Carter's guide to Australian contract law [3rd edition.] 9780409342871, 0409342874

Table of contents :
Full Title
Copyright
Dedication
Preface
Preface to Second Edition
Table of Cases
Table of Statutes
Guide Glossary
Abbreviations
Table of Contents
Part A — What is Contract Law?
1. Introduction
Part B — Is There a Contract?
2. Contract Formation
3. Consideration
4. Uncertainty and Conditional Contracts
5. Intention to Create Legal Relations
6. Pre-contractual Liability
Part C — What Are the Terms of the Contract?
7. Terms Expressly Agreed
8. Terms Impliedly Agreed and Consumer Guarantees
9. Incorporated Terms
Part D — What Do the Terms Mean?
10. Principles of Construction
11. Exclusion Clauses
Part E — Who Can Enforce the Contract?
12. Capacity and Parties
13. Privity of Contract
Part F — Has the Contract Been Performed?
14. Performance of the Contract
15. Breach of Contract
Part G — Has the Contract Been Prematurely Discharged?
16. Bases for Discharge
17. Discharge for Breach of Term
18. Discharge for Repudiation
19. Discharge for Delay
20. Discharge by Frustration
21. Consequences and Scope of Discharge
Part H — Has the Contract Been Rescinded?
22. Bases for Rescission
23. Misleading Conduct
24. Mistake
25. Improper Pressure
26. Unconscionable Conduct, Unjust Contracts and Unfair Terms
Part I — What Remedies Are Available?
27. Damages for Breach of Contract
28. Damages for Misleading Conduct
29. Specific Performance and Injunction
30. Restitution
31. Impact of Discharge on Remedies
Part J — What Defences May Be Raised?
32. Defences in Contract Law
33. Invalid Exercise of Rights
34. Illegality
35. Lack of Writing
Part K — How Do I Do It?
The How To Chapter
Sample Contracts
Quick Quiz Answers
Problem Questions
Problem Solutions
Index

Citation preview

Carter’s Guide to Australian Contract Law Third edition

J W Carter BA, LLB (Syd), PhD (Cantab), FAAL Emeritus Professor of Law, University of Sydney General Editor, Journal of Contract Law Consultant, Herbert Smith Freehills

LexisNexis Butterworths Australia 2016

AUSTRALIA

ARGENTINA AUSTRIA BRAZIL CANADA CHILE CHINA CZECH REPUBLIC FRANCE GERMANY HONG KONG HUNGARY INDIA ITALY JAPAN KOREA MALAYSIA NEW ZEALAND POLAND SINGAPORE SOUTH AFRICA SWITZERLAND TAIWAN UNITED KINGDOM

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LexisNexis Group, New York, NEW YORK LexisNexis, Miamisburg, OHIO

National Library of Australia Cataloguing-in-Publication entry Author: Title: .Edition: ISBN: Notes: Subjects: Dewey Number:

Carter, J. W. (John W.). Carter’s guide to Australian contract law. 3rd edition. 9780409342871 (pbk). 9780409342888 (ebk). Includes index. Contracts - Australia. 346.9402

© 2015 Ironhans Pty Limited. Under exclusive licence to Reed International Books Australia Pty Ltd trading as LexisNexis First edition 2006; Second edition 2011 This book is copyright. Except as permitted under the Copyright Act 1968 (Cth), no part of this publication may be reproduced by any process, electronic or otherwise, without the specific written permission of the copyright owner. Neither may information be stored electronically in any form whatsoever without such permission. Inquiries should be addressed to the publishers. Cover painting © Kathryn Elizabeth Carter, BA. Edited by Rosemary Peers. Design and typesettting in Minion and Myriad by DiZign Pty Ltd. Printed in China. Visit LexisNexis Butterworths at www.lexisnexis.com.au

This book is dedicated to the memory of my beautiful daughter Kathryn whose love of life, family and friends will always be an inspiration ‘Write me the stars and gaze at the page’ Kat 2003

Preface In terms of objects and structure, this edition follows the same pattern as the previous editions. However, the Problems and Solutions Chapters have been moved into the printed part of the book. I have brought the book up to date, including taking into account intervening High Court decisions in areas such as damages, terms implied in law, construction and unconscionable conduct. I have also spent considerable time on each chapter, endeavouring to ensure that the text of each chapter is clear, accessible and useful. This has led to changes to many of the examples in the text and the various questions, including in the Quick Quiz sections. There are also a few chapters in which I have restructured material. Chapter 10 is the main example. My thanks to Rosemary Peers for doing such a fantastic job editing the manuscript and also to Diana Murray for preparing the proofs and tables. I must also thank my secretaries at Herbert Smith Freehills, Daniela Furia and Ashley Liubertas, for their expert management of the proofs. My wife Helen joins with me in thanking LexisNexis (particularly Serena Cubie) for once again converting our daughter Kathryn’s artwork into the cover of the book. J W Carter Sydney October 2015

Preface to Second Edition In the preface to the first edition I explained: The use of the word ‘Guide’ in the title of this book is intended to reflect the functional approach of the book and, in particular, the way in which it attempts to guide students of contract law through the various issues. The part headings — which express all the important questions for a work of this level — are themselves signposts to the map which the chapters represent. Each chapter other than Chapter 1 ends with a series of brief questions which are intended to test a basic understanding of the content. More searching questions are included in the Problem Questions chapter, which is contained in the accompanying CD (along with the Solutions to Problems chapter). Recognising that students are expected to write essays and pass exams, and that an appreciation of the basics of contract drafting is helpful to an understanding of contract law, The How to Chapter and a Sample Contracts chapter have also been included. These are intended to reinforce the concept of the book as a ‘Guide’, as is the Guide Glossary.

Those objectives are equally applicable to this second edition. In preparing this edition I have reviewed the entire book not only for accuracy but also for ease of understanding. Of course, it has also been fully updated. That updating included the incorporation of analysis of the Australian Consumer Law, which comes into operation on 1 January 2011. Where appropriate, the corresponding provisions of the Trade Practices Act 1974 (Cth) — itself to be replaced by the Competition and Consumer Act 2010 (Cth) — are noted. My wife joins with me in thanking the publishers for allowing us to include the dedication and for converting Kathryn’s painting into the cover of the book. As always, I have to thank Rosemary Peers for her work in editing the book with her usual skill, judgment and diligence. The law is stated on the basis of the material available to me in bound volumes of reported cases on 1 November 2010. JW Carter Sydney November 2010

Table of Cases Those cases reprinted at length in Carter, Cases and Materials on Contract Law in Australia, 6th ed, are distinguished by bold References are to paragraph numbers ABB Power Plants Ltd v Electricity Commission of New South Wales t/a Pacific Power (1995) …. 34-21 Abbott v Lance (1860) …. 2-41 Abrahams v Herbert Reiach Ltd [1922] …. 27-14 Academy of Health and Fitness Pty Ltd v Power [1973] …. 33-35 Actionstrength Ltd v International Glass Engineering IN.GL.EN Spa [2003] …. 35-22 Adams v Lindsell (1818) …. 2-29 Addis v Gramophone Co Ltd [1909] …. 27-13 Administration of the Territory of Papua New Guinea v Leahy (1961) …. 5-08 Administrative and Clerical Officers Association v The Commonwealth (1979) …. 29-10 Aerial Advertising Co v Batchelors Peas Ltd (Manchester) [1938] …. 27-43 AGC (Advances) Ltd v McWhirter (1977) …. 2-42 Agricultural and Rural Finance Pty Ltd v Gardiner (2008) …. 10-31, 33-11 Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] …. 11-09 Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) …. 10-15 Akron Securities Ltd v Iliffe (1997) …. 23-30 Alati v Kruger (1955) …. 28-09, 28-10, 33-05, 33-26, 33-35 Alderslade v Hendon Laundry Ltd [1945] …. 11-04, 11-22, 11-23 Alexander v Rayson [1936] …. 34-07, 34-44 Allcard v Skinner (1887) …. 25-20 Allcars Pty Ltd v Tweedle [1937] …. 4-14 Allied Maples Group Ltd v Simmons & Simmons (a firm) [1995] …. 27-49 Alpha Trading Ltd v Dunnshaw-Patten Ltd [1981] …. 8-03 Amalgamated Investment & Property Co Ltd v John Walker & Sons Ltd [1976] …. 24-04

Amann Aviation Pty Ltd v The Commonwealth (1990) …. 17-02 AMEV-UDC Finance Ltd v Austin (1986) …. 27-54, 27-56 Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) …. 34-28, 34-29, 34-29, 34-31 —v— [No 2] [1975] …. 34-46 Andar Transport Pty Ltd v Brambles Ltd (2004) …. 10-07, 11-24 Andrews v Australia and New Zealand Banking Group Ltd (2012) …. 27-53, 2755, 27-56 Andrews v Parker [1973] …. 34-17, 34-18, 34-43 Ange v First East Auction Holdings Pty Ltd (2011) …. 9-10 Angel v Jay [1911] …. 33-34 Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) …. 16-21, 17-09, 17-13, 17-15, 17-27, 19-14 Antaios Compania Naviera SA v Salen Rederierna AB (The Antaios) [1983] …. 32-14 —v— [1985] …. 10-07, 17-02 Aotearoa International Ltd v Scancarriers A/S [1985] …. 4-13 Appleby v Myers (1867) …. 30-23, 30-29, 30-36 Archbolds (Freightage) Ltd v S Spanglett Ltd [1961] …. 34-13, 34-19 Ardlethan Options Ltd v Easdown (1915) …. 27-34 Argy v Blunts & Lane Cove Real Estate Pty Ltd (1990) …. 28-19 Aroney v Christianus (1915) …. 12-14 Ashby v Tolhurst [1937] …. 11-15 Associated Japanese Bank (International) Ltd v Credit du Nord SA [1989] …. 24-07 Associated Newspapers Ltd v Bancks (1951) …. 16-06, 17-09, 17-11, 17-12, 1816 Astley v Austrust Ltd (1999) …. 27-25, 27-28 Astra Trust Ltd v Adams [1969] …. 4-29 Atco Controls Pty Ltd (in liq) v Newtronics Pty Ltd (Receivers and Managers Appointed) (in liq) (2009) …. 5-06 Attorney General of Belize v Belize Telecom Ltd [2009] …. 8-01 Attorney-General v Blake [2001] …. 27-19 Austin v Sheldon [1974] …. 20-22 Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) …. 6-17 Australian and New Zealand Banking Group Ltd v Frost Holdings Pty Ltd [1989] …. 4-13

Australian Broadcasting Corp v XIVth Commonwealth Games Ltd (1988) …. 507 Australian Capital Territory v Munday (2000) …. 34-28 Australian Casualty Co Ltd v Federico (1986) …. 10-07 Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd (2003) …. 5-09 —v C G Berbatis Holdings Pty Ltd (2003) …. 26-10, 26-10 —v Samton Holdings Pty Ltd (2002) …. 26-10 Australian Performing Rights Association Ltd v Austarama Television Pty Ltd [1973] …. 10-20 Australian Woollen Mills Pty Ltd v The Commonwealth (1954) …. 2-04, 3-02, 3-08, 12-32 —v— (1955) …. 5-08 Australis Media Holdings Pty Ltd v Telstra Corp Ltd (1998) …. 4-12, 14-11 Automatic Fire Sprinklers Pty Ltd v Watson (1946) …. 14-04 Avery v Bowden (1856) …. 18-10 B & S Contracts and Design Ltd v Victor Green Publications Ltd [1984] …. 2005 Baburin v Baburin (No 2) [1991] …. 25-22 Bacchus Marsh Concentrated Milk Co Ltd v Joseph Nathan & Co Ltd (1919) …. 24-21 Bahr v Nicolay (No 2) (1988) …. 10-22, 13-09 Baker v Taylor (1906) …. 2-21 Balfour v Balfour [1919] …. 5-04 —v Hollandia Ravensthorpe NL (1978) …. 23-10 Ballas v Theophilos (No 2) (1957) …. 2-10, 2-14 Balmain New Ferry Co Ltd v Robertson (1906) …. 9-07 Baltic Shipping Co v Dillon (The Mikhail Lermontov) (1993) …. 27-41, 27-43, 27-44, 30-06, 30-12, 30-22 Banco de Portugal v Waterlow & Sons Ltd [1932] …. 27-34 Bank Line Ltd v Arthur Capel & Co [1919] …. 20-25 Bank of Australasia v Palmer [1897] …. 10-10, 10-16 Bank of New South Wales v Rogers (1941) …. 22-04 Bans Pty Ltd v Ling (1995) …. 14-23 Barba v Gas & Fuel Corp of Victoria (1976) …. 3-17 Barclays Bank Plc v O’Brien [1994] …. 25-24

Barry v Davies (trading as Heathcote Ball & Co) [2000] …. 2-42 Barton v Armstrong [1976] …. 25-10 Bastard v McCallum [1924] …. 2-25 Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) …. 4-23 Behn v Burness (1863) …. 16-25 Behzadi v Shaftesbury Hotels Ltd [1992] …. 19-16 Belgrave Nominees Pty Ltd v Barlin-Scott Airconditioning (Aust) Pty Ltd [1984] …. 29-11 Bell v Lever Bros Ltd [1932] …. 24-07, 24-08 —v Scott (1922) …. 18-22, 19-04 Bellgrove v Eldridge (1954) …. 27-12, 27-39, 27-47 Benedetti v Sawiris [2014] …. 30-17 Bentsen v Taylor Sons & Co (No 2) [1893] …. 17-09 Berger & Co Inc v Gill & Duffus SA [1984] …. 31-01 Beswick v Beswick [1968] …. 13-14, 27-04, 29-07 Bevanere Pty Ltd v Lubidineuse (1985) …. 23-26 BHP Petroleum Ltd v British Steel Plc [2000] …. 11-22 BICC Plc v Burndy Corp [1985] …. 33-32 Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council [1990] …. 619 Bliss v South East Thames Regional Health Authority [1987] …. 27-42 Blomley v Ryan (1956) …. 12-23, 26-01, 26-05, 26-06 Boland v Yates Property Corp Pty Ltd (1999) …. 28-19 Bolton v Mahadeva [1972] …. 14-21 Bondi Beach Astra Retirement Village Pty Ltd v Gora (2011) …. 2-25 Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) …. 4-15, 4-16 Boone v Eyre (1777) …. 14-18 Bot v Ristevski [1981] …. 31-13 Bowes v Chaleyer (1923) …. 4-09, 15-08, 17-14, 17-25, 18-14, 19-11 —v Shand (1877) …. 19-11 Bowmakers Ltd v Barnet Instruments Ltd [1945] …. 34-38 Bowman v Durham Holdings Pty Ltd (1973) …. 2-30 Boyd v Holmes (1878) …. 2-28 BP Petroleum Co (Libya) Ltd v Hunt (No 2) [1979] …. 30-36 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) …. 8-02 Bradshaw v Gilbert’s (Australasian) Agency (Vic) Pty Ltd (1952) …. 34-13 Braham v Walker (1961) …. 34-08

Brambles Holdings Ltd v Bathurst City Council (2001) …. 2-19, 10-24 Breen v Williams (1996) …. 8-06 Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem PVBA [1978] …. 20-05, 21-04 Bremer Vulkan Schiffbau und Maschinenfabrik v South India Shipping Corp Ltd [1981] …. 20-08 Brenner v First Artists’ Management Pty Ltd [1993] …. 30-18 Bressan v Squires [1974] …. 2-30, 2-31 Brian v Tyley (1916) …. 13-08 Bridge v Campbell Discount Co Ltd [1962] …. 27-54 —v Deacons [1984] …. 34-30, 34-32 Bridgewater v Leahy (1998) …. 26-06 Brien v Dwyer (1978) …. 19-10 Brinkibon Ltd v Stahag Stahl und Stahlwarenhandelsgesellschaft mbH [1983] …. 2-33 British and Beningtons Ltd v North Western Cachar Tea Co Ltd [1923] …. 1825, 22-07 British Steel Corp v Cleveland Bridge and Engineering Co Ltd (1981) [1984] …. 6-21, 30-18 British Traders’ Insurance Co Ltd v Monson (1964) …. 20-22 British Waggon Co v Lea & Co (1880) …. 14-11 Brogden v Metropolitan Railway Co (1877) …. 2-44 Brooks v Burns Philp Trustee Co Ltd (1969) …. 34-21, 34-47 Brown v Smitt (1924) …. 28-08 Brown (B S) & Son Ltd v Craiks Ltd [1970] …. 8-14 Buckland v Massey [1985] …. 34-08 Bulloch v Glasson (1915) …. 7-11 Bunbury Foods Pty Ltd v National Bank of Australasia Ltd (1984) …. 14-08 Bunge Corp New York v Tradax Export SA Panama [1981] …. 17-15, 19-11 Burger King Corp v Hungry Jack’s Pty Ltd (2001) …. 14-12 Burke v State Bank of New South Wales (1994) …. 22-04 Burns v MAN Automotive (Aust) Pty Ltd (1986) …. 27-25, 27-33 Burns Philp Trust Co Pty Ltd v Kwikasair Freightlines Ltd (1963) …. 29-09 Bush v Burns (1873) …. 3-17 Butler v Fairclough (1917) …. 3-28 Butler Machine Tool Co Ltd v Ex-Cell-O Corp (England) Ltd [1979] …. 2-35 Butt v M’Donald (1896) …. 14-12

Byers v Dorotea Pty Ltd (1986) …. 11-31, 28-22 Byrne v Australian Airlines Ltd (1995) …. 8-05, 8-06, 8-09, 14-12, 14-23, 27-37, 29-17 Byrne & Co v Leon Van Tienhoven & Co (1880) …. 2-12, 2-30 Byrnes v Kendle (2011) …. 10-20 Callaghan v O’Sullivan [1925] …. 34-25 Callisher v Bischoffsheim (1870) …. 3-28 Caltex Oil (Australia) Pty Ltd v Best (1990) …. 34-23 Cameron (R W) & Co v L Slutzkin Pty Ltd (1923) …. 10-28 Campbell v Backoffice Investments Pty Ltd (2009) …. 23-26, 28-22 Canada SS Lines Ltd v R [1952] …. 11-20, 11-23 Canning v Temby (1905) …. 14-03, 19-05 Car and Universal Finance Co Ltd v Caldwell [1965] …. 24-16, 33-14 Carlill v Carbolic Smoke Ball Co [1893] …. 1-40, 2-06, 2-22, 2-28, 2-38, 2-39, 2-41, 3-08, 3-10, 3-21, 6-06, 7-15 Carlton Cricket & Football Social Club v Joseph [1970] …. 12-29 Carlton SS Co Ltd v Castle Mail Packets Co Ltd [1898] …. 14-03 Carmichael v Colonial Sugar Refining Co Ltd (1944) …. 20-11 Carney v Herbert [1985] …. 34-48, 34-52 Carter v Hyde (1923) …. 2-11, 2-18, 29-15 Casey’s Patents; Stewart v Casey, Re [1892] …. 3-17 Causer v Browne [1952] …. 9-07, 9-11 Cavallari v Premier Refrigeration Co Pty Ltd (1952) …. 2-10, 15-09 Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Nord) [1976] …. 1-20, 16-27, 17-14, 17-21, 17-28 Central London Property Trust Ltd v High Trees House Ltd [1947] …. 6-12 CGU Workers Compensation (NSW) Ltd v Garcia (2007) …. 1-20, 6-23, 14-12 Chapelton v Barry Urban District Council [1940] …. 9-07, 9-11 Chaplin v Hicks [1911] …. 27-48 Chapman v Wade [1939] …. 34-36 Chappell & Co Ltd v Nestlé Co Ltd [1960] …. 3-15 Charge Card Services Ltd, Re [1989] …. 14-10 Charles Rickards Ltd v Oppenhaim [1950] …. 19-15 Charrington & Co Ltd v Wooder [1914] …. 10-24 Chartbrook Ltd v Persimmon Homes Ltd [2009] …. 10-20, 24-22 Charter Reinsurance Co Ltd v Fagan [1997] …. 10-25

China National Foreign Trade Transportation Corp v Evlogia Shipping Co SA of Panama (The Mihalios Xilas) [1979] …. 33-14 Ciavarella v Balmer (1983) …. 19-18, 33-10 Citicorp Australia Ltd v Hendry (1985) …. 19-18 Clark v Macourt (2013) …. 27-14 Clarke v Earl of Dunraven [1897] …. 2-43 Claude Neon Ltd v Hardie [1970] …. 20-25 Clea Shipping Corp v Bulk Oil International Ltd (The Alaskan Trader) [1984] …. 27-38 Clegg v Wilson (1932) …. 34-44 Clifford Davis Management Ltd v WEA Records Ltd [1975] …. 34-32 Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) …. 4-12 Coastal Estates Pty Ltd v Melevende [1965] …. 33-19 Coates v Sarich [1964] …. 30-14 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) …. 8-04, 10-05, 10-07, 10-21, 10-23, 1024, 10-25, 10-32, 20-01, 20-07, 20-15, 20-28, 20-29, 24-04, 30-24 Cohen v Cohen (1929) …. 5-05 Collins v Godefroy (1831) …. 3-16 Commercial Bank of Australia Ltd v Amadio (1983) …. 26-04, 26-05, 26-06 Commissioner for Main Roads v Reed & Stuart Pty Ltd (1974) …. 14-12 Commissioner of State Taxation v Cyril Henschke Pty Ltd (2010) …. 12-04 Commonwealth Bank of Australia v Barker (2014) …. 1-38, 8-09, 8-15 —v Carotino (2011) …. 4-25 —v Smith (1991) …. 23-27 —v TLI Management Pty Ltd [1990] …. 7-08 Commonwealth of Australia v Amann Aviation Pty Ltd (1991) …. 27-14, 2716, 27-18, 27-49 —v Ling (1993) …. 12-31 Comptoir d’Achat et de Vente du Boerenbond Belge SA v Luis de Ridder Limitada (The Julia) [1949] …. 20-12 Concut Pty Ltd v Worrell (2000) …. 3-25, 22-08 Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) …. 8-01 Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) …. 13-06 Continental Contractors Co Ltd v Medway Oil & Storage Co Ltd (1925) …. 1814

Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] …. 2918 Cooper v Phibbs (1867) …. 24-07 Corley v Chippendale (1882) …. 35-15 Couchman v Hill [1947] …. 7-13 Coulls v Bagot’s Executor and Trustee Co Ltd (1967) …. 3-10, 3-13, 13-13, 1314, 29-07 Cramaso LLP v Ogilvie-Grant [2014] …. 23-09 Crescendo Management Pty Ltd v Westpac Banking Corp (1988) …. 25-09, 2513, 25-14 Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] …. 21-03 Criss v Alexander (1928) …. 8-16, 10-32 Crombie v Crombie [1903] …. 35-21 Cudgen Rutile (No 2) Pty Ltd v Chalk [1975] …. 4-06 Cullinane v British ‘Rema’ Manufacturing Co Ltd [1954] …. 27-18 Cummings v Claremont Petroleum NL (1996) …. 13-08 Cundy v Lindsay (1878) …. 24-15, 24-16 Currie v Misa (1875) …. 3-02 Curtis v Chemical Cleaning and Dyeing Co [1951] …. 9-05, 11-26 Cut Price Deli Pty Ltd v Jacques (1994) …. 23-27 Cutter v Powell (1795) …. 14-17, 30-23 Cutts v Buckley (1933) …. 23-12 Cypjayne Pty Ltd v Babcock & Brown International Pty Ltd (2011) …. 15-17 D & C Builders Ltd v Rees [1966] …. 6-13 Dalgety and New Zealand Loan Ltd v C Imeson Pty Ltd [1964] …. 34-10 Dalgety Australia Ltd v Harris [1977] …. 2-24 Dalgety Wine Estates Pty Ltd v Rizzon (1979) …. 29-03 Dan v Barclays Australia Ltd (1983) …. 22-05, 22-07 Darlington Futures Ltd v Delco Australia Pty Ltd (1986) …. 11-08, 11-09, 1111, 11-12, 11-13, 11-15, 11-18, 11-24, 11-25 David Jones Ltd v Willis (1934) …. 8-14 David Securities Pty Ltd v Commonwealth Bank of Australia (1992) …. 30-05 Davis v Commissioner for Main Roads (1968) …. 11-22 —v Pearce Parking Station Pty Ltd (1954) …. 11-02, 11-22 Davis Contractors Ltd v Fareham Urban District Council [1956] …. 20-01,

20-07, 20-15, 20-24, 20-29 Dayeian v Davidson (2010) …. 3-32 De Francesco v Barnum (1890) …. 12-10 Decro-Wall International SA v Practitioners in Marketing Ltd [1971] …. 29-12 Demagogue Pty Ltd v Ramensky (1992) …. 11-31, 23-27 Denny Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] …. 20-09 Derry v Peek (1889) …. 23-14 Dewhurst (W A) & Co Pty Ltd v Cawrse [1960] …. 2-32, 2-33 Di Biase v Rezek [1971] …. 35-15 Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] …. 7-10 Dickinson v Dodds (1876) …. 2-11, 2-12, 2-16 Direct Acceptance Finance Ltd v Cumberland Furnishing Pty Ltd [1965] …. 1725 Director of Public Prosecutions (Vic) v Le (2007) …. 3-14 DJE Constructions Pty v Maddocks [1982] …. 34-52 Dobbs v National Bank of Australasia Ltd (1935) …. 34-22 Dome Resources NL v Silver (2008) …. 3-21 Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd (1992) …. 23-26 Dougan v Ley (1946) …. 29-07 Dressy Frocks Pty Ltd v Bock (1951) …. 34-36 DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) …. 10-24, 18-19, 18-20, 22-07 Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] …. 27-53, 27-54 —v Selfridge & Co Ltd [1915] …. 3-02 Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] …. 18-07 Earl of Aylesford v Morris (1873) …. 26-04, 26-05 Earl of Chesterfield v Janssen (1751) …. 26-01 Eastern Health v MIA Victoria Pty Ltd (2009) …. 4-12 Edgington v Fitzmaurice (1885) …. 23-10, 23-14 Egan v State Transport Authority (1982) …. 6-15 Eggleston v Marley Engineers Pty Ltd (1979) …. 9-13 Electricity Generation Corporation v Woodside Energy Ltd (2014) …. 10-25, 1516 Electronic Industries Ltd v David Jones Ltd (1954) …. 3-30, 35-25

Elias v George Sahely & Co (Barbados) Ltd [1983] …. 35-17 Elizabeth Bay Developments Pty Ltd v Boral Building Services Pty Ltd (1995) …. 4-12 Elkhoury v Farrow Mortgage Services Pty Ltd (1993) …. 31-01 Ellul v Oakes (1972) …. 7-10, 7-11 Embiricos v Sydney Reid & Co [1914] …. 20-16 Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) …. 2-44 Empresa Exportadora de Azucar v Industria Azucarera Nacional SA (The Playa Larga) [1983] …. 20-19 Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd (2008) …. 11-03, 28-22 Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) …. 9-05 —v Haxton (2012) …. 34-26, 34-39 Ermogenous v Greek Orthodox Community of SA Inc (2002) …. 5-09 Ernest Beck & Co v K Szymanowski & Co [1924] …. 11-13 Ertel Bieber & Co v Rio Tinto Co Ltd [1918] …. 20-25, 21-04 Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] …. 34-28 —v Mardon [1976] …. 23-16 Esso Petroleum Ltd v Commissioners of Customs and Excise [1976] …. 5-07, 707 Etablissements Chainbaux SARL v Harbormaster Ltd [1955] …. 19-13 Etna v Arif [1999] …. 8-15 Ettridge v Vermin Board of Murat Bay [1928] …. 31-01 Evans (J) & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] …. 10-15, 11-26 Evans Marshall & Co Ltd v Bertola SA [1973] …. 29-11, 29-12 Falck v Williams [1900] …. 10-05 Falko v James McEwan & Co Pty Ltd [1977] …. 27-41 Farmer v Honan (1919) …. 10-22 Farmers’ Mercantile Union & Chaff Mills Ltd v Coade (1921) …. 2-12 Federal Commerce and Navigation Co Ltd v Molena Alpha Inc [1979] …. 17-29, 18-08, 18-18, 18-19, 18-21 Federal Commissioner of Taxation v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) …. 22-05 Fehlberg v Stanton [1960] …. 30-09 Felthouse v Bindley (1862) …. 2-28

Ferguson, Re (1969) …. 34-42 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] …. 20-17, 30-09, 30-22, 30-26 Finch v Sayers [1976] …. 20-11, 21-03 Fink v Fink (1946) …. 27-50 Firth v Halloran (1926) …. 20-23 Fisher v Brooker [2009] …. 12-14 Fitzgerald v F J Leonhardt Pty Ltd (1997) …. 34-19, 34-36, 34-42 —v Masters (1956) …. 4-10, 4-17, 4-19, 29-15 Flamingo Park Pty Ltd v Dolly Dolly Creation Pty Ltd (1986) …. 28-19 Foakes v Beer (1884) …. 3-24 Foley v Classique Coaches Ltd [1934] …. 4-15 Fong v Cilli (1968) …. 2-16 Foran v Wight (1989) …. 18-13, 18-14, 18-22, 18-25, 19-12 Ford (by his tutor Watkinson) v Perpetual Trustees Victoria Ltd (2009) …. 1223, 26-16 Francis v Lyon (1907) …. 10-04 Freeth v Burr (1874) …. 18-17 Frost v Aylesbury Dairy Co Ltd [1905] …. 15-14 —v Knight (1872) …. 18-13, 18-16 Fry v Lane (1888) …. 26-04 Fuller v Happy Shopper Markets Ltd [2001] …. 30-06 Fullers’ Theatres Ltd v Musgrove (1923) …. 29-15 Gamerco SA v ICM/Fair Warning (Agency) Ltd [1995] …. 20-17 Garcia v National Australia Bank Ltd (1998) …. 25-23, 25-24 Gates v City Mutual Life Assurance Society Ltd (1986) …. 28-04, 28-06, 28-18 Geipel v Smith (1872) …. 19-12 Gelling v Crespin (1917) …. 20-13 Gemmell Power Farming Co Ltd v Nies (1935) …. 8-16 General Billposting Co Ltd v Atkinson [1909] …. 21-09 George v Greater Adelaide Land Development Co Ltd (1929) …. 34-06, 34-08, 34-39 —v Roach (1942) …. 30-10 George Wills & Co Ltd v Davids Pty Ltd (1957) …. 8-14 Geraghty v Minter (1979) …. 34-29, 34-30, 34-32 Geraldton Building Co Pty Ltd v Christmas Island Resort Pty Ltd (1992) …. 31-

01 Gerraty v McGavin (1914) …. 2-10 Gibbons v Wright (1954) …. 12-21, 12-22 Gibbons Holdings Ltd v Wholesale Distributors Ltd [2008] …. 10-31 Gibson v Manchester City Council [1979] …. 2-20, 2-35 Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] …. 1414 Giles v Thompson [1994] …. 34-26 Giliberto v Kenny (1983) …. 10-29, 12-03 Gillespie Bros & Co v Cheney Eggar & Co [1896] …. 10-32 Giumelli v Giumelli (1999) …. 6-18 Glasbrook Bros Ltd v Glamorgan CC [1925] …. 3-16 Glebe Island Terminals Pty Ltd v Continental Seagram Pty Ltd (The Antwerpen) (1993) …. 11-15 Glencore Grain Rotterdam BV v Lebanese Organisation for International Commerce [1997] …. 33-23 Gloucestershire County Council v Richardson [1969] …. 8-10 Glynn v Margetson & Co [1893] …. 11-16 Godecke v Kirwan (1973) …. 4-15 Golden Strait Corp v Nippon Yusen Kubishika Kaisha (The Golden Victory) [2007] …. 31-06 Goldsbrough Mort & Co Ltd v Carter (1914) …. 21-04 —v Quinn (1910) …. 2-10, 29-16 Gollin & Co Ltd v Karenlee Nominees Pty Ltd (1983) …. 19-10 Gould v Vaggelas (1984) …. 23-11, 28-04, 28-06, 28-07 Government of Newfoundland v Newfoundland Railway Co (1888) …. 14-15 GPG (Australia Trading) Pty Ltd v GIO Australia Holdings Ltd (2001) …. 26-10 Graham v Freer (1980) …. 23-19 —v Pitkin [1992] …. 4-28 Grant v Australian Knitting Mills Ltd [1936] …. 8-14, 13-03 Great Northern Railway Co v Witham (1873) …. 2-36 Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2003] …. 2404, 24-08 Great Western Railway v Bristol Corporation (1918) …. 10-25 Greaves & Co (Contractors) Ltd v Baynham Meikle & Partners [1975] …. 1513 Green v Sevin (1879) …. 19-16

Gullett v Gardner (1948) …. 8-03 Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (2008) …. 31-05 Guy-Pell v Foster [1930] …. 17-14 Hadley v Baxendale (1854) …. 27-23, 27-24, 27-25, 27-27 Halkett v Earl of Dudley [1907] …. 29-18 Hall v Busst (1960) …. 4-11 Hamilton v Lethbridge (1912) …. 12-13, 12-14 Hammer v Coca-Cola [1962] …. 18-17 Harbutt’s ‘Plasticine’ Ltd v Wayne Tank and Pump Co Ltd [1970] …. 27-47 Hardwick Game Farm v Suffolk Agricultural Poultry Producers Association [1966] …. 9-02 Hare v Nicoll [1966] …. 19-07 Hart v MacDonald (1910) …. 8-01, 8-04, 8-15, 15-06 —v O’Connor [1985] …. 12-23 Harvela Investments Ltd v Royal Trust Co of Canada (CI) Ltd [1986] …. 6-19 Harvey v Edwards Dunlop & Co Ltd (1927) …. 35-15, 35-17 Hatcher v White (1953) …. 34-43 Haugesund Kommune v Depfa ACS Bank (Wikborg Rein & Co Part 20 defendant) [2012] …. 12-04 Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) …. 25-11, 25-14 Hawkins v Clayton (1988) …. 8-05 Healing Sales Pty Ltd v Inglis Electrix Pty Ltd (1968) …. 1-34 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] …. 6-22, 23-15, 28-20 Heine Bros (Aust) Pty Ltd v Forrest [1963] …. 29-17 Heisler v Anglo-Dal Ltd [1954] …. 33-15 Helicopter Sales (Australia) Pty Ltd v Rotor-Work Pty Ltd (1974) …. 8-10 Henderson v Merrett Syndicates Ltd [1995] …. 8-08, 23-17 Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) …. 23-27 Henry Kendall & Sons v William Lillico & Sons Ltd [1969] …. 9-12, 9-13 Henthorn v Fraser [1892] …. 2-30 Herbert Clayton and Jack Waller Ltd v Oliver [1930] …. 27-43 Herbert Morris Ltd v Saxelby [1916] …. 34-29 Hercules Motors Pty Ltd v Schubert (1953) …. 7-15 Herne Bay Steam Boat Co v Hutton [1903] …. 20-20 Hewett v Court (1983) …. 29-06

Hewitt v Debus (2004) …. 19-07 Heyman v Darwins Ltd [1942] …. 21-09 Heywood v Wellers [1976] …. 27-43 HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] …. 11-21, 28-21 Hill v C A Parsons & Co Ltd [1972] …. 29-17 Hill (D J) & Co Pty Ltd v Walter H Wright Pty Ltd [1971] …. 9-13 Himbleton Pty Ltd v Kumagai (NSW) Pty Ltd (1991) …. 4-15 Hirji Mulji v Cheong Yue SS Co Ltd [1926] …. 20-30 Hirsch v Zinc Corp Ltd (1917) …. 21-02, 21-04, 31-14, 34-18 Hobbs v London and South Western Railway Co (1875) …. 27-41 —v Petersham Transport Co Pty Ltd (1971) …. 15-18 Hochster v De la Tour (1853) …. 1-19, 18-07 Hoenig v Isaacs [1952] …. 14-18, 14-21 Hoffman; Ex parte Worrell v Schilling, Re (1989) …. 33-19 Hoffman v Cali [1985] …. 27-40 Holland v Wiltshire (1954) …. 19-07 Hollier v Rambler Motors (AMC) Ltd [1972] …. 9-13 Holloway v Witham (1990) …. 28-19 Holman v Johnson (1775) …. 34-36, 34-41 Holmes v Jones (1907) …. 23-11, 23-18, 27-14, 28-05 Holt v Biroka Pty Ltd (1988) …. 28-19 Holwell Securities Ltd v Hughes [1974] …. 2-30 Home Counties Dairies Ltd v Skilton [1970] …. 34-31 Hong Guan & Co Ltd v R Jumabhoy & Sons Ltd [1960] …. 20-05 Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] …. 16-13, 16-27, 17-15, 17-17, 17-21, 17-25, 17-26, 17-29, 19-03 Hoobin, Re [1957] …. 30-14 Hooper Bailie Associated Ltd v Natcon Group Pty Ltd (1992) …. 4-12 Hope v RCA Photophone of Australia Pty Ltd (1937) …. 10-14, 10-28 Hospital Products Ltd v United States Surgical Corp (1984) …. 7-11 Hounslow London Borough Council v Twickenham Garden Developments Ltd [1971] …. 27-37 Household Fire and Carriage Accident Insurance Co Ltd v Grant (1879) …. 2-29 Howard v Pickford Tool Co Ltd [1951] …. 18-12 Howard Smith & Co Ltd v Varawa (1907) …. 10-17 Howe v Smith (1884) …. 30-14

—v Teefy (1927) …. 27-50 Hoyt’s Pty Ltd v Spencer (1919) …. 7-14, 10-10, 10-16, 10-19 Hughes v Metropolitan Railway Co (1877) …. 6-15 Hughes Aircraft Systems International v Airservices Australia (1997) …. 6-19, 623 Huppert v Stock Options of Australia Pty Ltd (1965) …. 18-10 Hussey v Eels [1990] …. 28-12 Hyatt Australia Ltd v LTCB Australia Ltd [1996] …. 13-10 Hyde v Wrench (1840) …. 2-19 Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] …. 31-12 I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) …. 23-30 Iannotti v Corsaro (1984) …. 34-07 ICT Pty Ltd v Sea Containers Ltd (1995) …. 29-09 Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) …. 33-10 Inglis v John Buttery & Co (1878) …. 10-24 Ingram v Little [1961] …. 24-16 Insight Vacations Pty Ltd v Young (2011) …. 11-13 Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) …. 4-06 Integrated Lighting & Ceilings Pty Ltd v Philips Electrical Pty Ltd (1969) …. 225 Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] …. 9-10 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] …. 10-06, 10-25 Ireland v Leigh [1982] …. 14-09 Isabella Shipowner SA v Shagang Shipping Co Ltd (The Aquafaith) [2012] …. 27-38 Islamic Republic of Iran Shipping Lines v Steamship Mutual Underwriting Association (Bermuda) Ltd [2011] …. 20-09 Ison v Australian Wheat Board (1967) …. 34-40 J & S Holdings Pty Ltd v NRMA Insurance Ltd (1982) …. 25-08 Jackson v Union Marine Insurance Co Ltd (1874) …. 20-14, 20-16 Jacob & Youngs Inc v Kent 129 NE 889 (1921) …. 14-21 Jarvis v Swans Tours Ltd [1973] …. 27-44

Jobson v Johnson [1989] …. 27-55 John McGrath Motors (Canberra) Pty Ltd v Applebee (1964) …. 23-14 Johnson v Agnew [1980] …. 16-06, 21-01, 21-05, 27-39, 33-08 —v Buttress (1936) …. 25-19, 25-20, 25-22 Jones v Bartlett (2000) …. 13-10 —v Dumbrell [1981] …. 23-09 —v Padavatton [1969] …. 5-08 Joscelyne v Nissen [1970] …. 24-22 Joseph Constantine SS Line Ltd v Imperial Smelting Corp Ltd [1942] …. 20-04, 20-27 Kakavas v Crown Melbourne Ltd (2013) …. 26-06, 26-10 Kamil Export (Aust) Pty Ltd v NPL (Australia) Pty Ltd (1993) [1996] …. 11-14 Kaufman v Gerson [1904] …. 25-07 Kennedy v Panama New Zealand and Australian Royal Mail Co Ltd (1867) …. 23-02, 24-08 Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) …. 28-19 Kerridge v Simmonds (1906) …. 34-25 Khaled v Athanas Bros (Aden) Ltd (1967) …. 2-14 Khoury v Government Insurance Office of New South Wales (1984) …. 33-19 King’s Norton Metal Co Ltd v Edridge Merrett & Co Ltd (1897) …. 24-15 Kingston v Preston (1773) …. 14-05 Kiriri Cotton Co Ltd v Dewani [1960] …. 34-45 Kitchen (J) & Sons Pty Ltd v Stewart’s Cash & Carry Stores (1942) …. 10-07 Kitching v Phillips (2011) …. 7-14 Kizbeau Pty Ltd v WG & B Pty Ltd (1995) …. 23-26, 28-17, 28-18 Kleinwort Benson Ltd v Malaysia Mining Corp Berhad [1989] …. 7-08 Kodros Shipping Corp of Monrovia v Empresa Cubana de Fletes (The Evia) (No 2) [1983] …. 20-07, 20-16 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) …. 10-24, 16-13, 16-27, 17-25, 17-28, 18-05 Koufos v C Czarnikow Ltd [1969] …. 27-25, 27-26 Krakowski v Eurolynx Properties Ltd (1995) …. 23-08 Krell v Henry [1903] …. 20-19, 20-20 Laird v Pim (1841) …. 31-11 Lalor v Winfield [1925] …. 35-15

