sense that they are alleging that there are grounds why it would be unfair to hold them to the contract.

The right to obtain rescission can be lost if:

it is not exercised within a reasonable time;

the parties cannot be replaced reasonably close to their original positions (for example, the contract was for the purchase of a car, but the car has been destroyed by lightening);

the innocent party has affirmed the contract in the interim (in other words has indicated that they wish to stand by the contract); or

another party has in the interim, acquired rights in the subject matter of the contract in good faith and for valuable consideration (for example, A sold B a car, B then sold the car to C – so B cannot give the car back to A as this would adversely affect C).

B. Legal capacity

Legal capacity is the ability of certain people to make legally binding agreements. If a party lacks legal capacity, an otherwise valid contract may be voidable. We will consider the position of minors, mentally ill persons and intoxicated persons.

Minors

Minors are people under 18 years of age. They have limited contracting capacity, as only contracts for 'necessaries' or 'beneficial services' are legally enforceable.

A part from the exceptions outlined below, contracts are not enforceable against minors, but minors can enforce their contracts against the other party. Minors' contract law protects minors but there are limitations to prohibit minors from profiting at the expense of adults who deal with them in good faith. Only two classes of contracts bind minors under the common law:

1. Contracts for 'necessaries'. These are contracts for goods and services which are reasonably necessary –not to minors in general –but to the particular minor's station in life and to the minor's actual requirements, such as food, clothing, accommodation, medical services and education. In determining whether goods/services were 'necessaries', the courts consider whether they were suitable for the minor given his or her station in life. So contracts for taxi rides, movie tickets or CDs would be considered 'necessaries' in this sense, whereas a motor vehicle or a diamond ring would not.

2. Contracts for 'beneficial services'. These are contracts for employment, education, apprenticeship and training contracts. A minor is bound by these contracts if they are for the minor's benefit and not oppressive. Examples are sporting contracts with young athletes and media contracts with young celebrities. 'Beneficial services' refers to contracts for education and /or employment training which are of benefit to the minor.

Key Case

McLaughlin v Darcy (1918) 18 SR (NSW) 585 is a decision involving Darcy, a minor who was a professional boxer. In 1916, at the age of 20, he decided he needed to go to America to gain more experience, better training and more fights. To get into America, he needed a passport, so he hired the services of McLaughlin, a solicitor, to act for him. McLaughlin travelled to Melbourne and while he was unsuccessful, he obtained a promise from the American authorities to consider Darcy's request favourably. Darcy understood that he was to pay McLaughlin's services whether he was successful or not.

The legal issue was whether, taken as a whole, could McLaughlin's claim against Darcy for his costs be considered ' necessaries'?

The court held that the contract was valid as it was one for necessaries. The solicitor's services were essential to the welfare of Darcy.

Minors' contracts in New South Wales

The age of majority is now 18 (The Minors (Property and Contracts) Act 1970 (NSW)). Legislation also regulates minors' contracts by holding minors to their contracts if they understand what they are doing an d the contract is for their benefit. The Act also provides that people have full contractual capacity in relation to a civil act, including contracts (s 6) , once they turn 18 (s 8) . However, a civil act is not binding if the minor does not have the necessary understanding necessary (ss 17,18 and 19).

The Act further provides that a contract is presumptively binding if the participation is for the benefit of the minor at the time of participation ( s 19). If the contract is found 'presumptively binding', the minor will be bound to the agreement (s 6(3) , and the contract can only be challenged through fraud, duress, etc.

Contracts which are not for necessaries or beneficial services are not enforceable by the other party against the minor. The minor can choose to remain with the contract or rescind the contract.

Mentally ill persons

Mentally ill persons have limited contracting capacity. Their contracts are voidable if the mentally ill person (or, more usually, someone acting on their behalf) can establish that, when the contract was made:

they were unable to understand their contractual obligations, and the other party knew, or should have known this.

Intoxicated persons

The same rules apply to contracts entered into by intoxicated persons as apply to contracts entered into by persons who are mentally ill – i.e. the person wishing to rescind the contract must show:

they were so intoxicated by alcohol or drugs when they entered the contract that they did not understand what they were doing; and

the other party was, or should have been, aware of their drunken or drugged condition.

Contracts by corporations

Their contractual capacity is limited in two ways:

1. Natural impossibility. Because the corporation is an artificial person, it cannot sign contracts and forms, send emails an d speak on the phone. All these are done by their agents or representatives on their behalf. Corporations cannot carry personal contracts.

2. Legal impossibility. Before 1984, companies were limited in what they could do because of the ultra vires – action beyond the defined objects and powers could have no effect if the company was not 'programmed' to do them.

Company law gives the directors the right to exercise the company's powers, except those that by statute must be exercised in general meeting. Officers of the company who are members of management can bind the company in contract, and their actions are actions by the company. The doctrine was abolished.

Section 126 of the Corporations Act 2001 (Cth) provides that a company may be bound by contracts entered into by agents acting on behalf of the company with the company's express or implied authority. A company may also be bound by a person acting on its behalf within the person's apparent authority.

Affirmation

Remember that a party loses the right to rescind a contract if they say or do something which indicates that they affirm (i.e. wish to stand by) the contract. In Matthews v Baxter (1873) LR 8 Exch 132, the plaintiff contracted to buy a property at auction when he was drunk. Later, when he sobered up and realised what he had done, he sought information about the contract, which he decided to affirm (i.e., confirm). He later had a change of heart and, wanting to avoid the obligation, sought rescission on grounds of intoxication. The court held that although he had established the elements of his plea (i.e., he was so drunk he did not understand what he was doing and the other party knew or should have been aware, that he was drunk), Baxter's subsequent confirmation of the contract meant that his right of rescission was lost. Thus, Baxter was bound by the contract, because he had adopted it while sober.

C. Legality

The law does not permit enforcement of contracts that are illegal. Contracts can be made illegal by a statute or by common law. Contracts which are illegal (eg a contract to commit a crime), are completely void, regardless of the parties' knowledge of the illegality).

D. Form

The 'form' of a contract refers to the way in which it was entered into. In general, the common law does not require contracts to be entered into in any particular way – any form of communication – by writing, words or actions is deemed sufficient to reach agreement. However, in some circumstances, legislation does require a specific method of communication to be used.

You may come across the terms 'simple contracts' and 'formal contracts'. Simple contracts are those entered into by words, by writing or by action. Most contracts entered into are simple contracts. Formal contracts are contracts entered into using a deed.

The following are some significant statutory requirements which must be complied with for certain types of contract to be valid:

Contracts for the sale of land must not only be in writing but must be by deed;

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A variety of contracts must be in writing, for example

· insurance contracts

· assignments of rights in copyright, patents and trade marks

· credit agreements.

E. Factors affecting consent

Click here for a PDF

of the flowchart, with all details expanded, or

Click here to view the interactive flowchart (http://www.mindmeister.com/427407981/consent) on MindMeister.com. You can view it without creating an account, or you can create a free account to save a copy and add your own notes.

In order to create a valid contract the parties to the agreement must have given their genuine consent to the agreement. Accordingly, the existence of the following may affect the validity or enforceability of the contract:

misrepresentation; duress;

undue influence; unconscionable conduct; and mistake.

Lack of genuine consent provides a right of rescission to the innocent party. Misrepresentation

A misrepresentation is a false statement of fact, which induces a person to enter a contract. Note:

representations must be distinguished from self-evident exaggerations which are referred to as advertising 'puffs' - e.g., 'This is the best car in town!'

There are three elements of misrepresentation. The statement must be:

false;

of fact; and

relied upon when the contract is made.

A misrepresentation has no effect if the other party was not aware of its existence or untruth, or does not

allow it to affect their judgement - it must, in fact, persuade the other party to enter the contract. Silence is not a misrepresentation - for example, if you don't tell someone about a defect in a product, that does not amount to misrepresentation. However, remember that anything you do say has to be the full truth – so if the seller of a car says it has been tested, but then does not go on to tell the buyer of what the test revealed, that would be a misrepresentation. Also note that if a representation becomes false (to the maker's knowledge) between when it was made and the contract being entered, then the maker has to inform the party of the true position.

There are three types of misrepresentation:

fraudulent; negligent; and innocent.

Fraudulent Misrepresentation is made 'knowingly or without believing in its truth or recklessly (careless whether it be true of false) with deliberate intention to deceive', as stated in Derry v. Peek (1889) 14 App Cas 33. It must be shown that the person making the statement knew it was false or had no belief in its truth. The representee may well wish to carry on with the contract if it is of some benefit, as well as suing for damages in tort, whether the representation is a term o f the contract or not. If the contract has not yet been completed the innocent party may repudiate the contract and sue for restitution. If the other party attempts to enforce the contract, the innocent party can raise the fraud as a defence and counterclaim damages.

Negligent misrepresentation occurs where the person making the representation did not know that what they were saying was untrue, but failed to take reasonable steps to find out whether it was true.

Innocent Misrepresentation is a statement which was made by a person who believed it was true and did not make it negligently.

The remedies that the innocent party (that is, the party who entered the contract in reliance on the misrepresentation) can obtain are as follows:

Fraudulent Misrepresentation: rescission + recovery of any consequential damages flowing from the misrepresentation.

Negligent Misrepresentation: rescission + consequential damages. Innocent Misrepresentation: rescission only.

Note – A representation may become a collateral contract. Collateral contracts will be discussed in the chapter dealing with contents of a contract.

Duress

Duress is the use of violence or illegal threats against a person, their goods or economic interests to force them to enter into a contract against their will. There is a lack of voluntary agreement.

Duress occurs where the innocent party or their immediate family (i.e., parent, spouse or child) is threatened with actual or perceived violence or imprisonment; or where a threat is made to damage the innocent party's property, and the innocent party enters the contract in order to avoid the harm.

If proven, duress renders the contract voidable at the injured party's option. The duress does not have to be the sole reason for the coerced party entering into the contract. It only has to be one of the reasons and the effect on the contract is that it will be voidable at the option of the injured party ( Barton v Armstong (1973) 47 ALJR 781

Undue Influence

Undue influence is the improper use by an ascendant person in a relationship of trust and confidence, of their power or influence over another, for personal benefit, so that the act of the influenced party to enter a contract is not free and/or voluntary. If proven the innocent party (that is, the party who was subject to undue influence) can obtain rescission.