Larkin v Girvan (1940) …. 3-21 Larking v Great Western (Nepean) Gravel Ltd (1940) …. 33-21 Larratt v Bankers and Traders Insurance Co Ltd (1941) …. 18-15, 33-11 Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) …. 18-17, 1912 Lauritzen (J) AS v Wijsmuller BV (The Super Servant Two) [1990] …. 20-27 Lavarack v Woods of Colchester Ltd [1967] …. 27-32 Laybutt v Amoco Australia Pty Ltd (1974) …. 2-18 Le Mans Grand Prix Circuits Pty Ltd v Iliadis [1998] …. 9-05 Leaf v International Galleries [1950] …. 7-11, 23-19 Leason Pty Ltd v Princes Farm Pty Ltd [1983] …. 23-19 Legione v Hateley (1983) …. 6-11, 17-06, 29-14, 32-10, 33-31 Lennon v Scarlett & Co (1921) …. 4-26 L’Estrange v F Graucob Ltd [1934] …. 9-04 Lewis v Averay [1972] …. 24-16, 33-33 Lewis Construction Co Pty Ltd v M Tichauer Societe Anonyme [1966] …. 2-29 Lexane Pty Ltd v Highfern Pty Ltd [1985] …. 30-13 Lexmead (Basingstoke) Ltd v Lewis [1982] …. 7-06, 27-22 Life Insurance Co of Australia Ltd v Phillips (1925) …. 4-19, 10-06 Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] …. 13-08 Lindner v Murdock’s Garage (1950) …. 34-29, 34-32 Liverpool City Council v Irwin [1977] …. 8-09, 10-32 Lloyds Bank Ltd v Bundy [1975] …. 25-19, 26-06 Lock v Bell [1931] …. 19-10 Lock (S H) (Australia) Ltd v Kennedy (1988) …. 26-19 Lockie v Walter Reid & Co Ltd [1916] …. 22-08 Lombok Pty Ltd v Supetina Pty Ltd (1987) …. 22-07 Lord Elphinstone v Monkland Iron and Coal Co (1886) …. 27-54 Louinder v Leis (1982) …. 19-10, 19-16, 19-17, 19-18 Louth v Diprose (1992) …. 25-19, 26-01, 26-04 Lovell & Christmas v Beauchamp [1894] …. 12-14 Lucke v Cleary (2011) …. 4-23 Lucy v The Commonwealth (1923) …. 27-32 Lumbers v W Cook Builders Pty Ltd (in liq) (2008) …. 30-06 Lumley v Gye (1853) …. 29-17 —v Wagner (1852) …. 29-17 Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) …. 16-15, 17-

12, 18-21, 27-10 Luxor (Eastbourne) Ltd v Cooper [1941] …. 8-03 MacAndrew v Chapple (1866) …. 19-12 McCarthy Bros (Milk Vendors) Pty Ltd v Dairy Farmers’ Co-operative Milk Co Ltd (1945) …. 34-20 McDermott v Black (1940) …. 3-27, 4-09 McDonald v Dennys Lascelles Ltd (1933) …. 14-15, 16-06, 21-01, 21-04, 21-05, 30-12, 30-13, 31-10, 31-11, 31-12 Macdonald v Longbottom (1860) …. 10-26 McDougall v Aeromarine of Emsworth Ltd [1958] …. 19-10 McFarlane v Daniell (1938) …. 34-47 Mackay v Dick (1881) …. 14-12 McKay v National Australia Bank Ltd [1998] …. 3-28 Mackenzie v Royal Bank of Canada [1934] …. 23-10 McLaughlin v Darcy (1918) …. 12-10 McNally v Waitzer [1981] …. 19-16 McRae v Commonwealth Disposals Commission (1951) …. 11-12, 15-02, 1510, 24-07, 27-16, 27-17, 27-18, 27-49, 32-05 MacRobertson Miller Airline Services v Commissioner of State Taxation (WA) (1975) …. 2-43, 9-10 Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) …. 10-07, 34-28 Mahmoud and Ispahani, Re [1921] …. 34-09, 34-36 Mahoney v Lindsay (1980) …. 18-14 Maiden v Maiden (1909) …. 29-02 Mainteck Services Pty Ltd v Stein Heurtey SA (2014) …. 10-25 Mallinson v Scottish Australian Investment Co Ltd (1920) …. 14-23 Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd [2003] …. 21-02 Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] …. 10-01 Manufacturers’ Mutual Insurance Ltd v John H Boardman Insurance Brokers Pty Ltd (1994) …. 2-25 Maple Flock Co Ltd v Universal Furniture Products (Wembley) Ltd [1934] …. 18-17, 18-24 Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) …. 24-22 March v E & M H Stramare Pty Ltd (1991) …. 27-21, 28-03 Mardorf Peach & Co Ltd v Attica Sea Carriers Corp of Liberia [1977] …. 32-15 Maredelanto Compania Naviera SA v Bergbau-Handel GmbH (The Mihalis

Angelos) [1971] …. 16-18, 17-10, 18-24, 31-06 Marek v Australasian Conference Association Pty Ltd (1990) [1994] …. 4-24 Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] …. 20-26 Marks v GIO Australia Holdings Ltd (1998) …. 23-23, 23-30, 28-17, 28-18 —v Jolly (1938) …. 34-44 Marquett v Walsh (1929) …. 34-50 Martin v Hogan (1917) …. 27-37 Mason v Provident Clothing and Supply Co Ltd [1913] …. 34-50 Masters v Cameron (1954) …. 4-12, 4-23, 4-24, 30-10 Matthes v Carter (1955) …. 35-21 Maxitherm Boilers Pty Ltd v Pacific Dunlop Ltd [1998] …. 9-10 May and Butcher Ltd v R (1929) [1934] …. 4-07, 4-15 Maybury v Atlantic Union Oil Co Ltd (1953) …. 7-14, 8-15 Mears v Safecar Security Ltd [1983] …. 10-32 Measures Bros Ltd v Measures [1910] …. 29-03 Meehan v Jones (1982) …. 4-06, 4-09, 4-15, 4-20, 4-27, 4-28, 4-29 Mehmet v Benson (1965) …. 19-09, 29-14 Melachrino v Nickoll [1920] …. 27-40 Mendelssohn v Normand Ltd [1970] …. 11-26 Meriton Apartments Pty Ltd v McLaurin & Tait (Developments) Pty Ltd (1976) …. 20-22 Mersey Steel & Iron Co Ltd v Naylor Benzon & Co (1884) …. 18-18 Metropolitan Health Service Board v Australian Nursing Federation (2000) …. 34-23 Metropolitan Water Board v Dick Kerr & Co Ltd [1918] …. 20-18, 20-25 Millars’ Karri and Jarrah Co (1902) v Weddel Turner & Co (1908) …. 18-24 Miller v Miller (2011) …. 34-01 Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) …. 23-27 Millett v Van Heek & Co [1920] …. 27-40 Milne v A-G for the State of Tasmania (1956) …. 5-08 —v Municipal Council of Sydney (1912) …. 2-37 Mobil Oil Australia Ltd v Lyndel Nominees Pty Ltd (1998) …. 2-41 Molton v Camroux (1848) …. 12-20 Monarch SS Co Ltd v A/B Karlshamns Oljefabriker [1949] …. 31-06 Money v Money (No 2) [1966] …. 34-42 Mooney v Williams (1905) …. 2-25

Morris v Baron & Co [1918] …. 35-24 Moschi v Lep Air Services Ltd [1973] …. 1-20 Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (The Kanchenjunga) [1990] …. 14-09 Murphy v Overton Investments Pty Ltd (2004) …. 28-17 Musumeci v Winadell Pty Ltd (1994) …. 3-21, 35-02 Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1968) …. 23-17 MYT Engineering Pty Ltd v Mulcon Pty Ltd (1999) …. 12-28 Narich Pty Ltd v Commissioner of Pay-Roll Tax [1983] …. 10-17 Nash v Inman [1908] …. 12-10 National Australia Bank Ltd v Pollak (2001) …. 3-27 National Carriers Ltd v Panalpina (Northern) Ltd [1981] …. 20-23, 20-31 National Westminster Bank Plc v Morgan [1985] …. 26-06 Naxakis v Western General Hospital (1999) …. 28-19 Neal v Ayers (1940) …. 28-12, 34-20 Neeta (Epping) Pty Ltd v Phillips (1974) …. 19-16 Nelson v Nelson (1995) …. 34-36, 34-42, 34-43 Nemeth v Bayswater Road Pty Ltd [1988] …. 7-10 New South Wales v Bardolph (1934) …. 12-31, 12-32 New Zealand Shipping Co Ltd v A M Satterthwaite & Co Ltd [1975] …. 3-04, 323, 13-07 Newcastle District Fishermen’s Co-operative Society v Neal (1950) …. 34-38 Nguyen v Taylor (1992) …. 26-19 NIAA Corp Ltd, Re (1993) …. 2-28, 20-24 Nicholls v Stanton (1915) …. 34-19 Nichols v Raynbred (1615) …. 1-36 Nicolene Ltd v Simmonds [1953] …. 4-18 Niesmann v Collingridge (1921) …. 4-25 Nissho Iwai Australia Ltd v Malaysian International Shipping Corp Berhad (1989) …. 11-16 NLS Pty Ltd v Hughes (1966) …. 27-56 Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] …. 3429, 34-32, 34-50 Normoyle (F & D) Pty Ltd v Transfield Pty Ltd t/a Transfield Bouygues Joint Venture (2005) …. 11-24 North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd (The Atlantic

Baron) [1979] …. 3-22, 25-13, 25-14 Northside Developments Pty Ltd v Registrar-General (1990) …. 12-28 Norton v Angus (1926) …. 29-18 NSW Leather Co Pty Ltd v Vanguard Insurance Co Ltd (1991) …. 9-13 NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd (1986) …. 24-22 O’Brien v Australia and New Zealand Bank Ltd (1971) …. 24-20 Ocean Tramp Tankers Corp v V/O Sovfracht (The Eugenia) [1964] …. 20-24 Oceanic Sun Line Special Shipping Co Inc v Fay (1988) …. 9-08, 9-11, 34-22 O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) …. 27-54, 27-55 Official Receiver v Feldman (1972) …. 33-19 Ogle v Comboyuro Investments Pty Ltd (1976) …. 33-08 Olley v Marlborough Court Ltd [1949] …. 9-08 On Demand Information Plc v Michael Gerson (Finance) Plc [2003] …. 33-32 Orton v Melman [1981] …. 34-53 Oscar Chess Ltd v Williams [1957] …. 7-11 O’Sullivan v Management Agency and Music Ltd [1985] …. 25-19, 25-22 —v O’Leary [1955] …. 14-21 Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal [1983] …. 22-07 Pacific Carriers Ltd v BNP Paribas (2004) …. 10-25 Page One Records v Britton (trading as ‘The Troggs’) [1967] …. 29-17 Pao On v Lau Yiu Long [1980] …. 25-09, 25-12 Papastravou v Gavan [1968] …. 34-30, 34-49, 34-53 Paradine v Jane (1647) …. 20-04 Parker v South Eastern Railway Co (1877) …. 9-10 Parkin v Thorold (1852) …. 19-05 Parsons (H) (Livestock) Ltd v Uttley Ingham & Co [1978] …. 27-26 Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (1998) …. 29-18 Pavey & Matthews Pty Ltd v Paul (1987) …. 30-05, 30-06, 30-07, 30-17, 30-19, 35-21 Payne v Cave (1789) …. 2-42 —v McDonald (1908) …. 34-44 Payzu Ltd v Saunders [1919] …. 27-33 Pearce v Brooks (1866) …. 34-18

Pearson (S) & Son Ltd v Dublin Corporation [1907] …. 11-05, 28-21 Pedashenko v Blacktown City Council (1996) …. 23-09 Pennsylvania Shipping Co v Compagnie Nationale de Navigation [1936] …. 3335 Percy v Board of National Mission of the Church of Scotland [2006] …. 5-09 Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (in liq) (2003) …. 23-13 Perri v Coolangatta Investments Pty Ltd (1982) …. 4-27, 15-09 Personal Representatives of Tang Man Sit v Capacious Investments Ltd [1996] …. 28-08, 33-08 Petelin v Cullen (1975) …. 24-20 Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) …. 18-04, 18-10, 18-13, 18-14 Peters American Delicacy Co Ltd v Champion (1928) …. 8-02 —v Patricia’s Chocolates and Candies Pty Ltd (1947) …. 34-30 Peyman v Lanjani [1985] …. 33-19 PGA v R (2012) …. 1-09 Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] …. 2-07 Phibro Energy AG v Nissho Iwai Corp (The Honam Jade) [1991] …. 19-14 Phibro Energy Inc v Coastal (Bermuda) Ltd (The Aragon) (1987) [1991] …. 1911 Phillips v Brooks Ltd [1919] …. 24-16 —v Ellinson Bros Pty Ltd (1941) …. 35-25 Photo Production Ltd v Securicor Transport Ltd [1980] …. 11-03, 11-10, 1111, 11-13, 11-17, 11-18, 16-06, 27-47 Pianta v National Finance & Trustees Ltd (1964) …. 29-06 Pico Holdings Inc v Wave Vistas Pty Ltd (formerly Turf Club Australia Pty Ltd) (2005) …. 3-11 Pigram v Attorney-General (NSW) (1975) …. 27-56 Pinnel’s Case (1602) …. 3-24 Pirie v Saunders (1961) …. 35-15, 35-16 Pitt v Curotta (1931) …. 30-13 Placer Development Ltd v The Commonwealth (1969) …. 3-32 Plaimar Ltd v Waters Trading Co Ltd (1945) …. 20-05 Planché v Colburn (1831) …. 30-20 Platform Funding Ltd v Bank of Scotland Plc (formerly Halifax Plc) [2009] ….

15-20 Popiw v Popiw [1959] …. 3-16, 3-29, 35-15 Pordage v Cole (1669) …. 14-05 Postlethwaite v Freeland (1880) …. 15-09 Potts v Miller (1940) …. 28-04 PRA Electrical Pty Ltd v Perseverance Exploration Pty Ltd (2007) …. 4-24 Prenn v Simmonds [1971] …. 10-07, 10-08, 10-12, 10-23, 10-24, 10-25, 10-30 Price v Strange [1978] …. 29-18 Price Higgins & Fidge v Drysdale [1996] …. 27-49 Proform Sports Management Ltd v Proactive Sports Management Ltd [2007] …. 12-10 Progress and Properties (Strathfield) Pty Ltd v Crumblin (1984) …. 4-28 Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) …. 20-23, 31-05 Psaltis v Schultz (1948) …. 18-16, 34-18 Pukallus v Cameron (1982) …. 10-20, 24-21, 24-22 Pym v Campbell (1856) …. 10-18 Queensland Co-operative Milling Association Ltd v Pamag Pty Ltd (1973) …. 34-31 Quin v Mutual Acceptance Co Ltd [1968] …. 34-37 Quinn v Burch Bros (Builders) Ltd [1966] …. 27-22 R v Clarke (1927) …. 2-39, 2-40 Radford v De Froberville [1977] …. 27-39, 27-47 Raffles v Wichelhouse (1864) …. 10-28, 24-10 Raineri v Miles [1981] …. 19-04 Rainy Sky SA v Kookmin Bank [2011] …. 10-07 Rawson v Hobbs (1961) …. 18-25 Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] …. 10-24, 10-25, 1026, 17-14 Redgrave v Hurd (1881) …. 23-18 Redmond v Wynne (1892) …. 1-21 Reese Bros Plastics Ltd v Hamon-Sobelco Australia Pty Ltd (1988) …. 2-33 Reg Glass Pty Ltd v Rivers Locking Systems Pty Ltd (1968) …. 8-08, 15-14, 2721 Regent v Millett (1976) …. 35-20 Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) …. 30-

20, 33-24 Ricochet Pty Ltd v Equity Trustees Executors and Agency Co Ltd (1993) …. 2327 Ringrow Pty Ltd v BP Australia Pty Ltd (2005) …. 27-55 Riverlate Properties Ltd v Paul [1975] …. 24-23 Roach v Bickle (1915) …. 4-22 Roadshow Entertainment Pty Ltd v ACN 053 006 269 Pty Ltd (1997) …. 33-23 Robertson v Wilson (1958) …. 20-23 Robinson v Davison (1871) …. 21-03 —v Graves [1935] …. 35-13 —v Harman (1848) …. 27-14 Robophone Facilities Ltd v Blank [1966] …. 27-27, 27-53, 27-54 Rogers v Whitaker (1992) …. 8-08, 15-17 Rose & Frank Co v J R Crompton & Bros Ltd [1923] …. 5-06, 34-22 Ross v Allis-Chalmers Pty Ltd (1980) …. 7-13 Ross T Smyth & Co Ltd v T D Bailey Son & Co [1940] …. 18-15 Roufos v Brewster (1971) …. 5-08 Roxborough v Rothmans of Pall Mall Australia Ltd (2001) …. 30-04, 30-09 Royal Bank of Scotland v Etridge (No 2) [2002] …. 25-18 Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) …. 10-25, 10-27, 10-30, 11-15 Royscot Trust Ltd v Rogerson [1991] …. 28-14 RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG (UK Production) [2010] …. 4-24 Ruxley Electronics and Constructions Ltd v Forsyth [1996] …. 27-47 Ryder v Taylor (1935) …. 13-09 Ryledar Pty Ltd v Euphoric Pty Ltd (2007) …. 6-08 S & E Promotions Pty Ltd v Tobin Bros Pty Ltd (1994) …. 4-10, 6-18 S & I Publishing Pty Ltd v Australian Surf Life Saver Pty Ltd (1998) …. 23-26, 23-27 Sabemo Pty Ltd v North Sydney Municipal Council [1977] …. 30-18 Saffron v Société Minière Cafrika (1958) …. 14-10 St John Shipping Corp v Joseph Rank Ltd [1957] …. 34-06, 34-15, 34-20 Samarenko v Dawn Hill House Ltd [2013] …. 19-18 Samos Shipping Enterprises Ltd v Eckhardt & Co KG (The Nissos Samos) [1985] …. 4-24

Sanderson Motors (Sales) Pty Ltd v Yorkstar Motors Pty Ltd [1983] …. 29-03, 29-11 Sargent v ASL Developments Ltd (1974) …. 32-11, 33-18, 33-19 Satellite Estate Pty Ltd v Jaquet (1968) …. 19-12 Saunders v Anglia Building Society [1971] …. 24-20 Savage (J J) & Sons Pty Ltd v Blakney (1970) …. 7-10, 7-13, 7-14 Scaffidi v Perpetual Trustees Victoria Ltd (2011) …. 3-27 Scammell (G) & Nephew Ltd v Ouston [1941] …. 4-14, 4-18 Scanlan’s New Neon Ltd v Tooheys Ltd (1943) …. 20-09, 20-17, 20-19, 20-20, 20-26 Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] …. 11-24 Schroeder (A) Music Publishing Co Ltd v Macaulay [1974] …. 34-30 Schuler (L) AG v Wickman Machine Tool Sales Ltd [1974] …. 10-31, 16-15, 1702, 17-07, 17-12, 17-15 Scotson v Pegg (1861) …. 13-07 Scott v Avery (1856) …. 34-22 Seadrill Management Services Ltd v OAO Gazprom (The Ekha) [2010] …. 17-22 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) …. 8-02, 10-12, 14-12 Seddon v North Eastern Salt Co Ltd [1905] …. 33-34 Selectmove Ltd, Re [1995] …. 2-28, 3-25 Sellars v Adelaide Petroleum NL (1994) …. 6-20, 27-48, 27-50, 28-19 Sempra Metals Ltd (formerly Metallgesellschaft Ltd) v Inland Revenue Commissioners [2008] …. 30-04, 30-06 Seppelt (B) & Sons Ltd v Commissioner for Main Roads (1975) …. 10-18 Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) …. 14-12 Shaddock (L) & Associates Pty Ltd v Parramatta City Council (1981) …. 23-17 Sharp v Thomson (1915) …. 24-10 Shaw v Ball (1962) …. 30-09 Shears v Chisholm [1994] …. 23-27 Shepherd v Felt and Textiles of Australia Ltd (1931) …. 17-18, 33-15 Shepherd (F C) & Co Ltd v Jerrom [1987] …. 20-08 Shepperd v Ryde Corporation (1952) …. 7-14 Shevill v Builders Licensing Board (1982) …. 17-25, 31-05 Shiloh Spinners Ltd v Harding [1973] …. 33-30

Shindler v Northern Raincoat Co Ltd [1960] …. 27-33 Shogun Finance Ltd v Hudson [2004] …. 24-15, 24-16 Sibley v Grosvenor (1916) …. 28-08 Sidhu v Van Dyke (2014) …. 6-18, 23-11 Simmons Ltd v Hay (1964) …. 20-11, 20-24 Simons v Zartom Investments Pty Ltd [1975] …. 33-35 Simpson v Surman (1922) …. 18-17 Singh v Ali [1960] …. 34-38 Slee v Warke (1949) …. 29-16 Smith v Chadwick (1882) …. 23-11 —v Hughes (1871) …. 24-17, 24-18 —v Land and House Property Corp (1885) …. 23-12 —v South Wales Switchgear Co Ltd [1978] …. 11-21 —v Welden (1922) …. 8-08 Smith New Court Securities Ltd v Citibank NA [1997] …. 27-39, 28-04, 28-12 Smythe v Thomas (2007) …. 2-42 Snarski & Snarski v Barbarich [1969] …. 28-21 Solle v Butcher [1950] …. 24-08 Sopov v Kane Constructions Pty Ltd (No 2) (2009) …. 30-20 Sotiros Shipping Inc v Sameiet Solholt (The Solholt) [1983] …. 27-33 South Australia v Johnson (1982) …. 28-04 South Australia Asset Management Corp v York Montague Ltd [1997] …. 28-04, 28-06 South Australian Cold Stores Ltd v Electricity Trust of South Australia (1965) …. 34-45 South Australian Railways Commissioner v Egan (1973) …. 26-02, 34-22 Spettabile Consorzio Veneziano di Armamento e Navigazione v Northumberland Shipbuilding Co Ltd (1919) …. 18-17 Sport International Bussum BV v Inter-Footwear Ltd [1984] …. 33-30 Spurling (J) Ltd v Bradshaw [1956] …. 9-05 Standard Chartered Bank v Pakistan National Shipping Corp (Nos 2 and 4) [2003] …. 28-11 Stanton v Richardson (1872) …. 19-13 State of Victoria v Sutton (1998) …. 33-11 State Rail Authority of New South Wales v Codelfa Construction Pty Ltd (1982) …. 21-10 —v Heath Outdoor Pty Ltd (1986) …. 10-15

Steele v Tardiani (1946) …. 14-20, 30-21 Stenhouse Australia Ltd v Phillips [1974] …. 34-51 Stern v McArthur (1988) …. 33-31 Stevens v Keogh (1946) …. 34-26 Stewart v White (2011) …. 11-19 Stilk v Myrick (1809) …. 3-19 Stirling v Maitland (1864) …. 14-12 Stockloser v Johnson [1954] …. 30-14 Stocks v Wilson [1913] …. 12-10 Stocznia Gdanska SA v Latvian Shipping Co [1998] …. 31-12 Stocznia Gdynia SA v Gearbulk Holdings Ltd [2010] …. 31-05 Stone v Nilsen [1951] …. 35-23 Strada Estates Pty Ltd v Harcla Hotels Pty Ltd (1980) …. 32-10 Stratton Finance Pty Limited v Webb (2014) …. 10-25 Street v Blay (1831) …. 33-34 Streeter v Western Areas Exploration Pty Ltd (No 2) (2011) …. 29-15 Strongman (1945) Ltd v Sincock [1955] …. 34-37 Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd (2010) …. 4-12 Subdivisions Ltd v Payne [1934] …. 35-24 Suburban Homes Pty Ltd v Topper (1929) …. 11-05 Sudbrook Trading Estate Ltd v Eggleton [1983] …. 4-16 Suisse Atlantique Société d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] …. 11-14 Summers v The Commonwealth (1918) …. 18-21 Sumpter v Hedges [1898] …. 14-17, 30-21 Sunbird Plaza Pty Ltd v Maloney (1988) …. 18-25, 31-04, 33-08 Sundell (T A) & Sons Pty Ltd v Emm Yannoulatos (Overseas) Pty Ltd (1955) …. 25-13 Svanosio v McNamara (1956) …. 24-08, 33-34 Sydney Corporation v West (1965) …. 11-15 Synge v Synge [1894] …. 18-23, 31-06 Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) …. 27-47 Tallerman & Co Pty Ltd v Nathan’s Merchandise (Victoria) Pty Ltd (1957) …. 226, 2-30, 22-07, 35-23, 35-24 Tamplin v Jones (1880) …. 29-14 Tanwar Enterprises Pty Ltd v Cauchi (2003) …. 29-14, 33-30, 33-31

Tatem (W J) Ltd v Gamboa [1939] …. 20-24, 20-31 Taylor v Caldwell (1863) …. 20-12, 20-13, 20-29 —v Johnson (1983) …. 1-39, 24-08, 24-18, 29-16 TC Industrial Plant Pty Ltd v Robert’s Queensland Pty Ltd (1963) …. 27-18, 2733 TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) …. 31-06 Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd (2014) …. 10-25 Tenji v Henneberry & Associates Pty Ltd (2000) …. 23-27, 23-30 Tennants (Lancashire) Ltd v C S Wilson & Co Ltd [1917] …. 20-05 Thames Valley Power Ltd v Total Gas & Power Ltd [2006] …. 20-05 Thomas Brown & Sons Ltd v Fazal Deen (1962) …. 34-38, 34-52 Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) …. 11-06, 11-13, 11-17, 11-18 Thomson v McInnes (1911) …. 35-16 Thorne (L G) & Co Pty Ltd v Thomas Borthwick & Sons (A/Asia) Ltd (1955) …. 10-13, 10-19 Thornton v Shoe Lane Parking Ltd [1971] …. 9-11 Tilley v Official Receiver in Bankruptcy (1960) …. 14-10 Timmins v Moreland Street Property Co Ltd [1958] …. 35-17 Tiplady v Gold Coast Carlton Pty Ltd (1984) …. 33-19 Tipperary Developments Pty Ltd v Western Australia (2009) …. 35-22 Todd v Nicol [1957] …. 5-05 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) …. 9-04 Toteff v Antonas (1952) …. 28-06 Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) …. 17-05, 17-09 Transfield Properties Pty Ltd v Arlo International Ltd (1980) …. 15-17 Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2009] …. 2725 Trawl Industries of Australia Pty Ltd v Effem Foods Pty Ltd trading as ‘Uncle Bens of Australia’(1992) …. 4-09 Traywinds Pty Ltd v Cooper [1989] …. 19-07 Tribe v Tribe [1996] …. 34-44 Tricontinental Corp Ltd v HDFI Ltd (1990) …. 10-07, 16-21 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) …. 13-01, 13-04, 13-05, 13-09 Tropical Traders Ltd v Goonan (1964) …. 33-17, 33-18

Turner v Australasian Coal and Shale Employees Federation (1984) …. 29-17 Turner Kempson & Co Pty Ltd v Camm [1922] …. 2-19 Tweddle v Atkinson (1861) …. 13-01 UGS Finance Ltd v National Mortgage Bank of Greece [1964] …. 11-18 Union Eagle Ltd v Golden Achievement Ltd [1997] …. 33-30 United Australia Ltd v Barclays Bank Ltd [1941] …. 33-06, 33-10 United Dominions Corp (Jamaica) Ltd v Shoucair [1969] …. 35-23 United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd [1968] …. 16-21 United Group Rail Services Ltd v Rail Corporation of New South Wales (2009) …. 4-12 United Scientific Holdings Ltd v Burnley Borough Council [1978] …. 19-07 Universal Cargo Carriers Corp v Citati [1957] …. 18-01, 18-22, 18-24, 18-25, 19-13, 20-02 Universe Tankships Inc of Monrovia v International Transport Workers Federation (The Universe Sentinel) [1983] …. 25-06 Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) …. 4-09 Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) …. 33-25 Van (H & E) Der Sterren v Cibernetics (Holdings) Pty Ltd (1970) …. 11-04 Vancouver Malt and Sake Brewing Co Ltd v Vancouver Breweries Ltd [1934] …. 34-31 Vantage Navigation Corp v Suhail and Saud Bahwan Building Materials LLC (The Alev) [1989] …. 25-14 Varley v Whipp [1900] …. 8-14 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] …. 10-25 Veivers v Cordingley [1989] …. 2-41 Vickery v Woods (1952) …. 13-08 Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] …. 27-24 Vimig Pty Ltd v Contract Tooling Pty Ltd (1986) …. 33-34 Wakefield Trucks Pty Ltd v Lach Transport Pty Ltd (2001) …. 28-17 Wakeling v Ripley (1951) …. 5-05 Walford v Miles [1992] …. 4-12

Wallaby Grip Ltd v QBE Insurance (Australia) Ltd (2010) …. 11-04 Wallis v Pratt [1911] …. 11-12 Walton Stores Ltd v Sydney City Council [1968] …. 11-15 Waltons Stores (Interstate) Ltd v Maher (1988) …. 1-40, 6-10, 6-13, 6-17, 6-18, 7-14, 35-22 Ward v Byham [1956] …. 3-29 Wardley Australia Ltd v State of Western Australia (1992) …. 28-17, 28-18, 3218 Warinco AG v Samor SpA [1979] …. 18-18, 18-24 Watt v Westhoven [1933] …. 23-19 Watts Watts & Co Ltd v Mitsui & Co Ltd [1917] …. 31-08 Way v Latilla [1937] …. 2-44 Webb Distributors (Aust) Pty Ltd v State of Victoria (1993) …. 23-30 Webster, Re (1975) …. 2-07 Wells (Merstham) Ltd v Buckland Sand and Silica Ltd [1965] …. 7-15 Wenham v Ella (1972) …. 27-33, 27-39 West v AGC (Advances) Ltd (1986) …. 26-19 Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd (1936) …. 31-09 White and Carter (Councils) Ltd v McGregor [1962] …. 27-36, 27-37, 27-38 White v Australian and New Zealand Theatres Ltd (1943) …. 10-26 —v John Warwick & Co Ltd [1953] …. 11-23 White Trucks Pty Ltd v Riley (1948) …. 2-30 Whitlock v Brew (1968) …. 4-15, 4-18, 4-19 Wigan v Edwards (1973) …. 3-16, 3-26, 3-31 Wilkinson v Osborne (1915) …. 34-16, 34-18 William Sindall Plc v Cambridgeshire County Council [1994] …. 28-14 Williams v Carwardine (1833) …. 2-40 —v Roffey Bros & Nicholls (Contractors) Ltd [1991] …. 3-21, 3-24 —v The Commonwealth (2012) …. 12-31 —v Williams [1957] …. 3-29 Williamson (J C) Ltd v Lukey (1931) …. 29-04, 29-08, 29-12, 29-18, 35-20 Wilson v Anderson (2002) …. 10-08 —v Darling Island Stevedoring & Lighterage Co Ltd (1956) …. 13-01 —v Kingsgate Mining Industries Pty Ltd [1973] …. 14-09 Winter Garden Theatre (London) Ltd v Millennium Productions Ltd [1948] …. 8-01, 16-04

Woden Squash Courts Pty Ltd v Zero Builders Pty Ltd [1976] …. 35-17 Wong Lai Ying v Chinachem Investment Co Ltd (1979) …. 20-22 Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] …. 13-13, 18-19 Woodside Offshore Petroleum Pty Ltd v Atwood Oceanics Inc [1986] …. 10-24 Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) …. 23-17 Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] …. 30-14 X v Commonwealth of Australia (1999) …. 8-08 Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) …. 34-05, 3413, 34-14, 34-15, 34-20 Yerkey v Jones (1939) …. 25-18, 25-23 York Air Conditioning & Refrigeration (Asia) Pty Ltd v The Commonwealth (1949) …. 4-06 Young & Marten Ltd v McManus Childs Ltd [1969] …. 8-08, 15-20

Table of Statutes References are to paragraph numbers Australia Australian Consumer Law (ACL) …. 1-08, 1-21, 6-04, 7-01, 7-09, 7-14, 8-11, 812, 8-17, 11-19, 11-31, 12-23, 13-11, 15-19, 16-09, 16-10, 17-03, 17-16, 17-22, 21-01, 22-12, 22-15, 22-16, 23-03, 23-06, 23-22, 23-23, 23-24, 23-26, 23-27, 23-28, 23-29, 25-17, 26-01, 26-08, 26-09, 26-13, 26-14, 26-15, 26-22, 27-09, 27-10, 27-23, 27-29, 27-41, 28-01, 28-11, 28-13, 28-16, 28-18, 28-19, 30-14, 31-02, 32-05, 32-14, 32-16, 33-22, 33-24, 33-35, 34-23 s 2(1) …. 8-13, 13-11 s 3 …. 8-12 s 4 …. 7-09, 23-22, 23-25, 23-26, 23-27, 23-28 s 4(3)(a) …. 23-28 s 4(3)(b) …. 23-28 s 18 …. 23-29, 23-30, 28-13, 28-16, 28-17, 28-18, 28-19, 28-22 s 20 …. 26-10, 26-11 s 21 …. 26-11 s 22 …. 26-12 s 22A …. 26-11 s 23(1) …. 26-22 s 24(1) …. 26-21 s 24(4) …. 26-21 s 25(1) …. 26-21 s 25(1)(n) …. 26-15 s 25(2) …. 26-21 s 26(1) …. 26-20 s 27(2) …. 26-20 s 29 …. 23-24 s 30 …. 23-24 s 31 …. 23-24 s 32 …. 23-24 s 33 …. 23-24

s 34 …. 23-24 s 35 …. 2-07, 23-24 s 36 …. 23-24 s 37 …. 23-24 s 50 …. 25-01 ss 51-62 …. 8-13 s 54(6)(b) …. 15-19 s 59(1) …. 13-11 s 60 …. 15-19 s 63….. 8-12 s 64 …. 10-14, 11-27, 11-28, 11-30 s 64A …. 11-29, 11-30 s 64A(2) …. 11-29 s 64A(3) …. 11-29 s 64A(4) …. 11-29 ss 151-159 …. 23-24 s 236 …. 26-13, 28-17, 28-18, 32-18 s 236(2) …. 32-18 s 237 …. 23-30, 26-13, 26-22 s 237(2) …. 23-30, 28-18 s 242 …. 23-30, 26-13 s 243 …. 26-13 s 250 …. 26-22 s 259 …. 16-10 s 259(2) …. 16-09 s 259(3) …. 16-09 s 259(4) …. 8-13, 27-23 s 260 …. 16-09 s 260(a) …. 16-09 s 263 …. 21-01 s 267 …. 16-10 s 267(2) …. 16-09 s 267(3) …. 16-09 s 267(4) …. 8-13, 27-23 s 268(a) …. 16-09 s 269 …. 21-01 Pt 2-3 …. 26-20

Pt 3-1, Div 2 …. 2-28 Pt 3-2, Div 1 …. 11-28 Pt 5-2, Div 5 …. 23-24, 26-13 Pt 5-4, Div 2 …. 13-11 National Credit Code …. 1-08, 35-03, 35-11 ss 76-81 …. 26-14 Commonwealth Australian Securities and Investments Commission Act 2001 ss 12BF-12BM …. 26-14 ss 12CA-12CC …. 26-08 s 12DA …. 23-23 s 12EB …. 8-15 Banking Act 1959 s 8 …. 34-14 Bills of Exchange Act 1909 s 8(1) …. 35-04 s 32 …. 3-17 Cheques Act 1986 s 35(1) …. 3-17 Competition and Consumer Act 2010 …. 27-54, 34-33 s 137B …. 28-19 Constitution …. 12-30 Corporations Act 2001 …. 12-25, 12-27, 12-28 s 124 …. 12-27 s 125(2) …. 12-27 s 127 …. 3-05 s 128 …. 12-28 Currency Act 1965 s 16….. 14-09 Electronic Transactions Act 1999 ss 14, 14A, 14B …. 2-34 Insurance Contracts Act 1984 …. 23-08 s 43 …. 34-22 s 48 …. 13-05, 13-11 s 50 …. 20-22 s 54 …. 16-25

Judiciary Act 1903 Pt IX …. 12-30 Pt IXA …. 12-30 Marine Insurance Act 1909 s 39(1) …. 16-25 Reserve Bank Act 1959 s 36(1) …. 14-09 Trade Practices Act 1974 …. 23-22, 34-33 s 51A …. 23-28 ss 51AA, 51AB, 51AC …. 26-09 s 68A …. 11-28, 11-29 s 82 …. 28-16 s 87 …. 28-16 Pt V, Div 2 …. 8-11 Australian Capital Territory Age of Majority Act 1974 …. 12-07 Civil Law (Property) Act 2006 s 204(1) …. 35-12 s 205 …. 13-08, 14-23 s 501 …. 19-06 Civil Law (Wrongs) Act 2002 s 40 …. 27-29 s 41(1) …. 27-29 s 173(b)(i) …. 33-35 s 173(b)(ii) …. 33-34 s 174 …. 28-14 s 174(3)(a) …. 28-14 s 175 …. 28-15 s 176 …. 28-22 s 177 …. 23-21 ch 13 …. 23-20, 28-13 Sale of Goods Act 1954 s 7 …. 12-09 s 8 …. 35-13 s 11 …. 24-07 s 12 …. 20-12

s 13 …. 4-13 s 14 …. 4-16 s 16(2) …. 17-03 s 17 …. 8-14 s 19(1), (2), (4) …. 8-14 s 32 …. 14-06 s 33(5) …. 14-08 s 39 …. 32-14 s 52 …. 14-22 s 56 …. 27-46 s 60 …. 2-42 s 62(1a) …. 23-19 ss 53, 54 …. 31-04 Sale of Goods (Vienna Convention) Act 1987 …. 2-11 New South Wales Associations Incorporation Act 2009 …. 12-29 Cattle Slaughtering and Diseased Animals and Meat Act 1902 s 47 …. 34-10 Civil Liability Act 2002 s 5o …. 15-17 Pt 4 …. 27-29 Sch 2, cl 2 …. 34-26 Contracts Review Act 1980 …. 12-23, 26-08, 26-17 s 4(2) …. 26-17 s 7 …. 26-16, 26-19 s 9(2) …. 26-18 Conveyancing Act 1919 s 12 …. 13-08 s 13 …. 19-06 s 36C …. 13-11 s 37C(1) …. 26-04 s 38 …. 3-05 s 54A …. 6-17, 35-12 s 55(2A) …. 30-14 s 66K …. 20-22 s 144(1) …. 14-23

Crown Proceedings Act 1988 …. 12-30 Electronic Transactions Act 2000 ss 13, 13A, 13B …. 2-34 Frustrated Contracts Act 1978 …. 30-26, 30-28 s 5(1) …. 30-28, 30-29 s 7 …. 30-27 s 10 …. 30-29 s 11 …. 30-29 s 12 …. 30-28 s 13 …. 30-30 s 15 …. 30-31 Law Reform (Miscellaneous Provisions) Act 1965 s 8 …. 27-29 s 9(1) …. 27-29 Limitation Act 1969 s 14(1)(a) …. 32-18 Minors (Property and Contracts) Act 1970 …. 12-06, 12-07, 12-18, 12-19 s 6(1) …. 12-15 s 19 …. 12-16 s 30(4) …. 12-17 s 31(1) …. 12-18 s 31(2) …. 12-18 s 33 …. 12-18 s 34 …. 12-18 s 36 …. 12-18 s 37 …. 12-19 s 39 …. 12-17 Restraints of Trade Act 1976 …. 34-53 s 4(1) …. 34-53 s 4(3) …. 34-53 Sale of Goods Act 1923 s 4(2A) …. 23-19 s 4(5) …. 16-27 s 7 …. 12-24 s 8 …. 35-13 s 11 …. 24-07 s 12 …. 20-12, 30-27

s 13 …. 4-13 s 14 …. 4-16 s 16(2) …. 17-03 s 17 …. 8-14 s 19(1) …. 8-14 s 19(2) …. 8-14 s 31 …. 14-06 s 32(4) …. 14-08 s 38 …. 32-14 s 51 …. 14-22 ss 52, 53 …. 31-04 s 54 …. 27-46 s 56 …. 29-07 s 60 …. 2-42 Sale of Goods (Vienna Convention) Act 1986 …. 2-11 Supreme Court Act 1970 s 68 …. 27-11 Northern Territory Age of Majority Act 1981 …. 12-07 Law of Property Act 2000 s 56 …. 13-10 s 58 …. 35-11 s 58(2) …. 35-15 s 62 …. 35-12 s 65 …. 19-06 s 182(1) …. 13-08 s 212(1) …. 14-23 Law Reform (Miscellaneous Provisions) Act 1956 s 15 …. 27-29 s 16 …. 27-29 Limitation Act s 12(1)(a) …. 32-18 Sale of Goods Act 1972 s 4(2) …. 23-19 s 7 …. 12-09 s 8 …. 35-13

s 10 …. 24-07 s 12 …. 20-12 s 13 …. 4-13 s 14 …. 4-16 s 16(2) …. 17-03 s 16(4) …. 33-34 s 17 …. 8-14 s 19(a) …. 8-14 s 19(b) …. 8-14 s 31 …. 14-06 s 32(5) …. 14-08 s 38 …. 32-14 s 51 …. 14-22 ss 52, 53 …. 31-04 s 54 …. 27-46 s 60 …. 2-42 Sale of Goods (Vienna Convention) Act 1987 …. 2-11 Water Act 1992 …. 34-19 Queensland Law Reform Act 1995 s 5 …. 27-29 s 10(1) …. 27-29 s 17 …. 12-07 Property Law Act 1974 s 55 …. 13-10 s 56 …. 35-11 s 56(2) …. 35-15 s 59 …. 35-12 s 62 …. 19-06 s 199 …. 13-08 s 232 …. 14-23 Sale of Goods Act 1896 s 5 …. 12-09 s 6 …. 35-13 s 9 …. 24-07 s 10 …. 20-12

s 11 …. 4-13 s 12 …. 4-16 s 14(2) …. 17-03 s 14(3) …. 33-34 s 15 …. 8-14 s 17(1) …. 8-14 s 17(2) …. 8-14 s 30 …. 14-06 s 31(4) …. 14-08 s 37 …. 32-14 s 50 …. 14-22 ss 51, 52 …. 31-04 s 54 …. 27-46 s 59 …. 2-42 s 61(2) …. 23-19 Sale of Goods (Vienna Convention) Act 1986 …. 2-11 South Australia Age of Majority (Reduction) Act 1970 …. 12-07 Frustrated Contracts Act 1988 …. 30-26 s 3(1) …. 30-32 s 3(3) …. 30-33 s 3(4) …. 30-33 s 4(2) …. 30-32 s 6 …. 30-32 s 7 …. 30-33 s 7(2) …. 30-33 Law of Property Act 1936 s 15 …. 13-08 s 16 …. 19-06 s 26 …. 35-12 s 64 …. 14-23 Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 s 3 …. 27-29 s 7 …. 27-29 Minors’ Contracts (Miscellaneous Provisions) Act 1979

s 6 …. 12-06 s 7 …. 12-14 s 8 …. 12-06 Misrepresentation Act 1972 …. 23-20, 28-13 s 4(1) …. 23-21 s 6(1)(a) …. 33-35 s 6(1)(b) …. 33-34 s 7 …. 28-14 s 7(2)(a) …. 28-14 s 7(3) …. 28-15 s 8 …. 28-22 Sale of Goods Act 1895 s 2 …. 12-09 s 3 …. 35-13 s 6 …. 24-07 s 7 …. 20-12, 30-32 s 8 …. 4-13 s 9 …. 4-16 s 11(2) …. 17-03 s 12 …. 8-14 s 14(b) …. 8-14 s 28 …. 14-06 s 29(4) …. 14-08 s 35 …. 32-14 s 48 …. 14-22 s 49 …. 31-04 s 50 …. 31-04 s 52 …. 27-46 s 57 …. 2-42 s 59(2) …. 23-19 Sale of Goods (Vienna Convention) Act 1986 …. 2-11 Town Planning and Development Act 1920 s 23(c) …. 34-06 Tasmania Age of Majority Act 1973 …. 12-07 Apportionment Act 1871

s 2 …. 14-23 Conveyancing and Law of Property Act 1884 s 36(1) …. 35-12 s 86 …. 13-08 Mercantile Law Act 1935 s 6 …. 35-11 s 12 …. 35-15 Sale of Goods Act 1896 s 5(2) …. 23-19 s 7 …. 12-09 s 8 …. 35-13 s 9 …. 35-13 s 11 …. 24-07 s 12 …. 20-12 s 13 …. 4-13 s 14 …. 4-16 s 16(2) …. 17-03 s 16(3) …. 33-34 s 17 …. 8-14 s 19(a) …. 8-14 s 19(b) …. 8-14 s 33 …. 14-06 s 34(4) …. 14-08 s 40 …. 32-14 s 53 …. 14-22 s 54 …. 31-04 s 55 …. 31-04 s 57 …. 27-46 s 62 …. 2-42 Sale of Goods (Vienna Convention) Act 1987 …. 2-11 Supreme Court Civil Procedure Act 1932 s 11(7) …. 19-06 Wrongs Act 1954 s 2 …. 27-29 s 4 …. 27-29 Victoria