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The common law courts recognise special (i.e., dominant and/or subservient) relationships, where undue influence is presumed to have occurred - in other words, where, if the subservient party alleges duress, the dominant party will need to rebut the presumption of duress. In cases of presumed undue influences, the defendant stands in an unequal relationship to the plaintiff in a relationship of confidence. The onus of rebutting this presumption lies on the defendant and they must prove that the transaction was a voluntarily act and that the plaintiff understood the contract. Presumed in some relationships:

Doctor and patient Parent and child

Priest/religious adviser and parishioner Solicitor and client

Trustee and beneficiary

Fiancé over fiancé, but not husband over wife Guardian and ward

A good example of duress vitiating a contract is provided by Johnson v. Buttress (1936) 56 CLR 113: An illiterate widower with a low IQ in his 60's, was wholly dependant relatives for guidance and support, including Mrs. Johnson (a relative of his late wife). He decided to bequeath his small cottage to Mrs.

Johnson. Then he executed a deed transfer the property to her right away. Mrs. Johnson's solicitor prepared both documents. His family only became aware of what had occurred after the man died a few years later; and his only son (Mr. Buttress) sought to have the transaction set aside on the ground of undue influence. The court held that Mrs. Johnson was in a position of trust and confidence and, thus, could exercise dominance over the man. The gift of the property was set aside.

In Allcard v Skinner (1887) 36 ChD 245, the plaintiff joined a religious order as a novice and took the vows of chastity, obedience and poverty. As a result of her vows the plaintiff had to give away her property. She left it to the sisterhood. The plaintiff ultimately left the order and some five years later asked for the money back. It was decided that whilst there was a presumption of undue influence, this had not been rebutted. The fact that she waited five years to exercise her rights amounted to an affirmation of the contract

Where no special relationship is presumed, the plaintiff must prove that the defendant exerted influence over them, and thus obtained a contract which they would not otherwise have made.

Unconscionability

'Unconscionable' means unprincipled or unscrupulous. Although the courts will not intervene simply because one party to a contract has made a bad bargain, they will do so if a party is at a special disadvantage, which affects their ability to safeguard their own interests (e.g., through illness, ignorance, inexperience, impaired faculties, financial need etc) and the other party, being aware of this, unconscionably takes advantage of the opportunity presented when contracting with them. Intervention by a Court for this reason can result in:

the contract being rescinded; or damages being awarded; or

a new contract being substituted for the old contract; or the old contract being amended to remove its harshness.

Unconscionability is illustrated by Commercial Bank of Australia Ltd v. Amadio (1982-1983) 151 CLR 447. An elderly Italian couple with limited English were persuaded by their son (a builder) and the son's bank manager to sign a mortgage over their property as security for a loan the son's company had with the bank. Neither son nor bank manager disclosed the company's true financial position and the couple mistakenly believed their liability was limited to $50,000 for six months; when, in fact, it was $240,000. The couple successfully had the mortgage and security set aside on the ground that they would not have signed had they had known the true state of the company's account and insolvency. The court held that because of their age and limited competence with the English language, the parties were not in an equal bargaining position. The bank should have disclosed the true position of the son's company. The mortgage and security were set aside because of the bank's unconscionable conduct.

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Prerequisites:

1. The weaker party was in apposition of special disadvantage

2. The stronger party knew about the weaker party's disability

3. The stronger party took unfair advantage of the weaker party's special disability. Examples of 'special disadvantage' of the weaker party include: age, sex, financial needs, illness, ignorance, imperfect English, infirmity, inexperience, impaired faculties- Collection House Limited v Taylor [2004]).

In Louth v Diprose, the plaintiff thought that the defendant and her two children were to be evicted from their rental property – The plaintiff paid about $ 60 000 AUD so that the defendant could buy a house to live in. When the plaintiff did this, he was under a special disadvantage in dealing with the defendant because of his love for her. She had exploited the plaintiff's disadvantage with the false atmosphere of crisis about the supposed eviction so as to unconscientiously manipulate the plaintiff to pay $ 60 000. The defendant was liable for unconscionable conduct in getting and retaining the gift.

F. Mistake

Generally, a 'mistake' is considered to be a belief that something exists when, in fact, it does not (i.e., a state of affairs, matter or object); or, where there is ignorance of the true state of affairs. The legal view of 'mistake' is much narrower – thus the mistake must be about an underlying, or fundamental, fact in the contract's subject matter. Mistake renders a contract void - in other words, since the parties were not agreeing about the same thing, there never was a contract. There are three types of mistake:

common mistake; mutual mistake; and unilateral mistake.

Common mistake occurs where both parties make the same mistake about the subject matter of the contract - e.g. Jessica agrees to buy Sam's pet bird which, unbeknown to both, now lies dead in its cage.

In Mc Rae v Commonwealth Disposals Commission [1950] HCA 12, the Commonwealth D.C advertised in newspapers inviting tenders 'for the purchase of an oil tanker lying on Jourmaund Reef, which is approximately 100 miles north of Samarai'. The plaintiff's tender was accepted. The plaintiff fitted out a salvage expedition but could not find the tanker even though in the sale note it was described as 'approximately 100 miles north of Samarai'. The plaintiff sued for damages for breach of contract. It was decided that by their advertisement, the Commission impliedly promised that there was a tanker in existence, and on the strength of that promise, McRae had submitted a tender. The Commission could not now avoid its responsibilities. The 'subject matter does not exist cases- res extinct'- did not apply.

Mutual mistake occurs where the parties misunderstand each other - that is, they were thinking and/or talking about different things when the contract was made. For example: Jessica accepts Sam's offer to buy his owl, thinking that he (Sam) was offering his pet white owl whereas in fact Sam was thinking of his grey owl.

In Raffles v Wichelhaus (1864) , the defendant agreed to buy '125 bales of Surat cotton. to arrive in the

Peerless from Bombay'. There were two ships of that name, one sailing in October and the other in December . The plaintiff's offer was with respect to the Peerless sailing in December, whereas the defendant's acceptance was for the Peerless sailing in October. There was no contract because the plaintiff and the defendant each intended to contract with respect to different ships – the contract was void from the start because the minds of the parties had never met.

Unilateral mistake occurs where only one party is mistaken, and the other party knows (or should be aware) of the first person's mistake - e.g., Sam offers to sell Jessica a car from his car lot. She says 'Yes, I will buy that car, because it has a CD player in it'. If the car does not have a CD player in it, Jessica is making a mistake which Sam knows about. He must correct the mistake by telling her what the true position is.

In Hartog v Colin and Shields [1939] 3 All ER 566, the defendant offered to sell the plaintiff 30 000 Argentine

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hare skins but by mistake misquoted the price as being so much per pound(weight) instead of so much per piece ( unit). The misquotation would result in the defendant receiving one third of the amount expected, yet the previous negotiation had proceeded on the basis that the price was to be per piece according to ordinary trade usage. The plaintiff purported to accept the offer and took advantage of the defendant's mistake. The plaintiff was not able to enforce the contract because he, and anyone else with any knowledge of the trade, must have realised that there was a mistake. If the plaintiff had had no experience in the fur trade, or in how prices were quoted, or if the previous negotiations had referred to prices only and not pieces or pounds, the result could not have been the same. In other words, if the plaintiff had not known that the defendant was mistaken, there would have been the requirements of a contract and once made, a good contract cannot be unmade.

In Cundy v Lindsay (1878) 3 App Cas 459, there was a well known firm called W Blenkiron & Son carried on business at 123 Wood Street. A crook called Alfred Blenkarn, who rented 37 Wood Street, decided to profit from the similar name. He wrote to Lindsay & Co, linen manufacturer in Belfast and ordered a quantity of handkerchief. He signed his letters 'Blenkiron & Co of Wood St. Lindsay & Co knew of Blenkiron & son, but not their exact address and they supplied the goods on that basis. Blenkarn did not pay for the goods and sold them to Cundy who was later sued by Lindsay & Co for conversion on the basis that the contract made with Blenkarn was void for mistake and that ownership of the goods never passed to Blenkarn. The mistake related to the actual identity of the other party and, because the other party was not who it was supposed to be, no contract came into existence

Non est factum

Special rules apply when a person tries to raise the argument that they were mistaken as to the contents of a written document, so the argument is very difficult to make successfully. This is known as the 'non est factum' ('it is not my act') defence to contractual liability. This is a very difficult defence to prove, as the law presumes that a signature indicates that the signatory has read and understood the document, and accepted its terms, thus, 'mistaken' signatories must show:

the signed document was radically different from what they thought they were signing; and when signing they were under a disability (e.g., blindness, illiteracy, reliance on another);

which made them unable to understand the meaning of the document through no fault of their own (i.e., it was not just a case of them failing to read a document they could have understood).

The defence is available to persons who are at a disadvantage, such as: People suffering from a temporary disability

Those who cannot read or understand the document

The mentally infirm if they cannot understand the document

Signing without reading the document does not prevent the defence from being raised. Nevertheless, the classes of persons that can raise the defence are limited to two group:

1. Those who cannot read owing to blindness or illiteracy and who must rely on others for advice, or

2. Those who through no fault of their own are unable to understand the meaning of a particular document.

In Petelin v Cullen [1975] HCA 24, the plaintiff was keen to buy the defendant's property at Liverpool. The plaintiff gave the defendant , who spoke little English and could not read English very well, a document which was an option which gave the plaintiff the right in consideration of paying $ 50 to buy the defendant's property within the next six months. Six months later the plaintiff was not able to exercise the option, so the plaintiff sent to the defendant another $ 50 and a document which the defendant signed, thinking it was a receipt. The second document turned out to be an option for a second six month period which the plaintiff later tried to exercise. The defendant refused to sell, and the plaintiff's claim for specific performance failed. The defendant's defence of non est factum was good because the document signed by the defendant was radically different from what the defendant thought it was.

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Rectification

Parties who have actually agreed on certain matters but due to a mistake at the time of putting the agreement in writing one or more terms have been erroneously cited can apply to a court to have the written document rectified. This is called the remedy of rectification. The parties must prove that at the time of signing they both agreed on the terms of the contract and that the contract as written does not reflect those terms.

Discussion Exercise A

Post your answers to the Forum for Topic 6. You are also encour aged to read over and respond to the posts made by others in the class.

David had run away from home at the age of 14 and at the age of 15 joined a religious sect known as 'Wakki Koresh Freedom Fighters'. David was financially and emotionally dependent on the sect and he relied on the sect leader, Wakki, for advice and guidance on a number of matters. David has a job as a checkout operator at Truworths Ltd, where he was paid $250 per week. Each week David had gives $50 to the sect to cover food and board expenses, and at the request of Wakki, had pus

$100 each week into Wakki's 'Freedom (Fighters) Account' with St. George Bank. David has become disenchanted with the sect and now wants to enrol in the Bachelor of Business degree at Charles Sturt University. He has no savings and asks your advice as to whether he can reclaim any of the money which he paid to the sect. Advise David.

Topic 6 Review Quiz

Topic 7: Contents of contracts

Learning Outcomes

At the completion of this topic you should be able to:

· explain the difference between express and implied terms;

· explain the difference between conditions and warranties and how the remedies available for breach of each differ;

· describe the nature of exclusion clauses and explain the conditions under which they are valid;

· outline the doctrine of privity of contract.

Readings

Textbook: Gibson, Chapter 13

Forum Discussion

Post your questions and thoughts to the forum as you study.

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Topic Review Quiz

When you have finished the prescribed readings, taken notes, answered the exercise questions, and discussed issues on the forum, you should take the Topic 7 Review Quiz at the end of this Topic.

This quiz is a learning activity and will not affect your marks in the subject. It is designed to help you assess your understanding of key concepts from this topic before moving on to the next one. You may take the quiz as many times as you like. You should take time to review the answers to each question and study the concepts you did not understand.

The flowchart below gives an overview of the concepts in this topic and how they fit together. You may download a PDF or open an interactive version below.

Open a PDF

of the flow chart, or

Open the interactive flow chart (http://www.mindmeister.com/427453641/terms-representation-collateral-contract) on MindMeister.com (you can view it without creating an account, or you can create a free account to save and edit your own copy.

A. Contents of contracts

Given the different methods by which parties may communicate, the content or terms of the contract may be expressed (in writing or orally) or be wholly implied (from conduct), or may be a combination of two or three of these. In other words, in determining what obligations parties have undertaken, it may be necessary to pay attention to what the parties wrote, what they said and what they did. The contents of the contract are called the 'terms'. Identifying the terms is helpful in determining what the parties have agreed to.

Statements made during negotiations are classified as:

1. a representation – non contractual statement. These are not intended to be legally binding.

2. a term – a contractual statement which is intended to be legally binding.

In determining whether a statement is a term or a representation the following considerations must be taken into account:

1. How important was the truth of the statement

2. Was the statement so important that the innocent party would not have contracted unless it was true?

3. What time period was there between the statement and the final agreement?

4. Was the innocent party asked to check the statement?

5. Was the statement made with intention of stopping the innocent party from finding any defects?

6. Was the statement later omitted when the contract was put in writing?

7. Did the party who made the statement have special knowledge or skill regarding the subject matter?

Key Cases

In Oscar Chess Ltd v Williams [1957]WLR 370, the defendant, a car dealer sold the plaintiff a second hand car described as – and which they both believed was – a 1948 model. Six months later, the plaintiff discovered that it was worth less because it was a 1939 model ,and the plaintiff claimed damages for breach of a term of the contract ( breach of a warranty). The plaintiff was not successful because the statement about the age was not a term. It was an innocent misrepresentation so there was no right to damages for breach of contract. At the time of the purchase, the defendant gave no 'warranty' about the car's age. The defendant had made the statement on reasonable grounds, and he honestly believed it to be truth.

In Bentley Productions Ltd v Harold Smith ( Motors ) Ltd [1965] 1 WLR 623, the defendant, a car dealer, told the plaintiff that the Bentley for sale had travelled only 20 000 miles on a replacement engine gearbox. When the plaintiff later discovered that the car's mileage was closer to 100 000, he was successful in suing damages for breach of contract ( breach of a warranty), because of various tests stated above : at least (1), (2) AND (7) were fulfilled.

Collateral contracts

If a statement can be regarded as a collateral contract or a preliminary contract, so that the main contract would not have been entered into in the absence of the earlier statement, the courts may be prepared to enforce the promises made by the parties before they entered into the main contract.

Key Cases

In JJ Savage & Sons Pty Ltd v Blakney [1970] HCA 6, the plaintiff bought a boat from the defendant ( a retailer). This contract was contained in correspondence between the parties. Part of the correspondence included a letter from the defendant which gave several estimated speeds of diesel engines that could be fitted to the boat. The boat did not reach the estimated speed, and the plaintiff sued the defendant for breach of the main contract and for breach of a collateral contract ( in consideration of the plaintiff entering into the contract with the defendant, and the defendant promising that the estimated speed would be 24 kph). The court held that the defendant's statement regarding the speed of the boat was neither a term of the main contract nor a term of a collateral contract. Accordingly, the defendant's statement about the boat's speed was not made with the intention to accept contractual responsibility, and it was not a contractual term. The plaintiff's claim of a collateral contract with the defendant failed.

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The pre-requisites for a collateral contract are:

1. Intention by the person making the statement that the statement is to be relied on

2. Reliance by the person alleging the existence of a collateral contract

3. Intention by the maker of the statement to guarantee its truth or falsity

Once established, it is only valid if:

-the statement relied on is promissory rather than representational

-It is not supported by past consideration, and

-It is consistent with the main contract.

Key Cases

In Hoyt's Pty Ltd v Spencer [1919] HCA 64 it was held that an informal collateral contract, in consideration into the principal contract, cannot be inconsistent with the principal contract. A lease between B and C provided for termination with four weeks' notice. When B wanted to terminate, C argued that there was a collateral contract that B would not exercise the right to terminate unless B was required to terminate by its head lessor ( A). C's argument failed because B was entitled to terminate. The court did not infer a collateral contract.

If a contract is wholly oral , the test is to work out whether what was said was intended to be acted upon ( term) or whether it was to be only words of encouragement ( representation).

If the contract is wholly written , the presumption is that what is written contains all the terms of the contract. According to the Parol evidence rule if a contract is in writing and if the writing appears to contain the whole contract, it is presumed that the writing contains all the terms of the contract.

B. Express and implied terms

Express terms are those explicitly agreed between the parties (i.e., which are spoken or written. Implied terms are those not actually expressed but are presumed (or 'read into' the contract). Some contracts may be wholly expressed, others may be partly expressed and partly implied, while others may be wholly implied (as when you go into a shop and purchase goods from the shopkeeper and neither of you says anything during the transaction.

Terms can be implied into a contract in the following circumstances:

where it is necessary to give efficacy to the contract (i.e., the contract will not work unless the term is read into it - see The Moorcock case below);

where there were previous dealings between the same parties on certain terms, and those terms are presumed, in the absence of anything to the contrary being said, to carry over into a new contract; where there is a trade custom that everyone engaging in that type of contract should be aware of; and where the term is mandatorily implied by statute law.

For a term to be implied it must be:

fair and reasonable;

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obvious (i.e., it must 'go without saying' that both parties intended the term); not be inconsistent with any express term; and

capable of clear expression.

Key Cases

A good example of the implication of a term on grounds of efficacy is provided by The Moorcock (1889) 14 PD 64, in which the owner of a ship rented space at a wharf with the intention of tying up the ship at the wharf for the purpose of taking on cargo. The owner of the wharf knew what size ship would be moored there. When the owner moored the ship, it became damaged through hitting the bottom of the harbour as the tide went out. The ship-owner said that the wharf owner had breached the contract by not providing a wharf where the sea was deep enough to accommodate the ship at low tide. The Court implied a term into a contract that the owner of the wharf would provide a place for the ship to berth safely (i) because the contract would be useless (i.e. would not be efficacious) unless the ship could be tied up at the wharf and (ii) the owner of the wharf knew the size of the ship.

Implied terms often come to the rescue of parties if they have been careless in specifying terms and have left out something vital - for example, if a person agrees to do work for another but no mention of a payment rate is made, the law would say that an implied term of their agreement would be that a 'a reasonable price' would be paid for 'the work done'.

An example of terms being implied by trade custom might be where an oil company hires a tanker for 6 months and returns it to the owner without cleaning it. Assuming that the contract did not contain a terms relating to who was responsible for cleaning the ship and the parties entered into a dispute on this issue, either of them might seek to prove that, within the shipping industry it was accepted practice that the obligation to clean the vessel lay on the hirer or the owner. For a term to be implied, the following conditions must be satisfied ( BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of The Shire of Hastings ( 1977) 180 CLR 266, 283):

1. It must be reasonable and equitable

2. It must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

3. It must be so obvious that 'it goes without saying',

4. It must be capable of clear expression

5. It must not contradict any express term of the contract

The court will not imply a term in order to make an agreement legally enforceable if the parties have not reached a concluded agreement ( Australia and New Zealand Banking Group Ltd v Frost Holdings Pty Ltd [1989] VR 695).

Note that, where the contract is in writing then the 'parol evidence rule' applies. This rule provides that in such contracts the contract is presumed to contain the entirety of the agreement between the party, and the courts may not look at extrinsic evidence in construing the meaning of the terms of the document. In other words, the party who seeks to rely on other, implied, terms, bears the onus of proving that the written contract did not contain the entirety of what the parties intended. In other words, oral evidence is unable to vary, contradict, add to or subtract from the words of a written document. If the parties intend to put all the terms of the contract in writing, the writing must be , and is taken to be, the complete contract (Asnicar v Mondo Consulting Pty Ltd [2004] NSWADT 143). It must be noted that there are some exceptions to the rule. Evidence can de admitted :

To prove that the written document is invalid for some reason

To show that a party to the contract is an agent of another person

To prove that a particular transaction was intended to be partly in writing and partly oral. To establish trade usage

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To prove the correct nature of the transaction

Circumventing the rule

To overcome the strictness of the rule:

1. If the contract is partly oral and partly written, all of the circumstances should be looked at to work out what was agreed.