Age of Majority Act 1977 …. 12-07 Australian Consumer Law and Fair Trading Act 2012 …. 30-34, 30-35 s 3 …. 30-34 ss 24, 25 …. 23-19 s 31 …. 8-17 s 34 …. 34-09 s 35(1) …. 30-34 s 35(1)(c) …. 30-34 s 36(1) …. 30-35 s 36(2) …. 30-35 s 37 …. 30-35 s 38 …. 30-36 s 39 …. 30-36 s 40 …. 30-36 Pt 2c …. 30-26 Pt 3.2 …. 30-26, 30-34 Goods Act 1958 …. 2-11 s 4(2) …. 23-19 s 7 …. 12-09 s 8 …. 35-13 s 11 …. 24-07 s 12 …. 20-12, 30-34 s 13 …. 4-13 s 14 …. 4-16 s 16(2) …. 17-03 s 16(3) …. 33-34 s 17 …. 8-14 s 19(a) …. 8-14 s 19(b) …. 8-14 s 35 …. 14-06 s 36(4) …. 14-08 s 42 …. 32-14 s 55 …. 14-22 ss 56, 57 …. 31-04 s 58 …. 29-07 s 59 …. 27-46 s 64 …. 2-42

Instruments Act 1958 s 126 …. 35-11, 35-12, 35-16 s 129 …. 35-15 Limitation of Actions Act 1958 s 5(1)(a) …. 32-18 Prices Regulation Act 1948 …. 34-13 Property Law Act 1958 s 41 …. 19-06 s 49(2) …. 30-14 s 56(1) …. 13-11 s 134 …. 13-08 Sale of Goods (Vienna Convention) Act 1987 …. 2-11 Supreme Court Act 1986 s 38 …. 27-11 s 50 …. 12-13 s 54 …. 14-23 Wrongs Act 1958 s 25 …. 27-29 s 26(1) …. 27-29 s 32(1) …. 34-26 Pt IVAA …. 27-29 Western Australia Age of Majority Act 1972 …. 12-07 Law Reform (Statute of Frauds) Act 1962 s 2 …. 35-12 Limitation Act 2005 s 27 …. 32-17 Property Law Act 1969 s 11(2) …. 13-10 s 20 …. 13-08 s 21 …. 19-06 s 131 …. 14-23 Sale of Goods Act 1895 s 2 …. 12-09 s 3 …. 35-13 s 6 …. 24-07

s 7 …. 20-12 s 8 …. 4-13 s 9 …. 4-16, 35-13 s 11(2) …. 17-03 s 11(3) …. 33-34 s 12 …. 8-14 s 14(i) …. 8-14 s 14(ii) …. 8-14 s 28 …. 14-06 s 29(4) …. 14-08 s 35 …. 32-14 s 48 …. 14-22 ss 49, 50 …. 31-04 s 52 …. 27-46 s 57 …. 2-42 s 59(2) …. 23-19 Sale of Goods (Vienna Convention) Act 1986 …. 2-11 Statute of Frauds 1677 (Imp) s 4 …. 35-11, 35-12 United Kingdom Law Reform (Frustrated Contracts) Act 1943 …. 30-26 Mercantile Law Amendment Act 1856 s 3 …. 35-15 Merchant Shipping (Safety and Load Line Conventions) Act 1932 …. 34-15 Sale of Goods Act 1893 …. 1-08 Sale of Goods Act 1979 …. 1-08 Statute of Frauds 1677 (Imp) …. 1-08, 30-11, 30-19, 34-05, 35-04, 35-06, 35-13, 35-14, 35-19, 35-23, 35-24, 35-25 s 4 …. 35-07, 35-08, 35-10 s 17 …. 35-07, 35-09 Unfair Terms in Consumer Contracts Regulations 1999 …. 26-21 International United Nations Convention on Contracts for the International Sale of Goods (1980) (CISG) …. 1-08, 2-11, 2-29, 2-30, 15-19, 17-22, 19-11 arts 1-5 …. 2-11 art 16 …. 2-29

art 16(1) …. 2-12 art 17 …. 2-19 art 18 …. 2-30 art 19 …. 2-25, 2-35 art 24 …. 2-29 art 25 …. 17-25 art 35 …. 7-01, 17-22 art 71 …. 18-24 art 72 …. 18-24

Guide Glossary Introduction. The ‘Guide Glossary’ is a list of descriptions for words, terms and expressions frequently used in this book. The descriptions are intended to be indicative of the relevant (that is, contractual) senses rather than comprehensive definitions. Many of the entries have other meanings as well. Generally, these are ignored. A law dictionary should be consulted for more precise and comprehensive definitions. Any word (or phrase) used in an entry which has its own entry is shown in SMALL CAPITALS. (Because it is used so frequently, this does not include ‘contract’.) When entries include two or more descriptions, each is numbered. The numbers assigned are sometimes used in other entries, to denote the relevant description. Italicised words (or terms) in square brackets are synonyms for what is defined in the entry. ab initio

from the beginning

acceptance

(1) agreement to an OFFER (2) an ELECTION to terminate for a REPUDIATION

affirmation anticipatory breach assignee assignment

an ELECTION to continue with a contract when there is a right to terminate or rescind a BREACH OF CONTRACT which precedes the time of PERFORMANCE the beneficiary under an ASSIGNMENT the transfer of the benefit of a contractual right (‘chose in action’) from an ASSIGNOR to an ASSIGNEE

assignor assumpsit

the person making an ASSIGNMENT the form of action from which the modern remedy of contract DAMAGES is derived a contract under which one person (the

bailment contract

bailor) grants another (the bailee) the right to possession of goods in return for a fee or other CONSIDERATION, as in a LEASE (or hire) of goods

bilateral contract

a contract supported by CONSIDERATION in the form of an exchange of PROMISES

bill of exchange

bill of lading breach of contract capacity champerty

charterparty

collateral contract common law common mistake

an unconditional promise in writing to pay a definite sum of money on demand or at a fixed time, for example, a cheque the document evidencing a contract for the carriage of goods by sea; it is also a document of title the FAILURE TO PERFORM a promise or an ANTICIPATORY BREACH of contract the power to enter into and be personally bound by a contract MAINTENANCE of an action in consideration of receiving a share in the proceeds of the action a type of contract for the provision of services, namely, the use of a vessel (usually with the crew) for a period of time (‘time charterparty’) or for one or more voyages (‘voyage charterparty’) the contract formed when the CONSIDERATION for a promise is entry into another contract (the ‘main contract’) [collateral warranty] that branch of the GENERAL LAW formerly administered by the common law courts both parties to an agreement make the same mistake in relation to some aspect of the agreement the idea that DAMAGES for BREACH OF CONTRACT

compensation principle

completion compromise

must not exceed the LOSS OR DAMAGE suffered by the PROMISEE in a SALE OF LAND, payment of the purchase money in return for a registrable document of transfer [settlement] a contract to settle a disputed claim [settlement]

condition

(1) a CONTINGENCY (2) any CONTRACT TERM (3) a CONTRACT TERM any breach of which entitles the PROMISEE to terminate the contract

condition precedent

(1) a CONTINGENCY which must occur before a contract or obligation is binding or enforceable (2) a term stating such a CONTINGENCY

condition subsequent

(1) a CONTINGENCY the fulfilment of which terminates a contract or obligation (2) a term stating such a CONTINGENCY

consensus ad idem consideration construction contingency contra proferentem

the meeting of the minds of contracting parties in relation to an agreement something of value (including a PROMISE) given by the PROMISEE as the price of a PROMISE the process by which the meaning or legal effect of a contract is determined [interpretation] an event which is not certain to occur CONSTRUCTION of an ambiguous clause in a document against the person who drafted the clause, or who puts it forward (1) any PROMISE (or set of PROMISES) which the law enforces on the basis that it is

contract

supported by agreement]

CONSIDERATION

[binding

(2) a document expressing or evidencing the terms of a contract

contract continuum

the description used in the book to describe a schematic representation of the life of a contract as a straight line from commencement of negotiations until DISCHARGE BY PERFORMANCE

contract price

contract term

covenant

creditor damage damages

debt debtor

the benefit which one party agrees to confer in return for the other party’s PERFORMANCE — conventionally, a money sum a statement or collection of words intended to operate as a distinct agreement in relation to some aspect of a contract [stipulation; clause; provision] (1) a PROMISE in a DEED (2) the conventional description of a PROMISE in restraint of trade a person to whom a debt is owed, and more generally the beneficiary of a promise [obligee] in the expression ‘LOSS OR DAMAGE, loss which is not of a financial nature a court’s judgment for a money sum awarded as compensation for LOSS OR DAMAGE caused by a breach of contract or other civil wrong a sum of money fixed by a contract and due and payable under the contract, such as the CONTRACT PRICE [liquidated sum] a person who owes a debt, and more generally any promisor [obligor] any document (including a contract document) intended to take effect as a deed

deed

which complies with the statutory requirements for the EXECUTION (1) of deeds [contract under seal; specialty; special contract]

default rule

a rule of the general law of contract applied to attribute intention on a matter with which the contract does not deal expressly

dependent promise

a PROMISE which becomes due for PERFORMANCE on satisfaction of a CONDITION PRECEDENT

discharge

(1) completion of PERFORMANCE of a contract or obligation (2) the release of the parties from the duty to perform their respective contractual obligations prior to completion of PERFORMANCE

duress economic duress election entire contract equity essential promise estoppel ex turpi causa maxim

exclusion clause

unlawful (or illegitimate) pressure inducing a contract amounting to (or analogous to) compulsion, coercion or extortion DURESS in relation to a person’s economic wellbeing the making of a ‘choice’ between two or more alternative rights or remedies a contract in which substantially complete PERFORMANCE is a CONDITION PRECEDENT to recovery of the CONTRACT PRICE that branch of the GENERAL LAW formerly administered by the Court of Chancery a CONDITION (3) see PROMISSORY ESTOPPEL the maxim ex turpi causa non oritur actio, that is, no cause of action arises out of an illegal contract a clause which excludes, qualifies or limits the rights which a party would otherwise enjoy

under the general law or statute [exception clause; exemption clause]

exclusionary rule

a rule of substantive contract law which prohibits the use of EXTRINSIC EVIDENCE in CONSTRUCTION of a contract document or to add or vary the terms for an INTEGRATED CONTRACT

execution

express term extrinsic evidence

failure of the agreed return

failure to perform

(1) the act of signing a document in accordance with any applicable statutory rules (2) full PERFORMANCE of a contract or one party’s obligations under the contract a term orally agreed or set out in a contract document prior negotiations, actual intention or subsequent conduct failure by a PROMISOR to receive the PERFORMANCE which was promised (‘agreed return’) as the price of a money sum paid by the PROMISOR [failure of consideration] a failure to DISCHARGE a contractual obligation on time or in accordance with the applicable STANDARD OF CONTRACTUAL DUTY

force majeure

events beyond the control of the parties which are agreed to provide an excuse for a FAILURE TO PERFORM

forfeiture

fraudulent misrepresentation

exercise by one party of a right to retain (‘forfeit’) money or property which it would otherwise be required to return to the other party, usually on termination of the contract a REPRESENTATION which is false to the knowledge of the REPRESENTOR or made recklessly, the REPRESENTOR not caring whether it was true or false, reliance on which causes LOSS OR DAMAGE to the REPRESENTEE

freedom of contract

the ability to decide whether, with whom and the terms under which a person contracts DISCHARGE (2) by an unforeseen event which

frustration

fundamental breach general law good faith guarantee

guarantor hire-purchase illegal contract

implied term in futuro in pari delicto maxim

independent promise injunction

occurred without fault and made PERFORMANCE of the contract radically different from that intended by the parties breach of an INTERMEDIATE TERM which entitles a PROMISEE to terminate the contract non-statutory law a requirement of honest conduct [bona fides] a contract under which a GUARANTOR promises the CREDITOR to ensure that a third person (the principal DEBTOR) performs a duty owed to the CREDITOR by the principal DEBTOR the PROMISOR under a contract of GUARANTEE [surety] a contract to hire goods which includes an OPTION to purchase the goods a contract which is illegal under statute or PUBLIC POLICY

a term which is as a matter of fact or law included in the contract even though not mentioned in an oral agreement or set out in a contract in (or evidenced by) writing for the future the maxim in pari delicto potior est conditio defendentis, that is, if the parties are equally at fault the condition of the defendant is the better a PROMISE the PERFORMANCE of which is not subject to fulfilment of a CONDITION precedent a remedy granted to restrain breach of a promise not to do something

innocent misrepresentation insolvent insured insurer integrated contract intermediate term joint and several promise joint promise lease liquidated damages loss loss or damage lump sum contract maintenance misleading conduct

a false REPRESENTATION believed by the REPRESENTOR to be true and which induces the REPRESENTEE to enter into a contract an inability to pay DEBTS as they fall due the PROMISEE under a contract of insurance the PROMISOR under a contract of insurance a contract the terms of which are stated exclusively in a document a contractual PROMISE which is neither a CONDITION (3) nor a WARRANTY (2) [innominate term] two or more people make the same PROMISE together and separately two or more people make the same PROMISE together a contract which confers a right to the exclusive possession of land or goods for an agreed period of time a valid agreement on the amount of DAMAGES payable for a BREACH OF CONTRACT in the expression ‘LOSS OR DAMAGE, loss of a financial nature when caused by BREACH OF CONTRACT, or other civil wrong, something for which compensation is sought a contract which provides for the payment of a single money sum as the price of work the giving of unjustified assistance or encouragement to a party litigating a dispute conduct, including any MISREPRESENTATION, which leads a person to believe that something is true when it is false a false material REPRESENTATION, made to induce

misrepresentation

a person’s entry into a contract

mutual mistake

each party makes a mistake in relation to some aspect of a contract, but their mistakes differ

negligence negligent misrepresentation

novation

objective theory

offer offeree offeror option contract parol evidence rule payee payer penalty performance

breach of a duty to exercise reasonable care an INNOCENT MISREPRESENTATION made in breach of a duty of care reliance on which causes LOSS OR DAMAGE to the REPRESENTEE [negligent misstatement] the replacement of one contract with another, including by replacing one of the parties, or adding or removing a party the theory under which intention is determined from the standpoint of a reasonable person in the position of the person to whom the intention was communicated an expression of willingness to contract on stated terms the person to whom an OFFER is made the person who makes an OFFER an OFFER supported by CONSIDERATION the aspect of the EXCLUSIONARY RULE which prohibits the use of EXTRINSIC EVIDENCE to add to or vary the terms of an INTEGRATED CONTRACT a person who has received, or is entitled to be paid, a money sum a person who has paid, or agreed to pay, a money sum an invalid agreement on the amount of DAMAGES payable for a BREACH OF CONTRACT the steps necessary to DISCHARGE a contractual obligation

privity of contract

the rule under which only the parties to a contract may be benefited or burdened by it as a matter of right or obligation

promise

(1) an express or implied term stating a contractual obligation, including a WARRANTY (1) (2) a CONTRACT TERM stating a promise [undertaking; contract]

promisee promisor

relief against forfeiture

the person to whom a PROMISE is made the person who makes a PROMISE the concept under which a person is precluded from denying that a promissory statement or REPRESENTATION was made [equitable estoppel] the standards adopted by the community to determine the inherent validity of a contract or CONTRACT TERM a money sum awarded to punish rather than compensate the plaintiff [exemplary damages] the name formerly given to part of the subject now termed RESTITUTION the sum awarded by way of RESTITUTION as the value of a non-monetary benefit conferred under an ineffective contract [quantum meruit] relief granted to prevent or reverse a

representation

a statement of fact made by a REPRESENTOR to a

representee representor

the person to whom a REPRESENTATION is made the person who makes a REPRESENTATION a refusal to perform a contract satisfying the

promissory estoppel

public policy

punitive damages quasi-contract

reasonable remuneration

repudiation

FORFEITURE REPRESENTEE

REQUIREMENT of SERIOUSNESS

requirement of seriousness

a generic description of the criteria required to be satisfied in proving a FUNDAMENTAL BREACH or REPUDIATION

rescission

(1) the exercise of a right to treat a contract as if it had never existed (2) the effect of an agreement to cancel a contract (3) the effect of an order setting aside a contract

restitutio in integrum restitution sale of goods sale of land severable contract several promise severance simple contract specific performance standard of contractual

the process by which parties are restored to their pre-contractual positions if a contract is rescinded or set aside a monetary award to prevent or reverse an UNIUST ENRICHMENT

a contract to transfer ownership in goods in return for a price (under the sale of goods legislation, a money sum) a contract to transfer ownership of land in return for a price a contract under which PERFORMANCE is apportioned so that each component has a separate price a PROMISE having the same content made by each of two or more people the process of eliminating the invalid part of a contract so that the balance can be enforced a contract which is not expressed in a DEED [parol contract] an order that the contract be performed in specie the degree of care which must be exercised in order to

duty

DISCHARGE (1) a PROMISOR

statute of limitations

a statute prescribing the time within which legal proceedings must be commenced

subjective theory

the theory under which the content or meaning of a contract is determined by direct reference to the parties’ actual intentions

tender

(1) an OFFER made in response to an invitation to do so (2) a proffer of performance

termination

(1) the exercise of a right to DISCHARGE a contract prematurely (2) the effect of an agreement to cancel a contract

time stipulation tort tripartite classification ultra vires

unconscionable conduct

undue influence unenforceable (contract) unilateral contract

a CONTRACT term stating the time for performance a category of legal wrong, such as NEGLIGENCE or deceit the classification of promissory terms as conditions, warranties or intermediate terms an act which exceeds the contractual capacity of an incorporated entity or the Crown conduct which, according to defined standards derived from EQUITY, would offend the conscience of a right-minded person in the circumstances abuse of an assumed or actual relationship of trust and confidence a contract which exists but which cannot be enforced by legal proceedings a contract the CONSIDERATION for which is doing an act other than making a PROMISE

unilateral mistake

unjust enrichment variation vicarious performance void voidable contract

waiver

warranty

where one party, but not the other, is mistaken in relation to some aspect of the contract, usually to the knowledge of the other a benefit is obtained by one person at the expense of another in circumstances which the law regards as unjust a contract to add, delete or change one or more terms of another contract PERFORMANCE on behalf of another, as where a subcontractor performs a contractor’s obligations devoid of legal effect a contract which may be rescinded at the ELECTION of a party to dispense with, or abandon; in relation to a right: (1) an ELECTION to pursue an inconsistent right (2) conduct giving rise to an ESTOPPEL in relation to exercise of a right (1) an express or implied undertaking of contractual responsibility for the truth (or falsity) of a present or past fact (2) a CONTRACT TERM no breach of which entitles the PROMISEE to terminate the contract

Abbreviations Bibliography and abbreviations of works referred to Beatson and Friedmann … Beatson, Jack, and Friedmann, Daniel, Good Faith and Fault in Contract Law, Clarendon Press, Oxford, 1995. Carter, Construction … Carter, J W, The Construction of Commercial Contracts, Hart Publishing, Oxford, 2013. Carter on Contract … Carter, J W, Carter on Contract, 2 vols, Butterworths LexisNexis, Sydney (looseleaf). Carter’s Breach of Contract … Carter, J W, Carter’s Breach of Contract, LexisNexis Butterworths, Sydney, 2011, and Hart Publishing, Oxford, 2012 (Hart Edition). Cases and Materials … Carter, J W, Cases and Materials on Contract Law in Australia, 6th ed, LexisNexis Butterworths, Sydney, 2012. Contract as Assumption … Coote, Brian, Contract as Assumption: Essays on a Theme, Bigwood, Rick, ed, Hart Publishing, Oxford, 2010. Contractual Indemnities … Wayne Courtney, Contractual Indemnities, Hart Publishing, Oxford, 2014. Essays in Equity … Finn, P D, ed, Essays in Equity, Law Book Co Ltd, Sydney, 1985. Essays on Contract … Finn, P D, ed, Essays on Contract, Law Book Co Ltd, Sydney, 1987. Essays on Restitution … Finn, P D, ed, Essays on Restitution, Law Book Co Ltd, Sydney, 1990. Lindgren, Time in Performance … Lindgren, K E, Time in the Performance of Contracts, 2nd ed, Butterworths, Sydney, 1982. Mason and Carter … Mason, Keith, Carter, J W, and Tolhurst, G J, Mason and Carter’s Restitution Law in Australia, 2nd ed, LexisNexis Butterworths,

Sydney, 2008 (the same references will apply to the 3rd edition, to be published in 2016). Peden, Good Faith … Peden, Elisabeth, Good Faith in the Performance of Contracts, Butterworths, Sydney, 2003. Simpson … Simpson, A W B, A History of the Common Law of Contract: the Rise of the Action of Assumpsit, Clarendon Press, Oxford, 1975. Tolhurst … Tolhurst, G J, The Assignment of Contractual Rights, Hart Publishing, Oxford, 2006.

Other Abbreviations ACCC … Australian Competition and Consumer Commission ACL … Australian Consumer Law (Competition and Consumer Act 2010 (Cth), Sch 2) CISG … United Nations Convention on Contracts for the International Sale of Goods (1980) (Final Act of the United Nations Conference on Contracts for the International Sale of Goods (UN Doc A/CONF 97/18, 10 April, 1980, Annex I)) National Credit Code … National Consumer Credit Protection Act 2009 (Cth), Sch 1

Contents Dedication Preface Preface to Second Edition Table of Cases Table of Statutes Guide Glossary Abbreviations Part A — What is Contract Law? 1 Introduction Part B — Is There a Contract? 2 Contract Formation 3 Consideration 4 Uncertainty and Conditional Contracts 5 Intention to Create Legal Relations 6 Pre-contractual Liability Part C — What Are the Terms of the Contract? 7 Terms Expressly Agreed 8 Terms Impliedly Agreed and Consumer Guarantees 9 Incorporated Terms Part D — What Do the Terms Mean? 10 Principles of Construction 11 Exclusion Clauses Part E — Who Can Enforce the Contract? 12 Capacity and Parties 13 Privity of Contract

Part F — Has the Contract Been Performed? 14 Performance of the Contract 15 Breach of Contract Part G — Has the Contract Been Prematurely Discharged? 16 Bases for Discharge 17 Discharge for Breach of Term 18 Discharge for Repudiation 19 Discharge for Delay 20 Discharge by Frustration 21 Consequences and Scope of Discharge Part H — Has the Contract Been Rescinded? 22 Bases for Rescission 23 Misleading Conduct 24 Mistake 25 Improper Pressure 26 Unconscionable Conduct, Unjust Contracts and Unfair Terms Part I — What Remedies Are Available? 27 Damages for Breach of Contract 28 Damages for Misleading Conduct 29 Specific Performance and Injunction 30 Restitution 31 Impact of Discharge on Remedies Part J — What Defences May Be Raised? 32 Defences in Contract Law 33 Invalid Exercise of Rights 34 Illegality 35 Lack of Writing Part K — How Do I Do It? The How To Chapter Sample Contracts Quick Quiz Answers Problem Questions

Problem Solutions Index

[page 1]

Part A

What Is Contract Law?

[page 2]

Chapter 1

Introduction [1-01] What is a contract? Perhaps the most basic question that anyone could ask about contract law is ‘What is a contract?’ The technical answer is that any promise (or set of promises) which the law enforces on the basis that it is supported by consideration is a contract.1 That leads to further questions, namely: ■ what is a promise? ■ what is meant by ‘enforce’? ■ what is consideration? Before dealing with those questions, it is worth looking at the issue less technically. Contracts, whether written or oral, are easily recognised. The purchase of this book involved entering into a contract. Purchasing a newspaper, taking a ride on a bus, buying a meal at a restaurant, and so on, exemplify typical contracts. We recognise them as such — even at the non-technical level — because of the element of exchange. The person who sold you this book provided something in exchange for the price. Exchange is the hallmark of contract. Almost invariably the exchange comprises the payment of money by one person and the provision of something in kind — goods, services or land — by the other. That is true whether the exchange is for the purpose of private consumption by an individual or has a commercial purpose. Whether the price is $1 or $1 million, the same law applies. This illustrates the diversity of the exchanges regulated by contract law and the scope of contract law itself. But contract would be a very narrow concept if limited to situations where money is exchanged for goods or services. The exchange of promises must also be taken into account. [1-02] What is a promise? In contract law, a ‘promise’ is an undertaking of responsibility for a state of affairs or the occurrence of an event. For example, by promising to pay the price, a buyer of land undertakes responsibility for the occurrence of an event, namely, payment to the vendor. What is important is not

so much that a person (the promisor) has promised to do something as that the promisor has undertaken a special type of responsibility — a contractual responsibility — for the occurrence of a particular event, namely, payment. The vendor will be indifferent as to who pays the price, so long as payment is on behalf of the purchaser. Because contract law tends to assume a commercial context, the definition of contract assumes that at least one party to the exchange has made a promise. That [page 3] is not always true in consumer contexts, where a promise can only be found by taking an artificial perspective. For example, if a newspaper is purchased, it would be virtually impossible to identify a moment in time at which either party made a promise (to pay or supply), for the simple reason that the transaction is over in an instant. Nevertheless, the transaction is a contract. The concern of this book is with exchanges where at least one person has made a promise. But the typical contract is one in which both parties have made promises. ‘Exchange’ therefore usually refers to an exchange of promises. [1-03] What do we mean by ‘enforce’? The idea of enforcement is essential to the concept of ‘contract’. It follows that promises which are not enforceable are not contracts. What is important here is that contractual promises have an institutional backing.2 Expressed in its simplest form, a promise is enforceable if a court would grant a remedy for its breach. The institutional backing means that where a promise is not performed (or is imperfectly performed) the ‘promisee’ (person to whom the promise was made) can go to court and obtain a remedy; and then call in aid all the sanctions offered by our legal system to ensure legal responsibility for the breach of contract. That includes the sale of the promisor’s assets in order to meet the judgment in favour of the promisee.3 Because of the institutional backing, it is easy to appreciate why some promises do not count as contracts. For example, if a person breaks a promise to have dinner with a friend, the absence of any intention that breach should be sanctioned through the legal system signifies that the promise is not a contractual promise. Since contract is the principal basis on which promises are

enforced, if a promise is not contractual it will usually not be enforceable at all. Therefore, when promises which do not count as contractual promises are enforced, they are not usually enforced in the same way — or for the same reasons — that promises which are contracts are enforced. [1-04] What is consideration? There is more to the enforceability of a promise as a contract than that the promise was intended to be legally enforceable. For example, a person might promise to give $100 to a charity, and intend to be bound by the promise. However, it is not a contractual promise: a promise to make a gift is not a contract. That is because of the absence of exchange: the charity has not promised to do anything in exchange for the promise, and the donor has not requested any particular act in exchange for the promise. Therefore, the institutional sanctions associated with contracts are withheld. Although the clear message of the above discussion is that a promise is only enforceable as a contract if the promisee has provided something of value for the promise, a very broad view is taken of what counts as ‘something of value’. Most importantly, the making of a promise satisfies that requirement. Assume that a [page 4] seller agrees to sell goods and that the buyer agrees to pay for the goods when they are delivered. This exchange is a classic example of a contract because each party’s promise is ‘something of value’. Perhaps more than anything else, this feature has served to make contract a very successful institution. The label given to the ‘something of value’ which must be provided in order to make a promise enforceable as a contract is ‘consideration’. If a promisee wishes to enforce a promise as a contract it must provide consideration. This is a technical concept.4 Although consideration may take the form of paying money (or providing goods, services and so on), commonly consideration is simply a promise. In an exchange of promises, each party is both a promisor and a promisee. The consideration for each party’s promise is the other party’s promise.5

Sources of Contract Law

[1-05] Agreement. In a practical sense, the principal source of contract law is the agreement of the parties themselves. The more detailed and specific the contract the less likely it is that it will be necessary to have recourse to legal rules. However, parties do not always, or even usually, specify in detail all that is to happen under their contract. And even if they have done so, something may go wrong. Any dispute between the parties to a contract may need to be resolved. The parties may do so themselves. Alternatively, the dispute may be referred to a third person to act as arbitrator, or there may be a hearing before a tribunal or court. Unless resolved by the parties, resolution must occur by the application of contract rules and principles. The search for these will, in nearly every case, go beyond the words used by the parties. Even so, because the rules and principles are applied by reference to the parties’ agreement, it is meaningful to say that rights and obligations are still regulated by the terms agreed. [1-06] Case law. The most important source of contract law is case law. This comprises earlier court decisions in which the rules and principles which regulate contractual relationships have been developed and applied. These state (and illustrate) the rules and principles which need to be considered in relation to a contract or what is alleged to be a contract. The importance of case law, in providing a source of legal rules and principles for contracts, leads to the citation of ‘authority’ to justify conclusions on the rights and obligations of the parties. This process illustrates a general technique. In a common law system such as ours the doctrine of precedent is applied and particular problems are resolved by recourse to the decisions in earlier cases.6 Books on contract law are helpful because they set out the rules and principles which can be distilled from the cases. Some rules and principles are so well established that it can be said with almost complete confidence that they will be applied. For example, [page 5] the rule that the meaning of a document depends on its construction is a universal truth. In other legal systems where the doctrine of precedent is less rigorously applied, earlier decisions may be discounted, and more reliance placed on the views of text writers and legal codes.

[1-07] Common law and equity. Frequent reference is made in contract books to ‘common law’ and ‘equity’. The former may be used quite generally — to refer to all the relevant non-statutory law. Frequently, however, usage is more technical: to distinguish rules and principles developed by the courts of common law from those developed by courts of equity. This usage arises because for a long time there were two distinct systems of law administered in separate courts. In England the two systems were fused in 1873. In all Australian Supreme Courts, as in the High Court of Australia and Federal Court of Australia, their administration is now also fused. Because of fusion it is in a sense anachronistic to speak today of ‘common law’ and ‘equity’. However, the terminology is helpful in two respects: (1) it indicates the original source of a rule or principle; and (2) it assists in predicting how the rules and principles will be applied. For example, because specific performance7 is a remedy which was originally available only in courts of equity, it is still today governed by equitable considerations such as fairness, regulating a discretion as to whether that remedy, rather than a common law remedy (damages), should be awarded.8 By contrast, the remedy of damages for breach of contract9 is not subject to discretion. It is available as of right whenever a breach of contract occurs. [1-08] Statute. The story of the role of statute in contract law is an interesting one. Historically, some of the landmarks are statutory. For example, in 1677 the Statute of Frauds (UK) was passed to require certain promises to be in writing or evidenced by writing.10 However, until the great codifying statutes enacted towards the end of the 19th century, contract law was almost entirely derived from decided cases. In 1894 the Sale of Goods Act 1893 (UK)11 was passed, and soon copied throughout Australia with very few amendments.12 Therefore, one major area of contract law is regulated (but not entirely) by statute.13 Today, statute plays an even greater role. Not only are other specific types of contracts, such as consumer credit transactions, primarily governed by legislation;14 statute has also been used to reform the law, and to regulate specific issues and [page 6] practices. One perspective for recent intrusions of statute law is a philosophy that

certain contracting parties, particularly ‘consumers’, need to be protected.15 [1-09] Australian contract law. In theory there is a single law of contract which applies throughout Australia, and the decisions of the High Court of Australia, as the final court of appeal, bind all Australian courts in contract disputes.16 However, because relatively few contract disputes reach the High Court, there is always the potential for the law of contract to be applied differently in different jurisdictions. There are also variations in statute law, some of which are significant. Nevertheless, the Australian law of contract should be seen as a single body of law, administered in eight jurisdictions.17 Much of contract law is derived from English decisions. At one time English decisions were authoritative in Australia. Today, all such decisions, unless they have been adopted by the High Court, are of persuasive authority and not binding. Accordingly, a State (or Territory) Supreme Court is free to ignore any English decision not already approved by the High Court. Nevertheless, there is still a considerable degree of uniformity between English and Australian contract law, particularly at the level of analysis in this book. English case law is not the only influence on the Australian law of contract. Decisions from other common law jurisdictions are sometimes cited as persuasive authority. This reflects the fact that similar solutions are found to contract problems in other countries around the world. Depending on how specific the issue, many cases would be resolved in precisely the same way in all common law jurisdictions. Accordingly, in a novel situation, or where the question arises whether the law should be changed, it is legitimate to look at solutions elsewhere.

The Life of a Contract [1-10] The contract continuum. In theory all contracts go through distinct identifiable stages which may be represented diagrammatically as a ‘contract continuum’: t1----------t2----------t3----------t4 The contract continuum works like this: (1) at point t1 negotiations begin; and (2) negotiations continue until point t2, which represents the moment of contractual formation.

The period t1–t2 is therefore the formation or agreement period. Moving on: [page 7] (3) point t3 represents the time at which performance of the contract begins; and (4) point t4 is the moment when it can be said that all obligations have been performed (‘discharged’). The period t3–t4 is therefore the performance period. In practice, contracts are much more dynamic than the diagram suggests: not all issues fit neatly into the divisions suggested by the contract continuum.18 It is also misleading to the extent that it suggests there are always distinct stages in the life cycle of a contract. Particularly in consumer contracts, the formation and performance periods are more or less coincident.19 Nevertheless, not only does the contract continuum express the essential concept of classical contract law as devised in the 19th century, it is also a useful tool of analysis today. In particular, it assists in the identification of issues. [1-11] Issues in contract. The contract continuum tells us that there are two main types of issue in contract law: ■ formation issues — these arise in the period t1–t2 and give rise to the question ‘Is there a contract?’ ■ performance issues — these arise in the period t3–t4 and give rise to the question ‘Has the contract been performed?’. No doubt in all agreements effective as contracts the parties’ objective is to reach point t4 — the discharge point. However, for a variety of reasons this may not occur. Since many of the contracts dealt with in the courts have not reached their discharge point, the cases discussed in this book often fall into that category. Such decisions focus on the remedial issues which arise in respect of the period t3-t4. Not all issues in contract law fit neatly into the two-stage analysis suggested by the contract continuum. For example, a particular kind of breach of contract — termed an ‘anticipatory breach’20 — may occur in the period t2–t3 notwithstanding that performance of the contract does not begin until point t3.

Some issues, but principally issues of mistake and illegality21 may, depending on the particular circumstances, be relevant to either period.

Types and Kinds of Contracts [1-12] Simple contracts and specialties. A ‘contract under seal’ or ‘specialty’ contract is one which is expressed in a document executed in accordance with formalities applicable to deeds. All other contracts, whether written or oral, are ‘simple contracts’ or contracts ‘by parol’. This book is concerned with simple contracts.22 [page 8] Relevantly, the significance of the distinction between deeds and simple contracts is that consideration is not required for the former. However, a contract may be expressed in a deed even though consideration is present. In other words, although not all deeds are contracts, some contracts are also deeds. [1-13] Unilateral and bilateral contracts. All contracts necessarily involve two (or more) people, referred to as ‘parties’. If both parties make promises, the contract is ‘bilateral’. If there is only one promisor the contract is ‘unilateral’. For example, assume that Helen has lost her dog ‘Dusty’, a valuable animal for which she is willing to pay $100 for its return. She might enter into a contract with John under which he promises to use his best endeavours, for a period of one week, to find the animal. Since each makes a promise, the contract between Helen and John is bilateral. Alternatively, Helen might place a newspaper advertisement offering to pay $100 reward to anyone who finds Dusty. If John sees the advertisement and returns Dusty in order to claim the reward,23 a unilateral contract is formed between Helen and John under which only Helen is a promisor. [1-14] Specific categories of contract. Contracts can also be classified according to their subject matter. Thus, sale of goods contracts are different from insurance contracts, sale of land contracts, and so on. The utility of classifying a contract depends on the issue being dealt with. Classification is important if the legal principles applicable depend on the

contract being of a particular type. For example, contracts for the sale of goods are governed by specific legislation24 which will not apply if the contract is one of, say, hire. In the absence of specific legislative provisions, the theory is that the same principles of law apply to all contracts, irrespective of their subject matter. This is sometimes termed the ‘unitary theory of contract’.25 The view that there are as many laws of contract as there are different kinds of contracts — sale of goods, insurance, employment and so on — was abandoned a long time ago. General texts such as this book can exist only because there is a general theory. However, one consequence of the increased role of statute is to cast doubts on the utility of the unitary theory.

Function and Importance of Contracts [1-15] All you need is a contract. In a very important sense, a contract is simply a means to an end. Assume that Janet, whether for private or commercial reasons, has a desire or a need for a particular brand of personal computer (Brand X). In order to satisfy that desire or need, Janet must find another person willing to supply the computer. Assume that ABC Ltd conducts a business which includes selling Brand X computers. Contract provides the means by which Janet can satisfy her desire or need. Assuming that she is willing to pay the price at which ABC Ltd is [page 9] willing to sell, all she has to do is enter into a contract with ABC Ltd. Similarly, from ABC Ltd’s perspective, the exchange occurs because ABC Ltd has a need to sell. Because contract functions as a way of satisfying needs and desires on mutually acceptable terms, it is not actually essential for a contract to be legally enforceable. That the exchange — goods or services for money — actually occurs is sufficient. However, when the contract takes the form of an exchange of promises, the fact that legal sanctions may be brought to bear for breach of contract promotes confidence that promises will be honoured. In cases where performance is not simultaneous, this confidence allows one party to give credit to the other.

[1-16] Contracts make the world go round. Think of how many contracts you have entered into over the past few weeks. Add to that all the contracts which were necessary for those contracts to be possible; for example, assume that you purchased an electric toaster. Your purchase depended on many other contracts having occurred — for the supply of raw materials to the maker of steel and other components, for the supply components to the manufacturer, employment of the manufacturer’s workforce, and so on. Now multiply that figure by the large number of similarly placed consumers and take into account that this all happens every day of the week. It is obvious that millions of contracts are entered into in Australia every day. Moreover, it happens the world over. It can readily be seen that, like love, contract makes the world go round. [1-17] Institutional backing. Contract is a coherent basis for exchange. It is used very frequently. The rights of parties under their contracts depend on the rules, principles and statutory provisions which make up the law of contract. Society has an interest in the formation and enforcement of contracts. Therefore, the legal system permits private rights to be enforced in the courts.26 Where necessary, courts make orders requiring people to perform their contracts, or to pay compensation for not doing so. These courts are created by society for the orderly settlement of disputes, including contract disputes. On that basis, contract is more than a means to an end: contract is an institution in its own right. If contracts were not enforced they would still be entered into, but the risks would be much higher. Sanctions are therefore an important part of contract law. A breach of contract is a wrongful act for which the law provides a remedy. The principal remedy is damages, that is, compensation for loss and damage caused by the breach.27 The remedies available in relation to contracts provide a security base for transactions which goes further than merely conferring compensation rights. Accordingly, in appropriate cases a contract may be specifically enforced.28 [1-18] Contracts as risk allocators. Contracts are risk allocators. Consider the SAMPLE SALE OF GOODS CONTRACT. Buyer Ltd needs a supply of Onion Seed in [page 10]

June. Assume that in March the market price for the quantity required is $1000. Buyer Ltd can protect itself against the risk that the market price will increase in the period between March and June by entering into a contract with Seller Ltd under which Seller Ltd agrees in March to supply the desired quantity in June for $1000. Seller Ltd then bears the risk that the market price will rise. Of course, Buyer Ltd still bears a risk: the price of Onion Seed may fall. However, the important point is that the risk of a change in market price has been allocated by the bargain in a way which both Buyer Ltd and Seller Ltd find acceptable. Risk may also be allocated in a way which has little to do with market price movements. Assume that Denise owns a house worth $300,000; that is, it would cost that much to rebuild if destroyed by fire. If a fire occurs, Denise may not have enough money to rebuild, and she might therefore have to sell the land and acquire a cheaper residence. Fire is therefore a risk which is too great for Denise to take herself. Accordingly, Denise will obtain insurance cover. Thus, for a premium of $1000 per year, the Generous Insurance Co Ltd agrees to insure Denise’s house, and to pay her $300,000 if it is destroyed by fire. By taking out the policy Denise reallocates the risk in a more acceptable way. If Generous Insurance pays her $300,000, Denise will have sufficient funds to build a new house. The fact that the law of contract protects Denise’s rights (and, of course, those of Generous Insurance) makes the insurance contract viable. In most cases, it can be assumed that the promises which each party makes are of equal value. Thus, in the SAMPLE SALE OF GOODS CONTRACT, the performance which each party promises to make is, in economic terms, equivalent to the other party’s performance. But an interesting feature of the insurance example is that Generous Insurance has promised to pay a greater sum than Denise has agreed to pay. Indeed, the latter’s payment is only 0.33% of the former’s. Moreover, even though Denise pays yearly, the total of her payments will never equal $300,000. Of course, Generous Insurance will probably never come under an obligation to pay anything. Whereas in the sale contract each party desires the event which triggers the other’s performance to occur, Denise does not want her house to burn down. Generous Insurance’s obligation to pay is activated by a fortuitous event. The proportion which the insurance premium represents of the sum which Generous Insurance has agreed to pay (0.33%) exceeds its assessment of the likelihood (probability) that the fortuitous event will occur in a given year. The difference between the two enables Generous Insurance to make a profit. [1-19] Contracts as economic activity. As individuals, our perspective on contracts is necessarily a micro-perspective: we see the contract world through

the windows that our individual contracts provide. Clearly, however, there is also a macro-perspective: the perspective of economic activity as a whole. The frequency of contracts is a measure of economic activity. Accordingly, the volume of money moving within the economy varies directly with the level of contracting: the more contracts the more money (and other items of wealth) changes hands. In providing rules for exchange, contract law is a means for the creation of wealth, employment opportunities, acquisition of property, and so on. [page 11] Economists dispute the importance of regulating consumer spending as a tool for regulating the economy. However, it is sufficient for our purposes to note that the level of contracting activity will both affect and be affected by price movements, and that the economy depends on contract being a healthy institution. Notwithstanding the obvious economic significance of the contract institution, courts very rarely address overtly whether the institution operates efficiently. Clearly, this is something in which society has a vested interest. However, judges are not usually also economists, and society is not likely to be well served by the work of amateurs. At best, courts have regard to economic impact in a fairly rudimentary way.29 The objective of a court’s adjudication is to protect the rights of individuals, and to resolve any dispute between them. If the law is successful in that, it will encourage people to contract, to everyone’s benefit. Efficiency is nevertheless important. Contract law should encourage efficient allocation of resources and risks. The obvious success of the institution within the economy suggests that contract rules operate efficiently. Economists may say that market forces operate to ensure that each individual contractual allocation of the risk of non-performance is efficient. However, this makes certain assumptions about how market forces operate. In particular, it is assumed that there is perfect information and that if a supplier is only prepared to contract on terms which place a disproportionate burden on the other party, that party will go elsewhere. The reality is that people do not have perfect information, and it may well be that everyone in a particular market will attempt to contract in a way which allocates a disproportionate amount of risk to the ultimate consumer.

Accordingly, limitations on freedom of contract (particularly in legislation) protect individuals without too much concern for whether this encourages efficiency in the market.

Some Fundamental Concepts, Principles and Ideas [1-20] Good faith as the essence of contract.30 It is basic that a promise, once made, should be kept.31 Contract is a successful institution not only because people need to contract but also because they have faith in their contracts. They respect their promises and also the sanctions which the legal system provides.32 Contracts are almost invariably performed as expected, and, generally, each party’s expectation that the other will perform is realised. But contract would be more or less useless if recourse to the courts was always necessary to enforce contracts. Contract only works as successfully as it does because people have faith in each other and are willing to trust that they will perform their contracts without being [page 12] taken to court. In sum, we keep to our contracts because this is conduct which we regard as normal behaviour. This is one sense in which good faith is the essence of contract. It would be surprising, given the obvious need for people to respect their contracts, if the rules and principles which make up contract law did not embody and promote good faith. The idea that a promise, once made, should be kept is both obligatory and usual behaviour. The latter reflects a moral perspective. The concept which makes usual behaviour coincide with obligatory behaviour is good faith. There are countless illustrations, throughout the length and breadth of contract law, of the way in which rules and principles promote or give effect to the ideals associated with good faith. ‘Good faith’ means honesty and respect for the transaction as a matter of substance rather than mere form. For example, in order to encourage the performance of contracts, a party cannot avoid contractual responsibility on the basis of a minor breach by the other party.33 It is sometimes suggested that the law should go further, and recognise as an

implied term34 of all contracts that each party will act in good faith. As a matter of law, that suggestion is not correct.35 Nevertheless, in particular contexts, the law gives overt recognition to a concept of good faith going beyond honesty. And in relation to particular contracts courts have on occasion rationalised the more stringent requirement of ‘reasonable’ conduct on the basis of ‘good faith’.36 [1-21] Freedom of contract. A view which is certainly elementary, if not fundamental, is that in a democratic society people should enjoy freedom in their contracting. In the 19th century there was considerable reluctance to countenance fetters on this principle.37 Freedom of contract comprises freedom to decide: ■ with whom to contract; ■ whether or not to contract; and ■ the terms of the bargain. In practice there is not, and never has been, such unbridled freedom. Monopolies have been with us for centuries, and when an individual wishes to enjoy a product or service there are frequently limitations on choice of contracting party or contract terms. Nor is complete freedom of contract socially desirable. Decisions not to contract with particular persons may be based on grounds which society regards as unacceptable. Legislation therefore restricts the freedom of individuals to make contractual decisions on the basis of colour, race or sex. The idea that there should be freedom to decide whether or not to contract is also qualified. For example, [page 13] legislation requires the owners of motor vehicles to take out policies of insurance to provide compensation to persons injured by the use of the vehicle. The most common statutory restriction on freedom of contract is to be found in qualifications to the idea that people should have complete freedom as to the terms which govern their bargain. For example, the ACL entitles an individual who has contracted to receive goods, services or land under a ‘consumer contract’ to challenge a term on the basis that it is unfair.38 Not all the restrictions on freedom of contract are statutory. The courts have developed rules which narrow the principle, or prevent its abuse. These include:

■ rules providing remedies where false information is provided, or improper pressure or unconscionable conduct is employed, during negotiations;39 ■ rules relating to contractual ‘penalties’;40 and ■ most generally, rules of public policy.41 For example, there is no freedom to agree to a contract to commit a crime. [1-22] Privity. The concept of privity of contract42 has two aspects: (1) only the parties to a contract may be subjected to the burdens which the contract imposes; and (2) only the parties to a contract are legally entitled to enforce its provisions. It would be most undesirable for A and B by their contract to be able to impose a burden on C without C’s consent. However, the virtues of the second aspect of the rule are not always self-evident. Assume that Annabel and Beatrice enter into a contract under which Annabel agrees to supply Beatrice with goods and Beatrice promises Annabel that she will pay Cyril $1000. Although the contract between Annabel and Beatrice is perfectly valid, because he is not a party to the contract, Cyril cannot enforce it. Therefore, at common law, if Beatrice fails to pay Cyril, only Annabel can enforce the contract.43 [1-23] The compensation principle. Saying that every breach gives rise to an obligation to pay damages44 does not explain the basis on which damages should be assessed. In redressing the wrong, should the law penalise the wrongdoer, or merely compensate the person wronged? The objective of the law of contract is to compensate, not to punish. The ‘compensation principle’ states that the person wronged should recover no more than reasonable compensation for loss or damage suffered because of the breach.45 In fact, the tendency of the law is to undercompensate rather than overcompensate. [page 14] The compensation principle also assumes that the law should generally ignore the reason why the contract has been breached. Therefore, loss caused by intentional breach is assessed without regard to the element of wilful misconduct. Again, the concern to redress loss suggests that if no loss is suffered

substantial damages cannot be recovered, even if the wrongdoer has benefited from its breach.

Rights, Remedies and Litigation General [1-24] Rights and remedies. A remedy is something awarded by a court, as opposed to a right which may be enforced without the need to have recourse to the courts. For example, a distinction is drawn between termination of the performance of a contract for breach or repudiation and the recovery of compensation in respect of loss suffered because of a breach of contract. The former is a right; the latter a remedy. A plaintiff-promisee may therefore elect to terminate a contract for breach (if sufficiently serious) without going to court; whereas damages are not recoverable without a court order.46 [1-25] Self-help. The distinction between rights and remedies is a technical one. Viewed from a wider perspective, rights such as termination for breach are really remedies. The broader concept includes a self-help remedy. Mentioning self-help leads to the question of how far contracting parties may take matters into their own hands. As a general rule, the law of contract does not favour self-help beyond obvious matters such as termination. For example, if Fred refuses to deliver the car he has agreed to sell to Kim, there is no justification for allowing Kim to go to Fred’s house and take the car without permission. Fred is still entitled to protection from trespass (and also theft if ownership has not passed to Kim). The fact that Kim has rights in contract is not sufficient to justify infringement of Fred’s rights — which are arguably more basic. More generally, to allow self-help in this form would be to encourage behaviour which society finds unacceptable. There is an element of public interest or policy which favours the orderly and civilised settlement of disputes through formal processes. [1-26] Litigation a last resort. The general law of contract has been developed in the context of the litigation of commercial contracts. However, people generally try to settle their disputes without going to court.47 Even for parties to commercial contracts, litigation is regarded as a last resort, that is, after all other avenues for settlement of a dispute have been exhausted.

[page 15] A variety of factors influence commercial people in deciding not to litigate: cost, business disruption, commercial reputation and the fear of losing valued customers. The cost element is often prohibitive when an ordinary consumer considers whether to go to court.48 This leads to a very important question in the law of contract. To what extent ought the law to be reworked to reflect the position of consumers for whom litigation is not an option? While contract law is largely in the hands of the courts there is little that can be done because they see their task as expounding and applying principles applicable equally to consumers and business people. However, alternative dispute resolution procedures provide both business people and consumers with further options.49 [1-27] Wider issues. The topic of remedies is at the heart of the law of contract. Whether or not the parties favour litigation, it is an important element of a contractual relationship. Contracts therefore often include provisions which restrict remedies. Such clauses, if valid, would make recourse to the courts even more difficult than it is. Intervention by the legislature is also important. The impact on contract law may be direct or indirect. Direct interference occurs, for example, in the prohibition on the use of exclusion clauses in relation to certain contracts.50 Indirect interference describes a wide variety of protective controls. Restrictions on the importation or sale of certain types of goods, the imposition of safety standards for some goods, the testing of drugs and the imposition of penalties for certain types of conduct all serve, in an indirect way, to reinforce contractual rights.

Resolving Contractual Disputes [1-28] How are contractual disputes resolved? One aim of this book is to show how contractual disputes are resolved. The book’s main vehicle is analysis of the rules and principles of contract law — as expounded in the decided cases. A subsidiary vehicle is to be found in the problem questions. In order to assist students and teachers the issues raised by each of the problems are identified and some guidance is provided on how those issues should be dealt with. Relevantly, there are two aspects of dispute resolution: (1) who resolves the disputes; and (2) the process used.

[1-29] Resolution without litigation. Before the parties to a contract go to court they will try to resolve the dispute themselves. There are a number of possibilities. All rely on the law of contract. One is to invoke a clause in the contract itself. For example, if the parties are corporations, they may have agreed for disputes to be resolved by discussions [page 16] between senior officers of the parties. Alternatively, the contract may provide for settlement of a dispute in accordance with the report of an expert, such as an engineer. A second possibility is the appointment of a third person to mediate the dispute. The parties may have inserted a mediation clause in the contract. (If not, there must be a separate agreement.) The task of the mediator is not to determine who is right or wrong. Rather, it is to assist the parties to resolve the matter themselves. Giving effect to the mediated resolution may involve a second contract by way of settlement. A third possibility is a settlement agreement. For example, assume that Alan claims that he is owed $10,000 by Betty under a contract. Betty might dispute that and say: ‘Rather than go to court to see whether you are correct, I will pay you $5000 if you treat that as fulfilling my obligation’. Alan’s reply might be: ‘I will accept $7500’. If Betty then agrees, there is a settlement contract which discharges the alleged liability to pay $10,000. As where effect is given to a mediated settlement, the process involves the creation of a second contract to solve the problems of the first. Finally, the parties may appoint a person to arbitrate the dispute. Again, the parties may have inserted an arbitration clause in the contract. (If not, there must be a separate contract.) Unlike litigation, arbitration is consensual. Arbitration may involve steps similar to litigation before a court, and the arbitration award is enforceable in much the same way as a court’s judgment. But there may also be significant differences. In particular, opportunities to appeal may be much more limited than where a dispute is litigated through the courts. [1-30] Resolution by litigation. If a court is called upon to resolve a dispute it will do so impartially, by applying the terms of the contract, the rules and principles of the law of contract and statute. Although trial procedures vary

depending on the nature of the claim and the court, the principal steps may be explained as follows. First, each party will document and serve on the other the basis for the claim and the defence to the claim. The purpose is to narrow the area of disagreement — so that they can ‘join issue’ on specific matters that must be determined in order to resolve the dispute. Second, there may be various inquiry processes, and each party may be entitled to require the other to produce relevant documents. Third, unless agreed by the parties, it will be necessary to determine the facts. There is a hearing (trial) at which evidence is given orally or by document (affidavit). The court must form views on the background to the contract, the relevant conduct of the parties and the circumstances (including the merits) of the dispute. Fourth, the parties’ legal representatives make submissions on the relevant law, and how the law should be applied to the facts. Although this will include oral argument before the court, even at the trial level written submissions may be required. Fifth, the court must reach a decision, by applying the law to the facts. Judgment is then given. The court will also decide who must pay the costs in the matter. Generally, costs follow the result, so that the unsuccessful party will have to pay the [page 17] successful party’s costs. Only rarely will this award cover all of the successful party’s actual costs. Therefore, even the successful party will usually be out of pocket. Sixth, if a money judgment is not satisfied, application may be made for the sale of the unsuccessful party’s assets to meet the judgment. There may be an appeal to a higher court. Generally, the factual decisions of the trial judge will remain, so that the essential task of the appellate court is to form its own view on the law after written and oral submissions. In most cases the order will be ‘appeal dismissed’ (the trial judge’s decision is affirmed) or ‘appeal allowed’ (the trial judge’s decision is reversed). Costs will be awarded accordingly.

[1-31] Access. Because litigation is a last resort, and a very expensive process, various forms of alternative dispute resolution are also in use.51 At the level of a consumer dispute, unless a large amount of money is at stake, going to court is simply out of the question for most people. Parliament has, however, established various tribunals with jurisdiction to hear and determine particular classes of contractual or contract-related disputes. Examples are industrial tribunals in relation to employment disputes and consumer and small claims tribunals for disputes arising out of the supply of goods or services to consumers. [1-32] Resolution by a student. Of more immediate interest is how students should resolve contract problems posed by their teachers. For a problem question, because the facts are stated or assumed in the question itself, the closest analogy in the processes discussed above is that employed by an appellate court. In essence, the student must write an opinion.52

Development of Modern Contract Law Origins [1-33] Introduction. In order to appreciate modern contract law we need to trace very briefly its origins and history. If contracts are thought of as the means by which people exchange items of wealth, the contract concept has a long history indeed. It has been with us ever since the day our very distant ancestors discovered that it could be beneficial to barter their possessions. It therefore seems a bit odd to say that, in the scheme of things, a law of contract is a very recent phenomenon. Yet, that is the position: what we see as the modern law of contract emerged in England in the 18th century. Indeed, little more than a handful of the cases cited in this book were decided before 1850. [1-34] Origins. Contract law has its origins in cases decided late in the 16th century when consideration became the basis for the enforcement of promises not made by deed. But the modern law bears little resemblance to those cases. Moreover, the evolution of the concept is so bound up with court procedures that [page 18]

it is very difficult to give a meaningful account of how the current position has been reached. Today, we tend to see consumer contracts as typical contracts. But in the early days of 17th century England a dispute in relation to a transaction such as the purchase of cloth would have been resolved informally or through customary processes. Even merchants’ contracts would have been debated before other merchants. Courts presided over by judges appointed by the state (the Crown) were only concerned with disputes in relation to particular kinds of rights and subject matter (which included documents under seal). For example, if a party to a deed wished to enforce it, the proper form of action was an action in covenant or debt. No generalised law of contract was needed because the focus was on specific claims or ‘forms of action’ conceived in terms of various ‘writs’. The only categories of wrong were those for which a writ was available. Because ‘wrongdoing’, rather than agreement, was the focus for inquiry, even the simple idea central to the law of contract that a person should be liable not only for not doing something (‘nonfeasance’), but also for doing something imperfectly (‘malfeasance’), did not receive formal recognition for a long time. The law of contract seems to have emerged out of what we now call the law of ‘tort’. Trespass ‘on the case’ became available in respect of purely private wrongs; for example, provision of medical services causing injury to the plaintiff’s person. The association between contract and wrongdoing is also illustrated by ‘breach of warranty’. Assume that an art dealer is trying to persuade you to buy a painting but you are uncertain of who painted it. The dealer might say to you: ‘I guarantee that this painting was painted by’ a particular artist. You then buy the painting. We term the express statement a ‘warranty’. It is an undertaking of contractual responsibility for the accuracy of the statement. If the statement is wrong, the dealer is liable for breach of contract. However, for a very long time, the dealer was regarded as liable for the tort of deceit, even if the dealer believed the statement to be true.53 [1-35] Assumpsit. Eventually, the idea took hold of a person being bound by a promise because of the assumption of a duty to perform. The modern concept of contract therefore began to emerge in the development of various forms of action in assumpsit. In the context of the provision of services, the plaintiff would allege that the defendant undertook to do the work, allege the breach and claim damages. Moreover, by the end of the 18th century the action for breach of warranty ceased to be seen as a tort, and assumpsit was used for actions on warranties in contracts of sale.

The extension of assumpsit was very important. But it also raised a problem. Should all promises be enforced? Emphasising the idea of exchange which characterises the modern law,54 the English courts did not accept that assumpsit should lie in respect of any and every promise. There had to be some reason or [page 19] ‘cause’ for the promise or its enforcement. While aspects remained uncertain until the 19th century, this hardened into the concept described earlier55 as ‘consideration’. [1-36] Executory promises. Adoption of the concept of consideration related contract law to ‘bargains’. This would have been a limiting approach had the view been taken that consideration could be established only by an exchange of performance, such as money for goods. Accordingly, by treating a promise as ‘good consideration’ for another promise,56 the law recognised executory promises as a ‘good’ or sufficient consideration.57 This served to give the concept of bargain a very broad scope. It meant that a contract would become binding before any promise was due to be performed. Therefore, consideration was not equated with the actual receipt of performance: the promise itself is the relevant benefit. An integral feature of modern commercial contracting is for performance to be postponed.58 The recognition of an executory promise as consideration makes it possible to regard those contracts as binding from the moment of formation. Any failure to perform a promise in accordance with its terms is simply a breach of contract.

Contract Doctrine and Theory [1-37] Contract doctrine. Because contracting is such an everyday phenomenon, and because contracting is an essential feature of economic activity, the community has a vested interest in contract. Three developments in the 19th century contributed to the recognition of a general law of contract.59 First, changes to the English court systems meant that contract disputes of all kinds were resolved within a centrally administered court system.60 Second, prevailing philosophies dictated that, in the interests of certainty, contract rules

should be systematic and coherent. Third, contract came to be taught to students by university academics, rather than by practitioners. This led to textbooks being written which presented contract within a more systematic theoretical framework than books written by and for the legal profession. Therefore, so-called ‘classical’ contract theory refers to a creation of the 19th century, developed in England for the purposes of English commercial transactions. The political and economic philosophies of that time, including notions of freedom of contract, individualism, competitiveness and laissez-faire, necessarily influenced the content of the law. This was reflected in a high regard for ‘doctrine’. The idea of contract doctrine is that the law can be set out as rules and principles applied within a pre-determined conceptual framework against which all [page 20] contracts are tested. This applies not only to the conception of ‘contract’ but also to components of contract law. For example, because application of the legal concept of frustration depends on the satisfaction of particular legal requirements, there is a ‘doctrine’ of frustration.61 [1-38] The unitary theory. The idea that there exists a single body of law applicable to all contracts reflects the doctrinal approach. As has already been mentioned,62 the view that there are as many laws of contract as there are different kinds of contracts — sale of goods, insurance, employment, and so on — has been rejected. Textbooks on the law of contract expound a general theory. The unitary theory may, however, be questioned from two perspectives. Many important contracts, including those involving the provision of credit, employment and sales of goods, are heavily regulated by statute.63 In addition, it has been doubted that contract law exists as a distinct body of law, separate from the law of tort and restitution.64 Nevertheless, even where a particular kind of contract has been subjected to special treatment by the legislature, reliance will still be placed on the conception that a contract is a promise which the law will enforce. That core concept will still attract a great deal of general principle. It follows that statute modifies — rather than replaces — the application of contract law. Indeed, it is impossible to find any contract to which much of the general law of contract does not apply.

[1-39] Objectivity. A central concept of contract law is ‘intention’. Most issues are resolved by reference to what is conceived to be the intention of the parties. In general, that intention is determined objectively. Accordingly, where a written contract is at issue, the concern is to understand what the parties have said, rather than what they meant to say.65 Accordingly, in relation to a contract between Kristin and Peter, intention is determined on the basis of what each has led the other reasonably to believe to be their intention. This criterion is applicable to contract formation66 as well as the content and meaning of their contract. To decide whether Kristin has made a promise to Peter, the relevant inquiry is what a reasonable person in his position would conclude. Similarly, if a promise is made by Kristin, the meaning of that promise is determined by what a reasonable person in Peter’s position would regard as the meaning. What Peter may actually have thought is not the test. Since the objective theory applies throughout most of contract law, many other examples could be given.67 Three points are important. [page 21] First, in stating that an objective approach is applied there is almost always a reference point which is one of the parties. Generally, courts do not look for the conclusions which a well-educated ‘fly on the wall’ would reach. Therefore, the reasonable person whose views are acted on is assumed to stand in the position of one or other of the parties. Second, the actual intentions of the parties — to which the contract is presumed to give effect — are important. Thus, there is no point in Peter claiming that a reasonable person in Peter’s position would have regarded Kristin as having made a promise if Peter actually acted on a different understanding.68 Third, entering into a contract is a commitment to the contract institution. Therefore, for matters on which Peter and Kristin have not expressly stated an intention, the rules and principles of contract law are used to attribute an intention. [1-40] Contract and the law of obligations. Taken together, contract law, tort law and restitution make up the common law of civil obligations. The policy considerations of the components are diverse. It is therefore difficult to make

comparisons between them without also making generalisations. It would be wrong to draw sharp distinctions.69 The growth of the tort of negligence in the past 50 years has been one reason for suggestions that the importance of contract has been reduced.70 However, each component does have general characteristics. Frequent references to the importance of ‘intention’ of contracting parties, ideas of freedom of contract and good faith all emphasise that contract is a consensual relationship. Responsibilities are undertaken voluntarily. Therefore, a contract between A and B involves a consensual assumption of responsibility to perform the promises agreed. This establishes a contrast with tort, where liability is imposed by law independently of the will of the parties. Principles regulating the tort of negligence occupy a fairly central place. If B suffers injury by reason of A’s negligence, the liability of A to compensate B will, in the absence of contract, depend on the imposition of a duty of care, owed by A to B.71 Once we move away from liability for negligence the gap between contract and tort widens. It seems clear, for example, that if A trespasses on B’s land, or defames B, the liability of A to pay compensation has nothing at all to do with contract law. Similarly, the consensual basis for contract differs from the imposed liability to make restitution for a benefit conferred.72 Restitution is concerned with cases in which a person is obliged to pay money to another even though there is no contract, or no effective contract. If B confers some benefit on A, the basis on which A may come under an obligation to make restitution to B is that the receipt or retention of the benefit unjustly enriches A. If unjust enrichment is present, the law imposes the obligation (to make restitution) where none was agreed. [page 22]

Hypothetical At times the distinction between tort and contract is subtle. Consider, for example, the position of John who advises Caterina that buying shares in XYZ Co Ltd will produce a profit. It may be possible to say that John has assumed some responsibility in relation to the investment. But the mere fact that Caterina buys shares, and that the company turns out to be a bad investment, does not mean that John is liable in contract to Caterina.

There is no element of exchange for any assumption of responsibility by John: Caterina has not provided consideration. However, John has expressed an opinion, and if he knew that there was no basis for the opinion Caterina may prove tortious liability for fraud in relation to her decision to buy the shares. In the absence of fraud, Caterina must establish the breach of a duty of care. If so, Caterina is entitled to compensation for loss of money on the investment if she relied on the advice.73 The hypothetical also raises a controversial question of contract law, namely, how the law should respond to reliance by a person to whom a statement is made. If detrimental reliance counted as a form of consideration there would be a contractual relationship between John and Caterina potentially giving rise to a liability to pay contract damages for bad advice. In some cases reliance may count as consideration, since a person may put forward as the price of a promise the other party’s reliance on the promise.74 However, this is fairly rare.75 Contract and restitution sometimes seem to cover the same ground. For example, if Caterina pays money to John under a contract in return for John’s promise to do something, a total failure by John to do so entitles Caterina to cancel the contract. Once the contract has been cancelled John must repay the money. The basis for John’s liability may be seen as restitutionary or compensatory. The former relies on the fact that it would be an unjust enrichment for John to retain the money; the latter relies on John’s failure to perform as a breach of contract. In the example, the significance of restitution is the fact that John may be held liable to repay even though he has a good defence to any claim for breach of contract.

Relevance of Contract Law [1-41] Don’t be fooled again. It goes without saying that contract is an extremely relevant subject. What may appear to be odd is that the study of contract is mainly concerned with examples of disputed transactions. The study of cases is an analysis of litigated contractual disputes. Because for most contracts no dispute arises, the study relates to atypical cases where something has gone wrong. Just what has gone wrong varies from case to

[page 23] case. But there is always a legal issue to be resolved in accordance with the law of contract. The dispute focuses attention on matters such as: ■ whether a contract was agreed; ■ what terms were agreed; ■ what the contract means; ■ whether the contract has been properly performed; and ■ whether the contract has come to an end. The Table of Contents of this book shows that these areas of dispute reflect topics for analysis; that is, contexts for expounding the law of contract. Contract rules and principles must provide bases for solving these problems. But it is more important for contract to evolve in a way which minimises the potential for such disputes. Accordingly, the law of contract is not simply a guide to how contract problems are solved, it is concerned with devising a socially acceptable and relevant mechanism for exchange which is enforced within the legal system. [1-42] Learning from problems. Each contract dispute is a problem to be solved. If contract law does not provide a satisfactory solution, there is something wrong with contract law. In this way, we learn about contract from problems that arise in the real world. One purpose of a contract text is to explain the problems (and solutions) within the framework of contract law as a coherent whole. The academic study of contract law necessarily involves critical analysis. We must constantly ask ‘How can we make it better?’. Your views on this are important. Equally, however, we must not lose sight of the fact that not only is the story of contract one of success rather than failure, but also that the number of disputed contracts is extremely small. Because contracts almost invariably succeed rather than fail we should be wary of reading too much into the fact that disputes do arise, and wary of suggesting general improvements on the basis of particular cases.

Features and Use of this Book

[1-43] Features. This book has been structured to highlight five distinct features which are intended to add value to the discussion and analysis of contract law within each chapter. ■ ‘Guide Glossary’ — defines words and terms frequently used in the book.76 This is not by any means exhaustive. ■ ‘How to’ Chapter — this is devoted to a discussion of how to do things which contract students must do, such as answering exam questions.77 [page 24] ■ Sample Contracts Chapter — this sets out in brief terms two SAMPLE CONTRACTS.78 One is a sale of goods and the other a contract for the provision of services. These are used for various purposes, including to illustrate principles.79 Each contains intentional errors. ■ Problem Questions Chapter — the problems are listed in chapter order. Some problems draw on material in other chapters as well. ■ Problem Solutions Chapter — the solutions are presented in the same way. They are not model answers.80 The solutions also include references to further reading. [1-44] Using this book. Contract law is primarily a case law subject. However, the subject is a very big one. At times, it is quite complex. Several features of the book are designed to eliminate complexity and to promote an understanding by problem solving. It is sometimes easier to illustrate particular issues by reference to the SAMPLE CONTRACTS and hypothetical problems than by using decided cases. The more specific features are: ■ Cases and Materials — the sixth edition of Cases and Materials on Contract Law in Australia81 contains extracts of many of the cases discussed in this book. These are flagged in footnotes.82 ■ Case studies — most chapters include one or more extended discussions of controversial or important cases. ■ Leading case, Hypothetical, Legal debate etc — to draw your attention to important aspects of contract law the logo and various selfexplanatory headings are inserted. ■ SAMPLE CONTRACTS — to highlight their use, references to the sample

contracts are shown in small capitals. ■ Quick quiz — each numbered chapter (other than this chapter) ends with a ‘quick quiz’. These contain simple questions. They include ‘true or false’ and multiple-choice questions. ■ Quick quiz answers — answers to the quick quiz questions are found at the back of the book. Abbreviations used in this book are set out in the Table of Abbreviations.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

Cf Pollock’s Principles of Contract, ed P H Winfield, 13th ed, Stevens & Sons, London, 1950, p 1. See [1-17]. See [1-30]. See generally Chapter 3. See generally Brian Coote, ‘The Essence of Contract’ (1988) 1 JCL 91 and (1989) 1 JCL 183. See further [HT-17]. See generally [29-01]–[29-07], [29-13]–[29-18]. See generally Chapter 29. See generally Chapter 27. See Chapter 35. See now Sale of Goods Act 1979 (UK). CISG regulates many international sale contracts. Other areas so regulated were bills of exchange and partnership. See National Credit Code. See ACL. See generally J W Carter and Andrew Stewart, ‘Commerce and Conscience: The High Court’s Developing View of Contract’ (1993) 23 UWALR 49; Andrew Stewart and J W Carter, ‘The High Court and Contract Law in the New Millenium’ (2003) 6 Flinders Journal of Law Reform 185. See also [HT-14]. See PGA v R (2012) 245 CLR 355 at 371; 287 ALR 599 at 606; [2012] HCA 21 at [25]. See further [1-11]. See [1-02]. See [15-05]. See Chapters 24 and 34. On deeds see [3-05]. It is assumed that the advertisement is properly characterised as an ‘offer’. See [2-06]. See also [1-08]. See further [1-38]. Arbitration awards are enforceable in the same way. See Chapter 27. See Chapter 29. See eg Hochster v De la Tour (1853) E & B 678; 118 ER 922 (see [18-16]), where the court was concerned to see that an economic resource (the plaintiff’s skills) could be used elsewhere. See generally J W Carter and Elisabeth Peden, ‘Good Faith in Australian Contract Law’ (2003) 19 JCL 155. But see Moschi v Lep Air Services Ltd [1973] AC 331 at 346.

32 33 34 35

36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75

See also [1-17]. See Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Nord) [1976] QB 44 at 71. See generally on implied terms Chapter 8. See CGU Workers Compensation (NSW) Ltd v Garcia (2007) 69 NSWLR 680; [2007] NSWCA 193. The matter was left open in Commonwealth Bank of Australia v Barker (2014) 253 CLR 169; 312 ALR 356; [2014] HCA 32. See further [14-12], [33-24]. Cf Redmond v Wynne (1892) 13 VLR (L) 39 at 46, 48. See [26-20]–[26-22]. See also [11-28]–[11-30] (exclusion clauses regulated by statute). See Chapters 25 and 26. See [27-51]–[27-56]. See Chapter 34. See generally Chapter 13. For exceptions to this rule see [13-04]–[13-11]. See [1-17]. ‘Reasonable compensation’ is a statement of the overall effect of the rules discussed in Chapter 27. But see [27-51] (agreed damages). See [1-29]. See [1-31]. See also [1-31]. See [11-28]–[11-31]. See [1-26]. See further [HT-18]–[HT-29]. See Healing Sales Pty Ltd v Inglis Electrix Pty Ltd (1968) 121 CLR 584. For discussion of the early history see Simpson, pp 240–7, 535–7. See also [1-01]–[1-02]. See [1-04]. See [1-04]. Cf Nichols v Raynbred (1615) Hob 88; 80 ER 238. Consumer contracts frequently differ from commercial contracts because the former may involve immediate gratification. See [1-02]. See also [1-08] (codifying statutes). These changes were adopted in the Australian colonies. See [1-07]. See Chapter 20. See [1-14]. Cf Commonwealth Bank of Australia v Barker (2014) 253 CLR 169; 312 ALR 356; [2014] HCA 32. See [1-40]. See [10-22]. That is, whether the parties have moved from t1 to t2 on the contract continuum (see Taylor v Johnson (1983) 151 CLR 422; 45 ALR 265). On the contract continuum concept see [1-10]. See eg [2-04] (offer and acceptance), [9-04] (signature of documents). See Carter, Construction, §9-23. Alternative causes of action may arise. See Chapter 33. See eg G Gilmore, The Death of Contract, Ohio State University Press, Ohio, 1974. If there is a contract, A may owe the same duty in contract and tort. See [30-06]. See [23-15]–[23-17]. Cf Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 (see [2-06]). Detrimental reliance is an element of promissory estoppel. The leading case is Waltons Stores

76 77 78 79 80 81 82

(Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513 (see [6-17]). See Chapter GG. See Chapter HT. See Chapter SC. See further [HT-05], [HT-09]. See further [HT-21]. LexisNexis Butterworths, Sydney, 2012. In addition, the names of cases extracted in Cases and Materials are indicated in bold in the table of cases. And any references to extracted cases in the Problems and Solutions Chapters are crossreferenced to Cases and Materials.

[page 25]

Part B

Is There a Contract?

[page 26]

Chapter 2

Contract Formation [2-01] Introduction. A key concern of contract law is to determine whether a contract exists. In defining a contract in terms of a promise that the law will enforce1 the law posits two essential ingredients: (1) promise; and (2) consideration. This chapter is concerned with the first ingredient. This can be expressed in terms of whether there is an agreement between the parties. Consideration is discussed in the next chapter. The two following chapters are also relevant. These discuss two legal propositions: ■ there is no agreement if the promise is too uncertain to be enforced;2 and ■ there is no agreement if the parties do not intend to create legal relations.3 [2-02] The negotiation process. It is perhaps easy to be misled by the transactions which as individuals we enter into every day, and to think that it is always easy to recognise whether or not there is a contract. Such contracts are not usually the subject of negotiations. For negotiated contracts, situations will arise where the question whether agreement has been reached is a difficult one. The principal method for determining whether a contract exists is by applying the rules of offer and acceptance. These rules were formulated in response to the sequence of postal communications which typified the process of negotiation by commercial people in the 19th century. There are difficulties in applying the rules on offer and acceptance to everyday transactions.4 Moreover, the ‘typical’ commercial negotiating process has changed since the 19th century. The post is now hardly ever used to negotiate commercial contracts. Electronic communication is more common and executed formal contracts (sometimes arrived at after many drafts) are used for nearly all significant contracts. For contracts transacted over the internet, standard forms are used. Analysis in terms of offer and acceptance is therefore not always appropriate. Moreover, a contract may be inferred from the conduct of the parties even though the requirements of offer and acceptance are not satisfied.5

[page 27] Nevertheless, provided that their shortcomings are borne in mind, the rules on offer and acceptance are still useful tools of analysis. [2-03] Offeror and offeree. A person who makes an offer of a contract is termed an ‘offeror’. Each person to whom the offer is made is known as an ‘offeree’. A contract results when the offeree accepts the offer in accordance with its terms and the rules discussed in this chapter. However, it follows from the discussion above that this is not the only way in which formation of a contract can be established.

Offer General [2-04] Definition. An ‘offer’ is an expression of willingness by one person (the offeror) to contract with another (the offeree) on the terms stated in the offer.6 It therefore confers on the offeree a facility or power, namely, to create a contract by doing what the offer requires. An offer has no further contractual significance: of itself it does not create a contractual liability or obligation. Whether an offer has been made is judged objectively. The legal character of a communication does not depend on the subjective views of the person who made it or the person to whom it was made. What matters is how a reasonable person in the position of the person to whom it was made would interpret the communication. For example, an expression of government policy to pay subsidies to the purchasers of certain goods is not an offer of a contract to pay a subsidy if it would not be so regarded by a reasonable person in the position of the people to whom it was communicated.7 [2-05] Persons to whom an offer may be made. It is for the offeror to decide to whom an offer will be made. The offer may be made to a named person, or to a described class of persons (such as anyone living in Smith Street, Newtown), or to an unspecified class, such as the community at large. Identifying the offeree is important in cases where ‘acceptance’ is alleged to be ineffective because the person who purported to accept it was not intended to have the benefit of the offer. This is discussed later.8

[2-06] Offers distinguished from other communications. There is no rule that communications of a particular kind, such as newspaper advertisements, are (or are not) offers. It is usual to distinguish offers from invitations to negotiate (invitations to ‘treat’) and mere sales talk (‘puffs’).9 Such communications are not offers. [page 28]

The distinctions can be illustrated by reference to the classic case Carlill v Carbolic Smoke Ball Co.10 The smoke ball company placed the following advertisement in newspapers: £100 reward will be paid by the Carbolic Smoke Ball Company to any person who contracts the increasing epidemic influenza, colds, or any disease caused by taking cold, after having used the ball three times daily for two weeks according to the printed directions supplied with each ball. £1000 is deposited with the Alliance Bank, Regent St, shewing our sincerity in the matter. Having read the advertisement, Ms Carlill purchased a smoke ball at a chemist’s shop and used it according to the directions. Nevertheless, she contracted influenza and sued to recover the £100 — claiming that the smoke ball company was contractually bound to pay it.11 She argued that the advertisement was an offer which she had accepted. The smoke ball company argued that there was no offer because the newspaper advertisement was not intended to be taken seriously. The court rejected this argument. Lindley LJ said:12 We must first consider whether this was intended to be a promise at all, or whether it was a mere puff which meant nothing. Was it a mere puff? My answer to that question is No, and I base my answer upon this passage: ‘£1000 is deposited with the Alliance Bank, shewing our sincerity in the matter’. Now, for what was that money deposited or that statement made except to negative the

suggestion that this was a mere puff and meant nothing at all? The deposit is called in aid by the advertiser as proof of his sincerity in the matter — that is, the sincerity of his promise to pay this £100 in the event which he has specified. I say this for the purpose of giving point to the observation that we are not inferring a promise; there is the promise, as plain as words can make it. Bowen LJ said:13 It seems to me that in order to arrive at a right conclusion we must read this advertisement in its plain meaning, as the public would understand it. It was intended to be issued to the public and to be read by the public. How would an ordinary person reading this document construe it? It was intended unquestionably to have some effect, and I think the effect which it was intended to have, was to make people use the smoke ball, because the suggestions and allegations which it contains are directed immediately to the use of the smoke ball as distinct from the purchase of it. It did not follow that the smoke ball was to be purchased from the defendants directly, or even from agents of theirs directly. The intention was that the circulation of the smoke ball should be promoted, and that the use of it should be increased … And it seems to me that the way in which the public would read it would be this, that if anybody, after the advertisement was published, used three [page 29] times daily for two weeks the carbolic smoke ball, and then caught cold, he would be entitled to the reward … Was it intended that the £100 should, if the conditions were fulfilled, be paid? The advertisement says that £1000 is lodged at the bank for the purpose. Therefore, it cannot be said that the statement that £100 would be paid was intended to be a mere puff. I think it was intended to be understood by the public as an offer which was to be acted upon.

The case did not decide that every newspaper advertisement is an offer. Equally, however, it indicates that such a construction may be open even though the word ‘offer’ is not used. The advertisement used the expression ‘will be paid’ and this was construed as indicating an offer in the form of a promise. Note the way in which the court decided the issue by reference to what an ordinary member of the public would consider to be the smoke ball company’s intention, rather than by reference to what Carlill may actually have thought. This is the objective theory of contract at work. Similarly, applying the objective approach, the smoke ball company was not permitted to rely on any subjective intention it might have had not to make an offer. We can take this two steps further. First, the approach applies to other forms of communication such as letters, circulars, websites, television advertisements, and so on. Second, the ‘ordinary member of the public’ standard will not always apply. It was because the offer was made to the public that the court in Carlill treated that as the correct perspective. In a case where the communication is made to a section of the public, or to a particular person, it may be appropriate to apply a narrower criterion: a reasonable member of the class or a reasonable person in the position of the particular person to whom the communication was directed. [2-07] General propositions. Although it is difficult, and indeed quite dangerous, to present generalisations on what constitutes an offer, two propositions seem fairly well established.14 (1) A mere statement as to the price at which land, goods or services might be sold or provided is not an offer.15 Generally, a statement of price is an invitation to persons reading or hearing the statement to make offers. If a person advertises in a newspaper ‘car for sale, 2009 model, price $10,000’, this is not usually an offer to sell the vehicle at that price. It will usually be treated as an invitation to anyone interested to make an offer. At best, the statement of price indicates the approximate amount which the owner is looking for. (2) The display of goods in a retail store is not an offer to sell at the price stated, even if goods are being sold on a self-service basis.16 [page 30]

The display of items for sale at a self-service store is, again, an invitation to treat. Therefore, it is the shopper who makes the offer — by presenting the item to the sales assistant. Whether the same analysis is applicable to internet shopping depends on what the internet site says. If the seller makes it clear that it is willing to sell to anyone who provides their bank account or credit card details, the ‘display’ on the site is an offer. But if the seller is inviting shoppers to make offers to buy at the prices displayed on the site, there is no contract unless and until the offer is accepted. However, it should not be thought that, just because for the purposes of the law of contract there is no ‘offer’ in such situations, a person is necessarily entitled to refuse to sell at the price named. A person who does so may be contravening a statutory provision.17 [2-08] Tenders. Assume that a government department has goods to sell, or a person wishes to have a building constructed. One way in which the price can be maximised (or minimised) is to call for interested people to send in their offers. These offers are called ‘tenders’ or ‘bids’. Analysis of tenders in terms of offer and acceptance must take account of various possibilities.18 For example, if the person calling for tenders makes it clear that the highest (or lowest) tender will be accepted, the request for tenders may itself be an offer. Ultimately, the issue depends on the wording of the advertisement, but generally each tender is an offer. The tender process will therefore confer on the person calling for tenders the power to create a contract with the selected tenderer by communicating an acceptance.19

Duration General [2-09] The issue. How long does an offer last? This is an important question because an offer ceases to be available for acceptance once it has come to an end. The general rule is that an offer continues to be available for acceptance until the time (if any) specified, unless the offer is revoked by the offeror in the meantime and provided that the offeree has not already rejected the offer. This statement incorporates several of a number of specific bases for saying that an offer has come to an end: ■ prior revocation; ■ lapse of time;

■ failure of a condition; ■ death; and ■ prior rejection. In analysing these specific bases, ‘offer’ and ‘option’ are distinguished. [page 31] [2-10] Offers and options. As explained earlier,20 offers of themselves have no contractual force. They merely confer on offerees the ability to create a contract, by accepting the offer. Therefore, unless acceptance has occurred, an offer can be withdrawn at the will of the offeror.21 For example, if Verity offers to sell her business to Pete for $500,000, Verity is free to withdraw the offer at any time before Pete’s acceptance. It follows that even if Pete has made up his mind to accept the offer, a statement by Verity, ‘I withdraw my offer’, shuts Pete out. The ability to withdraw an offer at will is not entirely satisfactory. This can be overcome by ‘purchasing’ offers. Pete may not want to decide whether to buy Verity’s business for $500,000 until he has considered other businesses. By that time Verity might have sold to someone else. So Pete might say, ‘I will pay you $500 if you promise not to sell the business to anyone else for two weeks’. Assuming that Verity agrees, Pete has the benefit of an ‘option to purchase’. Once an option has been agreed, the offer is binding as a contract. Verity (as offeror) cannot withdraw the offer for two weeks.22 Acceptance of an offer in an option is termed ‘exercise of the option’.