2. A collateral contract – in cases where an agreement is not fully in writing it may be possible to show that there is a collateral or subordinate contract.

Finally note that terms must not be vague – they must be sufficiently clear and certain so that an understanding of the contents agreement between the parties can be readily established. If terms of a contract are incomprehensible to the extent that the contract is meaningless, the courts may declare the contract void for uncertainty. However, if the essentials of the agreement are clear and it is only a particular term that cannot be understood, the courts may delete the uncertain term and leave the rest of the contract in existence.

C. Conditions and warranties

When considering the terms of a contract a fundamental distinction has to be made between a condition and a warranty. This is important because of the consequences of which may flow from a breach of a condition as compared to a breach of a warranty.

A condition can be defined as an important or essential term of the contract one that was so fundamental to the agreement that the parties would not have entered into the contract without it. Breach of a condition entitles the innocent party to either terminate the contract and sue for damages, or to elect to affirm the contract and sue for damages.

A warranty is a term which, whilst important, is not essential to the contract such that the contract would not have been entered into without it. A breach of a warranty entitles the innocent party to sue for damages only. There is no right to terminate the contract.

Key Cases

The following three cases illustrate the difference between a condition and a warranty:

In Bettini v. Gye (1876) 1 QBD 183 a singer, contracted to sing in a show for 3½ months and attend rehearsals at least 6 days prior to the season commencing, arrived four days late because of illness. The promoter terminated the contract alleging a breach of a condition. The court held that the term relating to attendance at rehearsals was a warranty, not a condition. The core of the contract could still be performed, so the theatre owner was not entitled to terminate it.

Poussard v. Spiers (1876) 1 QBD 410 was another contract relating to a performing artist. An actress, engaged to play the leading part in an operetta for the whole season, missed the first week of the season. The promoter (Spiers) terminated the contract alleging a breach of a condition. The court held that the promise to perform from the first night went to the 'root' of the contract and was a condition. Unlike in Bettini v Guy, where the performer had only missed rehearsals, here the performer had missed the actual performance.

In Associated Newspapers v. Banks (1951) 83 CLR 322 a comic strip artist contracted with a newspaper to provide a full-page comic for 10 years, to be

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placed on the front page of its comic section. A newsprint shortage caused it to printed on page 3 instead of page 1, which the artist regarded as a breach of a condition and held himself no longer bound by the contract. The newspaper sued for breach of contract. The court held that the page 1 requirement went to the 'root' of the contract and was a condition – the newspaper had breached the contract, so the cartoonist had been entitled to terminate it and was not himself in breach.

An intermediate or innominate term is a term which does not easily fit within the category of either a condition or a warranty until the circumstances of the breach have been determined. This is because some terms may be breached in a serious way in a trivial or less serious way. For example, a term that a motor vehicle is 'roadworthy' may be breached in a serious way if the engine has completely seized up. However, the same term may be breached in a less serious, or minor way, as a result of the windscreen wipers being defective. In such cases it is necessary to consider the seriousness of the breach in order to determine whether the innocent party may treat it as a breach of a warranty or a condition. Generally, if there is a serious breach of an innominate term then the innocent party will have the same rights as if the term had been a condition (as in Poussard v. Spiers (1876) 1 QBD 410). If the breach is less serious then the innocent party will only have the right to sue for damages as if it had been a warranty (as in Bettini v. Gye (1876) 1 QBD 183). Note that it is up to the court, taking an objective view of all the circumstances of the contract, to determine whether a breach of an innominate term should be treated as a breach of a condition or of a warranty - whether the parties themselves have called the term a condition or a warranty is not decisive.

The key case which applies where a court needs to work out whether a breach is of a condition or a warranty is Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, in which one company had chartered (ie hired) a ship from another for a year. The contract stipulated that the ship owners were obliged to supply it in a seaworthy state, however it was not clear whether thos term was a condition or a warranty. The ship was not seaworthy in several respects, and the hirers were unable to use it for several weeks during its voyage while as it needed repairs. The court held that although the owners of the ship were undoubtedly in breach of contract, the length of time for which the ship had not been able to be used was not so long as to have deprived the hirers of the substantial benefit of the contract, and so they were entitled only to damages, and could not terminate the contract.

The distinction between conditions and warranties is of great importance when it comes to determining what remedy is available for breach of a contract. We will deal with this later, but for the present it is important to remember the following:

D. Exclusion clauses

Exclusion clauses are terms that exclude or limit the liability of a party to a contract - for example a sign at the entrance to a car park says 'No responsibility is accepted for the loss or theft of patrons' valuables', or a clause in a building contract says 'The liability of the builder for damages in the event of a breach of

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contact is limited to $1,000'. Exclusion clauses can operate to exclude liability either in tort or in contract, or both.

In contract, exclusion clauses will be effective in excluding or limiting the liability of the party relying on them, if they are:

incorporated into the contract, and

expressed widely enough to cover the particular situation.

Incorporation into the contract

Like any term in a contract, an exclusion clause must obviously be part of the contract to be effective. Key Cases

If the contract is a written one, and the exclusion clause is contained in the contract, the clause will be effective, as is shown by L'Estrange v Graucob [1934] 2 KB 394. In this case, a person rented a cigarette-vending machine. The contract was a written one. It contained a clause excluding the supplier of the machine of any liability to repair the machine if it broke down. The machine broke down and was therefore useless to the person hiring it. She claimed that the contract had been breached because the machine did not work, and that the supplier should either repair the machine or provide her with a new one. She said that she had not read the exclusion clause when she signed the contract. The court held that a person is presumed to have read a contract they sign. The person hiring the machine was bound by all the terms of the contract, including the exclusion clause. The supplier of the machine was therefore not liable to repair it.

Irrespective of whether the contract is written or oral, the exclusion clause must be in the contract at the time it is entered into. A person cannot unilaterally add clauses to a contract. Giving notice of a term after a contract has been formed is ineffective. This is shown by Olley v. Marlborough Court Ltd [1949] 1KB 532. Mrs Olley booked into a hotel with her husband. They signed a form at the reception desk. This form contained the contract they had with the hotel. On reaching their room a notice was found on the back of the door excluding liability regarding the safety of articles left in hotel rooms. Their room was burgled and the hotel claimed exemption from liability because of the clause. The court held that the hotel could not rely on the exclusion clause because it had not been brought to the guests' attention when the contract was made (i.e., at reception desk).

If the contract is oral (that is, not written) whether the exclusion term is part of the contract will depend on whether reasonable steps have been taken to bring the clause to attention before, or at the time, the contract was made. The requirement that the term must be brought to the person's notice in a reasonable manner has been interpreted in a number of cases where people entered into oral contracts and were then given a receipt or ticket on which an exclusion clause was printed. This has been held not to amount to reasonable notice.

Key Cases

In Causer v. Browne [1952] VLR 1 a person sued for damage to her dress caused by staining during dry-cleaning, The dry-cleaner argued that he was not liable because he had handed the plaintiff a receipt for her dress when she left it and on the back of the receipt was a notice that the dry-cleaner was not liable for damage to clothes.

The court held that people were reasonably entitled to assume that the receipt was given to the owner after the contract was entered into merely to enable an owner to reclaim the article (dress). The receipt was not a contractual document with terms. Thus, the plaintiff was not bound by the exclusion clause and the dry-cleaner was

liable for the damage caused to the dress. In such cases, if a person wants an exclusion clause to be effective, they should either actually tell the person that they exclude liability before the oral contract is entered into, or have a notice to that effect prominently displayed so that all customers can see it before deciding whether or not to enter into a contract.

Similarly, in Thornton v. Shoe Lane Parking Ltd [1971] 2 QB 163 the plaintiff entered and parked his car in parking garage. After he had paid his money into the machine at the automatic entry gate he received a ticket which said: 'This ticket is issued subject to the conditions of issue as displayed on the premises.' The conditions were in a notice inside the garage, which exempted the proprietors (defendant) from liability for personal injury (amongst other things). The plaintiff was injured when he returned to collect his car and sued for damages. The court held that the contract was made before the ticket was dispensed from the machine. Thus, the terms (and exclusion clause in particular) were not incorporated into the contract and the ticket was a mere receipt. Nowadays, garages display their terms (including any exclusion clause) at a place that drivers can see them before they buy a ticket - that is, the terms of the contract are made known before the contract is entered into.

Sufficient width

To be effective, exclusion clauses must be expressed widely enough to cover the liability that has arisen. Courts have traditionally been hostile to exclusion clauses because they deprive a party of remedies they would usually have, so any uncertainty or ambiguity concerning the meaning or circumstances of application of a clause will be resolved in the plaintiff's favour, where possible. This principle is known as the 'contra proferentem' rule, which is to the effect that exclusion clauses will be strictly construed against those who seek to rely on them.

Key Cases

The application of this principle is demonstrated by Sydney City Council v. West (1965) 114 CLR 481, in which the plaintiff left his car in a car park and was given a ticket, which excluded liability for 'damage to the car and its contents or injury to any person'. Later, someone claiming to be the plaintiff and had lost his ticket, was allowed to drive the car from the car park, notwithstanding citing a registration number that was different from that recorded for plaintiff's car. The plaintiff sued for damages. The court held that the defendant could not rely on the clause and was liable for the loss of plaintiff's car because what happened was outside its terms – i.e., the clause, as written, did not cover theft of the car; and, the defendant's releasing the car without the correct ticket being presented was an unauthorised act. The court held that clear words must be used to negate liability (in this case, liability for negligence).

Sydney City Council v. West (1965) 114 CLR 481 also shows the operation of the 'four corners' or 'deviation' rule. According to this rule, an exclusion clause only covers a loss which occurs when the party is performing the contract – acting within the four corners of the contract.