Legal debate The nature of an option was debated in Goldsbrough Mort & Co Ltd v Quinn.23 Quinn granted Goldsbrough an option to purchase his lands. When Quinn refused to recognise Goldsbrough’s exercise of the option, it successfully sought an order for specific performance. Two views were expressed. Griffith CJ said24 that the ‘true principle’ is that an option is a conditional contract for valuable consideration to sell the property (or other subject matter). The ‘condition’ is that the optionee binds itself to perform the terms of the offer embodied in the contract. Isaacs J expressed a different view. He said25 the only feature ‘which

distinguishes an option from a mere offer is the consideration’. In his view, it remains an offer. The consideration ‘merely ensures its continuance, by creating a relation in which the law forbids the offeror retracting it’. In essence, an option is an offer accompanied by a promise not to revoke the offer. The matter is still being debated! The balance of authority probably favours the approach of Isaacs J.26 Even so, Griffith CJ’s approach will be appropriate in cases where the option is drafted as a promise to sell subject only to exercise of the option. However, it is doubtful whether the decision in any case would turn on the precise [page 32] legal nature of an option contract.27 On both views, because it has been purchased, an option is supported by consideration and is therefore contractually binding. In the paragraphs below, the word ‘option’ is used to describe an offer supported by consideration.

Revocation [2-11] At any time before acceptance. Because an offer has no contractual force of its own, it may be revoked (withdrawn) by the offeror at any time prior to acceptance. This is true even if the offer states a definite time period which has not expired.28 For example, Eliza might tell Michael that she has a book for sale at $100, offer it to Michael and give him one week in which to make up his mind. If the next day Eliza tells Michael she has changed her mind, that she withdraws her offer, it will be too late for Michael to accept. He cannot complain about not being allowed a week in which to decide whether to accept the offer. The rule that an offer is not rendered irrevocable, even if the offer says just that, has been criticised and does not apply to sale of goods transactions governed by CISG.29 Article 16 states that an offer cannot be revoked if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable. In addition, the offer cannot be revoked if the offeree has reasonably relied on the offer as being irrevocable. In the case of options, the position is quite different. Since the option operates as a promise not to revoke the offer prior to the time stipulated for expiry, the

optionor has no power to revoke.30 If, in the example above,31 Verity purports to revoke the option within the two-week period, the revocation is ineffective. Pete is still entitled to accept the offer.32 [2-12] Communication. To be effective, revocation of an offer must be communicated to the offeree.33 However, revocation need not be communicated by the offeror personally: it is sufficient for the offeree to be reliably informed.34 The rule applies even if the parties use the post to conduct their negotiations. [page 33]

Illustration In Byrne & Co v Leon Van Tienhoven & Co35 the defendants’ offer to supply goods was accepted by the plaintiff’s telegram which took effect at the time it was sent. The fact that the defendants had already posted a letter of revocation did not prevent the formation of the contract. Revocation would only take effect on receipt, which was after the contract had come into being. Communication may be a problem for offers made to a large number of people: the offeror may not know who has notice of the offer. In such cases the appropriate course is for revocation to be given the same publicity as the offer. If the offer was published in a newspaper it would, in principle, be sufficient for the offeror to publish its notice of revocation in the same newspaper.

Lapse of time [2-13] Lapse where time stipulated. Unless accepted, an offer which is stated to remain open for a specific period of time lapses on expiry of the specified period. The same is true of options. Accordingly, in the example above,36 if Pete did not accept Verity’s offer within the two-week period, it will have lapsed. [2-14] Lapse where no time stated. If an offer (including an option) does not specify a time period for acceptance, it must be accepted within a ‘reasonable time’.37 It is impossible to state in the abstract how long that will be. The concept is necessarily a relative one. Regard should be had to the form of communication, the subject matter of the contract contemplated and the form which acceptance must take.

The period need not be calculated solely by reference to the circumstances when the offer was made. Regard may also be had to later events, including correspondence in relation to the offer.38

Failure of condition [2-15] Concept of condition. The concept of ‘condition’, so frequently encountered in contract law,39 is a difficult one. In the present context it refers to a contingency which must be fulfilled if the offer is to remain open for acceptance. The rule is that an offer (including an option) terminates on the failure of any condition to which it was subject.40 The condition may be that a fact continues to be true. For example, John might offer to buy Bart’s champion racehorse ‘Bluey’ for $3 million, ‘provided’ that Bluey remains ‘sound’. If the horse becomes unsound prior to acceptance, the offer [page 34] terminates. Therefore, if Bart purports to accept John’s offer after the horse has broken a leg, the acceptance will be ineffective.

Death [2-16] Effect on offers. It seems that the general rule is that an offer terminates on the death of either the offeror or offeree.41 There is, however, authority for the proposition that if the offeror dies the offeree may accept at any time prior to the receipt of notice of death.42 This view reflects the notion that revocation is not effective until communicated, but arguably gives insufficient weight to the possibility that the offer was subject to an implied condition that both the offeror and offeree remain alive. Moreover, some offers are clearly personal to the offeror (or offeree) because of the characteristics of the contract contemplated. For example, if Smith, a wellknown artist, offers to paint Brown’s portrait for $1000, the death of either Smith or Brown terminates the offer. [2-17] Effect on options. Generally, death of the optionor or optionee will not terminate an option. Many options are given in respect of real estate and it

would be difficult to conclude that the option was intended to terminate on the death of either the intending purchaser or the vendor. In all cases it is necessary to construe the option. It may expressly state that it is terminated by death of the optionor (or optionee). If there is no express statement, death will terminate the option only if the option is ‘personal’ to the optionor or optionee.43 [2-18] Binding on whom? The question which no doubt springs readily to mind when it is said that sometimes an offer (or option) may be accepted (or exercised) notwithstanding the death of the offeror or offeree (optionor or optionee) is ‘Who can exercise the option or fulfil the obligations of the deceased?’. When a person dies, the deceased’s property passes to a ‘legal personal representative’. That is the person appointed by the will (as executor) or appointed by the court (as administrator). Assuming that the offer (or option) does not terminate on death, the property includes the subject matter of the offer (death of offeror) or the right to accept the offer (death of offeree). For example, if a vendor grants an option to purchase land: ■ the legal personal representative of the vendor is bound by the option (death of optionor);44 or ■ the legal personal representative of the purchaser is entitled to exercise the option (death of optionee).45 [page 35]

Rejection [2-19] Simple rejection and counter offers. An offer is terminated if the offeree rejects it, or makes a counter offer. A counter offer therefore has the same effect as a rejection.46 In Hyde v Wrench,47 an owner offered to sell his estate for £1000. The offeree initially said he would pay £950. Subsequently, however, he purported to accept the offer to sell for £1000. This was not an effective acceptance because the offer had been ‘killed’ by the counter offer (to pay £950). In Brambles Holdings Ltd v Bathurst City Council48 Heydon JA suggested that the general principle that ‘rejection of an offer brings it to an end cannot be universal’. He explained that a rejected offer could remain operative if ‘repeated,

or otherwise revised’, or if the offer could, for some other reason, be treated as ‘remaining on foot’. It seems that a counter offer takes effect on receipt by the offeror. That is the rule stated in art 17 of CISG in relation to a rejection, and the position should be the same in relation to counter offers. [2-20] Requests for information. An offeree does not reject an offer, or make a counter offer, merely by requesting further information about the offer.49 Assume that Elisabeth has offered to sell Greg a drum kit for $5000. If Greg asks Elisabeth whether she would be prepared to allow him to pay the price in two equal instalments over two months, the inquiry should not be regarded as a counter offer unless it is clear from the circumstances that Greg is saying ‘I don’t want to purchase the kit if I have to pay a single lump sum; but would be prepared to take it on these terms’. The issue is what interpretation a reasonable person in Elisabeth’s position would place on Greg’s statement.

Other matters [2-21] Acceptance after termination. If a person purports to accept an offer after it has terminated, the ‘acceptance’ will not of itself give rise to a binding contract. However, it is not entirely without legal significance, since it may be reasonable to treat the attempted acceptance as an offer which the original offeror may accept. Similarly, a counter offer is in effect an offer, and therefore capable of acceptance by the original offeror. For example, if Elisabeth offers to sell a drum kit to Greg for $5000, and Greg replies by stating that he will pay $4000, he cannot claim to have accepted Elisabeth’s offer. As a counter offer, his ‘acceptance’ is itself an offer. Elisabeth may decide to accept $4000 as the price, and therefore communicate acceptance. There is then a binding contract to sell at $4000.50 [page 36] [2-22] Unilateral contracts. It will be recalled51 that a unilateral contract is a contract formed by the exchange of a promise for an act. The classic example is Carlill v Carbolic Smoke Ball Co.52 Although the smoke ball company made a promise, Carlill did not. She merely did an act which was the acceptance of the

smoke ball company’s offer. Because she contracted influenza, she was entitled to be paid £100. It is typical of such unilateral contracts that the required act may take time to accomplish. Given the general rule that an offer may be revoked at any time prior to acceptance, the question is whether the power to revoke can be exercised after the offeree has commenced to accept the offer. Two issues arise: (1) what act of acceptance is contemplated by the offer? (2) when is it too late for revocation to occur? For example, what would have been the position in Carlill if the smoke ball company had purported to withdraw its offer before Carlill contracted influenza? These and other difficulties are considered after the rules governing acceptance have been discussed.53

Acceptance Requirements of Acceptance [2-23] Acceptance. The acceptance of an offer may be defined simply as compliance with the requirements stated in the offer. If the offer says nothing on the matter, two requirements will operate. The acceptance must be: (1) an unequivocal acceptance;54 and (2) communicated to the offeror.55 Only the person (or persons) to whom the offer was made may accept the offer. Therefore, if A makes an offer to B, and C purports to accept the offer, C’s ‘acceptance’ is simply an offer to contract which A may accept. The same principles apply to options. [2-24] Knowledge. It seems obvious to say that only a person with knowledge of an offer can accept it.56 If two identical offers are made by email, the requirement of knowledge means there is no contract: neither party’s communication can be an acceptance of the other’s offer. [page 37]

In practice, only if an offer stipulates for acceptance by conduct is the requirement of knowledge likely to create controversy.57

Unequivocal Acceptance [2-25] Effective acceptance. To be effective, an acceptance must be unequivocal, in the sense that a reasonable person in the position of the offeror would have no doubt that the offeree is accepting the offer.58 The clearest case is where the offeree says ‘I accept your offer’. However, this is not required. Any unequivocal indication that the offer is being accepted will do.59 But offer and acceptance must also correspond. A counter offer is not an acceptance of the offer because it does not ‘match’ the offer. An acceptance which deviates from the offer is not unequivocal, even if that deviation is minor, unless the deviation is for the benefit of the offeror. For example, where a potential buyer of goods responds to the seller’s offer but includes a different delivery date,60 or a seller of goods responds to a potential buyer’s offer to buy with a letter of acceptance which includes a clause granting the seller a right to suspend delivery,61 the acceptance will not be unequivocal. If an offer presents alternatives, acceptance must comply with one of those.

Illustration In Manufacturers’ Mutual Insurance Ltd v John H Boardman Insurance Brokers Pty Ltd62 an offer to renew an insurance contract gave the insured two alternative ways of accepting the offer: communication of acceptance to the insurer; or payment of the premium to the insurer. In fact, the insured paid the premium to its broker. That was held to be ineffective as an acceptance. The requirement of compliance with the offer is quite strict. However, the common law is qualified in its application to international sales by CISG. Article 19 states that an offeror may be bound by an acceptance which differs from the offer. There are two requirements: the acceptance must not materially alter the offer and the offeree must not object to the discrepancy. However, the illustrations in art 19(3) of material terms include additional or different terms relating to the price, payment, quality and quantity of the goods or extent of one party’s liability to the other. Therefore, in practice the provision will not operate very differently to the common law.

[page 38]

Communication General propositions [2-26] General rule. The general rule is that acceptance of an offer is not effective unless and until communicated to the offeror.63 Communication need not be by the offeree personally, but it is not sufficient for the offeree merely to decide to accept the offer. [2-27] Offeror rules! An offeror is entitled to specify the manner of acceptance. This may involve dispensing with the requirement of communication. For example, in Carlill v Carbolic Smoke Ball Co64 the terms of the offer made it clear that communication of acceptance was not required. However, there are limits to what the offeror can do. [2-28] Offeror cannot stipulate for silence. An offeror cannot impose a contract on the offeree by deeming silence to be acceptance.

Origin of the rule In Felthouse v Bindley65 John Felthouse decided to sell his farming stock at auction. Prior to the auction, the plaintiff (John’s uncle) offered to buy a horse for £30. However, John said he wanted £31.50. The uncle then offered to pay half the difference (£30.75). He added, ‘If I hear no more about him, I consider the horse mine’ at that price. John did not reply because he was quite happy with the offer. He told the defendantauctioneer not to include the horse in the auction. By mistake, the auctioneer put the horse up for sale and it was sold to a third party. The uncle’s action in tort against the auctioneer was based on the assumption that the uncle had become the owner of the horse because of the ‘contract’ with John. The action failed because the court held that the horse had not been sold: John never accepted the uncle’s offer. Similarly, if a publisher sends a set of encyclopedias to Jones, stating that unless they are returned within seven days the publisher will consider them to have been purchased for $42,000, a contract does not arise merely because Jones does not return the books in time. This approach is reinforced by statutory

provisions which make the practice of demanding payment for unsolicited goods an offence.66 In the commercial context there is potential for tension between the rule that silence is not acceptance and the way in which business may be carried on. Express agreement may be reached for a business relationship to include an arrangement under which offers which are not rejected within a specified period are binding contracts.67 Even if there is no express statement, the normal rule does not apply if [page 39] it can be inferred from a consistent course of dealings between traders that silence is acceptance. More generally, acceptance may be inferred from conduct.68 If only rarely, silence may sometimes amount to conduct.69

Parties at a distance [2-29] The postal acceptance rule. Where the postal acceptance rule applies acceptance is effective (and the contract is formed) at the time when the letter of acceptance is posted. Although cases on the postal acceptance rule still come before the courts, the post is now rarely used to negotiate contracts. The main reason for discussing it today is to see whether the considerations which support the rule are relevant to other forms of communication used to negotiate at a distance.

Origin of the rule The rule first emerged in Adams v Lindsell.70 The defendant made a written offer to sell wool on 2 September. This was received by the plaintiff on 5 September. He then posted a letter of acceptance on the same day. Prior to its receipt, the defendant sold the wool to a third party. It was held that acceptance occurred, and the contract was formed, when the letter of acceptance was posted on 5 September.71 Where the postal acceptance rule applies, the offeror is bound even if the letter of acceptance is never received.72 Of course, the offeree must be able to prove that a correctly addressed acceptance was posted.

If CISG73 applies, a posted acceptance is not effective until receipt. But the offeror’s ability to revoke the offer comes to an end when the offeree posted the letter of acceptance. [2-30] When the postal acceptance rule applies. The postal acceptance rule is an exception to the general rule requiring actual communication. For the rule to apply it must be appropriate to conclude that the offeror reasonably contemplated that acceptance would also take place by post.74 However, it is not required that either party contemplate that acceptance will be complete on posting: that aspect is supplied by the legal rule.75 And even though the offeror may assume that the [page 40] offeree will post an acceptance, that does not prevent the offeree using a more immediate or reliable form of acceptance, because that benefits the offeror.76 Although the postal acceptance rule will usually be taken to apply if the offeror used the post, the circumstances may justify a conclusion that application of the rule would be unreasonable.77 Moreover, an acceptance must always be in accordance with the offer.78 Therefore, the postal acceptance rule does not apply if the offer stipulates for actual communication of acceptance. This is a question of construction. For example, if the offer says that acceptance must be ‘received’ or ‘notified’, the postal rule may not apply.79 The postal acceptance rule does not apply to letters of rejection. These are effective only upon receipt.80 [2-31] Justification of the postal acceptance rule. Attempts at technical justification of the postal acceptance rule have largely failed. The rule is one of convenience.81 Faced with a choice between various possibilities, such as acceptance being effective only on receipt of the acceptance letter, the courts in the 19th century chose the time of posting as the time of acceptance. The rule benefits offerees by placing the risk of delay in communication on the shoulders of the offeror. This seems a policy decision. It reflects the ability of the offeror to exclude the rule. And by dispensing with the requirement of actual receipt, the postal acceptance rule leads to contracts being concluded at an earlier point in time.

[2-32] Telephone. Since telephonic communication is more or less instantaneous, the general rule of communication applies. Acceptance is complete only when heard by the offeror. Although this seems obvious and of no significance, it may be important where the contracting parties are in different jurisdictions. If Belinda (in Victoria) makes an offer to Paul (in New South Wales) and Paul telephones his acceptance, the contract is formed in Victoria, rather than New South Wales.82 [2-33] Facsimile. The point made above about the place of formation illustrates the context of decisions about communication by telex, a defunct mode of communication. In Brinkibon Ltd v Stahag Stahl und Stahlwarenhandelsgesellschaft mbH83 the House of Lords held that acceptance by telex takes effect on receipt. [page 41] The contemporary relevance of the telex cases is that they are based on the reasoning that if there is no material delay in receipt there is no justification for departing from the general rule. Communication by facsimile is analogous to telex, and not quite defunct. Applying the telex cases, acceptance by facsimile is effective on receipt, rather than when it is sent.84 [2-34] Electronic mail. What is the position where a contract is agreed between parties communicating by electronic mail?85 There are two opposing views: (1) since the parties are negotiating at a distance, and an electronic mailbox is analogous to a letter box, the postal acceptance rule should be applied by analogy; or (2) since communication by electronic mail is more or less instantaneous, there is no analogy with the postal acceptance rule. Similar issues arise in relation to other modes of electronic communication, such as text messages. The better view is that the general rule of actual receipt applies. To begin with, the rationale for not applying the normal requirement to acceptance by post, namely, delay in receipt, is not as relevant to communication by electronic mail as it is to postal communication. In addition, it is consistent with recent

legislation dealing with certain aspects of electronic transactions.86 However, the legislation does not expressly resolve the issue.87

Battle of the forms [2-35] Standard forms as acceptances. Where negotiations for a commercial contract are conducted by each party using its own standard form (terms of business), it may be difficult to determine which party’s terms govern the contract — if there is one! If there is a general rule, where each party fires off its own terms, it is that the contract is on the terms of the party who fired the last ‘shot’.

In Butler Machine Tool Co Ltd v Ex-Cell-O Corp (England) Ltd88 the issue was whether a seller of machinery could rely on a price variation clause included in its standard terms. The machinery was supplied, and had to be paid for. But whose terms governed the price payable for the goods? The relevant communications were: [page 42] (1) the seller quoted a price and enclosed its standard terms, including a price variation clause; (2) the buyer ordered the machinery, enclosing its standard terms, which had no price variation clause; and (3) the seller acknowledged receipt of the buyer’s order, using a slip detached from the buyer’s standard form. The court analysed the communications in this way. (1) was an offer. Although (2) purported to be an acceptance, it was a counter offer because the buyer’s terms differed from those of the seller. Therefore, (3) was an acceptance of the buyer’s (counter) offer, and the contract was on the buyer’s terms. Accordingly, the seller’s price variation clause was not a term of the contract. The Ex-Cell-O case indicates that to ensure that a particular clause is included

in the contract this must be insisted on throughout negotiations. If the seller in Ex-Cell-O had included its standard terms when returning the ‘acknowledgement’, the decision might well have been different. In the course of his judgment in Ex-Cell-O, Lord Denning MR suggested that the better approach is to look at all documents passing between parties, and the parties’ conduct, to determine whether they have reached agreement on all material points, even though application of offer and acceptance analysis might lead to a different conclusion. However, this suggestion has not been taken up. Accordingly, offer and acceptance analysis is used, even though the results may appear to be arbitrary.89

Particular Issues Tenders [2-36] Acceptance giving rise to unilateral contract. A tender is usually an offer by the tenderer.90 In some cases, acceptance of the tender may result in the formation of a unilateral contract.

Hypothetical Assume the Queensland Government calls for tenders for the supply of personal computers to its schools. Also assume that Blanco’s tender is accepted by a letter which states: We advise that your tender has been accepted. You must supply such personal computers as the government may choose to order from time to time.

There is no obligation on the government to order any computers, but Blanco is obliged to supply whatever quantity is ordered. Since only Blanco promises to do anything, the contractual arrangement is unilateral in character. [page 43] Therefore, if the government places an order, Blanco must fill it. The acceptance of the tender gives rise to a ‘standing offer’. Blanco may extricate himself from this arrangement by notice.91 But the notice cannot apply to any order already placed by the government.92

If the contract which comes into existence on the acceptance of a tender is unilateral, contracts entered into pursuant to that contract are ordinary bilateral contracts. Therefore, in the hypothetical, the government must pay for computers ordered and supplied. [2-37] Acceptance giving rise to bilateral contract. Alternatively, acceptance of a tender may give rise to a bilateral arrangement under which both offeror (tenderer) and offeree make promises.

Illustration In Milne v Municipal Council of Sydney93 Milne tendered (offered) to do repairs at the council’s electrical station for 12 months. The court held that the council’s acceptance of the offer gave rise to a contract under which the council promised to give Milne the exclusive right to do the work for the 12-month period. Therefore, when the council needed repair work to be done, it was obliged to give the work to Milne. Milne was also contractually bound for the agreed term.

Unilateral Contracts [2-38] Introduction. Ever since Ms Carlill took her complaint to the English Court of Appeal,94 unilateral contracts have occupied a role in offer and acceptance analysis which far exceeds their commercial significance. A typical case is the acceptance of an offer of a ‘free’ gift. For example, a newspaper company which offers to provide a ‘free’ set of steak knives to new subscribers is making an offer which, if accepted, will lead to the creation of a unilateral contract. Unlike the subscription contract, the contract to supply the knives is unilateral: only the newspaper company is obliged to do anything. Such contracts are hardly the stuff of commerce. Nevertheless, dealing with unilateral contracts under a separate heading is appropriate in order to highlight some particular features and difficulties. [2-39] Knowledge of offer. There is the very real possibility that a person could ‘accept’ the offer of a unilateral contract without knowing of the offer. Very simple acts are typically contemplated as acceptance, such as using the smoke ball in Carlill

[page 44] v Carbolic Smoke Ball Co,95 or purchasing the subscription to the newspaper in the example above. Since acceptance requires knowledge of the offer, there is no contract if the act is done by a person who is ignorant of the offer. If Cedric offers to pay $1000 to the first person to swim across Sydney Harbour on Boxing Day, the mere fact that Dawn happens to be the first such swimmer does not create a contract. Her knowledge of the offer must also be investigated.96 [2-40] Acceptance of offer. Two points about the acceptance of the offer of a unilateral contract are important. The first is that commonly the offeror will have dispensed with (‘waived’), the communication requirement.97 Second, the act of acceptance must have been done in reliance on the offer.98 Usually, reliance is presumed if the offeree knew of the offer. Therefore, for practical purposes, the offeror must show there was no intention to accept the offer.

Leading case In the leading case of R v Clarke,99 a £1000 reward was offered by the Government of Western Australia for information leading to the arrest and conviction of the murderers of two police officers. Clarke gave certain information, and claimed the reward. At the trial of his claim, Clarke’s evidence was that he provided the information to clear himself of an unfounded charge in connection with one of the murders. Even on the assumption that he was otherwise entitled to claim the reward, Clarke had no contract because the offer did not induce him to provide the information. [2-41] Revocation before acceptance. The most controversial issue raised in relation to unilateral contracts is whether the offeror is entitled to withdraw (revoke) the offer before acceptance.100 That is the normal rule.101 However, does the normal rule apply if acceptance takes time? Can revocation occur if the offeree is part way through the act of acceptance? It is first necessary to identify what is required. Care should be taken not to confuse acts of acceptance with events which merely ‘trigger’ the obligation of the promisor (offeror) to perform. For example, in Carlill v Carbolic Smoke Ball Co,102 contracting influenza was the event which triggered the smoke ball

company’s obligation to pay; but it was not an act of acceptance. Once Carlill had used the smoke ball as directed in reliance on the advertisement she had accepted the offer and the contract was formed. Performance by the smoke ball company was postponed until she contracted influenza — which might never have happened. [page 45]

Hypothetical What is the position if Sue offers to pay Cliff $1000 if he walks from Sydney to Newcastle, but she overtakes him at Gosford (about halfway) and says that the offer is revoked? Assuming that Cliff intended to accept the offer there are, in principle, three possible solutions: (1) the revocation is effective because it precedes acceptance. Sue has no liability; (2) the revocation of the offer is effective — Sue does not have to pay $1000. But Sue is liable to pay compensation for breach of an implied (collateral) promise not to revoke her offer; or (3) the revocation is ineffective because commencement of the required act of acceptance creates a binding contract. If Cliff completes the walk he may claim $1000. And if he stops because of Sue’s statement, he can claim damages for breach of contract. Literal adherence to the principles of offer and acceptance supports solution (1). That is because the acceptance rule requires the offeree to have done everything stipulated by the offer. It is also consistent with the consideration rule, since it is difficult to see what consideration Cliff provides by merely doing part of the required act.103 The consideration requirement is the main problem in relation to solution (3). Although it may be possible to argue that the consideration required by the offer is reliance on the offer, so that a contract arises once there is definite or substantial reliance by the offeree, the terms of most offers of unilateral contracts suggest that the offeror bargained for completion of the act. Solutions (1) and (3) are at least straightforward. That cannot be said of

solution (2). It solves the problem that one contract is not binding by creating a second contract which neither party may have contemplated. The recent cases tend to reject solution (1). Whether solution (2) or (3) has been adopted is not always clear. In Veivers v Cordingley104 McPherson J said: … although as a general rule an offer may be retracted before acceptance, yet, if it takes the form of an offer in exchange for the doing of an act or acts, then: (1) acceptance takes place when the offeree ‘elects’ to do the relevant act or acts; and (2) the offer becomes irrevocable once the act or acts, which will constitute consideration for the offer, have been partly performed.

[page 46] In that case, the offer was to increase the price under a sale of land contract if the local council approved a plan of subdivision. The vendor’s application for a subdivision was held to be sufficient to prevent the purchaser withdrawing the offer. More recently, in Mobil Oil Australia Ltd v Lyndel Nominees Pty Ltd105 the court said there is no ‘universal proposition’ to the effect that an offeror is bound merely because the offeree has commenced to do the act of acceptance. It also thought the approach in Veivers might be unjust where there are multiple offerees. On the facts at issue in Mobil, where offers were made to a large number of franchisees, it was held that a franchisee who had embarked on performance did not for that reason alone enjoy a contractual entitlement. It is open to the offeror to draft the offer of a unilateral contract so as to reserve the power to withdraw at any time.

Auctions [2-42] Principles. There are three participants in an auction: (1) the owner of what is being auctioned; (2) the auctioneer, who is the owner’s agent to sell the property; and (3) anyone who bids for the property. The application of the concepts of offer and acceptance to a purchase at auction depends on the terms regulating the auction. However, the basic principle is that when an auctioneer calls for bids this is not an offer to sell on

behalf of the owner of the property. Instead, the auctioneer is inviting offers.106 It follows that each bid is an offer. When the auctioneer considers that the bidding has stopped, a sale is announced by ‘knocking down’ the property to the highest bidder. Any bid may be withdrawn prior to acceptance.107 The extent to which these principles need to be modified for online auctions is unclear.108 Because each bid is an offer, the auctioneer is under no legal obligation to sell to the highest bidder. For example, the owner may have placed a ‘reserve’ price on the property so that the auctioneer is not entitled to sell unless the reserve price is reached. What, then, is the position if the auction is advertised as being ‘without reserve’? It is logical to say that the property must be sold to the highest bidder; but is there any legal basis for such an obligation? [page 47]

Recent case In Barry v Davies (trading as Heathcote Ball & Co),109 Mr Barry attended an auction, intending to bid for two machines. Davies (the auctioneers) put the machines up for sale, but the audience showed little interest. Barry then bid £200 for each machine. However, the auctioneer withdrew the machines, which were ultimately sold for £750 each. The question for the court was whether Barry was entitled to recover damages for breach of contract from the auctioneers. He relied on the fact that, at a view prior to the auction, the auctioneers said the machines were being sold on a ‘without reserve’ basis. Clause 1 of the auction conditions said that the purchaser would be the highest bidder. The court held in favour of Barry on the basis that a contract to sell on a without reserve basis arose when he bid in reliance on the auctioneers’ statement. Therefore, although there was no contract of sale, there was a contract that the auction would be conducted on a particular basis. That contract was breached and the auctioneers were liable accordingly.

Scope of the Rules [2-43] Limitations of offer and acceptance. The offer and acceptance rules are no more than tools of analysis. An ability to identify an ‘offer’ and an

‘acceptance’ is not essential to the formation of a contract.110 There are many situations in which it is difficult to unravel what is clearly a contract into offer and acceptance components. In other cases, the analysis would be artificial, as where a contract document is signed. Therefore, offer and acceptance analysis will not necessarily provide a simple answer to the questions of when and where a contract is formed.111 [2-44] Agreement based on conduct. There is always a danger that offer and acceptance will be employed too mechanically. Even if negotiations do not follow the normal offer and acceptance pattern, analysis of the parties’ conduct may establish a contract.

Hypothetical Assume that Machine Co Ltd and Soule Bros have been negotiating the appointment of the latter as distribution agents for the former’s products. Assume also that Machine sends Soule a draft agreement, which is sent back signed, but with amendments requiring Machine’s consent. Soule has made a counter offer which must be accepted if the contract is to come into being. [page 48] Assume Machine’s managing director decides to accept the amendments, and files the ‘contract’. Under the offer and acceptance rules, Machine should communicate its acceptance. What if both parties behave in a way which is consistent only with an agreement having been reached? For example, Machine might provide client information to Soule who then solicit orders from clients. The logical inference from this conduct is that a contract has been formed on the amended terms.112 In other words, Machine’s acceptance is by conduct.113 There is a second type of case. A contract may be inferred from conduct even though there is no offer. For example, what purports to be an offer may be incomplete. If the parties behave as though contractually bound, the terms of the contract must be implied from the parties’ conduct.114

QUICK QUIZ Short answer Classify each communication in the following series of communications between A and B. (1) Email from A to B: ‘What is lowest price for Formdale Sheep Station?’ (2) Email from B (the owner of the station) to A: ‘Lowest price $900,000’. (3) Email from A to B: ‘Your offer to sell Formdale Sheep Station for $900,000 accepted’. True or false? (1) The requirements of offer and acceptance were not satisfied in the series of communications between A and B in the short-answer question. (2) Principles of offer and acceptance are the most significant principles in contract law. (3) Newspaper advertisements in the form ‘I offer to sell my motor car for $10,000’ are always offers. (4) Acceptance of an offer must be communicated personally by the offeree. [page 49] Choose the best answer (1) A contract was found to exist between Ms Carlill and the Carbolic Smoke Ball Co because: (a) Carlill purchased the smoke ball promptly after seeing the advertisement; (b) Carlill caught the flu after seeing the advertisement; (c) Carlill caught the flu; (d) Bowen LJ had sold all his shares in the smoke ball company;

or (e) Carlill used the smoke ball as directed in reliance on the advertisement. (2) The postal acceptance rule: (a) has been made redundant by email; (b) results in a contract being formed at the time of posting; (c) applies in all cases where the parties have used the post to communicate; (d) does not apply unless referred to in the offer; or (e) is a complete waste of time. (3) To be valid the acceptance of an offer must: (a) not differ from the terms of the offer; (b) not be significantly different from the terms of the offer; (c) repeat the offer; (d) be in writing and nailed to the offeror’s door; or (e) be in writing.

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12 13 14 15 16 17 18 19 20 21

See [1-01]. See Chapter 4. See Chapter 5. See [2-43]. See [2-44]. Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 93 CLR 546 at 555. See Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 93 CLR 546 (see [3-08]). See [2-24]. See also [5-07]. [1893] 1 QB 256, Cases and Materials, §3-06C. According to A W B Simpson, ‘Quackery and Contract Law: The Case of the Carbolic Smoke Ball’ (1985) 14 Leg Studies 345 at 389, Carlill died 50 years later, at the age of 96. Her death certificate recorded old age as the principal cause. The other contributing factor was influenza. [1893] 1 QB 256 at 261–2. [1893] 1 QB 256 at 266–8. See also [2-42] (auctions). Re Webster (1975) 132 CLR 270; 6 ALR 65. Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401. See ACL, s 35 (bait advertising). The form of the contract which results varies according to the circumstances. See [2-36]–[2-37]. On whether there is a separate contract to comply with the requirements of the tender process see Chapter 6. See [2-04]. See [2-09], [2-10].

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30 31 32 33

34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57

Sometimes termed a ‘call’ option, as distinguished from a ‘put’ option, under which a seller can require a buyer to buy. (1910) 10 CLR 674. See C J Rossiter, ‘Options to Acquire Interests in Land’ (1982) 56 ALJ 576 and 624. (1910) 10 CLR 674 at 678. (1910) 10 CLR 674 at 691. See eg Gerraty v McGavin (1914) 18 CLR 152 at 163; Cavallari v Premier Refrigeration Co Pty Ltd (1952) 85 CLR 20 at 25. See Ballas v Theophilos (No 2) (1957) 98 CLR 193 at 207. See Dickinson v Dodds (1876) 2 Ch D 463. For legislation adopting CISG see: ACT: Sale of Goods (Vienna Convention) Act 1987; NSW: Sale of Goods (Vienna Convention) Act 1986; NT: Sale of Goods (Vienna Convention) Act 1987; Qld: Sale of Goods (Vienna Convention) Act 1986; SA: Sale of Goods (Vienna Convention) Act 1986; Tas: Sale of Goods (Vienna Convention) Act 1987; Vic: Sale of Goods (Vienna Convention) Act 1987; WA: Sale of Goods (Vienna Convention) Act 1986. CISG prevails over any other law. It is attached as a schedule to the legislation (except in Victoria, where it is now a schedule to the Goods Act 1958). For application of CISG see arts 1–5. See also Carter v Hyde (1923) 33 CLR 115. See [2-10]. It would be open to a court to order specific performance against Verity, as in Carter v Hyde (1923) 33 CLR 115. See Farmers’ Mercantile Union & Chaff Mills Ltd v Coade (1921) 30 CLR 113. See also CISG, art 16(1) (until a contract is concluded an offer may be revoked if the revocation reaches the offeree before the offeree has dispatched an acceptance). See Dickinson v Dodds (1876) 2 Ch D 463. (1880) 5 CPD 344. See [2-10]. See Ballas v Theophilos (No 2) (1957) 98 CLR 193. Cf Khaled v Athanas Bros (Aden) Ltd (1967) 1 BPR 9310. See eg [3-09], [16-19]. See David McLauchlan and Rick Bigwood, ‘Lapse of Offers Due to Changed Circumstances: A Contract Conversation’ (2011) 27 JCL 222. Dickinson v Dodds (1876) 2 Ch D 463 at 475. Fong v Cilli (1968) 11 FLR 495. Chapter 20 (frustration). See Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57 at 75–6; 4 ALR 482. See Carter v Hyde (1923) 33 CLR 115. See Turner Kempson & Co Pty Ltd v Camm [1922] VLR 498. See also [2-25]–[2-35] (requirement of correspondence between offer and acceptance). (1840) 3 Beav 334; 49 ER 132. (2001) 53 NSWLR 153 at 179; [2001] NSWCA 61 at [80]. See Gibson v Manchester City Council [1979] 1 WLR 294 at 302. See Baker v Taylor (1906) 6 SR (NSW) 500. See [1-13]. [1893] 1 QB 256, Cases and Materials, §3-06C. See [2-38]–[2-41]. See [2-25]. See [2-26]–[2-34]. See Dalgety Australia Ltd v Harris [1977] 1 NSWLR 324. See [2-39].

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75 76 77 78 79

80 81 82 83 84 85 86 87

88 89 90 91 92 93 94

See Bondi Beach Astra Retirement Village Pty Ltd v Gora (2011) 82 NSWLR 665 at 681; [2011] NSWCA 396 at [69] (option). See eg Integrated Lighting & Ceilings Pty Ltd v Philips Electrical Pty Ltd (1969) 90 WN (Pt 1) (NSW) 693. See Mooney v Williams (1905) 3 CLR 1. See Bastard v McCallum [1924] VLR 9. (1994) 179 CLR 650; 120 ALR 401. See Tallerman & Co Pty Ltd v Nathan’s Merchandise (Victoria) Pty Ltd (1957) 98 CLR 93 at 111. [1893] 1 QB 256 (see [2-06]), Cases and Materials, §3-06C. (1862) 11 CBNS 869; 142 ER 1037, Cases and Materials, §3-28C. See ACL, Pt 3-1, Div 2. Cf Boyd v Holmes (1878) 4 VLR (E) 161. See [2-44]. See Re NIAA Corp Ltd (1993) 33 NSWLR 344 at 354; Re Selectmove Ltd [1995] 1 WLR 474 at 478. (1818) 1 B & Ald 681; 106 ER 250. Prior to their demise, telegrams were subject to the postal acceptance rule. See Lewis Construction Co Pty Ltd v M Tichauer Societe Anonyme [1966] VR 341 at 345. See Household Fire and Carriage Accident Insurance Co Ltd v Grant (1879) LR 4 Ex D 216. See arts 16 and 24. See Henthorn v Fraser [1892] 2 Ch 27 (approved Tallerman & Co Pty Ltd v Nathan’s Merchandise (Victoria) Pty Ltd (1957) 98 CLR 93 at 111). This does not apply to contracts governed by the CISG. See art 18. See Bressan v Squires [1974] 2 NSWLR 460 at 462. See also David McLauchlan, ‘The Uncertain Basis of the Postal Acceptance Rule?’ (2013) 30 JCL 33. See White Trucks Pty Ltd v Riley (1948) 66 WN (NSW) 101. See eg Tallerman & Co Pty Ltd v Nathan’s Merchandise (Victoria) Pty Ltd (1957) 98 CLR 93 (contentious correspondence between solicitors). See [2-25]. See also [2-35] (battle of the forms). See Holwell Securities Ltd v Hughes [1974] 1 All ER 161. Cf Bressan v Squires [1974] 2 NSWLR 460. For an ‘intermediate’ situation see Bowman v Durham Holdings Pty Ltd (1973) 131 CLR 8 (acceptance ‘deemed’ effective when ‘in the ordinary course of the post’ the letter would have been received). See Byrne & Co v Leon Van Tienhoven & Co (1880) 5 CPD 344 (see [2-12]). See Bressan v Squires [1974] 2 NSWLR 460. See W A Dewhurst & Co Pty Ltd v Cawrse [1960] VR 278. [1983] 2 AC 34. See also W A Dewhurst & Co Pty Ltd v Cawrse [1960] VR 278. See Reese Bros Plastics Ltd v Hamon-Sobelco Australia Pty Ltd (1988) BPR 97325. See Eliza Mik, ‘The Effectiveness of Acceptances Communicated by Electronic Means, or — Does the Postal Acceptance Rule Apply to Email?’ (2009) 26 JCL 68. See eg Electronic Transactions Act 1999 (Cth), ss 14, 14A, 14B; Electronic Transactions Act 2000 (NSW), ss 13, 13A, 13B. The principal objectives are to confirm the validity of contracts made by electronic means and to ensure that legal requirements expressed by reference to records, documents and signature can be satisfied electronically. [1979] 1 WLR 401, Cases and Materials, §3-44C. See Gibson v Manchester City Council [1979] 1 WLR 294 at 296, 302–3. Cf CISG, art 19 (see [2-25]). See [2-08]. It is open to the government to make the standing offer binding for a particular period of time, but it must provide consideration or the contract must be in deed form. See Great Northern Railway Co v Witham (1873) LR 9 CP 16. (1912) 14 CLR 54. Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256.

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108 109 110 111 112 113 114

[1893] 1 QB 256 (see [2-06]), Cases and Materials, §3-06C. See R v Clarke (1927) 40 CLR 227 at 235. See [2-27]. R v Clarke (1927) 40 CLR 227. (1927) 40 CLR 227, Cases and Materials, §3-34C. Cf Williams v Carwardine (1833) 5 Car & P 566; 172 ER 1101. See also [2-22]. See [2-11]. [1893] 1 QB 256 (see [2-06]), Cases and Materials, §3-06C. See generally on consideration in the context of unilateral contracts [3-08]. [1989] 2 Qd R 278 at 297–8 (relying on Abbott v Lance (1860) Legge 1283). (1998) 153 ALR 198 at 228, 225–6. See eg Payne v Cave (1789) 3 TR 148 at 149; 100 ER 502 at 503; AGC (Advances) Ltd v McWhirter (1977) 1 BPR 9454 at 9456–7. See, in relation to sale of goods: ACT: Sale of Goods Act 1954, s 60; NSW: Sale of Goods Act 1923, s 60; NT: Sale of Goods Act 1972, s 60; Qld: Sale of Goods Act 1896, s 59; SA: Sale of Goods Act 1895, s 57; Tas: Sale of Goods Act 1896, s 62; Vic: Goods Act 1958, s 64; WA: Sale of Goods Act 1895, s 57. See Smythe v Thomas (2007) 71 NSWLR 537; [2007] NSWSC 844. [2000] 1 WLR 1962. Cf Clarke v Earl of Dunraven [1897] AC 59. See the discussion in MacRobertson Miller Airline Services v Commissioner of State Taxation (WA) (1975) 133 CLR 125; 8 ALR 131. See Brogden v Metropolitan Railway Co (1877) 2 App Cas 666. Cf Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 (implied assent to printed offer by the acceptance of work following the receipt of the offer). Cf Way v Latilla [1937] 3 All ER 759.