Discussion Exercise (Jack & Jill)

Jack and Jill had attended a formal Ball following which both Jack's dinner jacket and Jill's evening dress required dry cleaning. Jack took both garments to D & C Dry Cleaners which he had used on numerous occasions. As in the past Ms Gordon, the attendant, took the garments and handed jack a docket which Jack placed in his wallet without reading it. When he returned to collect the items he found his dinner suit had shrunk due to being treated at too high a temperature. When he asked for

LAW110- Topics 5-9

Jill's dress he was told that a woman who looked like Jill had arrived to pick it up but said that she had lost the docket. Ms Gordon had allowed the woman to sort through the garment rack and take the dress which she identified as belonging to her. When shown a photograph of Jill, Ms Gordon admitted that the woman who collected the dress did not look anything like Jill. When Jack demanded compensation for both his damaged suit and Jill's dress Ms Gordon directed him to a clause on the back of his docket which said:

D C Dry Cleaners will not be liable for any damage to clothing left for cleaning howsoever such damage may be caused.

Ms Gordon also pointed to a large sign above the counter which was in the same terms as the clause on the docket. Jack remembered seeing the sign but said that he had never read either the sign or the clause on the back of the docket. Advise Jack.

Post your answers to the Forum for Topic 7. You are also encouraged to read over and respond to the posts made by others in the class.

E. Privity of contract

A fundamental rule of Law of Contract is known as privity of contract, which means that only the parties to a contract acquire contractual rights and/or obligations (because they alone have given consideration).

For example, if A enters into a contract to sell B a TV set for $100. If A does not deliver the TV set to B, another person, C, cannot sue A for breach of contract, as only A and B are parties to the contract. There are some exceptions to the doctrine of privity, some of these are:

agency

agreements affecting land bills of exchange documentary letters of credit

land law ( leases and covenants) negligence

novation trusts

unconscionable conduct

Topic 7 Review Quiz

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Topic 8: Discharge of contracts

Interactive Video (8:16 minutes)

At the completion of this topic you should be able to:

· outline the various ways that a contract may come to an end (be 'discharged');

· outline the rules relating to discharge by performance;

· recognise the circumstances in which the law automatically discharges a contract;

· outline what happens when a contract is discharged as a result of a breach by one of the parties, and what remedies are available;

· outline determine what damages are recoverable for breach of contract and how such amounts are limited by the concepts of remoteness and mitigation;

· outline the consequences of termination of a contract as a remedy for breach;

· describe the equitable remedies and the circumstances when they are available; and

· discuss when a contractual claim becomes prescribed through elapse of time.

Readings

Textbook: Gibson, Chapters 14 and 15

Forum Discussion

Post your questions and thoughts to the forum as you study.

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Topic Review Quiz

When you have finished the prescribed readings, taken notes, answered the exercise questions, and discussed issues on the forum, you should take the Topic 8 Review Quiz at the end of this topic.

This quiz is a learning activity and will not affect your marks in the subject. It is designed to help you assess your understanding of key concepts from this topic before moving on to the next one. You may take the quiz as many times as you like. You should take time to review the answers to each question and study the concepts you did not understand.

A. Discharge of contract

When a contract comes to an end it is said to be 'discharged'. This can be by: performance;

agreement;

operation of law; or breach.

Discharge by performance

The most common method for a contract to come to an end is when both parties fulfil their promises. The common law requires that performance be precise (i.e.? exactly what was promised), otherwise, the defaulting party is in breach of the contract and not entitled to its benefits. The rule of precise performance thus means that you are entitled to receive performance only if you are ready to give performance – part performance by one party does not oblige the other party to give any performance.

In Re Moore & Co Ltd and Landauer & Co [1921] 2 KB 519 the court held that if tinned fruit is contracted to be delivered in boxes of 30, and is delivered in boxes of 24, the buyer can refuse to accept and can reject the goods because performance by the seller is not what was contracted – even though the total is the correct quantity. This means that the obligations of the seller have only been partially fulfilled.

Time may be of the essence

Performance must take place in the time specified , or by an implied term within a reasonable time if no time is specified. A 'time is of the essence' clause could usually only be implied in commercial contracts as a matter of construction of the contract if it would fulfil the intention of the parties. If time is not of the essence, serving a notice to complete fixes the time for performance of the contract so that non- compliance becomes a breach of contract. The effect of the notice is to convert a non-essential term into an essential term, and this could become the basis for proof of repudiation of the contract.

Exceptions to the rule of precise performance:

1. Where the contract is divisible. If payment is due under the contract from time to time for doing specified parts of the contract, the contract can be divided into its component parts. The presumption is that the contract is divisible unless it is made as a whole.

2. Where partial performance has been accepted. An implied promise to pay for partial performance will be possible only if it can be inferred from all the circumstances.

3. Where performance is prevented by the other party .If A is prepared to perform A's part of the contract, but is prevented from doing this by the other party B, A can sue B for damages for breach of contract.

4. Where there has been substantial performance. It might be unjust not to allow recovery if there was only a slight difference between the work actually done and what was contracted for. If so, recovery may be allowed under the doctrine of substantial performance. If there is no evidence that entire performance is a condition precedent, any breach can be compensated in damages.

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Sam orders 5,000 bricks from Mary but only 4,000 are delivered. Sam can

(i) refuse to accept the bricks or

(ii) keep them without being liable to pay Mary the purchase price until the rest are delivered.

Because of its harshness to defaulting parties, the courts have developed exceptions to that rule. The first of these is where the contract is 'divisible' (i.e., can be separated into parts).

Example

Jessica contracts with Sam for him to build five tennis courts @ $7,000 per court, can part-payment (i.e., $28,000) be sought by Sam if he completes only four? The courts would say that, because the contract specified $7000 per court, the contract was 'divisible' and payment is entitled for the four completed courts because the contract was to do five separate things. Note however that contracts are presumed to be entire unless the contrary can be shown – thus divisibility has to be proved.

The other exception is where there has been 'substantial' performance (i.e., only a slight difference between the actual and required performance).

Example

Sam contracts to build five tennis courts for Jessica. On the designated day for completion, all five courts have been built, but the net of the fifth court has not been installed. The contract could be said to have been 'substantially' performed, and Sam would be entitled to payment for five courts, less damages in the amount of what it would cost Jessica to get someone to install a net.

Discharge by agreement

What is formed by agreement can be ended at any time by agreement. Agreement can take several forms:

Mutual agreement (called a bi-lateral discharge) is available where both parties still have something to do under the contract.

Example

Sam contracts to build Jessica's house for $150,000 to be paid progressively during building, and after $100,000 is paid, they both agree to discharge their agreement, then Sam does not have to complete the house and Jessica does not have to pay the outstanding $50,000.

Unilateral discharge happens where one party has fully performed, and the other party has not.

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Sam has completely finished building Jessica's house. Jessica has paid $100,000 of the $150,000 price. Sam wants to release Jessica from paying the remaining $50,000. For such an agreement by Sam to be binding, Jessica must do something extra – i.e., she must provide some consideration. (See the earlier discussion of Foakes v Beer (1884) 9 App Cas 605).

The other option is for both parties to execute a deed of release (because a deed is binding without consideration).

Finally, remember that the doctrine of estoppel may operate to enable a person to enforce a promise, even where they themselves are not paying consideration (Look back to the discussion of Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130).

B. Discharge by operation of law

The law provides automatically discharges contracts in certain circumstances, including:

death, bankruptcy, and frustration.

Death

The law presumes that, in the event of the death of either party personal service contracts terminate automatically, but other contracts (such as for the sale of goods) do not terminate, as they can be performed by deceased person's executor or administrator.

Bankruptcy

Bankruptcy is a process by which individuals who are unable to pay their debts as and when they fall due can be cleared of their debts under the law. The bankrupt person is no longer personally liable for contracts entered pre- bankruptcy, and claims by creditors are lodged with the 'Official Receiver in Bankruptcy', who determines what percentage of the claims can be satisfied out of the bankrupt person's assets. The contractual capacity of the bankrupt person is limited until the order of bankruptcy is discharged by a court.

Frustration

If it becomes impossible for a contract to be completed because of events beyond the control of the parties, the contract is said to be 'frustrated' - for example, if a natural disaster or a war makes the contract impossible to fulfil, or the law is changed to make the contract illegal. Parties are free to specify in their contract what sort of events will be considered to frustrate a contract, as under the common law, only an event that made the contract impossible (as distinct from more difficult) counted as frustration.

For example, the wash-out of a bridge used by a coal company to send trucks of coal purchased by a power station would not make the contract impossible to perform if there was another bridge further down-stream, even if that required a long diversion and made the contract unprofitable for the trucking company.

Frustration of contract can only arise if (National Carriers Ltd v Panalpina ( Northern) Ltd [1981] AC 675):

There is a significant or radical change to the nature of the contractual rights and obligations caused by the supervening act.

Neither party to the contract has caused the supervening act

There was no contemplation by the parties of the supervening event when they entered the contract In the new circumstances, it would be unjust to hold the parties to the literal sense of the contractual stipulations as originally agreed upon.

Key Cases

In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24, the plaintiff contracted with the railways authority to excavate tunnels and to do concrete work on the construction of the Eastern Suburbs Railway in Sydney in 1972. The work included blasting and excavation which made a lot of noise and vibration, and local residents applied for and were granted injunctions to restrain night work (between 10 pm and 6 am). The plaintiff couldn't complete the contract on time and incurred additional costs and loss of profit. The contract had been frustrated by the injunctions as the performance of the contract had become something radically different from that contracted for. The plaintiff won its claim for payment on a quantum meruit for the work done instead of payment under the original contract price.

In Krell v Henry [1903] 2 KB 740, Henry hired a flat at 56 A Pall Mall from Krell to watch the coronation procession of King Edward VII and paid deposit. The procession was postponed because the king was sick, and Henry refused to pay the balance of the rent. The surrounding circumstances showed that the foundation of the contract was to see the coronation procession. When the procession was cancelled, the contract was dissolved and Krell could not recover the balance of the rent under a contract. Similarly, in Chandler v Webstre [1904] 1 KB 493, the plaintiff also hired a room from the defendan to view that same procession. As in Krell v Henry, the plaintiff paid a deposit and the defendant took action to enforce the contract. The obligation to pay the rent in full had arisen before postponement ( the frustrating event), the plaintiff's claim for deposit refund was rejected and the defendant was successful for his counter claim for the balance. Under the contract the lessee had to pay before the frustrating event. This case was overturned in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 .

In Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32, the plaintiff , a Polish firm, agreed to buy machinery from the defendant, and paid a medium deposit with its order. Germany's invasion of Poland and the outbreak of World War II in 1939 prevented delivery of the machinery to Poland. The plaintiff was able to recover the deposit after the defendant refused to refund it on the grounds that work on the machinery had already begun. The House of Lords held in favour of the plaintiff. Accordingly, the plaintiff had received no machinery, and there was a total failure of consideration.

The parties are also free to specify who will bear the financial loss resulting from frustration, but if they do not, legislation governs this issue. In NSW provisions contained in Part 3 of the Frustrated Contracts Act 1978 (NSW) provide that each party bears equally in the losses flowing from the frustration – in other words, each party must pay half the expense the other has incurred in preparing to perform under the contract ( Pt 3) . The Act also specifies that money paid before frustration is to be repaid ( s 12), and promises due but not performed because of the frustration are discharged except to the extent necessary to support a claim for damages ( s 7).

C. Discharge by breach

Breach of contract can arise in two ways:

anticipatory breach - a party says or does something, before the due date of performance, which indicates that they do not intend to perform. Anticipatory breach can occur because of either, unwillingness to perform, or inability to perform.

OR

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actual breach - a party fails to do something at the actual time stipulated for performance;

in either circumstance the aggrieved party (that is, the person who is entitled to the performance) is entitled to the remedies for breach of contract.

The effect of the breach depends upon what type of term of the contract was breached. As you will recall, a term of a contract can be classified as

a condition - a term which is of such importance to the contract that a party would not have entered into the contract at all had they known that the term would not be complied with

OR

as a warranty - term which is of lesser importance (in other words, all the other terms of the contract which are not conditions)

For breach of a condition the aggrieved part can obtain

specific performance (an order that the contract be performed by the other party) + damages

OR

termination (a declaration that the contract is at an end and that the innocent party no longer has to perform) + damages.

For breach of a warranty, the aggrieved party cannot obtain termination, and can only obtain

Specific performance + damages

Discussion Exercise A

Frank needs a new house. He meets with Gordon, who is a builder. He looks at several house plans. He chooses one that he likes and on 1 July they sign a 50-page contract in which the fact that the house will have a steel roof is listed as one of the specifications. The overall cost of the house is stated in the contract as being

$250,000. On 5 July , Gordon sends to Frank a bulky set of documents containing site plans, house plans, agreed colour schemes and landscaping plans, all consistent with the contract that was signed. Unnoticed by Frank was a single sheet of paper included in the pile, headed 'Standard Terms of Our Construction Contracts', which contained a statement (which did not appear in the July 1 contract) as follows:

The building contractor excludes all liability for consequentia l damages taking the form of financial loss in the event of a bre ach of this contract.

The day the house is finished Frank notices that although all the other terms of the contract have been complied with, the house has a tile roof, not a steel one. It would take 3 months to take off the tile roof and put on a steel one, and it would cost Frank

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$6,000 to rent another house to live in while the work is done. Advise Frank fully as to all the legal issues arising out of this scenario and his legal rights against Gordon.

Post your answers to the Forum for Topic 8. You are also encouraged to read over and respond to the posts made by others in the class.

D. Damages

Damages are intended to provide compensation and are based on the principle of restitution – that is, their purpose is to replace plaintiff in the same financial position as if the breach had not occurred - in other words, to put them in the financial position they would have been in had the contract been performed properly.

General damages

The purpose of the award is to provide compensation to p for loss. The amount to be awarded is the difference between the contract price and the cost of making the work conform to the contract.

Nominal damages

It is a token amount. These are damages for proving the point that the plaintiff has been able to show that the defendant did breach the contract but he or she suffered no actual loss from the breach Charter v Sullivan [1957] 2 QB 117).

Exemplary

Punitive, vindictive, penal. These are awarded to punish bad conduct such as deliberate wrong doing. These are not usually awarded for breach of contract.

The first thing that a plaintiff seeking an award of damages must do is prove causation – that is, that the damages were caused by the defendant's breach of contract.

The amount of damages that will be awarded is limited by the concept of remoteness: The party who has breached the contract is not necessarily liable for all damage caused by the breach. They are liable only for damages that flow naturally from the breach – i.e., in the usual course of things, and/or were anticipated by the parties when the contract was made. Damages that were not foreseeable, because they were too remote, are not recoverable – see Hadley v. Baxendale (1854) 9 Exch 341, in which the court held that a defendant is only liable for:

damages that 'flow naturally from the breach' – i.e., in the usual course of things (and it was unusual in this case that the mill had only one crankshaft); and/or

such damages 'as may reasonable be supposed to have been in the contemplation of both parties' when the contract was made.

Compare this case with Victoria Laundry Ltd v Newman Industries Ltd [1949] 2 KB 528, in which a commercial laundry entered into a contract to have one of its boilers repaired. It was agreed that the repairs would be done by a certain date. The repair company knew that the laundry relied upon the boiler to operate at its normal level of business. However, the repair company did not know that the laundry was due to receive a special order to do the laundry for a hotel, from which it would have earned profits above what it normally earned. The court held that the repair company was liable to pay damages to the laundry company equal to the average profit per day that the laundry company would usually make, as these were losses that were reasonably predictable. However the repair company did not have to pay damages to compensate the laundry for the loss of the extra profit it would have made from the special contract, as the repair company had not been informed of this potential (and not reasonably foreseeable) loss by the laundry.

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Discussion Exercise B

Qantas Ltd signs a contract with Airbus Industries SA under which Airbus will build a new-generation A380 for Qantas at a price of $200 million. The contract contains 500 clauses of specifications. Clause 34 states that the aircraft must have 400 economy, 50 business and 25 first class seats. On the day the aircraft is due to be handed over, Qantas finds that all clauses of the contract have been complied with, except clause 34, in that the aircraft has 400 economy, 45 business and 25 first class seats. The board of Qantas has asked you if they can terminate the contract. You are also told that it would take Airbus two weeks to add 5 business class seats, that Qantas makes a profit of $250,000 per day an aircraft is operational, and that over the next two weeks it stands to make $100,000 extra because of a special contract it has with the Australian Netball Federation to take players to the World Netball Championships in Germany. Advise Qantas on its legal position.

Post your answers to the Forum for Topic 8. You are also encouraged to read over and respond to the posts made by others in the class.

Pecuniary loss

Under the common laws, compensation can be paid only for actual financial (or pecuniary) loss. It is not available for injury to a plaintiff's feelings due to inconvenience, discomfort or mental stress However, 'sentimental' damages can be recovered where the object of the contract was to provide pleasure and/or relaxation (i.e., in holiday travel / accommodation type contract), as in Jarvis v Swan Tours [1973] 1QB 233, where the court held that the plaintiff was entitled to damages for disappointment when a Swiss skiing holiday didn't match the description in the defendant's advertising brochure.

Mitigation of loss

The innocent party has a duty to mitigate their loss – i.e., do everything reasonable to keep their loss to a minimum. For example, assume that a tenant breaches a 12 month lease agreement after two months by leaving the property and ceasing to pay rent. The lessor is entitled to sue the tenant for the loss flowing from the breach, i.e. lost rental payments, but is also obliged to take reasonable steps to mitigate their loss by trying to find another tenant. If the lessor finds another tenant after say, three months, then the damage recoverable against the first tenant will be the lost rental over the three month period, plus incidental expenses. If the lessor fails to take any steps to find another tenant and the first tenant can show that there was a reasonable supply of suitable tenants available, then the lessor will not be able to claim as damages against the first tenant the whole ten months lost rental - a court would award only what it calculated the lessor would have lost had he taken reasonable steps in mitigation. The defendant must establish that the plaintiff has not mitigated his/her loss (not vice versa).

Liquidated damages clauses and penalty clauses

Damages are classified as either liquidated or unliquidated. Liquidated damages are those that are determined (and included as a clause) when the contract is made. For example, in their contract, Sam and Jessica agree that, if her house is not completed by a specified date, Sam will pay damages of $250 per week to Jessica until it is finished so that she can rent a house while she is waiting. Unliquidated damages are those that have to be proved by a party in the usual if they sue for breach of contract.

A penalty provision is a sum specified in a contract to deter the other party from possible breach – for example, a clause in a contract which says 'If you fail to maintain our IT system, we can recover $2,000 per day in lost profits, plus ,1,000 per day in penalties'. Penalties are not enforceable at law. The law does not allow one party to punish another – parties are entitled to recover only their actual loss or (in the case of liquidated damages clauses) a reasonable estimate thereof. If a court concludes that a sum in a contract is not a genuine estimate of potential loss, it cannot be relied upon - and the plaintiff will have to prove actual damage. Parties often erroneously refer to liquidated damages clauses as penalty clauses, but this should be avoided for obvious reasons.

Loss of right to sue

The right to sue may be lost by operation of :

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1. Prescription and the Statute of limitation

We have already seen in the discussion of the law of torts that there are statutory time limits on the right to sue. In New South Wales the right to sue on a contract is lost if legal proceedings are not commenced within six years from the cause of action arising in the case of simple contracts (s 14(1)) of the Limitation Act 1969 (NSW), and 12 years from the cause of action in the case of deeds (s 16).

OR

2. Equitable defences

laches – like an estoppel for delay, such as by not collecting fees which are owing – on the basis that 'equity aids the vigilant'

acquiescence – matters like agreement without protest, implying consent by remaining silent and agreeing to the infringement of rights

delay – long delays in enforcing one's rights tend to prejudice the other party.

E. Termination

If a condition of a contract is breached, the plaintiff may elect to terminate the contract. Performance of the contract ceases at that time. Although the parties do not have to return any property that they may have given each other during the life of the contract, anything they have each lost and gained financially up until termination will be taken into account in determining what damages will be payable to the aggrieved party.

Example

Assume Adam contracts to build a warehouse for Bob for $100,000, anticipating a profit of $25,000 (i.e. that it would cost $75,000 to build the warehouse). Assume also that Adam and has already spent $30,000 on the project and has received a deposit of $10,000 from Bob. If Bob breaches the contract by saying that they no longer want the warehouse, how much will the court award Adam?

F. Equitable remedies

The remedies of damages and termination came from the common law. The remedies of specific performance and injunction come from the law of equity. This distinction in origins is now of historical interest only, as the same courts apply common law and equity rules. Equitable remedies are discretionary (i.e., at a court's discretion) and will not be awarded where damages are considered to be an adequate remedy. This means that, given a choice between ordering a party to perform under a contract or to pay damages to the aggrieved party, the courts will do the latter. An exception to this rule is provided by contracts of sale for land or anything that is unique and cannot readily be obtained elsewhere. In such cases, the courts will order a defaulting seller to perform.

Specific performance is a court order requiring a party to complete his or her contractual obligation. Specific performance is not granted in contracts of employment, because the very fact that litigation has occurred indicates that the employer-employee relationship has been damaged and that it would be futile to require the employee to work for the employer.

An injunction is a court order that restrains someone from doing a wrongful act. In the case of contract law an example would be where A and B enter a contract that A will sell his car to B, and two days before delivery, B finds out that A is about to give the car to C. B can get an injunction prohibiting A from doing this. Sometimes, the court may order a ' Mareva' or freezing order if there is a real risk that the assets may

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be moved or disposed of, a court may issue a Mareva order to freeze assets to keep them within the jurisdiction of the court or to stop them being disposed of ( Mareva Compania Naviera SA v International Bulkcarriers S A, The Mareva [1980] 1 All ER 231). The court can also authorise entering the premises of a prospective defendant to inspect documents and records, removing them and seizing offending items. This order is known as an 'Anton Piller' injunction or a search order, and it can be issued independently of other court-ordered powers of inspection under various court rules.

Topic 8 Review Quiz

Topic 9: Statutory modifications of contract law

Learning Outcomes

At the completion of this topic you should be able to:

· explain why consumer protection requires that the common law of contract be modified by statute law;

· explain how to identify who is a consumer under the Australian Consumer Law;

· describe the operation of the implied guarantees contained in the Australian Consumer Law;

· describe the protection given by the Competition and Consumer Act 2010 (Cth) to consumers against misleading and deceptive conduct;

· explain how the Competition and Consumer Act 2010 (Cth) protects consumers against duress, unconscionable conduct and unfair terms; and

· describe the role of State Sale of Goods Acts in relation to non-consumer contracts.

Readings

Textbook: Gibson, Chapters 16,17 and 18

Discussion Task- 'Penta-drama'

Watch the video embedded on this page and read the newspaper article underneath it.

Have you faced similar issues with a corporation? What measured did you take? What was the outcome? Please share your experience with us! You are also encouraged to read over and respond to the posts made by others in the class.

(http://www.dailytelegraph.com.au/news/opinion/public-defender/fighting-for-your-consumer-rights-cu stomers-who-refuse-to-give-in/news-story/77a9bb2f92bdeb8338d5328464a339d2)

Original source: http://www.dailytelegraph.com.au/news/opinion/public-defender/ fighting-for-your-consumer-rights-customers-who-refuse-to-give-in/news-story/77a 9bb2f92bdeb8338d5328464a339d2 (http://www.dailytelegraph.com.au/news/opinion/public-def ender/fighting-for-your-consumer-rights-customers-who-refuse-to-give-in/news-story/77a9bb2f92bdeb8 338d5328464a339d2)

Topic Review Quiz

When you have finished the prescribed readings, taken notes, answered the exercise questions, and discussed issues on the forum, you should take the Topic 9 Review Quiz at the end of this topic.

This quiz is a learning activity and will not affect your marks in the subject. It is designed to help you assess your understanding of key concepts from this topic before moving on to the next one. You may take the quiz as many times as you like. You should take time to review the answers to each question and study the concepts you did not understand.

A. Statute law, common law and consumer protection

In previous topics you have studied have contract law and have begun to apply it to factual situations. A defect in the common law of contract is that it offers little protection to contracting parties who find that the goods or services they have purchased do not match their expectations. True the common law does provide remedies in cases of misrepresentation, but in the absence of misrepresentation, a person who finds that what they have bought is defective has no remedy - the general rule is caveat emptor (let the buyer beware). In addition, many of the common law rules governing certain types of contract, such as sale and lease, were found to be unsuitable to modern commerce. For these reasons the law of contract has been considerably modified by statute, and in this topic we are going to examine some of these modifications.

B. The Australian Consumer Law (ACL)

A major reform of consumer law took place with the enactment of the Competition and Consumer Act 201 0 (http://www.austlii.edu.au/au/legis/cth/consol_act/caca2010265/) (Cth) (http://www.austlii.edu.au/au/legis/cth/consol_act/caca 2010265/), which replaced the Trade Practices Act 1974 (Cth). The Australian Consumer Law (ACL) is a Schedule to the 2010 Act. Although the Commonwealth Parliament cannot legislate generally on business

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law, it can legislate on corporations, and so the Act applies to any contract which a consumer enters into with a corporation. In addition, and in order to make the ACL applicable to contracts entered into by consumers other than with corporations (for example, with a sole trader), all the States undertook to enact the ACL into law in their jurisdictions. The result is that there is now a uniform law national governing consumer contracts. Any contracts which do not fall under the definition of consumer contracts continue to be governed by the various State Sale of Goods Acts which we will look at later.

Who is a consumer?

Key to the operation of the ACL is the definition of a 'consumer' contained in s 3(1), which states that a consumer is a person who acquires goods or services either if

the price of the goods is less than $40,000 or

the price exceeds $40,000 but the goods are those commonly acquired for personal, domestic or household use or consumption.

Section 3(2) excludes from the category of goods acquired as a consumer those goods which are acquired for purposes of re-supply or for the purpose of being used up or transformed in trade or commerce in the course of a process of production or manufacture, or of the treatment or repair of other goods or fixtures to land.

The ACL implies a number of guarantees into all consumer contracts. These guarantees cannot be excluded by agreement – s 64 provides that such an exclusion clause will be invalid. The purpose of this non-exclusion provision is to protect consumers who are usually in a weaker bargaining power than suppliers. The guarantees implied by the ACL are as follows:

S 51 that the supplier has clear title in the goods, and can thus transfer ownership to the consumer.

S 52 that the consumer obtains the right to undisturbed possession – that is, will not be legally challenged in their right to possess the property

S 53 that there are no undisclosed securities over the property – that is, that there is no 3rd party who has rights over the property because it had been used a security for a loan, for example

S 54 that goods are of acceptable quality – we will examine this in more detail below

S 55 that goods are fit for any specific purpose that the consumer made known to the supplier S 56 that goods will correspond to any description of them by the supplier

S 57 that goods supplied with reference to a sample shown to the consumer will correspond to the sample In the case of contracts for the supply of services, the ACL implies the following guarantees:

S 60 that services will be performed with due care and skill (which will be tested according to a standard of reasonableness)

S 61 that services are for any purpose which the consumer made known to the supplier S 62 that services will be rendered within a reasonable time.

Acceptable quality – s 54

Perhaps the most common consumer complaint is that goods were not of acceptable quality. It is very important to realise at this juncture that a consumer's rights are not limited by the terms and duration of any warranty they may have received when they purchased goods – such warranties cannot limit the operation of any provision of the ACL – so just because a warranty has expired does not prevent a consumer from pursuing remedies under the ACL.

The key provision of the ACL is s 54, which imports into consumer contracts a guarantee that goods are of acceptable quality. 'Acceptable quality' is defined as follows:

(2) Goods are of acceptable quality if they are as:

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fit for all the purposes for which goods of that kind are commonly supplied; acceptable in appearance and finish;

free from defects; safe; and

durable

as a reasonable consumer fully acquainted with the state and condition of the goods (including any hidden defects of the goods), would regard as acceptable having regard to the matters in subsection (3).

The factors listed in subsection (3) are the nature of the goods, their price (if relevant), any statement made on the packaging of the goods and any representation by the manufacturer or the supplier, and any other relevant circumstance. The guarantee does not apply if the reason the goods were not of acceptable quality was drawn to the consumer's attention (ss (4)), if the consumer's own conduct causes them to become of unacceptable quality (ss (6)) or the goods were examined by the consumer and the examination ought reasonably to have revealed that the goods were not of acceptable quality (ss (7)).

Remedies for breach of statutory guarantees are found in sections 259-264 of the ACL. Key to the operation of these provisions is the concept of 'major failure' of goods, defined in s 260 as meaning, inter alia, failure which would have caused the consumer not to acquire the goods if aware of the failure (s 260(a)), or failure which renders the goods 'substantially unfit' for the purpose for which such goods are commonly supplied, and which cannot be remedied within a reasonable time (s 260(c)).

If a failure to comply with a guarantee - such as the guarantee of acceptable quality in s 54 - constitutes a major failure, the consumer may, subject to s 262 (discussed below), reject the goods (s 259(3)(a)) or recover compensation for the reduction in value of the goods resulting from the failure to comply with the guarantee (s 259(3)(b)). In addition, the consumer may recover any consequential damages caused by the failure to comply with the guarantee (s 259(4)).

In cases where the failure was not a major failure, s 259(2) states that the consumer must give the supplier an opportunity to remedy the failure within a reasonable time, but that if the supplier fails to comply, the consumer may either have the defect remedied and recover the costs from the supplier, or may reject the goods. Section 261 provides that where a supplier is required under s 259(2) to remedy a failure to comply with the guarantee, the supplier may do so by repairing the goods, replacing the goods with identical goods, or refunding the consumer what they paid for the goods.

Under s 262(1), the consumer's right to reject the goods is lost if the rejection period for the goods has ended, the goods have been lost, destroyed or disposed of by the consumer, if the goods were damaged after delivery to the consumer for reasons unrelated to their condition at the time of supply or if the goods have been attached to other property and cannot be detached without damage to the goods. The key provision which will limit consumers' rights to return goods and obtain a refund is that relating to expiry of the rejection period, contained in s 262(1)(a). The 'rejection period' is defined in s 262(2) as follows:

The rejection periodfor goods is the period from the time of the supply of the goods to the consumer within which it would be reasonable to expect the relevant failure to comply with a guarantee referred to in section 259(1)(b) to become apparent, having regard to:

a. the type of goods; and

b. the use to which a consumer is likely to put them; and

c. the length of time for which it is reasonable for them to be used; and

d. the amount of use for which it is reasonable for them to be put before such failure becomes apparent.