[page 50]

Chapter 3

Consideration [3-01] The concept. For a promise to be enforced as a contract, it must have certain characteristics.1 The main2 characteristic required by the common law is that the promise be given for something of value termed ‘consideration’.3 Therefore, if A (‘promisor’) makes a promise to B (‘promisee’), A’s promise is enforceable by B as a contract if it is ‘supported by consideration’. The essence of the concept is that only promises which have been purchased should be enforced as contracts. Promises for which no consideration has been provided are not binding as contracts, and may not be enforceable at all. If Bilbo promises to give Frodo a ring, but does not do so, Frodo has no contractual rights against Bilbo. The promise is not enforceable because Frodo has not purchased the promise, either by promising to do something himself, or by conferring some other benefit on Bilbo or by suffering some detriment at Bilbo’s request. The position is different if Bilbo’s promise is given in return for a promise by Frodo. The requirement of consideration applies to the creation of any contract, including a variation to an existing contract. [3-02] Definition. Consideration has been defined in two ways. One definition relies on concepts of benefit and detriment.4 Consideration is present if the promisee (as the person to whom the promise is made) confers a benefit on the promisor, or suffers some detriment. The second insists on an element of bargain by defining consideration as the price of a promise.5 Consideration is present if the promise has been purchased. The problem with the first definition is that it does not capture the fact that there must be a connection between the promise and the benefit or detriment put forward as consideration. For example, the mere fact that Smith happens to confer some benefit on Jones does not of itself amount to consideration for a promise made by Jones. Rather, the benefit or detriment must, at least in part, be conferred (or suffered) because of the promise. Because contract law has developed under the influence of commercial

contracts, the second definition has been preferred.6 It is more compelling because it better captures the element of exchange,7 and the element of bargain. [page 51] Under the bargain theory, the exchange of one promise for another is good consideration. The weakness is that it is not easy to explain how one promise can be consideration for another if that other promise is binding only if the first promise is supported by consideration!8 [3-03] Issues. In terms of analysis, consideration tends to be seen as a collection of particular (specific) rules. These rules seek to explain why the promisor’s promise is enforceable by the promisee as a matter of contract by defining what counts as consideration. The main points can be summarised as follows: ■ valuable consideration — the issue in all cases is whether something ‘valuable’ has been provided. There is a low threshold: consideration may be purely nominal; ■ for a promise — technically, the issue is always whether there is consideration for a promise, rather than consideration for a contract; ■ provided by promisee — it is only meaningful to ask whether the promisee has provided consideration; and ■ remedies — no action for damages for breach of contract is available unless the promise alleged to have been breached is supported by consideration.9 [3-04] Promises not supported by consideration. Because of the requirement of consideration, many promises are not enforceable as contractual promises. An obvious example is a promise to make a gift.10 Such a conclusion creates no tension. It is logical to prefer promises which have been purchased over purely gratuitous promises. Unless a promise has been purchased there is no reason why it should not be revocable; and enforcement of gratuitous promises as contracts could prejudice third parties such as the promisor’s creditors. However, and to the discredit of the law, the concept has become excessively technical. Some of the technicalities make it ill-suited to common commercial arrangements. The requirement may deny validity to a promise which is worthy

of enforcement. For example, if a seller who is required to deliver goods to a buyer in Sydney later promises to deliver the goods to Melbourne, because the second promise is entirely for the buyer’s benefit, the seller is not bound. Indeed, contract renegotiation is a common source of problems because of the requirement of consideration.11 The courts have overcome12 or ignored13 some of the technicalities. However, this serves to highlight that the concept of consideration is in need of an overhaul. Promises not supported by consideration are not always of no legal effect. The law of contract does allow for the enforcement of some such promises; but not [page 52] as contracts. For example, enforcement may be possible under the doctrine of promissory estoppel.14 [3-05] Deeds. Consideration is a requirement of ‘simple contracts’.15 It does not apply to promises in documents executed as deeds.16 Even a promise to make a gift is binding if put in a deed. Therefore, an easy way to avoid the problems created by the consideration doctrine is to express the contract in a deed.17 However, creating a valid deed requires compliance with particular statutory requirements which do not otherwise apply.18

Executory and Executed Consideration [3-06] Promise as consideration. An essential point to understand is that a promise may be consideration. If Holly promises to pay James $1000, and James promises to sell her his motor car, Holly and James have exchanged promises (‘mutual promises’) which, taken together, constitute a valid contract supported by executory consideration. The consideration for Holly’s promise is James’s promise; and the consideration for James’s promise is Holly’s promise. Such promises are paradigmatic examples of binding promises under Australian contract law. Most commercial contracts are based on an exchange of mutual promises, and it is common to introduce documents stating such contracts with the phrase ‘in consideration of the mutual promises expressed herein’. This can be seen in the SAMPLE CONTRACTS.

[3-07] Executed consideration. In order to be supported by consideration it is not necessary for a promise to be exchanged for a promise. For example, James’s promise to sell his car might be given in exchange for the payment of $1000 by Holly. Making the payment is an executed consideration, which, having been bargained for, entitles Holly to enforce James’s promise to sell her his car. An executed consideration is therefore consideration in the form of an act, rather than a promise to do an act.19 [3-08] Unilateral contracts. The concept of executed consideration has its principal application in the context of ‘unilateral’ contracts.20 For example, in Carlill v Carbolic Smoke Ball Co21 the consideration provided by Carlill was executed in nature. She did not promise to use the smoke ball as directed; but her use of the smoke ball was an executed consideration. Carlill was entitled to enforce the [page 53] smoke ball company’s promise because she did the act requested by the smoke ball company as the price of its promise.

Leading case In Australian Woollen Mills Pty Ltd v The Commonwealth,22 the High Court explained that where the doing of an act is put forward as executed consideration for a promise there must be a sufficient connection (‘nexus’) between the promise and the act. In that case the Commonwealth Government said it would pay a subsidy to purchasers who used Australian wool for local manufacture. The Australian Woollen Mills purchased and used wool for local manufacture and it alleged that a contract to pay a subsidy had been formed. The court disagreed. There was insufficient connection between any promise made by the government and the act which was put forward as consideration. In essence, the court said that there was no request (express or implied) by the government for local manufacturers to purchase wool. Therefore, doing that act could not said to be providing the price of the government’s promise.

[3-09] Conditional gift promises. The reasoning above may also be used to show that conditional gift promises do not give rise to contracts. For example, if Homer promises to give his television set to Marge if she will switch it on, it cannot be said that by doing so Marge has provided consideration. Unfortunately for Marge, the law does not give legal effect to the gift promise as a contract. Marge’s act is merely the event (‘condition’) on the occurrence of which the promise to make the gift must be performed. Although the act has been requested by Homer, it cannot be said that the act was the ‘price’ of Homer’s promise.

Movement from the Promisee [3-10] The rule. The concept of consideration concerns the enforcement of promises. As we have seen, the person to whom the promise is made, and who seeks to enforce it, is termed the ‘promisee’. The requirement (rule) is that consideration must be provided by (‘move from’) the promisee.23 Therefore, in each case it is necessary to identify the promisee and to ask whether that person has provided consideration. For example, if Sidney promises to sell goods to Brigit, who promises to accept and pay for the goods, Sidney is (as promisee) entitled to enforce Brigit’s promise because he has provided consideration by making his promise to sell. The same is true of Sidney’s promise. But if A makes a promise to B, and C provides some benefit to A, no consideration moves from the promisee (B).24 [page 54] An executed consideration must also move from the promisee. In Carlill v Carbolic Smoke Ball Co,25 Carlill was the promisee. She provided consideration for the smoke ball company’s promise by using the smoke ball as directed in reliance on the latter’s promise. [3-11] Need not move to the promisor. Although it is essential for consideration to move from the promisee, it is not necessary that consideration move to the promisor.26 Although this may sound peculiar, it reflects the fact that a person may be willing (or even obliged) to benefit a third person who is not a party to the contract.

Hypothetical Assume that Denise wants to borrow $1000 from Celia. Knowing that, in the past, Denise has not paid her debts, Celia refuses to lend the money. Denise’s good friend Gerald might approach Celia and say: ‘Please lend $1000 to Denise. I will ensure that she repays the debt.’ Assuming that Celia shows her agreement by handing $1000 to Denise, there are two contracts: (1) a contract of loan between Denise (as debtor) and Celia (as creditor) formed by the provision of executed consideration (Celia handing over $1000 at Gerald’s request) in exchange for Denise’s promise to repay the money; and (2) a contract of guarantee between Gerald (as guarantor) and Celia (as creditor), in which the consideration for Gerald’s promise is Celia’s loan to Denise. In (2), the consideration for Gerald’s promise moves from the promisee (Celia). It is irrelevant that it is Denise and not the promisor (Gerald) who receives the money. The same analysis would apply if the consideration provided by Celia took the form of a promise to lend the money. [3-12] Consideration and privity. The rule that a person who is not a party to a contract is not entitled to enforce a promise27 is difficult to distinguish from the rule requiring consideration to move from the promisee. However, the consideration rule and the privity rule are considered to be distinct.28 Consider this example. Assume Alan promises Barry that he will pay $1000 to Cedric and Barry promises that he will repay the money. If Alan fails to pay the money to Cedric, any action by Cedric to enforce the promise will fail. That is the privity of contract rule at work. However, Barry has (as promisee) provided consideration and is entitled to make a claim in respect of the breach.29 [page 55] By contrast, if Alan promises Barry that he will pay $1000 to Cedric and Cedric promises Alan that he will repay the money, Alan’s promise to Barry

(promisee) is not enforceable by Barry because he did not provide consideration. The promise is not a contract.30 [3-13] Joint promisees. An exception to the rule that consideration must move from the promisee is provided by the case of ‘joint promisees’.31 Where there are joint promisees it is sufficient that one of them has provided consideration. This exception operates where a single promise is made to two or more persons jointly. For example, if Alan promises to lend Barry and Cedric $100, Barry and Cedric are joint promisees. Alan is bound if either Barry or Cedric provided consideration. Therefore, even if the promise to repay is made only by Barry, both Barry and Cedric can enforce Alan’s promise. In an action by them, it is irrelevant that as between themselves only Barry provided consideration.32

Sufficiency Introduction [3-14] The rule. The rule is that consideration must be sufficient but need not be adequate. Although this is straightforward, the words ‘sufficient’ and ‘adequate’ need to be explained.33 If a promisee provides ‘something’ of value, that is sufficient as a matter of law. There is no concern with whether the consideration, or indeed the performance of any promise, is a good deal for the promisor. In other words, the ‘something’ need not be ‘adequate’ in terms of value. Consider this simple example. Alpha has a car to sell which has a market value of $10,000. Assume that Beta makes an offer to pay $4000. If Alpha decides to accept that offer, the promise by Alpha to sell for $4000 is enforceable even though the price is clearly inadequate. [3-15] Nominal consideration. So strong is the rule that consideration need not be adequate that a nominal benefit is recognised as sufficient consideration. The payment of (or the promise to pay) a nominal sum, say $10, is in law sufficient to support a promise to sell goods worth $100,000 even though, objectively, it is wholly inadequate. Whether the consideration is actual payment of $10 or the promise to pay that sum, no inquiry into adequacy is made. [page 56]

Example The nominal consideration rule also applies to unilateral contracts. For example, in Chappell & Co Ltd v Nestlé Co Ltd34 Nestlé hit upon a scheme to promote sales of its chocolate bars. This was to offer the public ‘records’35 of the popular tune ‘Rockin Shoes’ in return for payment of 1s 6d and the wrappers from three bars of their chocolate. Because Nestlé did not own the copyright in the tune, the copyright legislation required payment of a royalty to the copyright owner (Chappell) equal to a certain percentage of the ‘ordinary retail selling price’ of the record. Nestlé did its sums on the basis that the ‘ordinary retail selling price’ was 1s 6d, but Chappell argued that this was wrong: the selling price consisted of the money and the wrappers. This neatly raised the issue of whether provision of the wrappers was part of the consideration provided by purchasers of the records. A majority of the court held that the supply of the three wrappers was not merely a qualifying condition to be satisfied by persons wishing to buy the records. Rather, it was part of the consideration. It did not matter that Nestlé threw away the wrappers. [3-16] Performance of existing duty not sufficient consideration. The most troublesome application of the consideration requirement is to situations where the promisee already owes a duty to the promisor. The general rule is that a promise to perform — or the performance of — an existing legal duty is not consideration.36 This rule has its main impact in the renegotiation of contracts. This is dealt with in detail later.37 For the present it is sufficient to note that because any variation of the terms of a contract arises under a second contract between the same parties, that contract must be supported by consideration. For example, if, in the SAMPLE SALE OF GOODS CONTRACT, Seller Ltd and Buyer Ltd agree to increase the price that is a variation to the contract which requires consideration. The promisor under the variation is Buyer and the promisee is Seller. Therefore, Seller must provide consideration. However, if Seller merely repeats its promise to deliver the goods, there is no consideration (moving from the promisee) because Seller was already obliged to do that. Therefore, Buyer is not bound by the price variation contract and is only required to pay the original price. The rule also applies where the duty is of a public kind. For example, in

Collins v Godefroy38 a person who had received a subpoena to appear as a witness in a court case was promised a fee for court attendance. The promise was not enforceable by [page 57] the witness because the only consideration which could be put forward was the promise to attend or actual attendance. Since the witness was subject to a public legal duty to appear, there was no consideration. It follows that the promisee must provide something in addition to the legal duty which is already owed. If the duty is exceeded, either by act (or forbearance) or by promise, consideration will be present.39 Whether the pre-existing duty is private or public, it is arguable that public policy is a better criterion than consideration to determine whether the second promise is binding.40

Past Consideration [3-17] The rule. Unless statute provides otherwise,41 past consideration is no consideration.42 For example, if Vince sells a plot of land to Pat and, after the title to the land has been transferred to Pat (and the price paid) Vince promises ‘in consideration of the sale’ to build a house on the land, Vince’s promise is not binding as a contractual promise.43 So far as the consideration requirement is concerned, the sale is an event in the past and cannot be valuable consideration for Vince’s promise. Although conceptually difficult, past consideration must not be confused with an executed consideration. The latter is sufficient consideration.44 The issue may arise where services have been rendered without any express agreement on the price to be paid.

Example This is illustrated by Re Casey’s Patents; Stewart v Casey.45 In consideration of his services in working the rights, the owners of certain patent rights agreed to transfer a one-third share in the patents to the defendant. The agreement was upheld: the owners’ promise was not based on past consideration. There are two alternative ways of explaining this result.

First, the services having been requested in the first place, the satisfaction of that request created a contract to pay a reasonable sum for the services. The defendant provided consideration for the promise by providing the services. The subsequent promise to transfer a one-third share was then evidence of the reasonable sum. Second, there were two contracts. Under the first contract, formed by the original request and response, there was no agreement on the price of the services. The second contract was an agreement which fixed the price as a one-third share in the patents. That agreement terminated and replaced the first agreement. [page 58]

Renegotiation of Contracts Operation of the Existing Duty Rule [3-18] Introduction. From a practical perspective, contract renegotiation is an important topic.46 However, it is unusual to devote any section of a contract text to the topic. That is because, from the perspective of consideration, a renegotiation contract is no different from any other contract. But a renegotiation perspective helps to explain some of the problems.47 Broadly speaking, there are three renegotiation contexts: (1) before performance is complete, the parties agree to vary the contract but neither party is in breach of contract; (2) after breach (or an allegation of breach) of the contract by one of the parties, they agree to deal with that specific issue; and (3) an agreement to cancel (rescind or terminate) the contract. The contrast is between (2), where the purpose of the renegotiation is to resolve a dispute (termed ‘settlement agreements’ or ‘compromises’), and (1) and (3), where the purpose is simply to vary or cancel the contract. [3-19] Existing duties rule. The starting point is the ‘existing duties rule’, which we met earlier.48 A promise to perform (or the performance of) an existing legal duty is not consideration. Accordingly, if A promises B that A will do something which A is already under an obligation to do, the promise cannot

be put forward as consideration. The law does take a very broad view of what is capable of being consideration, and treats even nominal consideration as sufficient consideration. However, an inability to detect any objective difference between the duty and the promise (or its performance) means that there is nothing of value to be counted as consideration.

Origins The law is derived from Stilk v Myrick.49 Two sailors deserted their ship. In order to induce the remaining crew to do the work of a full crew, the captain promised to pay the wages of the deserters to those who remained. Under their contracts, the crew were required to do all they could under the ‘emergencies of the voyage’. Since there was no danger involved in continuing to serve, the promise by the remaining crew to work the ship home was simply the repetition of an existing promise. Lord Ellenborough therefore held that there was no [page 59] consideration even though, as a matter of fact, the captain benefited from completion of the voyage. It follows that in any case where the ‘new’ promise is indistinguishable from the old, it has no legal value. In most contexts, however, there will be a difference. Usually, the renegotiation does benefit both parties because people usually insist on being paid a ‘price’ for agreeing to a renegotiation. The rule does not apply if the parties put their renegotiation in a deed.50 Other exceptions are considered below. [3-20] Nominal consideration. If, at the time when the parties agree to their renegotiation contract, the party who benefits from the renegotiation (the promisee) pays a nominal sum (say $10), or provides some other nominal benefit, the other party’s renegotiation promise is binding. For example, if the parties to the SAMPLE SALE OF GOODS CONTRACT agree to reduce the contract quantity by 10 per cent, but there is no reduction in the price, the existing duty rule would prevent the renegotiation agreement taking effect as a contract. But if Seller Ltd agrees to give Buyer Ltd a CD of Abbey Road,

in consideration of Buyer’s promise to accept the reduced contract quantity, the renegotiation agreement will be binding. [3-21] Benefit in fact. A factual benefit will amount to consideration if it is bargained for. Although it did not involve a renegotiation, Carlill v Carbolic Smoke Ball Co51 illustrates that a promisor may bargain for an act as consideration. Moreover, although the smoke ball company did not sell the smoke ball to Carlill, it clearly had an interest in promoting sales of its product. In the renegotiation context, courts seem willing to find consideration in factual benefit which was not bargained for.52

In Williams v Roffey Bros & Nicholls (Contractors) Ltd,53 Williams agreed to do carpentry work for Roffey for £20,000. This comprised work on 27 flats. When Williams ran into financial problems, Roffey promised to increase the price by £10,300. If Williams made any promise, it was to do what he was already bound to do. He could not rely on that promise as consideration for renegotiation of the price. However, Williams completed eight more flats before the parties fell out. His claim for payment for that work was successful. Because Roffey benefited in fact, the court held its promise was binding. The factual benefits were a measure of protection against the risk that, by breaching the main contract to refurbish, Roffey would become liable to pay damages (to a third party), and also avoidance of the trouble and expense involved in replacing Williams. [page 60] The court distinguished the existing duty rule by applying a very complex principle, the elements of which can be expressed (a little more simply) as follows:54 (1) if A has contracted to do work for B in return for the payment by B; (2) after A has partly performed its contract, B has reason to doubt that A will complete performance; (3) B then promises A an additional payment in return for A’s promise to perform its contractual obligations on time;

(4) as a result of giving this promise, B obtains a practical benefit from A’s performance; and (5) the conclusion is that B’s promise in (3) is supported by consideration. There are two major problems with this approach. First, at the technical level, the approach is inconsistent with the bargain theory of consideration. Williams was promisee. The question was whether consideration moved from him. In order to count as consideration a benefit must be bargained for.55 A later benefit cannot be put forward as consideration to support an earlier promise. The consideration which Williams offered is stated in element (3). This does not match the consideration found by the court, that is, element (4). On that basis, the case was wrongly decided. Second, at a more practical level, the court stated that it was concerned to take a pragmatic rather than doctrinal approach, and to find consideration if there is commercial advantage to both sides arising out of the continuing relationship with the promisee.56 Although this is laudable, the solution is no less technical than the problem it seeks to deal with. The end result is a complex principle for courts to apply if the parties go to court. The decision in Williams v Roffey has prompted much discussion.57 However, it was simply an erroneous application of the concept of consideration. It would have been simpler for the court to say every renegotiation contract in which each party makes a promise which the other party regards as valuable is binding. Of course, that would have been so obviously contrary to law that it could not be stated overtly. However, the law will not develop until a court of sufficient standing decides that consideration, like beauty, lies in the eye of the beholder. Anything which is not contrary to public policy law should be treated as sufficient consideration if the parties regarded it as valuable. Whether Williams v Roffey is good law in Australia remains unclear.58 [3-22] Position where duty exceeded. Consideration is present if a contractual duty is exceeded, either by act (or forbearance) or by promise. [page 61] For example, in North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd

(The Atlantic Baron),59 a buyer’s promise to pay a price increase in the construction of a ship was supported by consideration because the seller promised to increase (and did increase) the value of a security which it gave under the contract. [3-23] Duty owed to third party. A promise to perform a duty owed to a third person is good consideration for a renegotiation promise. Therefore, if A owes a duty to B, a promise by A to C is good consideration for a promise by C even if the promise is to perform the duty which A owes to B.60 [3-24] Part payment of a debt. A debt is a sum certain in money due from one person to another. A very common form of contract renegotiation is for a creditor to agree to accept part payment to discharge the whole. The existing duty rule is a problem here too.

Illustrating the problem Assume that Delores borrows $30,000 from Penny. Although the debt is repayable on 1 June, the money is not repaid. On 30 September Penny gets a court judgment against Delores, who must pay $30,000 plus interest to satisfy the judgment. Now, Delores might say: ‘I do not have the money now, but give me time’. Penny, being a generous person, might say: You can pay me $1000 per week for the next 30 weeks. If you make all the payments I will consider the debt fully paid (including interest).

Assume that 30 weeks later Delores has paid every $1000 instalment on time. Her satisfaction in paying off the debt is short-lived when she receives a demand from Penny for $20,000 ‘interest on the debt recently paid’. Since Delores promised to do less than she was legally bound to do, there is no consideration which she can put forward to defeat Penny’s claim61 and she seems destined for bankruptcy. This conclusion flows from the approval by the House of Lords in Foakes v Beer62 of a ruling in a case decided in 160263 that payment of a lesser sum does not satisfy an obligation to pay a greater sum. As approved, lack of consideration is the reason why a promise to treat the whole debt as discharged is not binding. It does not matter whether the promise is made in return for payment of less or the promise to pay less. Even if purely nominal, the presence of something ‘extra’ will change the position. For example, if Penny had asked for, and Delores had agreed to provide

Penny with one free consultation (in her capacity as a medical practitioner) as well as the $30,000, the whole debt would have been discharged. That means we [page 62] get the absurd position where a promise to pay $990 out of a $1000 debt cannot be consideration for a promise to cancel the whole debt, whereas a promise to pay $10 and a canary bird is good consideration for a promise to cancel the same $1000 debt! The recognition of nominal consideration manifests itself in various other ways, such as: ■ bringing forward the date for payment; and ■ changing the place of payment to suit the creditor. However, the principle applied in Williams v Roffey Bros & Nicholls (Contractors) Ltd64 does not apply to part payment of a debt.65 [3-25] Termination of the contract. Another example of renegotiation is cancellation of a contract. This is an agreement to terminate, discharge or rescind the contract. If the parties agree to terminate their contract, the renegotiation is binding because the parties are assumed to benefit from being discharged from their respective obligations.66 The existing duty rule creates no difficulty if the parties expressly terminate their contract as part of a renegotiation. For example, assume that Edith wishes to give Errol a pay rise and is happy to do so without requiring Errol to do extra work. Because of the existing duty rule, her promise to pay more money will not be supported by consideration. But if Edith and Errol agree to terminate the employment contract, and replace it with a new contract differing from the old contract only in the amount of wages, the arrangement is binding on Edith. Accordingly, termination is a way around the existing duty rule. Even if termination is not an express part of a renegotiation, an intention to terminate will often be implied. In the employment example just given, a court may assume an intention to terminate even if Edith and Errol do not expressly say so in their renegotiation contract.67 Such cases of termination assume that neither party is in breach. Once there is a breach, or an allegation of breach, renegotiation will take the form of the release or compromise of an actual or potential liability.

Compromise and Related Matters [3-26] Compromise of a disputed claim. Relevantly, a ‘disputed claim’ arises where one party claims an entitlement under the contract which the other party disputes. A compromise of the claim occurs if the parties enter into another contract — the renegotiation contract — to resolve the dispute. The rule that a promise to perform an existing duty is not sufficient consideration does not impact on the [page 63] renegotiation contract even if the promisee in fact does no more than it was obliged to do under the compromised contract.

Consider the following fact situation, based on the decision of the High Court in Wigan v Edwards.68 Benny, a builder, agrees to sell a plot of land that he owns to Prudence, and also to build a house on the land prior to completion. After the house has been built, but before the title to the land has been conveyed to Prudence, she complains that the building is defective and refuses to complete the sale of the land. She says that she will not pay the balance of the price until the defects in the building are remedied. If Benny promises that he will ‘make good’ any defects in the building work if Prudence will complete the transaction, and Prudence agrees to do so, there is an apparent problem. Even if she is correct that the building is defective, Prudence may be legally bound to complete the sale. If so, Prudence would be promising to do what she is already bound to do. Given the community interest in the orderly settlement of disputes, the existing duty rule cannot be permitted to stand in the way of the compromise. But where is the consideration necessary to enable Prudence to enforce Benny’s promise to make good the defects? In Wigan, Mason J explained:69 … a promise to do precisely what the promisor is already bound to do is a sufficient consideration, when it is given by way of a bona fide compromise of a disputed claim, the promisor having asserted that he is not bound to perform the obligation under the preexisting contract or that he has a cause of action under that contract. The qualification

recognises that for the court itself to examine and determine the correctness of the promisor’s claim would be a pointless exercise when the new bargain indicates that the promisee regarded the fresh promise as a benefit, presumably viewing the promise of performance as more advantageous than the remedies available to him for breach of contract. But the law, by insisting that the claim in dispute is one which was honestly or bona fide made, prevents the qualification from assisting the party who would seek to gain an unfair advantage by threatening unscrupulously to withhold performance under a contract.

Breaking down this statement, the arrangement between Benny and Prudence is supported by consideration: ■ Prudence has asserted a claim against Benny, namely, that she is not required to pay until defects in the building are made good; ■ whether right or wrong, her claim was made bona fide and is neither vexatious nor frivolous; ■ Benny has disputed the claim; ■ the renegotiation agreement is intended to compromise the dispute; and [page 64] ■ it does not matter that, had the dispute been litigated rather than compromised, Prudence would have failed. Faced with an alleged compromise, it follows that a court will not ask whether, in law, there was merely a promise to perform an existing duty. Rather, the court is concerned with whether the compromise was honestly obtained. If this is the case, the compromise is a valid contract. It is not clear whether, in addition to honesty, it is necessary to show that the claim was not vexatious or frivolous. However, in Wigan Mason J said70 it must be rare for a person to have a bona fide belief in a claim which is vexatious or frivolous. [3-27] Release. Related to renegotiation by the compromise of a disputed claim are cases in which one party to a contract releases the other from liability under the contract.71 If each party agrees to release the other under a renegotiation in the form of an agreement to terminate the contract, consideration will be present.72 However, that assumes that there is no outstanding liability. In a situation where B has an accrued liability to A, for example, to pay damages for breach of contract, A may

agree to release B, or may agree to take something in place of B’s liability. The former operates as a simple release of B (A abandons its rights against B), whereas the latter insists that B satisfy the outstanding liability. Consideration must be present in both cases and if there is no element of compromise the existing duty rule is a problem. For that reason, in practice a simple release is usually expressed in the form of a deed.73 Where the intention is to satisfy the outstanding liability by the provision of ‘something’, it is necessary to establish that something as satisfying the consideration requirement. Assume that Betty is liable to pay damages to Angie for breach of a sale of goods contract. Although the amount of the claim has not been quantified, Angie says ‘if you agree to pay $1000 I will release you from your liability’. Clearly, if Betty agrees, the release is supported by consideration. But what if she does not pay? Angie needs to know whether she can sue Betty for breach of the sale contract (for which she might recover more than $1000) or must sue on the renegotiation promise (she can only recover $1000). This depends on application of the concept of ‘accord and satisfaction’.74 The idea here is that the renegotiation contract (the ‘accord’) between Angie and Betty must be construed to see what benefit (‘satisfaction’) Angie and Betty intended. There are two possibilities:75 [page 65] ■ promise — the promise is satisfaction. Entry into the renegotiation contract brought Betty’s liability under the sale contract to an end. Angie can only enforce the renegotiation contract; or ■ performance — performing the renegotiation contract is satisfaction. Betty therefore remains liable on the sale contract. [3-28] Forbearance to sue. If one party to a contract has rights against the other, for example, for breach of contract, which can be enforced through the courts (or an agreed dispute resolution mechanism), there may be a limited renegotiation in the form of forbearance to sue. The party who has the right to go to court in respect of an accrued liability may agree to postpone taking that step. The rules here are quite technical, but the basic idea is that a promise not to sue for a time in relation to an accrued liability may be consideration for a

renegotiation promise by the party subject to the liability. Assume that Emma owes Melanie $10,000, and that payment is due on 1 March. If on 1 March Emma asks Melanie not to sue for the debt, a forbearance to sue may be agreed. For example, in consideration of Melanie promising not to sue until, say, 1 June, Emma might promise to grant Melanie a mortgage over her land as security. The promise by Melanie (not to sue until 1 June) is good consideration for the promise by Emma (to provide the security). If Emma does not pay on 1 June, Melanie may enforce Emma’s promise. And, of course, Emma will have a good defence if Melanie sues before that date. The above example involves a bilateral contract. But the forbearance to sue may be supported by consideration in the form of actual forbearance at the request of the person who is liable. This means that the above example works equally well if Melanie actually forbears to sue until 1 June: at the request of Emma; and in consideration of Emma’s promise to grant a mortgage to Melanie if she does not sue.76 Some subsidiary points to note are:77 ■ forbearance alone is not sufficient — the mere act of forbearance is not in itself consideration, there must generally be a request to do so; ■ request may be implied — a request to forbear need not be express but may be implied; ■ duration — since adequacy of consideration is not a concern, a forbearance for even a very short time may be good consideration; and ■ reasonable time may be implied — where a promise to forbear is not for a fixed period, a reasonable time is implied. [page 66]

Discussion [3-29] Is consideration the right criterion? In Ward v Byham,78 Denning LJ said:79 I have always thought that a promise to perform an existing duty, or the performance of it, should be regarded as good consideration, because it is a benefit to the person to whom it is given.

In a later case80 he added a logical qualification, namely, ‘so long as there is

nothing in the transaction which is contrary to the public interest’. The law may ultimately treat as sufficient consideration anything which the parties regarded as beneficial, subject only to public policy, and rules against misleading conduct and improper pressure.81 However, that is not the law at present. Cases concerning the compromise of disputed claims82 would not be affected by this approach. But cases which refuse to treat a promise to accept the part payment of a debt83 as good consideration would be decided differently. The promise would be binding.84 [3-30] Variation and estoppel. The above discussion illustrates the principle that where parties agree to vary the terms of an existing contract, consideration is required. There are two further questions. First, what is the position where, although there is no exchange of promises, the parties act on the basis that the contract has been varied. The issue is one of ‘estoppel’, that is, whether the circumstances preclude the parties from denying that they varied the contract. Consideration is not required for an estoppel.85 Second, what about changes which are not so much variations as minor modifications to the operation of the contract? For example, a buyer might request that a seller delay delivery, without asking for agreement to a new delivery date.86 Such arrangements do not require consideration. However, it is arguable that they are merely applications of the estoppel concept, in this context often termed ‘waiver’.87 [page 67]

Illusory Consideration [3-31] The concept. An ‘illusory’ consideration is any apparent consideration which does not qualify as consideration as a matter of law. For example, in Wigan v Edwards88 Mason J said that the existing duty rule expresses the concept that the ‘new promise, indistinguishable from the old, is an illusory consideration’. That is just an illustration of the concept. In fact, all the specific rules on what does not count as consideration could be expressed in the same way; for example, a past consideration is an ‘illusory’ consideration. However, the concept is useful to explain several subsidiary bases for saying that a promise which is:

■ too uncertain to be enforceable; ■ illegal; or ■ wholly discretionary has no legal or economic value and does not count as consideration. Only discretionary promises need to be discussed.89 [3-32] Discretionary promises. A promise is wholly discretionary if the agreement entitles the promisor to choose whether or not to perform. Unless it is actually performed, such a promise is purely illusory.

Leading case In Placer Development Ltd v The Commonwealth,90 the Commonwealth ‘promised’ to pay a subsidy ‘of an amount or at a rate determined by the Commonwealth from time to time’ on the import of certain timber products. The only indication of amount was a statement that it would not exceed the amount of customs duty paid on the timber. When Placer sought to enforce this promise, it was met by the defence that the promise was illusory because the Commonwealth had reserved to itself a discretion not only as to amount, but also whether to pay any subsidy at all. The court said it is a general principle that promissory expressions reserving an option as to performance cannot count as consideration. The majority held that this principle applied, with the result that the Commonwealth’s ‘promise’ was illusory. There is, however, much to be said for the view of the minority that there was a promise which obliged the Commonwealth to pay something by way of subsidy, if not a ‘reasonable’ sum.91 [page 68]

QUICK QUIZ Short answer (1) Cleaning Bros Ltd promises to clean Lisa’s carpets and Lisa promises to pay $200 for the work. Identify the consideration. (2) What is the consideration in the SAMPLE SERVICES CONTRACT?

(3) What consideration is provided by Buyer Ltd in the SAMPLE SALE OF GOODS CONTRACT?

True or false? (1) Consideration determines whether a promise is binding as a contract. (2) Smith signs a document which states ‘I promise to give Brown my television set’. There is a contract between Smith and Brown. (3) Smith signs a deed which states ‘I promise to give Brown my television set’. The promise is binding on Smith. (4) Past consideration is good consideration. (5) Consideration must move from the promisee to the promisor. Choose the best answer (1) If A promises to sell a motor car to B and C jointly, in consideration of the payment of $100 by B: (a) C is not a party to the contract; (b) C is not a party to the consideration; (c) B and C have provided consideration; (d) A is not bound by the promise; or (e) A’s promise may only be enforced by B. (2) The existing duty rule: (a) applies only to contractual duties; (b) is avoided by the use of nominal consideration; (c) was invented by creditors to exploit debtors; (d) applies only to public and private duties requiring the payment of money; or (e) is a rule of public policy. (3) An agreement by D and E to compromise a claim made by E and disputed by D is binding on D only if: (a) the disputed claim relates to a contract; (b) E received adequate consideration; (c) D has received legal advice; (d) E commenced proceedings against D prior to the compromise; or (e) E acted bona fide in making the claim.

(4) F owes G $1000 payable on 10 March. F pays $900. G will not be entitled to sue for the balance if: (a) both F and G have acted in good faith; (b) payment is made on 20 March at the request of F; (c) payment is made on 1 March at the request of G; (d) payment is made in $100 notes; or (e) $900 is all the money that F has in the world.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

See [1-35]. See also [2-01]. See [1-04]. See Currie v Misa (1875) LR 10 Ex 153 at 162. See Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847 at 855. See also [1-36]. See Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 92 CLR 424. [1-01]. See Contract as Assumption, Chapter 2. However, a promise in a deed is enforceable in the same way: [3-05]. See [3-01]. See also [1-04]. See [3-18]–[3-30]. See eg [6-08]–[6-18] (promissory estoppel). See New Zealand Shipping Co Ltd v A M Satterthwaite & Co Ltd [1975] AC 154. See [6-08]ff. See [1-12]. Also described as ‘contracts under seal’ or ‘specialities’. See [1-12]. A deed which states promises by one party only is termed a ‘deed poll’. See eg Corporations Act 2001 (Cth), s 127; Conveyancing Act 1919 (NSW), s 38. For the distinction between ‘past’ and executed consideration see [3-17]. See generally [2-22], [2-36], [2-38]–[2-41]. [1893] 1 QB 256 (see [2-06]), Cases and Materials, §3-06C. (1954) 92 CLR 424, Cases and Materials, §6-07C. See Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 119 CLR 460 at 479, 493. Unless C is B’s agent. [1893] 1 QB 256 (see [2-06]), Cases and Materials, §3-06C. See Pico Holdings Inc v Wave Vistas Pty Ltd (formerly Turf Club Australia Pty Ltd) (2005) 214 ALR 392 at 407; [2005] HCA 13 at [66]. See [13-02]. See also [13-02]. For the remedies available see Chapter 13. The position is different if Barry is Cedric’s agent. See generally on ‘joint’ promises [12-33]–[12-35]. See Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 119 CLR 460 at 478–9, 493. See Director of Public Prosecutions (Vic) v Le (2007) 232 CLR 562 at 592; 240 ALR 204; [2007] HCA 52 at [113]–[115]. [1960] AC 87.

35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77

These were actually thin films of cellulose acetate mounted on cardboard and would only play a limited number of times. See Wigan v Edwards (1973) 1 ALR 497 at 512; 47 ALJR 586 at 594. See [3-18]–[3-30]. (1831) 1 B & Ad 950; 109 ER 1040. Glasbrook Bros Ltd v Glamorgan CC [1925] AC 270; Popiw v Popiw [1959] VR 197. See [3-29]. See Bills of Exchange Act 1909 (Cth), s 32 (an antecedent debt or liability is good consideration for a bill of exchange). See also Cheques Act 1986 (Cth), s 35(1). See Barba v Gas & Fuel Corp of Victoria (1976) 136 CLR 120; 12 ALR 649. Cf Bush v Burns (1873) 12 SCR (NSW) L 186 (executed consideration established). See [3-07]. [1892] 1 Ch 104. See J W Carter, ‘The Renegotiation of Contracts’ (1998) 13 JCL 185. For discussion of other aspects of renegotiation see [16-03] (discharge by agreement), [22-05]–[2209] (rescission by agreement), [25-13]–[25-14] (improper pressure). See [3-16]. (1809) 2 Camp 317; 170 ER 1168. This is because consideration is not required: [3-05]. [1893] 1 QB 256 (see [2-06]), Cases and Materials, §3-06C. Cf Larkin v Girvan (1940) 40 SR (NSW) 365 at 368. [1991] 1 QB 1. [1991] 1 QB 1 at 15–16. See [3-01]. See [1991] 1 QB 1 at 19, 22. See eg J W Carter, Andrew Phang and Jill Poole, ‘Reactions to Williams v Roffey‘ (1995) 8 JCL 248; Contract as Assumption, Chapter 3. But see Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723. Cf Dome Resources NL v Silver (2008) 72 NSWLR 693 at 711; [2008] NSWCA 322 at [68]. [1979] QB 705. See New Zealand Shipping Co Ltd v A M Satterthwaite & Co Ltd [1975] AC 154. See also [13-07]. But cf [6-17]. (1884) 9 App Cas 605, Cases and Materials, §6-86C. Pinnel’s Case (1602) 5 Co Rep 117a; 77 ER 237. [1991] 1 QB 1 (see [3-21]). See Re Selectmove Ltd [1995] 1 WLR 474. It is assumed that neither party has fully performed its side of the contract. Cf Concut Pty Ltd v Worrell (2000) 176 ALR 693; [2000] HCA 64. On whether writing is required see [35-23]. (1973) 1 ALR 497; 47 ALJR 586, Cases and Materials, §6-66C. (1973) 1 ALR 497 at 512; 47 ALJR 586 at 594–5. Walsh J agreed. See (1973) 1 ALR 497 at 513; 47 ALJR 586 at 595. Walsh J agreed. See eg Scaffidi v Perpetual Trustees Victoria Ltd (2011) 42 WAR 59; [2011] WASCA 159. See [3-25]. On deeds see [3-05]. See McDermott v Black (1940) 63 CLR 161. Cf National Australia Bank Ltd v Pollak (2001) 186 ALR 44 at 52–3; [2001] FCA 1408 at [26]–[30]. Cf Callisher v Bischoffsheim (1870) LR 5 QB 449. See generally Butler v Fairclough (1917) 23 CLR 78 at 96; McKay v National Australia Bank Ltd [1998] 1 VR 173 at 177–8.

78 79 80 81 82 83 84 85 86 87 88 89 90 91

[1956] 1 WLR 496. [1956] 1 WLR 496 at 498. Cf Popiw v Popiw [1959] VR 197 at 199. Williams v Williams [1957] 1 WLR 148 at 151. See generally Chapters 23 and 25. See [3-26]. See [3-24]. See further [6-08]ff (promissory estoppel). See generally on estoppel [6-05]–[6-18]. See Electronic Industries Ltd v David Jones Ltd (1954) 91 CLR 288. See also [33-30]. (1973) 1 ALR 497 at 512; 47 ALJR 586 at 594. Walsh J agreed. On uncertainty and illegality see Chapters 4 and 34. (1969) 121 CLR 353, Cases and Materials, §6-53C. Cf Dayeian v Davidson (2010) 76 NSWLR 512 at 524; [2010] NSWCA 42 at [55]. See (1969) 121 CLR 353 at 363.

[page 69]

Chapter 4

Uncertainty and Conditional Contracts [4-01] Two ideas! Two ideas are dealt with in this chapter. The first is that for an agreement to qualify as a contract it must be sufficiently certain and complete. The second idea is that the parties may make an agreement ‘conditional on’, or ‘subject to’, the occurrence of a particular event. These ideas are treated together because many of the cases on conditional contracts also raise issues of uncertainty or incompleteness. [4-02] Concepts. To be enforceable as a contract in a court of law an agreement must be sufficiently certain and complete.1 The difference between incompleteness and uncertainty is easy to draw as a matter of principle. An incomplete agreement fails to qualify as a contract because the parties did not reach finality in their negotiations on one or more essential terms. But even if an agreement is complete, it may fail to qualify as a contract because it is impossible to give meaning or effect to one or more important terms. The concept of a ‘conditional contract’ is more problematic since the word ‘conditional’ is ambiguous. There are two relevant senses for ‘conditional’: ■ ‘no contract’ — the agreement is conditional in the sense that it does not exist as a contract unless and until a certain event occurs; and ■ ‘no performance’ — the agreement is a contract, but is conditional in the sense that it does not have to be performed unless and until a certain event occurs. The difference is very important. If the agreement is conditional in the first sense it is not a contract: the relevant event postpones contract formation. Until the event occurs, either party may walk away from the agreement. By contrast, if an agreement is conditional in the second sense, it is a contract. Only performance is postponed. Neither party may walk away from the contract until it is clear that the relevant event will not occur. These two senses describe two categories of case. Into which category an

agreement falls depends on the parties’ intention. If there is a document it is therefore a question of construction.2 [page 70] [4-03] Terminology. Terminology is somewhat confusing in this area. Courts often talk of ‘contracts’ being ‘void’ for uncertainty. However, this is really a contradiction. An agreement which is void is not a contract. The position is that a legal requirement for the creation of a contract is not satisfied. More difficulties surround the expression ‘conditional contract’. A condition3 is an event (or contingency) which is not certain to occur, but which the parties have agreed must occur before their agreement is a contract or required to be performed. Alternatively, it may be an event the occurrence of which ends the contractual relationship. The former is often described as a ‘condition precedent’, and the latter a ‘condition subsequent’.4

Uncertainty and Incompleteness General [4-04] Forms. Uncertainty arises from the inclusion by the parties of terms which lack meaning or which cannot be applied to the facts. This may arise for a variety of reasons, including that an agreement has more than one possible meaning and it is impossible to tell which is intended. However, in practice, agreements are today hardly ever found to be uncertain.5 Incompleteness results from an omission by the parties of a term which is essential in order for the agreement to operate as a binding contract. This usually occurs because negotiations break down before agreement is reached on all the necessary terms. [4-05] Necessary terms. The criterion by which courts determine whether an agreement is uncertain or incomplete is generally expressed in terms of whether all the essential terms of the contract have been agreed, and are capable of being given effect. There are two senses of ‘essential’. One sense is ‘necessary’. It is possible to identify some terms as necessary as a

matter of law, for all contracts.6 The parties must have reached agreement on each of the following: ■ the parties; ■ the subject matter; and ■ the consideration (in the sense of price) for each party’s promise. In a second sense, ‘essential’ refers to all the terms which the parties have indicated must be agreed if they are to be contractually bound. Therefore, it is not always sufficient for the parties to have agreed on all terms which are necessary as a matter of law. [page 71] [4-06] Approach of the courts. The modern approach is to uphold agreements wherever this is possible. In Meehan v Jones,7 Mason J expressed this in terms of the ‘traditional doctrine that courts should be astute to adopt a construction which will preserve the validity of the contract’. Indeed, the courts bend over backwards to enforce an agreement which the parties regarded as a contract even though there is an element of uncertainty or incompleteness.8 This is particularly true of contracts which have been partly performed.9 For example, in Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd10 uncertain matters relating to the use and purchase of a computer were made clear by what the parties did, and the agreement was therefore sufficiently certain. [4-07] Resolving the issue. To resolve an issue of uncertainty or incompleteness, four steps may need to be taken. First, identify the element of uncertainty or incompleteness. This might appear obvious. However, not every apparent vagueness actually raises a legal issue.11 Generally speaking, lack of clarity in meaning is almost always capable of being resolved. Second, if there is an element of uncertainty or incompleteness, determine its significance. The rule is that only uncertainty or incompleteness in relation to an essential element prevents the agreement being a contract.12 Third, see whether the element of uncertainty or incompleteness can be ‘cured’.13 In some cases a term can be implied. In other cases, recourse may be had to:

(1) any procedure included in the contract for resolving the matter; or (2) an external standard. Fourth, if the agreement is still uncertain or incomplete ask whether it is permissible to ignore (‘sever’) the uncertain or incomplete element and enforce the balance of the contract.14 If severance occurs, the parties are bound. [4-08] Other perspectives. There are at least two other perspectives for the discussion above.15 First, if it is argued that the agreement was formed by offer and acceptance, an uncertain or incomplete offer, even if ‘accepted’, cannot lead to a contract. The other perspective is the ‘consideration’ alleged. An agreement cannot qualify as a contract unless the consideration for any promise sought to be enforced is sufficiently certain. [page 72] These can be put to one side. The concern is whether what is claimed to be a contract is uncertain or incomplete.

Uncertain Agreements [4-09] Uncertainty and difficulty in construction. Difficulty in construction is not synonymous with uncertainty.16 Provided the words in issue can be given a reasonably definite meaning, no issue of uncertainty arises merely because the words at issue are capable of more than one meaning, or are otherwise difficult to construe or apply.17 Nor is ambiguity necessarily a problem. If two (or more) meanings are open, the function of the court is simply to determine (objectively) which meaning was intended by the parties.18 Only if the rules which govern the resolution of ambiguity19 fail is there a problem. Commercial contracts are full of words such as ‘reasonable’, ‘about’, ‘at cost’, ‘fair average quality’. It is almost always possible to attribute meaning to such words. For example, in Bowes v Chaleyer20 the High Court saw no uncertainty in the words ‘as soon as possible’ in a sale of goods contract which required goods to be shipped in two lots, ‘Half as soon as possible. Half two months later’. More recently, in Trawl Industries of Australia Pty Ltd v Effem Foods Pty Ltd trading as ‘Uncle Bens of Australia’21 it was held that words used in a formula for fixing

prices in future years of a contract for the supply of goods were not uncertain. The relevant words — ‘cost … plus percentage profit margin’ — could be applied objectively, if necessary by recourse to expert evidence or the understanding of people in the trade. [4-10] Construction to avoid uncertainty. Obvious errors or inconsistencies in a contract document can usually be resolved by construction. No issue of uncertainty then arises. For example, in S & E Promotions Pty Ltd v Tobin Bros Pty Ltd22 although a clause in a contract made references to cll 21 and 17, these were not the appropriate cross-references. It was clear that the intention was to refer to cll 19 and 21. The references were read accordingly, so that no issue of uncertainty arose. In this context, ‘construction’ may involve the addition of words to correct clerical errors.23 For example, in Fitzgerald v Masters24 a sale of land contract purported to incorporate (into the contract) a set of standard terms ‘so far as they are inconsistent herewith’. Either the word ‘not’ had been omitted, or ‘inconsistent’ should have been [page 73] ‘consistent’. The High Court held that in order to avoid uncertainty the clause was to be read accordingly.

Incomplete Agreements [4-11] Failure to agree on price. The classic illustration of an incomplete agreement is one which omits the contract price. Although this sounds like a necessarily fatal omission, it is only fatal as a matter of law in a sale of land transaction.25 For other agreements, the omission of price may be cured in either of two ways:26 ■ reasonable price — it may be implied that the parties intended a ‘reasonable’ price to be paid; or ■ method — the contract may include a method for fixing the price, such as appointing an expert. However, if neither is applicable, the agreement will fail as a contract.

[4-12] Terms to be negotiated.27 The law does not recognise an agreement to enter into a contract as a binding contract.28 Similarly, an agreement to negotiate is not usually binding as a contract. The context in which this often arises is where the parties enter into a preliminary agreement. This is an agreement which is intended to structure the negotiation of a final agreement. Descriptions such as ‘heads of agreement’, ‘letter of intent’ and ‘terms sheet’ are used to describe such agreements. The idea is that once the negotiations have been completed, the preliminary agreement is replaced. At least that is the theory!

In Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd29 four companies contemplated a coalmining joint venture. They executed a document which commenced: Heads of Agreement This document will serve to record the terms and conditions subject to and upon which [the parties] agree to associate themselves in an unincorporated Joint Venture for the purpose of developing and exploiting the coal prospect … The parties will forthwith proceed in good faith to consult together upon the formulation of a more comprehensive and detailed joint venture agreement (and

[page 74] any associated agreements) which when approved and executed will take the place of these heads of agreement …

The objectives and intention of the parties, as expressed in the statement quoted above were: ■ a record — of agreed terms; ■ an undertaking — to consult together on a more comprehensive joint venture contract; ■ a standard for consultation — good faith; and ■ an agreement as to the impact of the final contract — discharge of the heads of agreement. Many attempts were made — in 14 drafts — to finalise the joint-venture contract, but all failed. When Coal Cliff withdrew from the negotiations

Sijehama contended that Coal Cliff was not entitled to do so, and claimed damages. The New South Wales Court of Appeal held that Sijehama was not entitled to damages because the heads of agreement was not, in point of law, a contract. However, two of the judges (Kirby P and Waddell A-JA) considered that, in principle, parties who have expressly bound themselves to negotiate in good faith should be held to their promise. The problem with the heads of agreement was that the parties had omitted to state criteria which could be used to decide that a party to the heads of agreement had not acted in good faith. This suggests that if the parties do set out the relevant criteria, an agreement to negotiate in good faith may be upheld as a binding contract.30 Whether relief for the breach of such a contract would be valuable is, however, a further issue. The third judge (Handley JA) disagreed. He said31 that ‘a promise to negotiate in good faith is illusory and therefore cannot be binding’. The view of Handley JA is also the position under English law,32 and the status of agreements to negotiate in good faith remains uncertain in Australia.33 An agreement to conciliate in relation to a matter is probably more likely to be legally effective. However, the requirements of certainty and completeness must still be satisfied.34

Resolving Apparent Uncertainty or Incompleteness Implied terms and external standards [4-13] Implied terms. Courts routinely imply terms to fill apparent gaps in contracts.35 For example, if the agreement is silent on when performance is to [page 75] commence, a term requiring performance to commence within a reasonable time is implied. The implication of a term is a very powerful device for curing apparent uncertainty or incompleteness. However, a court cannot complete an incomplete agreement. The issue is whether, by applying the rules under which

terms are implied, it can be concluded that the parties reached agreement on the outstanding matter. Accordingly, if the agreement omits a term because it was still being negotiated, no term can be implied.36 Assume that an agreement for the provision of services fails to state the price which the customer must pay for the services. The agreement will fail as a contract unless a term can be implied. In most cases, a court will conclude that the parties impliedly agreed that a reasonable price would be paid. Where an agreement has been partly performed, the inference will be easy to draw.37 It is provided for by legislation in the case of sale of goods contracts.38 [4-14] External standards. If the position is reached where an issue of apparent uncertainty or incompleteness cannot be resolved merely by construing the contract, or implying a specific term, a court may apply an external standard such as reasonableness if that is a legitimate inference as to the intention of the parties. However, there are limits to that approach. In practice, it tends to be restricted to particular kinds of obligations and contracts with which the courts are familiar because of the frequency with which disputes in relation to such matters come before the courts. Slight differences in the wording of an agreement may be significant. For example, in Allcars Pty Ltd v Tweedle39 an agreement to take goods on hirepurchase stated the payment terms and incorporated the terms of the ‘usual hiring agreement’ of a company which the plaintiff could nominate. Since the nomination was of a company which did have a ‘usual’ hiring agreement, the contract was effective. However, in G Scammell & Nephew Ltd v Ouston,40 where the purchaser of a motor van paid the deposit and agreed to pay the balance ‘on hire-purchase terms’, it was held that the agreement was incomplete. In the absence of some external standard, there was no way to determine what ‘hirepurchase terms’ were applicable.

Contractual machinery [4-15] Third party resolution. A very common way for contracting parties to anticipate and deal with problems of uncertainty and incompleteness is to provide [page 76]

for the resolution of disputes by a third party. Accordingly, the dispute resolution provision can be invoked if such an issue arises. A third party may be empowered to resolve a dispute in relation to one or more terms. This includes a dispute as to price. The usual example is an arbitration clause. However, in cases where there is apparent uncertainty or incompleteness, the arbitration clause must be wide enough to cover the dispute which has arisen. Three cases may be contrasted.

Contrasting cases In May and Butcher Ltd v R41 a sale of goods agreement was held to be incomplete where it said that prices were to be agreed, because the arbitration clause in the agreement did not apply. The same conclusion was reached in Whitlock v Brew,42 where the incomplete provision related to a lease of a portion of land agreed to be sold. Incompleteness was not saved by an arbitration clause. Although the contract referred to ‘such reasonable terms as commonly govern such a lease’, it did not authorise the arbitrator to impose such terms as the arbitrator might think were reasonable. By contrast, in Foley v Classique Coaches Ltd43 an agreement to purchase all petrol requirements at a price to be agreed by the parties from time to time contained an arbitration clause. When a dispute arose, the agreed disputes procedure was held to permit the arbitrator to resolve any dispute as to the quantity, quality and price of petrol. This was on the basis that the parties had impliedly agreed that the arbitrator should apply a standard of reasonableness. An independent third party (such as an arbitrator or expert), may be given the power to determine essential terms. Accordingly, in Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd44 Gibbs CJ, Murphy and Wilson JJ said that ‘it is … well established that the parties to a contract may leave terms — even essential terms — to be determined by a third person’. The contract need not include criteria to guide the third party.45 There are, as always, limits. If the third person (such as a solicitor) acts for one of the parties, the third party may determine non-essential terms. However, a criterion such as ‘reasonableness’ must be available to determine whether the terms are appropriate.46 There is no difficulty in allowing a party latitude in how to perform its obligations.47 But whether one party can be given the right to settle essential

[page 77] terms is debatable. In that context it may be necessary for the parties to state an applicable criterion. Otherwise, the agreement is based on illusory consideration.48 [4-16] Contractual machinery breakdown. What is the position if the parties’ agreed machinery breaks down? For example, assume an agreement says that if there is a dispute as to the value of some item of performance, an expert must be appointed by the parties to value it. If one party refuses to join in the appointment, the machinery will fail unless a court can step in. The issue arose in Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd.49 Wilson was lessee of a service station and car park. The lease (cl 4.01) included an option for Wilson to have a further three-year lease. Rent for that period was to be ‘mutually agreed’. If no agreement was reached, Wilson promised to pay ‘such rental as may be fixed by an arbitrator’. Clause 3.05(b) said the President of the Queensland Law Society Inc could nominate an arbitrator. Although Wilson exercised the option, no appointment was made under cl 3.05(b). The simple solution would have been for the court to make an appointment.50 However, the High Court held it had no power to do so. All that could be done was to order the lessor to do whatever was ‘reasonably necessary to ensure that the rent’51 was fixed and, if the rent was fixed, renew the lease. It follows that, generally, a court will not step in to impose a different machinery when the agreed machinery breaks down. The contract may therefore become ineffective. For example, if there is a contract to sell goods at a price fixed by the valuation of a third party, and the third party cannot or does not make the valuation, the agreement becomes void.52 But the buyer must pay a reasonable price for any goods actually delivered.

Severance [4-17] If all else fails … If all else fails, that is, the uncertainty or incompleteness cannot be resolved by any of the methods described above, the only option for the court is to consider ignoring the offending provisions of the agreement. This process is termed ‘severance’. The objective of severance is to enable the contract to be enforced as if the

uncertain or incomplete element was not included in the contract. For example, in Fitzgerald v Masters53 the clause in question referred to a set of standard terms which did not in fact exist. Severance involved enforcing the contract on the terms actually stated. The end result was that what looked to be an uncertain or incomplete contract was valid. [page 78] [4-18] Basis for severance. The basis for severance is the intention of the parties. Construction of the contract must therefore show that, rather than have the whole agreement declared void for uncertainty or incompleteness, the parties intended the offending provisions to be ignored. For example, if an ancillary term of a contract is meaningless, it will usually be severed.54 Severance must be consistent with the intention of the parties.55 As in all questions of construction, an objective approach is applied. Severance is not always possible. Cases like G Scammell & Nephew Ltd v Ouston56 and Whitlock v Brew57 do not really present an opportunity for severance. In the former, because the transaction contemplated was one of hirepurchase, the intention was to enter into an agreement providing for payment of the price by instalments over time. Severance would have fundamentally changed the agreement by converting a credit transaction into a sale of goods for cash. [4-19] Test for severance. The key question is whether severance would radically alter the agreement. Severance tests state this basic idea in various ways. For example, in Whitlock v Brew58 Taylor, Menzies and Owen JJ approved the formulation of Knox CJ in Life Insurance Co of Australia Ltd v Phillips:59 When a contract contains a number of stipulations one of which is void for uncertainty, the question whether the whole contract is void depends on the intention of the parties to be gathered from the instrument as a whole. If the contract be divisible, the part which is void may be separated from the rest and does not affect its validity.

Under this test, the fact that the contract is divisible is an indication of the parties’ intention. If they have made the contract divisible this enables the court to deduce an intention in favour of severance. Assume that the parties construct an agreement for the sale of goods so that a separate payment falls due in respect of each delivery, and the contract specifies different categories of goods for each delivery. Uncertainty in relation to the terms governing one delivery should not

affect the other deliveries because the contract makes each delivery divisible from each other delivery. Where the contract is not expressed in divisible terms, determining the parties’ intention is more difficult. What is ultimately the key factor is whether severance will leave the essential terms of the contract intact. For example, in Fitzgerald v Masters60 the clause in question could only be severed because all the essential terms had been agreed, and it was obvious that the parties did not intend to be bound only if the terms referred to existed. [page 79]

Conditional Contracts General [4-20] The condition precedent/subsequent distinction. Reference was made earlier to the distinction between conditions precedent and conditions subsequent.61 A condition precedent is an event which the parties have agreed must occur before all or part of the agreement is effective or enforceable. A condition subsequent is an event which the parties have agreed will terminate the contract. Consider a contract between Sid and Bruce for the sale of 1000 tonnes of wheat. The wheat is to be exported from Newcastle to Osaka and the contract states ‘this contract is subject to the issue of an export licence to Sid’. If this clause is construed as stating a condition precedent, the issue of the licence is an event which must occur before the contract becomes binding or before it becomes enforceable. Alternatively, the clause may be construed as a condition subsequent, so that the non-issue of the licence terminates the contract. The fact that the same event may be seen as either a condition precedent or a condition subsequent tends to show that the distinction is largely a semantic one.62 What is important is the impact of failure of the condition. [4-21] Condition precedent to what? In all conditional contract cases, the crucial issue is to answer the question ‘Condition precedent to what’? There are two situations: existence of a contract or performance of the contract.63 These may be explained by reference to the contract referred to above, between Sid and Bruce, for the sale of 1000 tonnes of wheat.

(1) There is no contract until the export licence is issued to Sid. Because there is no contract until the licence has been obtained, either party may withdraw from the agreement at any time prior to the issue of the licence. (2) The obligation of the parties to perform is postponed until the export licence is issued to Sid. Until the licence issues, neither party is entitled to withdraw from the agreement. If no licence is obtained, the contract cannot be performed. The significant feature of this situation is that it is meaningful to ask whether Sid has promised to obtain the licence. That is not possible in the first situation due to the absence of contract. If Sid made that promise, expressly or impliedly, Bruce is entitled to sue for damages. [4-22] Making the choice. ‘Subject to’ provisions are classified in accordance with the intention of the parties. The contract must be construed in accordance with the view that a reasonable person in the same position of the parties would take. [page 80] Each case necessarily depends on its own facts. The parties may have expressly stated that there is no contract until the event in question occurs. In two contexts, that intention may be deduced as a matter of construction. The first is when the expression ‘subject to contract’64 has been used. The second is where statute prohibits entry into a contract prior to occurrence of the relevant event.65 In all other situations it is unusual today for a court to decide that the event conditions the existence of a contract.

Subject to Contract [4-23] Introduction. The words ‘subject to contract’ mean subject to the execution of a contractual document stating the terms of the contract. A great many cases concern the construction of this and similar expressions in sale of land agreements.

Three categories The effect of the words is clear. However, the purpose of the formal

document varies. Three possibilities (categories of case) were identified by the High Court in Masters v Cameron:66 (1) immediately bound — signing the formal document is no more than a formality and does not affect the rights of the parties; (2) performance postponed — the obligation of the parties to perform is postponed until the formal document has been signed; or (3) no contract — there is no contract until the formal document has been signed. Recent cases suggested there is a fourth category. This is one in which an agreement is ‘subject to contract’ and the intention is that the formal agreement may contain further terms.67 Why this is a separate category is unclear. It is, indeed, obvious that in all situations the document signed can include other terms — if the parties choose to do so. The cases say that in the fourth category the parties are bound, and that it is irrelevant whether the parties actually agree to additional terms. The cases must therefore fall within category (1) or (2). Thus, in relation to category (2), Masters v Cameron acknowledges68 that the formal contract may be a document which is ‘fuller or more precise but not different in effect’. Into which category a particular agreement should be placed depends on the intention of the parties. It is therefore a question of construction. [page 81] [4-24] No contract. It is convenient to begin with the third category. In Masters v Cameron69 the High Court accepted that use of the expression ‘subject to contract’ in a sale of land transaction creates a presumption that there is no contract until the parties have signed a formal contract. In that case, the presumption was not rebutted. Therefore, neither party was bound and the purchasers were not in breach of contract when they withdrew from the transaction. It was irrelevant that all the terms of the contract had been agreed. Therefore, in the third category either party may simply refuse to sign the formal contract. Even though they do not use the expression ‘subject to contract’ (or equivalent), the parties may contemplate the execution of a formal contract. There being no express condition precedent, it is a question of construction

whether the existence of a binding contract is conditional upon the execution of a formal document. For example, in Marek v Australasian Conference Association Pty Ltd70 the parties intended to contract by exchanging executed documents. Therefore, although there was no express ‘subject to contract’ clause, there was no contract until documents were exchanged. Outside the sale of land context there may be no presumption. However, the transaction may still fall into the ‘no contract’ category, either because of the expressed intention of the parties or the impact of applicable usages. Therefore, particular words may be found to have a special significance in a trade, namely, that there is no contract prior to adoption of a formal document.71 Whatever the context, even if the parties agreed to postpone contract formation until the execution of a formal document, their conduct may show that they have dispensed with the requirement.72 [4-25] Performance postponed. If the existence of a contract is not postponed until they have signed the contract document, the usual intention is for performance to be postponed. For example, in Niesmann v Collingridge73 a contract granted the plaintiff an option to buy land. All the essential terms of a contract to purchase had been agreed, including the price. The term stating the price stipulated that part was to be paid ‘on the signing of the contract’. This was held to indicate that each party was obliged to sign a document conforming to the terms of the agreement. Because each party has expressly or impliedly promised to sign the formal document, a refusal to do so is a breach of contract. In such a situation, the court may make an order requiring the formal document to be signed. This is the first step in carrying out an order for specific performance of a sale of land contract.74 [page 82] [4-26] Formal document a matter of form. Although fairly rare in practice, it is possible for parties to intend the signing of the formal document to be a matter of form.75 Having reached finality in negotiating the terms of their bargain, the parties are immediately bound by the agreement as a contract and it is irrelevant that there is no formal document. In such cases, the ‘subject to contract’ clause merely expresses a desire to have a formal document, perhaps because the contract was agreed in correspondence

between the parties. Since the clause has no impact, an action for breach can be brought without first obtaining an order for execution of the formal document.

Other ‘Subject to’ Clauses [4-27] Generally. All ‘subject to’ clauses are governed by the same general principles. This is because the effect of any such clause always depends on construction of the contract. Once we move outside the ‘subject to contract’ context, it is assumed that the event referred to in the clause conditions (postpones) contract performance rather than contract formation.76 Usually, if the parties intend there to be no contract until the event occurs, they must expressly say so. This position was established in 1982 by the decision in Meehan v Jones.77 Earlier cases in which courts decided that the event in question postponed contract formation are not now very reliable.78 Why is this approach taken? One answer is to consider the ability to resile from the agreement. If a particular event must occur in order for a contract to exist, there is nothing to bind either party to wait until the event occurs. They can just walk away.79 Unless the parties have said so, that must be an unlikely intention. The approach also promotes good faith. Because the parties contemplate that occurrence of a particular event affects their relations, they should at least be bound to wait to see whether it occurs. For example, assume that X agrees to buy a ship from Y at a named price, ‘subject to A’s inspection and report that the vessel is seaworthy’. If the event (A’s inspection and report) makes performance of the agreement conditional, X is obliged to wait, and cannot resile from the contract if, for example, the market price of the vessel happens to fall. [4-28] Subject to finance. Why would a contract use the words ‘subject to finance’? The reason is that the paying party may be unsure of their financial resources, and not want to be contractually bound to perform the contract if finance at a reasonable rate of interest cannot be obtained. The contract might be for the purchase of a house and land at a price of $750,000, for which the major source of finance is a bank loan.80 By making the contract ‘subject to finance’, the buyer [page 83]

obtains a measure of protection against the risk that no bank will provide a loan at a reasonable rate.

For many years the legal effect of the expression ‘subject to finance’ was unclear. On one view, such clauses were too uncertain to be enforced. The matter was resolved by the High Court in Meehan v Jones.81 The case concerned a contract to sell land on which an oil refinery was built. Special condition 1 of the contract provided that the contract was ‘executed by the parties subject to’: (b) The Purchaser … receiving approval for finance on satisfactory terms and conditions in an amount sufficient to complete the purchase.

The clause went on to say that if the condition (approval of finance) was not satisfied on or before a specified date, the contract was ‘at an end’. All payments previously made by the purchaser would then be refunded. Prior to the agreed date the vendor sold the land to a third party. Shortly afterwards, the purchaser told the vendor that finance had been obtained. Several issues arose. First, was condition 1 too uncertain? The court made two points: (1) the expression ‘subject to finance’ was not inherently uncertain; and (2) the fact that it also referred to ‘satisfactory’ terms and conditions made no difference.82 Accordingly, condition 1 was sufficiently certain to be enforced. Second, did special condition 1 make the existence of a contract depend on approval of finance? The agreement did not expressly say so. Nor, in the court’s view, was that the construction of the contract. Accordingly, the vendor’s conduct in selling the land to a third party was a breach of contract. Third, was the purchaser obliged to seek finance? Since the purchaser had obtained finance, it was not necessary to resolve this issue. Of course, the contract could have included an express statement. Even though it did not, two members of the court thought there was an implied term requiring the purchaser to use reasonable endeavours to obtain finance.83 The subsequent cases indicate that the obligation will usually be implied.84 There are good commercial reasons for the above conclusions: (1) From the purchaser’s perspective: ■ the purchaser can seek finance without having to worry about the vendor reselling the land in the meantime; and

■

if the purchaser obtains sufficient finance from a third party, the vendor is obliged to complete the purchase, and the purchaser does not risk having to pay for the finance without being able to use it as intended. [page 84]

(2) From the vendor’s perspective: the vendor does not face the risk that the purchaser will simply not bother to look for finance; for example, if land prices fall. [4-29] Personal satisfaction. Cases such as Meehan v Jones85 have another dimension. Special condition 1 referred to the ‘satisfaction’ of the purchaser, and also went on to refer to an amount ‘sufficient to complete the purchase’. It is fairly common to find words referring to ‘satisfaction’ in ‘subject to’ clauses. If a party were to have a complete and unfettered discretion, it might be argued that the consideration provided, for example (as in Meehan) by promising to buy land subject to fulfilment of the condition, is illusory.86 However, there is always at least a minimum standard of honest dissatisfaction (good faith). This is sufficient to head off the illusory consideration argument. ‘Honest’ dissatisfaction is a subjective standard.87 However, as a matter of construction or implication, the parties may have agreed to an objective standard, that is, ‘reasonable dissatisfaction’. This is more onerous: the question is whether a reasonable person in the position of the party in question would be dissatisfied.

QUICK QUIZ Short answer (1) To what does the concept of uncertainty refer? (2) What is meant by the expression ‘conditional contract’? True or false? (1) An agreement is too uncertain to be a contract if it is ambiguous.

(2) If necessary to resolve a construction difficulty, words may be added to a contract in the construction process. (3) An agreement may be incomplete if a material term is missing. (4) If an agreement is made ‘subject to finance’, generally there is no contract until finance is obtained. Choose the best answer (1) Clause 9.2 of the SAMPLE SALE OF GOODS CONTRACT: (a) is sufficiently certain; (b) is void for uncertainty; (c) is void for uncertainty unless a ‘usual’ set of force majeure terms can be found; (d) is not severable; or (e) should be construed as referring to ‘reasonable’ force majeure terms. [page 85] (2) The phrase ‘subject to contract’ signifies that: (a) the parties are still negotiating; (b) one of the parties is illiterate; (c) there is no contract unless and until a formal document is executed; (d) the contract is one for the sale of goods; or (e) the parties contemplate the execution of a formal document. (3) An agreement to negotiate in good faith is: (a) void as an agreement to agree; (b) a waste of time; (c) binding only if in writing; (d) in principle binding; or (e) none of the above. (4) If A Ltd agrees to contract with B Ltd ‘subject to approval of A Ltd’s shareholders’: (a) shareholder approval is a condition precedent;

(b) shareholder approval is a condition subsequent; (c) shareholder approval is a formality; (d) A is bound by the contract whether or not shareholder approval is obtained; or (e) A has promised to obtain shareholder approval.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

28 29 30 31

See generally H K Lücke, ‘Illusory, Vague and Uncertain Contractual Terms’ (1977) 6 Adel LR 1. See generally on construction Chapter 10. For other meanings see [16-19]–[16-23]. For an illustration of the difference see [4-20]. See [4-06], [4-09]. See also [1-01] (need for promise or set of promises). (1982) 149 CLR 571 at 589; 42 ALR 463. See eg Cudgen Rutile (No 2) Pty Ltd v Chalk [1975] AC 520. See eg York Air Conditioning & Refrigeration (A’sia) Pty Ltd v The Commonwealth (1949) 80 CLR 11 at 53. (1988) 5 BPR 11,110 at 11,118. See [4-09]. See eg May and Butcher Ltd v R (1929) [1934] 2 KB 17n at 22. For the sense of ‘essential’ see [4-05]. See [4-13]–[4-16]. See [4-17]–[4-19]. Cf [34-46]–[34-53]. See [3-31] (‘illusory’ consideration). See Carter, Construction, §14-26. See McDermott v Black (1940) 63 CLR 161 at 175; Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 437. See further [4-10]. See Meehan v Jones (1982) 149 CLR 571 at 578; 42 ALR 463. See [10-27]–[10-28]. (1923) 32 CLR 159, Cases and Materials, §30-52C. (1992) 27 NSWLR 326. (1994) 122 ALR 637 at 547. See Carter, Construction, §3-06. If the mistake is not purely clerical, an order for rectification is usually necessary. See [24-21]–[24-23]. (1956) 95 CLR 420. See Hall v Busst (1960) 104 CLR 206. See also [4-13]. See J W Carter and M P Furmston, ‘Good Faith and Fairness in the Negotiation of Contracts’ (1994) 8 JCL 1 and (1995) 8 JCL 93; J M Paterson, ‘The Contract to Negotiate in Good Faith: Recognition and Enforcement’ (1996) 10 JCL 120. Masters v Cameron (1954) 91 CLR 353 at 362. Contrast [4-15] (parties may confer on a third party the power to determine terms which were not agreed). (1991) 24 NSWLR 1, Cases and Materials, §4-22C. See also Eastern Health v MIA Victoria Pty Ltd (2009) 22 VR 502; [2009] VSC 105. See United Group Rail Services Ltd v Rail Corporation of New South Wales (2009) 74 NSWLR 618 at 632; [2009] NSWCA 177 at [50]. (1991) 24 NSWLR 1 at 42.

32 33 34 35 36

37 38

39 40 41 42 43 44 45 46 47 48 49 50 51 52

53 54 55 56 57 58 59 60 61 62 63 64 65 66 67

68

See Walford v Miles [1992] 2 AC 128. See Australis Media Holdings Pty Ltd v Telstra Corp Ltd (1998) 43 NSWLR 104 at 127–8; Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd (2010) 41 WAR 318; [2010] WASCA 222. See Hooper Bailie Associated Ltd v Natcon Group Pty Ltd (1992) 28 NSWLR 194 at 207–9. Contrast Elizabeth Bay Developments Pty Ltd v Boral Building Services Pty Ltd (1995) 36 NSWLR 709 at 715–17. See generally Chapter 8. See Aotearoa International Ltd v Scancarriers A/S [1985] 1 NZLR 513 at 556; Australian and New Zealand Banking Group Ltd v Frost Holdings Pty Ltd [1989] VR 695 at 702. See Brian Coote, ‘Contract Formation and the Implication of Terms’ (1993) 6 JCL 51. If it is impossible to imply an agreement to pay a reasonable price, restitution may be available in respect of benefits conferred. See generally Chapter 30. See ACT: Sale of Goods Act 1954, s 13; NSW: Sale of Goods Act 1923, s 13; NT: Sale of Goods Act 1972, s 13; Qld: Sale of Goods Act 1896, s 11; SA: Sale of Goods Act 1895, s 8; Tas: Sale of Goods Act 1896, s 13; Vic: Goods Act 1958, s 13; WA: Sale of Goods Act 1895, s 8. [1937] VLR 35. [1941] AC 251. (1929) [1934] 2 KB 17n. (1968) 118 CLR 445. [1934] 2 KB 1. (1982) 149 CLR 600 at 604; 43 ALR 68. See Himbleton Pty Ltd v Kumagai (NSW) Pty Ltd (1991) 29 NSWLR 44 at 63–4. See Godecke v Kirwan (1973) 129 CLR 629; 1 ALR 457. See generally M Howard, ‘Terms to be Supplied by a Contracting Party’ (1982) 56 ALJ 77. See Meehan v Jones (1982) 149 CLR 571; 42 ALR 463. See generally on illusory consideration [3-31]–[3-32]. (1982) 149 CLR 600; 43 ALR 68. See Sudbrook Trading Estate Ltd v Eggleton [1983] 1 AC 444. (1982) 149 CLR 600 at 606; 43 ALR 68 per Gibbs CJ, Murphy and Wilson JJ. See ACT: Sale of Goods Act 1954, s 14; NSW: Sale of Goods Act 1923, s 14; NT: Sale of Goods Act 1972, s 14; Qld: Sale of Goods Act 1896, s 12; SA: Sale of Goods Act 1895, s 9; Tas: Sale of Goods Act 1896, s 14; Vic: Goods Act 1958, s 14; WA: Sale of Goods Act 1895, s 9. (1956) 95 CLR 420 (see [4-10]). See Nicolene Ltd v Simmonds [1953] 1 QB 543; Whitlock v Brew (1968) 118 CLR 445 at 461. See [4-19]. [1941] AC 251 (see [4-14]). (1968) 118 CLR 445 (see [4-15]). (1968) 118 CLR 445 at 461. (1925) 36 CLR 60 at 72. (1956) 95 CLR 420 (see [4-17]). See [4-03]. See Meehan v Jones (1982) 149 CLR 571 at 582; 42 ALR 463. See also [4-02]. See [4-23]–[4-26]. See Roach v Bickle (1915) 20 CLR 663. (1954) 91 CLR 353 at 360. The key case is Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 (affirmed (1986) 40 NSWLR 631). See also eg Lucke v Cleary (2011) 111 SASR 134 at 152; [2011] SASCFC 118 at [71]. For discussion see eg G J Tolhurst, J W Carter and Elisabeth Peden, ‘Masters v Cameron — Again!’ (2011) 42 VUWLR 49. See (1954) 91 CLR 353 at 360 per the court.

69 70 71

72

73 74 75 76 77 78 79 80 81

82 83 84 85 86 87

(1954) 91 CLR 353, Cases and Materials, §5-16C. (1990) [1994] 2 Qd R 521 at 528–9. See Samos Shipping Enterprises Ltd v Eckhardt & Co KG (The Nissos Samos) [1985] 1 Lloyd’s Rep 378 at 385 (presumed from use of ‘subject [to] details’ in an agreement for the sale of a ship that there is no binding contract until details are agreed). See PRA Electrical Pty Ltd v Perseverance Exploration Pty Ltd (2007) 20 VR 487; [2007] VSCA 310; RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG (UK Production) [2010] 1 WLR 753; [2010] UKSC 14. (1921) 29 CLR 177. Contrast Commonwealth Bank of Australia v Carotino (2011) 111 SASR 573 at 589; [2011] SASCFC 110 at [63]. See generally on specific performance Chapter 29. See eg Lennon v Scarlett & Co (1921) 29 CLR 499. See also [4-22]. (1982) 149 CLR 571; 42 ALR 463 (see [4-28]). See eg Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 542, 557; 41 ALR 441. See [4-02]. Repayment of the loan will be secured by a mortgage over the property. (1982) 149 CLR 571; 42 ALR 463, Cases and Materials, §5-06C. See J P Swanton, ‘“Subject to Finance” Clauses in Contracts for the Sale of Land’ (1984) 58 ALJ 633 and 690. See also Graham v Pitkin [1992] 1 WLR 403. See further [4-29]. See (1982) 149 CLR 571 at 591, 598; 42 ALR 463. See eg Progress and Properties (Strathfield) Pty Ltd v Crumblin (1984) 3 BPR 9496. (1982) 149 CLR 571; 42 ALR 463 (see [4-28]). See [3-31]–[3-32]. See eg Astra Trust Ltd v Adams [1969] 1 Lloyd’s Rep 81.

[page 86]

Chapter 5

Intention to Create Legal Relations [5-01] Issues. This short chapter is concerned with issues which rarely arise in the decided cases. An agreement can only qualify as a contract if it satisfies the legal requirements discussed in previous chapters. It would therefore be logical to say that such an agreement must be a contract. But that might sometimes be a very silly result. For example, if Barry offers to lend his sister Jill his copy of King Lear if she will promise to lend him her copy of Othello when she has read it, he is hardly likely to sue her for breach of contract if she accepts the offer but then refuses to carry out the agreement. Even though there looks to be offer, acceptance and consideration for an agreement which is complete and sufficiently certain, we know the arrangement is not a contract. But what is the legal rationale? In the commercial context parties will almost invariably regard any agreement which satisfies the legal requirements for a contract as contractually binding. But can they decide otherwise? Can they say ‘This agreement is binding in honour but not at law’? [5-02] The principle. An intention to create legal relations is a necessary ingredient for every contract.1 If there is no intention to contract, the agreement is not contractually binding. Unlike the concepts discussed so far, the requirement of intention to contract is not the subject of specific detailed rules. In most cases, the question is answered objectively, that is, without asking whether the parties actually (subjectively) intended to create legal relations. To assist with that approach, the law makes certain presumptions.2 It is sometimes suggested that intention to create legal relations is not an independent principle of law. One argument is that the definition of an offer as an expression of willingness to contract on the terms stated3 means that there is no additional requirement. However, the authorities proceed on the basis that there is an independent principle. And emphasising that element of the offer

concept would merely shift the focus of inquiry. Moreover, contract lawyers generally prefer to deal [page 87] with issues sequentially. If all other requirements are satisfied, why tackle intention to create legal relations unless it is raised as a distinct issue? [5-03] The presumptions. Courts mostly hear commercial disputes. In that context, unless the matter is raised, it is taken for granted that the parties did intend to enter into legal relations. An intention to that effect need not be proved as a distinct matter. In other words, there is a presumption that a commercial agreement is intended to be binding as a contract. In the present context, the concept of ‘commercial contract’ is a broad one, embracing all transactions which are not of a family, social or domestic nature. For an arrangement of the latter nature, the presumption is against there being any intention to contract. Therefore, intention to create legal relations must be proved. [5-04] Some words of warning. Because family, social and domestic agreements are not often before the courts, there are relatively few cases. Many are quite old and affected by a social context which is quite different from that of Australia today. Several of the cases will appear rather insensitive. For example, a leading case is Balfour v Balfour,4 where a husband promised to pay his wife £30 per month as a living allowance when, for medical reasons, she could not go with him to Ceylon (his place of employment). His promise was held not to be enforceable as a contract. Leaving the wife to bear the family responsibilities without any means of supporting herself because the promise was not intended to be legally binding seems quite unacceptable today. Because most commercial agreements are intended to be contracts, there are very few cases in the commercial context where it has been held that there was no intention to create legal relations. Moreover, the ability to agree that legal sanctions are not available for breach of the agreement is qualified by the principle of public policy that the parties to a contract cannot oust the jurisdiction of the courts to deal with disputes in relation to their contract.5 Therefore, even if a clause says an agreement is not binding as a contract, this

will not prevent a party going to court for the purpose of obtaining a ruling on the validity or effect of the clause.

Family, Social and Domestic Agreements [5-05] Presumption may be rebutted. If a father and son agree that the son may use the car on Saturday night in ‘payment’ for mowing the lawns on Saturday morning, all the elements of contract look to be present. But because it is a family arrangement the law presumes that there is no intention to create legal relations. It is simply a family matter. For example, in Cohen v Cohen,6 an agreement by a husband to pay his wife $200 per year as a ‘dress allowance’ was not regarded as contractual in nature where there was nothing to indicate that intention. [page 88] Disputes about agreements of a family, social or domestic nature cannot be taken to court unless there is an intention to enter into a legally binding relationship. But the parties do not have to say so expressly.

Typical example Typically, cases in this area have concerned facts along the following lines.7 Consider a woman (Wendy) aged 21, married and living in England, whose aunt Agatha, aged 78, is living in Perth. Assume that Agatha promises to transfer title in her $550,000 house to Wendy if she will move to Perth (with her own family) and look after Agatha for the rest of her life. Assume Wendy leaves England (at her own expense), travels with her family to Perth and looks after her aunt Agatha very well for the next five years. If Agatha decides to sell her house and move to a retirement village, there is a risk that Wendy will have suffered considerable inconvenience and financial sacrifice without any compensation. A court is therefore likely to hold that the evidence is sufficient to rebut the presumption that there was no intention to enter legal relations.

It might be more satisfactory to say that the presumption only arises where the parties are living together, and that there should be no presumption when the parties live apart, even though the arrangement has domestic characteristics.