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The operation of s 262 is problematic, as it will be difficult for a court to determine how long any given item – a fridge, a TV, a pair of shoes – should reasonably be expected to last.

Discussion Exercise A (Tom Gullibler)

Tom buys a DVD player from the local branch of Darley Gorman Appliances Ltd. It is a top range model, costing $250. The DVD player comes with a 12 month warranty.

The order form that Tom signed at the time of purchase contained the following clause:

Darley Gorman Ltd makes no representation as to the quality of the goods purchased. The liabilities of Darley Gorman Ltd are confined to the terms of our 12 month warranty, which requires that we may choose to repair or replace goods at our discretion, where the purchaser can prove that goods were defective at the time of sale. The purchaser acknowledges that this contract contains the entirety of the terms of the contract with Darley Gorman Ltd, and that all other remedies, statutory or common law, are excluded.

13 months after purchase, the DVD player stops working. He takes it back to Darley Gorman Ltd. They say that because the warranty period has expired they have no obligations towards Tom. Advise Tom as to the likelihood of success if he was to take this matter to court.

Post your answers to the Forum for Topic 9. You are also encouraged to read over and respond to the posts made by others in the class.

C. Misleading and deceptive conduct

One of the most frequently used provisions under the Trade Practices Act 1974 was s 52 which prohibited a corporation when engaging in trade or commerce from engaging in 'conduct that is misleading or deceptive or is likely to mislead or deceive'. This section has now been replaced by s 18 of the ACL, contained in the Competition and Consumer Act 2010 (Cth). One would expect the courts to draw upon case-law generated under the old s 52 as they interpret the new s 18.

The section has deliberately been framed in broad terms and encompasses a wide range of business activities. It is not confined to cases involving consumer contracts and would, for example, apply to actions performed by one corporation vis-a-vis to another.

Section 18 says that 'a person must not, in trade or commerce, engage in misleading or deceptive conduct, or conduct that is likely to mislead or deceive'.

Section 18 applies only to a person engaging in trade or commerce – that is, in the course of a business. So a person selling their car would not be subject to s 18 in relation to any statements they made (although they would be subject to the common law of misrepresentation).

Note that an intention to mislead or deceive is not required for liability. It is not the intention or negligence of the person engaging in the conduct that has to be proved – it is the effect of that conduct on the plaintiff. Once a plaintiff proves that they were misled, the question becomes whether the defendant's conduct was, objectively, misleading or deceptive. The objective nature of the test means that the court determines what an average consumer in the position of the plaintiff would have believed, and if such a person would have been misled, then s 18 has been breached – see Taco Company of Australia Inc v Taco Bell Pty Ltd [1982] ATPR 40-303.

The Act provides a wide range of remedies for breach of s 18, including:

S 232 injunction ordering a party not to engage in conduct in breach of the ACL

S 236 damages to compensate parties who suffered financial loss as a result of being misled

S 237-238 ancillary orders (such as rescission of the contract, variation of the contract, a declaration that all or part of the contract is void, or an order that money be refunded or property be returned).

Discussion Exercise B ( Mary D'Contrerie)

Mary D'Contrerie reads an advert in the local newspaper which reads as follows:

Special offer: Get a full set of tyres from Exhaust `n Tyre this week and we will throw in a free one-year membership of the NRMA. You can have confidence in our tyres and in the road services offered to motorists by the NRMA.

Mary goes to her local Exhaust 'n Tyre branch. She buys four tyres at $150 each, and receives an NRMA membership. She is very pleased about this until she speaks to her friend Tom, who tells her that he bought the same set of tyres from Exhaust `n Tyre the previous week for $100 per tyre, and that he is an NRMA member, the annual fees for which are $80. When Mary contacts Exhaust 'n Tyre about this, they say that the advertising campaign put into the newspaper in error by a misguided marketing manager, and that the company had not intended it to run. Advise Mary as to what remedies she might have.

Post your answers to the Forum for Topic 9. You are also encouraged to read over and respond to the posts made by others in the class.

D. Unconscionable conduct

We have already seen how the common law allows a contract to be rescinded where the consent of a party was obtained by unconscionable means – see Commercial Bank of Australia v Amadio (1983) 151 CLR 447. The Competition and Consumer Act 2010 (Cth) contains a statutory version of unconscionability, which can be remedied by a wider range of orders than were available under the common law. The key provisions are as follows:

S 20 provides that a person may not, in trade and commerce, engage in conduct which is unconscionable under the unwritten (i.e. common) law

S 21 specifically prohibits unconscionability in consumer contracts (for goods ordinarily acquired for personal or domestic use), with factors listed in s 21(2) to guide the courts in determining whether unconscionability exists (such as the relative bargaining strength of the parties; whether the terms of the contract were not reasonably necessary to protect the supplier; the consumer's ability to understand documentation and the use of pressure tactics by the supplier)

S 22 provides specific protection from unconscionability to small business, in that unconscionability is prohibited in the supply of goods and services under commercial contracts to unlisted companies.

Thus one would expect that consumers will use s 21, small businesses s 22 and all other contracting parties s 20 when alleging unconscionability.

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The remedies available for unconscionable conduct are the same as for misleading and deceptive conduct.

E. Unfair contract terms

A similar area to unconscionability is unfair contract terms. Section 23(1) of the ACL provides that a term of a consumer contract (that is, a contract goods, services or land acquired predominantly for person al or domestic purposes) will be void if

it is unfair and

the consumer contract is a standard form contract

Section 25 lists the criteria that will determine if a term is unfair – essentially if the term leads to an imbalance of contractual rights and obligations; it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term and it would cause the consumer detriment.

F. The Sale of Goods

The Sale of Goods Act regulates sale of goods in each state or territory. It does not operate Australia wide. It regulates the contracts not regulated by the Australian Consumer law, that is, business to business contracts.

A contract for the sale of goods is defined by the Sale of goods legislation as a contract whereby the seller transfers, or agrees to transfer property in goods to the buyer for money consideration. Accordingly, there must be:

goods;

money consideration; and transfer of property.

The Sale of Goods Act 1923 (NSW), s 5 provides a broad definition of goods. The definition includes all 'chattels personal other than things in action and money. The term includes emblements and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale'.

Many people assume that if a person has possession of goods, that person must also be the owner. There is a vast difference between 'property in' and 'possession'. 'Property in goods' means the same thing as 'ownership' or 'title'. 'Possession of goods' refers to the control or custody of goods. Several rules serve to determine when ownership of goods passes from the seller to the buyer:

If the goods are unascertained goods (ie. goods that are not yet precisely identified or agreed upon) then ownership cannot pass until such goods become ascertained ( ss 21 and 25 A)

If the goods are specific goods (ie goods identified and agreed upon at the time the contract is made) then ownership will pass when the parties intend ( 2 2(1)). For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties, and the circumstances of the case ( 22(2)).

The rule that one cannot give what one doesn't possess is acknowledged in the Sales of Goods Acts, section 26 (1), which states that a buyer from a non-owner gets no better title than the seller. However, several exceptions apply:

1. Estoppel – owner gives the impression that seller has authority to sell. Buyer must purchase in good faith and for value from seller to have good title.

2. Sale by an agent of the owner

3. Sale by mercantile agent – trade product for a commission basis on behalf of owner . In New South Wales, the exception is qualified by section 28 of the legislation.

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4. Sale under voidable title – the buyers bought in good faith without notice ( Lewis v Averay [1971] 1 QB 198)

5. Special powers of sale – pPersons with statutory or common law powers-eg, sheriffs, innkeepers(

Pacific Motor Auctions Pty Ltd v Motor Credits ( Hire Finance) Ltd [1965] HCA 8 ).

6. Sale in market overt – protects the title of a purchase acting in good faith without notice of any defect in title who purchases goods openly displayed in a 'market overt' such as a market established by local community.

Rules as to delivery

1. Delivery is a voluntary transfer of possession

2. Delivery is not the same as transfer of ownership

3. If there is no agreement, the goods must be delivered to the seller's place of business if there is one, if there is not, they must be then delivered to the seller's residence.

4. If contract requires the seller to send the goods to buyer, but doesn't fix a time for them to be sent, the seller must send them within reasonable time.

5. If the goods are in the possession of a third person, there is no delivery by seller to buyer unless and until the third person acknowledges to the buyer that the goods are being held by that person on the buyer's behalf

6. Demander tender of delivery is not effective unless it is mailed at a reasonable hour

7. Unless otherwise agreed, the expenses of getting the goods into a deliverable state must be done by the seller

Section 13 of the legislation stipulates with respect to the ascertainment of price that:

(1) The price in a contract of sale may be fixed by the contract, or may be left to be fixed in a manner thereby agreed, or may be determined by the course of dealing between the parties.

(2) Where the price is not determined in accordance with the foregoing provisions, the buyer must pay a reasonable price. What is a reasonable price is a question of fact dependent on the circumstances of each particular case.

Remedies for non –performance

The sale of goods legislation gives the unpaid seller rights against both the goods and/or the buyer in the event of default by the buyer. Certain rights are available which allow the seller to use the goods as a kind of security for payment, including:

1. a lien on the goods – right to retain goods –for the price while they are still in the possession of the seller

2. withhold delivery

3. right of stopping the goods after the seller has parted with possession but before delivery to the buyer

4. limited right of resale –for example, if goods are perishable, or if the unpaid seller has given notice to the buyer and the buyer does not pay.

The legislation gives the seller a personal action against the buyer either: for the price of the goods, OR

for damages for non-acceptance

Common law and equitable remedies are provided in the legislation to assist a buyer if there is non- delivery, delayed delivery, delivery of inferior goods, or other breaches of the contract. These remedies of the buyer include:

rejection of the goods

an action for damages ( including action for breach of warranty of quality)

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