Commercial Agreements [5-06] Express exclusion. The presumption is that a commercial agreement is intended to be legally binding.8 Where a document is signed, the absence of an intention to create legal relations will not be inferred by construction. There must usually be an express term stating the contrary before the conclusion can be reached that there is no intention to create legal relations. For example, in the famous case of Rose & Frank Co v J R Crompton & Bros Ltd9 a commercial agreement between parties in England and New York stated that neither the ‘arrangement’ between the parties, nor the document in which its terms were expressed, was to be regarded as ‘a formal or legal agreement’. It went on to say that the parties ‘honourably’ pledged themselves to the arrangement. The provision was held to be a clear and effective expression of intention that the agreement was intended to create commercial, but not legal, relations. [5-07] Promotions and promotional statements. In the absence of an express statement, the presumption of an intention to enter legal relations will rarely be rebutted in the commercial context. However, evidence of the absence of intention [page 89] may be given,10 and if no document is signed, an intention that the agreement is not to create legal relations may sometimes be inferred. It is readily understood that a contractual obligation will not be intended where an advertiser makes extravagant, non-specific claims (‘puffs’)11 about its products. Such statements are not promises. Nevertheless, the question whether a party has made a promise is distinct from the question whether the promise was intended to be legally binding as a contract.12

In 1966 England won the World Cup of soccer. When the 1970 World Cup came round, Esso Petroleum Ltd devised a scheme to promote its petrol which sought to capitalise on the 1966 success. It therefore offered certain coins, which bore the likenesses of the English soccer team, to motorists who purchased Esso petrol. The promotion was that one coin would be given away ‘free’ for every four gallons of Esso petrol purchased. These coins had no intrinsic value, and we do not know whether the promotion was more successful than the England team; but we do know that Esso ran into problems with the revenue authorities. In Esso Petroleum Ltd v Commissioners of Customs and Excise,13 the issue was whether the coins were goods ‘produced … for sale’ and therefore chargeable to purchase tax. In order to decide that issue, the court examined whether the promotion gave rise to contracts between Esso and those who purchased petrol in response to the promotion. Clearly, motorists who purchased four gallons of Esso petrol entered into a contractual relationship with the service station proprietor. That much at least could be taken for granted. Dealing with the ‘offer’ in relation to the coins was more problematic. There were two possibilities. (1) The only contract was the contract of sale because: ■ the promotional statements made by Esso were not offers, but merely promises to make gifts to purchasers who qualified by purchasing four gallons of petrol; or ■ to the extent that the promotional statements were ‘offers’, their ‘acceptance’ did not give rise to any contract between Esso and a customer because there was no intention to create legal relations. (2) In addition to the sale contract: a collateral contract14 arose in relation to the coins between Esso and any customer who purchased four gallons of petrol in reliance on the promotional statements made by Esso. These (and other) possibilities were canvassed by those members of the court who expressed views on the matter. However, there was an equal division of opinion. By emphasising the commercial benefits to Esso and the proprietors, two members of the [page 90]

court concluded that legal relations were intended. The other two members emphasised lack of intrinsic value, the use of words such as ‘free’ and ‘gifts’ in the promotion and that customers were not likely to sue if they did not receive coins. They held there was no contract. Most consumers would no doubt assume that in such a situation a contractual entitlement would arise. Account might also be taken of the fact that, over time, the coins might become collector’s items, so that a full set might become quite valuable. Therefore, the better view is that legal relations arose in relation to the coins. As Lord Simon explained:15 Esso and the garage proprietors put the material out for their commercial advantage, and designed it to attract the custom of motorists. The whole transaction took place in a setting of business relations … [I]t seems to me in general undesirable to allow a commercial promoter to claim that what he has done is a mere puff, not intended to create legal relations …

Utility of the Classifications and Presumptions [5-08] Utility of the classification. The contrast between family, social and domestic agreements on the one hand, and commercial agreements on the other, is not very precise. It can be difficult to apply. Assume that a married woman aged 34 and living (with her son) in Washington agrees with her mother (living in the West Indies) to move to England and study for a career in reliance on a promise by the mother that she will pay her specified amounts. Should this be regarded as a family agreement for the purposes of intention to create legal relations? What if the daughter is employed and has a family, and the transaction is carried out by the mother’s solicitor? It does not seem right to treat it as anything other than a ‘commercial’ arrangement.16 Again, what of an agreement between family members, who conduct separate businesses, for the loan of a truck for a week to use in one family member’s business? Should this be treated as domestic even though there is clearly a commercial purpose?17 How should arrangements with a government department be classified? In Administration of the Territory of Papua New Guinea v Leahy18 A’s property was infested with cattle ticks. After unsuccessful attempts to eradicate them, A asked for government assistance. A government department agreed to carry out an eradication program free of charge. A’s cattle died because the department was

unsuccessful. It was held that there was no intention to create legal relations because [page 91] the arrangement was purely administrative. Therefore, no contractual remedy was available. Arguably it should have been seen as a commercial agreement.19 [5-09] Utility of the presumptions. The questions raised in the previous paragraph lead to a more fundamental question, namely, the utility of the presumptive approach. If the distinction between commercial arrangements, on the one hand, and family, social and domestic agreements on the other is uncertain, perhaps the idea that intention to enter into legal relations should be resolved by the use of presumptions is also problematic. In Ermogenous v Greek Orthodox Community of SA Inc20 a contract was alleged between a community organisation and a person engaged to serve as an archbishop.21 Gaudron, McHugh, Hayne and Callinan JJ questioned22 the ‘utility of using the language of presumptions’. Deciding that there was a contract, it was held no contrary presumption had to be rebutted. However, difficulties in identifying the full scope of arrangements of a family, social or domestic nature is not in itself a reason for doubting the utility of a presumption against intention to contract in some situations. For certain arrangements intention to create legal relations is a distinct issue, and must therefore be proved. Otherwise, there is a risk that a contract will be found when none was intended. Nor do doubts about the utility of a presumption in that context raise an issue about the contrary presumption in the commercial context. The purpose of the latter is to ensure that people are not required to prove a positive intention to contract.23

QUICK QUIZ Short answer (1) What is meant by the expression ‘intention to create legal relations’? (2) What policy considerations justify the presumption that domestic

agreements are not intended to be contractual in nature? (3) What policy considerations justify the presumption that commercial agreements are intended to be contractual? [page 92] True or false? (1) No intention to create legal relations is presumed where agreement occurs in a family, social or domestic context. (2) An irrebuttable presumption of intention to create legal relations arises in a business-to-business commercial agreement. (3) An agreement by a government department to pay a subsidy on the sale of pharmaceutical products may be attended by an intention to create legal relations. Choose the best answer (1) The decision in Balfour v Balfour [1919] 2 KB 571 (see [5-04]): (a) is best seen as a product of the social environment of England at the time it was decided; (b) was wrongly decided; (c) illustrates rebuttal of the presumption of intention to create legal relations; (d) involved a commercial contract; or (e) all of the above. (2) An agreement between brother and sister, each aged 19, to purchase a car from a dealer is: (a) binding in honour only; (b) an agreement occurring in a family context; (c) a bad idea; (d) only binding on the brother; or (e) presumed to be intended to create legal relations with the seller. (3) If a commercial agreement is binding in honour, and not as a contract:

(a) specific performance is available in relation to the agreement; (b) this must be the result of an express provision of the agreement; (c) the agreement may not be terminated for default; (d) substantial damages may be claimed for its breach; or (e) none of the above.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

See H K Lücke, ‘The Intention to Create Legal Relations’ (1970) 3 Adel LR 419. See [5-03]. See [2-04]. [1919] 2 KB 571. See [34-21]–[34-23]. (1929) 42 CLR 91. See Wakeling v Ripley (1951) 51 SR (NSW) 183; Todd v Nicol [1957] SASR 721. See eg Atco Controls Pty Ltd (in liq) v Newtronics Pty Ltd (Receivers and Managers Appointed) (in liq) (2009) 25 VR 411 at 431; [2009] VSCA 238 at [68]. [1923] 2 KB 261; [1925] AC 445, Cases and Materials, §8-16C. See Carter, Construction, §9-27. See [2-06]. Such statements may, however, amount to misleading or deceptive conduct. See Chapter 23. Cf Australian Broadcasting Corp v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540. [1976] 1 All ER 117. See generally on collateral contracts [7-12]–[7-15]. [1976] 1 All ER 117 at 121. Cf Jones v Padavatton [1969] 2 All ER 616, where there was held to be no intention to create legal relations. See Roufos v Brewster (1971) 2 SASR 218. (1961) 105 CLR 6. See also Australian Woollen Mills Pty Ltd v The Commonwealth (1955) 93 CLR 546; Milne v A-G for the State of Tasmania (1956) 95 CLR 460 at 472–3. (2002) 209 CLR 95 at 105; 187 ALR 92; [2002] HCA 8 at [25]. See also Percy v Board of National Mission of the Church of Scotland [2006] 2 AC 28; [2005] UKHL 73. (2002) 209 CLR 95 at 106; 187 ALR 92; [2002] HCA 8 at [26]. See Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd (2003) 198 ALR 657 at 740.

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Chapter 6

Pre-contractual Liability [6-01] Why contracts fail. The discussion in the previous chapters suggests various reasons why a valid contract may not result from negotiations: ■ failure to agree, for example, what is put forward as an acceptance is a counter offer; ■ absence of consideration; ■ uncertainty; ■ incompleteness; ■ failure of condition, for example, failure to satisfy ‘subject to contract’ requirement; and ■ absence of intention to create legal relations. In terms of the contract continuum,1 the parties have not reached point t2.2 [6-02] Mischief. A concept of ‘pre-contractual liability’ is useful to explain that the law does address mischiefs which may arise if contract negotiations fail. Although not a term of art,3 it is a useful description of liability which may arise when a contract fails to materialise. There are four main ideas. First, a contract may fail to materialise because one party has refused to perform an obligation under some other contract. That other contract can be enforced in order to prevent reliance by that party on its own breach of duty to deny the existence of a contract. Second, although the contract has failed to materialise, one party may have led the other to believe that a contract existed or would come into existence. The mischief here is permitting a party to go back on its conduct without compensating the other party. Unjust departures from conduct which led the other to incur expenses are addressed independently of the law of contract. Third, prior to the failure of the contract, one party may have done work for the other, or conferred some other benefit, in anticipation of the contract being agreed. The mischief here is the fact that it may be unjust to hold that there is no obligation to pay for the benefit. If there would otherwise be an unjust

enrichment, the law addresses the mischief by requiring the benefit to be paid for. [page 94] Fourth, failure of the contract to materialise may have occurred in circumstances where one party has committed some wrong, in tort or under statute. The mischief here is addressed by the law of tort, or by statute. In all cases other than the first, the absence of a contract merely means that no claim is available for contract damages. It provides a setting for consideration of other liability bases. [6-03] Complexity. The law in relation to pre-contractual liability is diverse and complex. It is easier to understand the concept by looking at an illustration.

Hypothetical Assume that Builder submits a tender to build a house for Able. The rules under which the tender was made require Able to consider tenders submitted by 10 March. Assume that, without entering into a contract, Able asks Builder to start work, and tells Builder it will ‘probably be awarded the contract’. Assume now that Able decides to award the contract to Clarence, whose tender for a lower price was received on 10 April. On the basis of the above, Builder has the following arguments: (1) acting on Clarence’s bid was a breach of the tender rules which operate as a form of preliminary contract; (2) Able’s statement that Builder would probably be awarded the contract amounted to a promise or representation relied on by Builder with the result that it would be unjust for Able to go back on the promise or representation; (3) Able has been unjustly enriched by the work which Builder has done; and (4) Able has been guilty of misleading or deceptive conduct and is liable under statute. [6-04] Labels. The discussion and illustration above emphasise that pre-

contractual liability is usually concerned with liability arising independently of contract. The concept of ‘pre-contractual liability’ is then no more than an organising label for ideas which may operate in conjunction with contract law. Translating the ‘mischiefs’ identified earlier into legal concepts, the principal ideas are: ■ breach of contract — even though the contract intended may not have materialised, another contract of a preliminary or collateral nature may have been breached. The ‘pre-contractual liability’ will then take the form of damages for breach of contract.4 This is one exception to the idea of ‘independent’ liability; [page 95] ■ estoppel — one party may be precluded (‘estopped’) from denying that a contract exists, or that a representation or promise was made and detrimentally relied on. The principles are those of the law of estoppel; ■ unjust enrichment — if a person receives a benefit for which there is no contractual obligation to pay, the law sometimes imposes an obligation to make restitution. The principles are those of the law of restitution for an unjust enrichment;5 ■ tort — since a person may be liable in tort, for example, for negligent misstatement in breach of a duty of care, a claim for damages in tort may be available.6 The principles are those of certain branches of tort law; and ■ contravention of a statutory prohibition — a person may be liable for conduct which is prohibited by statute. The principles are statutory, for example, those applied under the ACL for engaging in misleading or deceptive conduct.7 Estoppel is the main focus of this chapter. The other bases for pre-contractual liability are discussed briefly under a heading of ‘other bases’.

Estoppel Introduction [6-05] Concept. The key to understanding estoppel is to appreciate that the

law may require a person to treat as true something which is in fact false. If I say to you (pointing to the vehicle in Bill’s garage) ‘Bill owns that car’ when in fact I own it, I may by my statement (representation) later be precluded (estopped) from denying that the representation is true. That false basis then becomes, for you and me, the true basis for our dealings. Therefore, if, for example, Bill sells the vehicle to you, I may be estopped from denying that you have become the owner of the vehicle even though I did not authorise Bill to sell it to you on my behalf. In essence, our rights and liabilities are worked out on a fictional basis: that something is true (Bill was the owner of the car) when it is actually false (because I owned it). The same approach can sometimes be applied to promises. Assume that A promises to enter into a contract with B, and that B relies on that promise to B’s detriment, for example, by spending money for a particular purpose. A may then be precluded (estopped) from denying that the promise was binding even though it was not supported by consideration. Alternatively, A may be entitled to go back on the promise only if A compensates B for the detriment suffered. [6-06] Relationship with consideration. The law takes the view that, generally, promises are enforced as contracts, but only when supported by consideration.8 [page 96] If some promises can become ‘binding’ purely on the basis of estoppel, that must to some extent undermine the consideration requirement. In part this is due to different perspectives on the legal significance of reliance on a promise. Consideration may be lacking for purely technical reasons. For example, if Amy owes Alan $1000, and Alan promises to accept $750 in satisfaction of the $1000 debt, Alan is not bound by the promise because Amy has not provided consideration even if she has relied on the promise by paying Alan.9 This illustrates that reliance on a promise does not of itself make the promise binding. In order for reliance to count as consideration it must have been part of the exchange, that is, bargained for as the price of the promise. For example, in Carlill v Carbolic Smoke Ball Co10 Carlill provided consideration by relying on the advertisement. There was a contract because the smoke ball company bargained for her reliance.

By contrast in cases of estoppel, reliance is purely collateral: it is not the bargained for element of an exchange. That does not mean that reliance is an alternative to consideration. However, when combined with other circumstances, some effect may be given to a promise not supported by consideration if an estoppel operates. [6-07] Operation. Estoppel becomes relevant if a person seeks to go back on a promise (or representation) by asserting a legal right inconsistent with the promise. Proof of reliance on the promise is essential to the operation of estoppel. If other requirements are satisfied, the person who made the promise may be disentitled to assert (precluded from asserting) the legal right. The operation of estoppel will vary according to what legal right is at issue. An obvious legal right is to break off the negotiation of a contract at any time prior to satisfaction of the legal requirements for a contract. If an estoppel nevertheless operates, it provides a basis for ‘pre-contractual liability’. Of course, legal requirements such as consideration would count for very little if promises ‘supported’ by estoppel were given the same legal effect as promises supported by consideration. Ensuring that estoppel does not completely undermine the requirement necessarily leads to complexity. In all cases, the object of estoppel is to prevent the unconscionable assertion of strict legal rights by the person estopped. Take, for instance, the position where a person seeks to deny that a particular promise is binding, but is held to that promise on the basis of estoppel. Giving a promise which is binding by virtue of estoppel the same effect as a contractual promise is one way of ensuring that people do not act unconscionably. However, as indicated above, that cannot be the general rule. In most cases only a limited form of enforcement is appropriate. That will usually be dealing with the detriment which is suffered when the ‘promisor’ goes back on the promise. Accordingly, the operation of estoppel is decided on a case-by-case basis. [page 97] [6-08] Types of estoppel. The estoppel concept applies in a variety of situations, many of which are not relevant to contract law. Where relevant, estoppel usually11 operates on statements made by one person to another and

relied upon by that other in circumstances where, for the purposes of the law of contract, the statement would not be binding. The statement may be one of fact, so that the relevant concept is ‘estoppel by representation’. Alternatively, the statement may be a promise, so that the relevant concept is ‘promissory estoppel’.12 [6-09] Scope of promissory estoppel. At one time it was thought that promissory estoppel was limited to statements made between parties in a preexisting legal relationship, such as a contract. But this is not an invariable requirement. Promissory estoppel may therefore operate between people who are merely negotiating a contract, and who never agree to contract. The main concern is with pre-contractual liability, that is, promissory estoppel in the context where there is no binding contract. However, it is also appropriate to consider the operation of estoppel in relation to the informal renegotiation of a binding contract. Consideration is given later to how promissory estoppel may affect rights under an existing contract.13

Elements of Promissory Estoppel [6-10] Requirements of promissory estoppel. There is no generally accepted summary14 of the requirements of promissory estoppel. However, for our purposes the concept can be expressed in three elements: (1) a clear and unequivocal promise by one person; (2) reliance on the promise by the person to whom it was made, usually of a detrimental nature; and (3) an element of unconscionable conduct by the person who made the promise. These requirements are considered below in the context of negotiation (or renegotiation) of a contract. However, there is also a line of cases under which a promise to confer an interest in land may be enforced on the basis of a ‘proprietary estoppel’. This applies even though no contract is contemplated and notwithstanding that there may be no clear and unequivocal promise. Typically, detrimental reliance takes the form of improving the property in expectation of satisfaction of the promise.15 [page 98]

[6-11] The promise. The first requirement is that the promise must be ‘clear and unequivocal’,16 or ‘clear and definite’. The principal rationale is that vagueness or imprecision in a promissory statement indicates that it should not be relied upon. For example, assume that Fred, who has been negotiating a contract with Dolly, asks Dolly whether she intends to sign the draft contract. If Dolly says ‘we’ll see’, her statement could hardly be regarded as an unequivocal promise to sign. However, an express promise is not required. It may be legitimate to imply a promise from conduct. Generally, silence will not amount to conduct because it is equivocal. Another rationale is that the person sought to be estopped should contemplate reliance. A person who has made an unequivocal promise should anticipate that reliance is likely to occur. [6-12] Reliance. The statement said to be a promise for the purposes of promissory estoppel may have induced some action (or inaction) on the part of the person to whom it was made which is of itself detrimental. Because of that reliance, it will usually be unconscionable17 for the promisor to go back on the promise without giving prior notice. Alternatively, even though reliance may not be in itself detrimental, it may be sufficient to create a situation in which detriment will be suffered if the promise is not adhered to. There is unconscionable conduct in going back on the promise if that would cause detriment to the person setting up the estoppel. Assume that Central Sydney Trust Ltd owns a large apartment block in Sydney. One floor is leased to High Profits for $50,000 per week. Initially, High Profits has no trouble getting sub-tenants for the floor who pay, in total, $60,000 per week. This yields High Profits a good profit. But when Central Sydney builds an adjacent apartment block, sub-tenants begin to leave and it becomes difficult for High Profits to find new tenants. Assume that only $20,000 per week is now being received by High Profits. Because it is losing $30,000 per week, High Profits may ask for a rent reduction. Central Sydney might then informally promise to accept, say, $25,000 per week as rent. Instead of selling its lease on the market, High Profits continues to seek new sub-tenants for the property. In this illustration,18 the parties have not actually varied the lease contract. Moreover, the promise by Central Sydney is not supported by consideration. However, High Profits may have relied on it, for example, by not selling its lease. It may therefore be unconscionable to allow Central Sydney to ask for the rent which High Profits is contractually obliged to pay ($50,000 per week), without first giving reasonable notice to High Profits.

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Unconscionable Conduct and Duration [6-13] Unconscionable conduct. Although reliance by the person setting up the estoppel is essential, it is not sufficient.19 The person against whom the estoppel is asserted must not only have played a role in that reliance, but also have acted unconscionably. Relief will be granted only if it would be unconscionable for the person sought to be estopped to go back on the promise. An example is the failure to take an opportunity to intervene so as to prevent detriment from occurring when there was an opportunity to do so. The conscience of the party setting up the estoppel must also be clear. In other words, it would be a waste of time for one person to argue that another has acted unconscionably if there is an element of impropriety in their own conduct. Assume then that A & B Builders carry out certain building work for Lees. The agreed price is $10,000, of which $5000 has been paid. When Builders’ representative asks for the balance, Lees proposes to pay $3000 if Builders will promise not to sue for the balance. Lees knows full well that Builders desperately needs the money. In order to stave off bankruptcy, Builders accedes to the proposal. Of course, there is no consideration to support Builders’ promise not to sue.20 Lees must invoke estoppel. In this example,21 Builders can go back on its promise. Although an unequivocal promise was made, and may have been relied on, the fundamental point is that because Lees sought to obtain an unfair advantage by exploiting Builders’ weak financial position, it is not unconscionable for Builders to go back on its promise. [6-14] Promissory estoppel may be temporary. Promissory estoppel may have only a temporary operation. As a general proposition, the estoppel lasts as long as it would be unconscionable for the promisor to go back on the promise. From that perspective, promissory estoppel may simply suspend rights, that is, operate until removed by notice. [6-15] Removal by notice. A person against whom an estoppel might arise may nevertheless be able to ‘remove’ the estoppel and resume the position occupied prior to the making of the promise. The notice must be reasonable in the circumstances. This might well be the position in the Central Sydney Trust Ltd example given

above.22 The concern of Central Sydney is to reinstate its right to receive the full rent ($50,000 per week). It would be sufficient for Central Sydney to show: ■ a rise in the demand for inner city apartments; and ■ reasonable notice to High Profits. [page 100] However, this facility (to serve notice) is not available where it would be unfair for notice to be given.23 In other words, the estoppel may have achieved a permanent alteration of rights.

Effect of Promissory Estoppel [6-16] Introduction. If one person is entitled to say that another person is precluded (estopped) from denying that a promise was made, the first person is not in the same position as a promisee under a contract. There is, therefore, no automatic entitlement to the relief which would be available in a breach of contract case. Particularly in cases where the estoppel arises in the context of a pre-existing contractual relationship,24 promissory estoppel may simply provide a defence when the party estopped seeks to enforce its strict legal rights. However, the concept may have a greater remedial impact.25 There is then a broad distinction between: ■ allowing the person estopped to go back on the promise, but requiring the detriment suffered by the other party to be redressed; and ■ holding the person estopped to the promise. [6-17] Remedies. The question of remedy is the most difficult aspect of estoppel.26 If the person estopped is held to the promise, the other party will be in much the same position as a promisee under a contract.

In Waltons Stores (Interstate) Ltd v Maher,27 Waltons planned to open new premises in Nowra (in New South Wales). To that end, it had protracted negotiations with the Mahers for the terms under which Waltons would lease

their land. Part of the arrangement was for the Mahers to build a warehouse by 5 February 1984. However, Waltons changed its retail policy and refused to sign the lease. By then the Mahers had taken steps — detrimental steps — in reliance on the belief that Waltons would do a deal. There was no contract, but could the Mahers establish an estoppel? The relevant dates and events were as follows.28 21 October 1983 — a draft agreement for lease was sent to the Mahers. 1 November — the Mahers informed Waltons that they had begun to demolish a new portion of the old building. [page 101] 7 November — the Mahers told Waltons that unless agreement was reached in a couple of days it would not be able to have the new building ready on time. 7 November—fresh documents (incorporating agreed amendments) were sent to the Mahers. Waltons’ solicitors said: … we have not yet obtained our client’s specific instructions to each amendment requested, but we believe that approval will be forthcoming. We shall let you know tomorrow if any amendments are not agreed to.

No such communication was made. 11 November — the Mahers signed the lease and sent it to Waltons’ by way of exchange’. Mid-November — having been advised that it was not contractually bound, Waltons instructed its solicitors to ‘go slow’ because it had changed its mind about the Nowra premises. Early January 1984 — construction of the new building was begun by the Mahers. 19 January — Waltons informed the Mahers that it would not enter into any lease. By this time, construction of the new building was 40% complete. On these facts, the High Court held that Waltons was estopped, and awarded the Mahers the same damages as would be awarded in an action for breach of contract. But there were two approaches. Deane J and Gaudron J held that Waltons was bound to adhere to an

assumption that a binding contract existed, or that contracts had been exchanged. In other words, the estoppel related to a matter of fact, rather than a promise. On this basis, the Mahers’ rights were equivalent to those which would have arisen had a contract actually existed. The Mahers could sue for damages for breach of contract. The ‘majority’ judges invoked promissory estoppel. In their view, a promise was implied from Waltons’ conduct, namely, that it would exchange contracts or give reasonable notice to the Mahers if it decided not to do so. In taking the various steps summarised above, the Mahers had relied on that promise to their detriment. Waltons acted unconscionably in standing by. On the facts, Waltons could not depart from its promise.29 It would have been open to the court to order specific performance. However, that was no longer possible. Accordingly, the Mahers were entitled to damages instead. Notwithstanding Waltons Stores, only rarely will a party be estopped if a sale of land contract is negotiated on a ‘subject to contract’ basis.30 Moreover, in Waltons Stores the terms of the lease agreement had been fully negotiated. If the parties’ negotiations are incomplete, the relief awarded in that case may not be available.31 [6-18] Moulding relief. The decision in Waltons Stores (Interstate) Ltd v Maker32 does not mean that whenever promissory estoppel prevents a person going back on [page 102] a promise there is a right to claim compensation for ‘breach’ of the promise. It would overturn the doctrine of consideration to enforce such gratuitous promises by way of damages as a matter of course. Therefore, if compensation is awarded, the remedy is not necessarily equivalent to that available for breach of a contractual promise.33 There is also an element of discretion in granting relief. Since the remedy provided must meet the needs (justice) of the case, relief will be moulded to suit the circumstances.34 It may be sufficient to deal with the impact of the plaintiff’s reliance rather than to require the defendant to perform an unperformed

promise. Moreover, the ‘price’ of the relief granted may be the imposition of terms on the successful party.35 This flexible approach is particularly evident in cases where the estoppel concerns a promise to confer an interest in property without entering into a formal contract. In Giumelli v Giumelli,36 in order to improve his parents’ property the plaintiff gave up a particular career path. He received no payment, just living expenses. By way of compensation, he was promised an (unspecified) interest in a property. When he married he built a house on the property and was promised that the house would be his. The court considered that an estoppel arose, based on the promise to confer an interest in the property. But what relief should be granted? The choice was between the transfer of an interest in the land, and an order for a monetary payment. The court chose the latter, as being more appropriate. However, in assessing the amount, regard was had to the value of the property, rather than the financial loss attributable to reliance on the promise.37

Other Bases for Liability [6-19] Preliminary contract. Parties sometimes negotiate a contract through a two-stage process.38 The first stage is a preliminary agreement, such as a letter of intent. The second is entry into the contract contemplated by the preliminary agreement. Clearly, if a preliminary contract is valid it may be breached, so that liability may arise even though the final contract does not eventuate.39 Such a preliminary contract may be implied from the circumstances. For example, in Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council40 the local authority called for tenders for a concession. Tenderers were required to post their bids in the town hall letter box prior to a stipulated date. The Club’s bid was submitted on time. However, the local authority was late in opening the letter box. It refused to consider the bid [page 103] and awarded the contract to another tenderer. There was no express statement that the tender rules were contractual. However, the court held that the local

authority had breached an implied (or collateral) contract to consider all tenders submitted in accordance with the tender rules. [6-20] Misleading or deceptive conduct. Misleading or deceptive conduct in trade or commerce is prohibited by statute.41 There is a statutory remedial regime which applies where a person suffers loss or damage by reliance on a false or inaccurate statement.42 The prohibition may be contravened by conduct during the negotiation of a contract that does not materialise. For example, assume that C is negotiating with two prospective purchasers (A and B) for a sale of its business. Assume that C breaks off negotiations with A because of misleading conduct by B. When C discovers it has been misled, it enters into a contract with A. It may be possible for C to prove that the price paid by A is lower than it would have been had C not relied on B’s misleading conduct. If so, C will be entitled to recover damages under statute from B.43 [6-21] Restitution. If an unjust enrichment is established, a restitutionary claim is available.44 Accordingly, if a benefit is conferred during the negotiation of a contract which is never agreed, restitution may be a basis for claiming payment for the benefit conferred during the negotiations. This is quite a technical area. ‘Unjust enrichment’ does not operate merely because a reasonable person would consider it unfair for a person not to pay for a benefit received. Its operation in the context of pre-contractual liability is illustrated by British Steel Corp v Cleveland Bridge and Engineering Co Ltd.45 British Steel negotiated with Cleveland Bridge for a contract to construct and deliver steel nodes which were required by Cleveland Bridge to complete a building contract with a third party. The only signed document was a letter of intent. This recorded the intention of the parties to execute a formal agreement. The negotiations got bogged down because of disputes between the lawyers over liability provisions. British Steel nevertheless completed the work, albeit later than anticipated. The judge held that it did not matter that the letter of intent was not binding. British Steel was entitled to be paid a reasonable sum by way of restitution for the work done. This was on the basis that Cleveland Bridge had accepted the benefit of the work.46 [6-22] Tort. Relevantly, the potential bases for liability in tort in the context of pre-contractual liability are fraud and negligence.

[page 104] A liability to pay damages for negligence may be alleged where a contract fails to materialise. Such claims generally fail because of an inability to satisfy the key element of negligence, namely, a duty of care. A duty of care not to cause purely economic loss is unusual.47 However, if negotiations for a contract break down because of a negligent misstatement by one party to the negotiations, the principle in Hedley Byrne & Co Ltd v Heller & Partners Ltd48 may be called in aid to establish the duty of care. [6-23] What about good faith? Except that each party must act honestly, there is no general duty to conduct negotiations in good faith.49 In particular, the view that failure to negotiate in good faith may be a tort has been rejected.50 However, promotion of good faith can be seen as a relevant factor when determining whether a preliminary agreement should be implied.51

QUICK QUIZ Short answer (1) Explain the pre-contractual liability concept. (2) What is the purpose of the concept of estoppel? (3) What is the function of reliance in the concept of promissory estoppel? True or false? (1) Australian law recognises a coherent doctrine of pre-contractual liability. (2) Damages may be awarded to enforce a promise binding by reason of promissory estoppel. (3) Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513 (see [6-17]) is the leading case on promissory estoppel. Choose the best answer (1) In the context of pre-contractual liability: (a) failure to negotiate in good faith is a tort;

(b) restitution for unjust enrichment does not apply; (c) damages may be awarded if loss is caused by the commission of a tort; (d) promissory estoppel always achieves the same results as a binding contract; or (e) damages for breach of contract can never be awarded. [page 105] (2) Liability may be based on promissory estoppel: (a) if the person alleging estoppel has acted unconscionably; (b) if the promise is supported by consideration; (c) whether or not the promise was relied on; (d) whether the promise was made expressly or impliedly; or (e) only if a contract was entered into. (3) In Waltons Stores (Interstate) Ltd v Maher, a majority of the court held that: (a) Waltons was estopped from denying that it had entered into a contract; (b) Waltons’ solicitors had been negligent; (c) Waltons had acted fraudulently; (d) promissory estoppel is restricted to conveyancing transactions; or (e) Waltons acted unconscionably.

1 2 3 4 5 6 7 8 9 10

See [1-10]. Additionally, if they reach that point, the contract is not enforceable. See eg Chapter 35 (failure to satisfy a statutory requirement of writing). See also Chapter 34 (illegal contract). See [6-04] (organising label). See [6-19]. See generally Chapter 30. See generally Chapter 28. See generally Chapter 23. See [1-04], [3-01]. See [3-24]. [1893] 1 QB 256 (see [2-06], [2-22]), Cases and Materials, §3-06C.

11

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51

Estoppel includes conventional positions which arise without representation or promise. See eg Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603 at 646; [2007] NSWCA 65 at [202] (reliance and detriment essential). See eg Paul Finn, ‘Equitable Estoppel’ in Essays in Equity, p 59. On ‘proprietary estoppel’ see [6-10], [6-18]. See [32-09]–[32-12]. However, a statement by Brennan J in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 428-9; 76 ALR 513 has frequently been quoted as such a summary. See [6-18]. This was stressed in Legione v Hateley (1983) 152 CLR 406; 46 ALR 1 (see [32-10]). See further on unconscionable conduct [6-13], [6-18]. Loosely based on observations in Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 at 34. Cf Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 406; 76 ALR 513. See [3-24]. Largely based on D & C Builders Ltd v Rees [1966] 2 QB 617. See [6-12]. See Hughes v Metropolitan Railway Co (1877) 2 App Cas 439 at 448; Egan v State Transport Authority (1982) 31 SASR 481 at 518. See further [32-12]. See Chapter 32. See [6-17]–[6-18]. See eg Anthony Mason, ‘The Place of Equity and Equitable Remedies in the Contemporary Common Law World’ (1994) 110 LQR 238. (1988) 164 CLR 387; 76 ALR 513, Cases and Materials, §7-08C. Most of the communications were through solicitors. It was also held that s 54A of the Conveyancing Act 1919 (NSW) was not a defence. See [35-22]. See [4-23]–[4-26]. See Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582. (1988) 164 CLR 387; 76 ALR 513 (see [6-17]). Cf Sidhu v Van Dyke (2014) 251 CLR 505 at 530; 308 ALR 232; [2014] HCA 19 at [86] (equitable compensation in sum which represented the ‘value of the promise’). See eg Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 419; 76 ALR 513. See eg S & E Promotions Pty Ltd v Tobin Bros Pty Ltd (1994) 122 ALR 637 at 653. (1999) 196 CLR 101; 161 ALR 473. It was also secured by an equitable charge. See [4-12]. See Harvela Investments Ltd v Royal Trust Co of Canada (CI) Ltd [1986] 1 AC 207. [1990] 1 WLR 1195. Cf Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1. See Chapter 23. See Chapter 28. Cf Sellars v Adelaide Petroleum NL (1994) 179 CLR 332; 120 ALR 16. See generally Chapter 30. (1981) [1984] 1 All ER 504. A payment made during negotiations may also be the subject of a claim for restitution. See [3009]. See [23-17]. [1964] AC 465. See [23-17]. See [1-20], [14-12], [33-24]. See CGU Workers Compensation (NSW) Ltd v Garcia (2007) 69 NSWLR 680; [2007] NSWCA 193. Cf Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1.

[page 107]

Part C

What Are the Terms of the Contract?

[page 108]

Chapter 7

Terms Expressly Agreed [7-01] Binding contract assumed. This part of the book is concerned with a process of identification: ‘What are the terms of the contract?’ In this chapter we look at terms to which the parties agreed expressly. The next chapter looks at implied terms and consumer guarantees under the ACL. Although the latter do not operate as implied terms, they are somewhat analogous.1 Analysis of the terms of a contract necessarily proceeds on the assumption that there is a contract. If there is a contract document, the contract includes the terms stated in the document. However, it may still be necessary to consider the parties’ negotiations to see whether the parties agreed to terms not stated in the document. Working out what the terms mean is a process of ‘construction’ (or ‘interpretation’). That is dealt with later.2 [7-02] Concept of ‘term’. Contractual terms are variously described as: ■ ‘clauses’; ■ ‘stipulations’; ■ ‘provisions’; and ■ ‘covenants’. Technical distinctions could be drawn. However, that is unnecessary. The grouping of words into terms — as numbered paragraphs and sentences — is obvious if there is a contractual document. If the agreement is verbal, the agreed terms must be established from the parties’ statements. [7-03] Types of terms. Contractual terms may be classified in various ways. No single classification will serve as a vehicle for analysing all the issues which can arise. As noted above, ‘express’ terms are distinguished from ‘implied’ terms. Only the former have actually been stated by the parties, either orally or in writing. The most important distinction is between promises and ‘other’ terms. The latter includes:

■ definitional terms — for example, cl 1 of the SAMPLE SALE OF GOODS CONTRACT says that ‘Goods’ means ‘Onion Seed’; ■ interpretation clauses — for example, cl 2 of the SAMPLE SERVICES CONTRACT states that ‘words importing the singular include the plural and vice versa’; [page 109] ■ exclusion clauses — for example, a term providing ‘the liability of ABC Ltd for any breach of this agreement is limited to the payment of $100’; and ■ contingencies (conditions precedent) — for example, a clause stating that a contract is ‘subject to shareholder approval’. [7-04] Promise. By and large this chapter is concerned with promissory terms. These state contractual obligations, and therefore confer contractual rights on the other party, that is, the promisee. Any term of a contract which is capable of being breached is a promise. This concept embraces not only promissory statements (‘I promise to do X’) but also statements of fact for which contractual responsibility has been assumed. These are usually termed ‘warranties’.3 Accordingly, a promise is present in relation to a factual statement if a party is saying, in effect, ‘I guarantee that this statement is true’. The discussion below is primarily concerned with situations in which a contract is wholly or partly verbal in nature. In cases where there is a contractual document, the issue is whether in addition to the promises stated in the document an oral term was also agreed.4

Terms and Representations [7-05] The distinction. In the course of their negotiations parties will refer to various matters, and each may make statements to induce the other to enter into the contract. Some statements may find their way into a contract document — if there is one. Others may not. If one party claims that it enjoys rights against the other because of a precontractual statement, the statement will usually relate to the attributes of the subject matter of the contract. The statement must be classified:5

■ ‘puffery’ — it has no effect; ■ a ‘mere’ representation — it confers a right to rescind; or ■ a promissory term — breach confers a right to damages. If there is no document, classification establishes the terms of a verbal bargain. Typically, however, the issue arises where the parties used a document to state agreed terms. Whether or not the document was signed, the question is whether the parties intended the document to state all the agreed terms.6 [7-06] ‘Puffery’. The word ‘puff’ is used to describe a statement which is not intended to be taken seriously. Since the statement has no contractual effect, it is not a contractual term.7 [page 110] For example, in Lexmead (Basingstoke) Ltd v Lewis8 a manufacturer’s advertising literature accompanying its dual-purpose towing hitches stated that they were ‘foolproof’ and ‘required no maintenance’. The court held that the advertisements ‘were not intended to be, nor were they acted upon as being, express warranties’.9 The words used must be balanced against the overall contractual setting.10 [7-07] Representations and contract terms. A representation is a statement of fact made to induce a contract but which is not contractually binding. For example, during negotiations for the sale of a computer the seller might have said to the buyer: ‘This machine is only six months old.’ If the statement is merely a representation of a fact believed to be true, it has no contractual effect. Alternatively, it may take effect as a term of the contract, because the seller warranted the age of the machine. At common law, the importance of the distinction between representations and terms lies in the remedies available. If a representation is untrue (but believed to be true) the only remedy is to elect to treat the contract as if it never existed. This is termed ‘rescission’.11 But if the pre-contractual statement is a term of the contract, the remedy of damages is available.12 Assume that the statement in the above example (‘this machine is only six months old’) was untrue. If it was only a representation, the buyer is entitled to rescind the contract and get a refund of the price. Contract damages cannot be

claimed. But if the statement was a term (‘warranty’) the buyer is entitled to damages for breach of contract. A pre-contractual statement may be a term of a contract even though it does not relate to a factual matter. Therefore, if during negotiations one party says that it will repair any defects in the subject matter, the statement may be a term of the contract if that was intended. The point here is that because the statement is not factual in nature, if there was no contractual intent the person to whom it was made will not even enjoy the right to rescind.13 [7-08] Contract terms as representations. It is rightly assumed that if a statement such as the above (‘this machine is only six months old’) is included in a contract document it will operate as a term, rather than a mere representation. However, sometimes a statement of fact in a contract term does not embody a promise. It may still be no more than a representation. The question is one of intention, decided by construing the document.14 [page 111] [7-09] Statutory remedies. The discussion above relates to the position under the general law. However, even if a statement is merely a representation there may be a statutory remedy. Since a false statement of fact inducing entry into a contract will be misleading or deceptive conduct in trade or commerce, a claim may be made for contravention of s 18 of the ACL.15 More importantly, a statement which is not a contractual warranty may take effect as a consumer guarantee for the purposes of the ACL. But the statement must relate to goods supplied to a ‘consumer’.16 There is a statutory right to damages if the consumer guarantee is not complied with. [7-10] Distinguishing terms from representations. The basis for distinguishing a term from a representation is the intention of the parties. As in most situations,17 this intention is determined objectively.18 If a statement of fact is made, what is required is proof of the statement and an intention to guarantee (‘warrant’) its truth.19 It is also essential — but not of itself sufficient — to prove that the statement was relied on.20 There is a tension between the approach summarised above and the analysis in the English decision in Dick Bentley Productions Ltd v Harold Smith (Motors)

Ltd.21 In that case it was said that a warranty is presumed to have been agreed if an oral statement was intended to be relied upon and was actually relied upon. However, under Australian law the element of intention to guarantee the truth of a statement is a matter of proof not presumption. Therefore, Australian cases supporting the Dick Bentley approach must be viewed with suspicion.22 [7-11] Relevant factors. Since intention is determined objectively, the question is what a reasonable person in the position of the person to whom the statement was made would conclude. The statement is a term if a reasonable person would so regard it. This must be inferred from the circumstances. In practice, courts rely on various factors as indicators of what a reasonable person would have concluded. In a given case, more than one factor may be relevant. Many illustrations could be given to show these factors at work. However, it is sufficient to refer to the main factors which have been found helpful in the cases.

Illustrations ■

Time when it was made — a statement is more likely to be held to be a term if it occurred shortly before entry into the contract. [page 112] In Bulloch v Glasson,23 the auctioneer of a property said that a certain acreage was ready for ploughing. The plaintiff successfully bid for the property on that basis. The statement was a term of the contract. It was breached because in fact a smaller area was ready to plough. ■ Content of the statement — the more intrinsically important the content of the statement the more likely it is that the statement was intended to be a term. In Hospital Products Ltd v United States Surgical Corp,24 a distributor was held to be bound by a pre-contractual statement of a promissory nature that he would devote his best efforts to distributing the company’s products. ■ Knowledge and expertise of the parties — the relative knowledge and expertise of the parties is probably the most important factor.

In Ellul v Oakes,25 certain advertising material for the sale of a property said that it was sewered. In fact, the property was served by a septic tank. The plaintiffs relied on the statement when agreeing to purchase the property. It was held that the defendant had breached an oral term of the contract. The court reasoned that the sewer arrangements were exclusively within the knowledge of the defendant and that a reasonable person would have inferred — as did the plaintiffs — that the accuracy of the statement in the advertising material was being guaranteed. By contrast, in Oscar Chess Ltd v Williams,26 during negotiations for the sale of a 1939 model Morris car, Williams said it was a 1948 model. He based that on the registration book which he showed to Oscar Chess. Since Oscar Chess was a car dealer, and Williams merely a private seller, the court held that Williams’s statement was not a term of the contract. It was merely a representation. ■ Form — how a statement is expressed may be relevant. If it is made as one of fact, rather than an opinion, form lends some support to it being a term. The converse is also true. For example, a statement as to the provenance of a painting may be a matter of opinion, and on that basis is less likely to be a term of the contract.27 Reference is sometimes made to whether there is a written memorandum of the contract. In the Oscar Chess case it was said that it cannot be assumed, if there is no written contract, that every statement made during negotiations is a contractual term. However, if there is a written memorandum which does not include the [page 113] statement as one of its terms it is more difficult to show that the statement was intended to be a term.28

Collateral Contracts

[7-12] Forms of collateral contract. We have just seen that a statement made during negotiations may be a term of the contract ultimately agreed by the parties. Alternatively, a statement made during negotiations may take effect as a second contract which is ‘collateral’ to the ‘main’ contract. The consideration for the promise under the collateral contract is entry into the main contract. A collateral contract may be: ■ between the same parties as the main contract; or ■ between parties only one of which is a party to the main contract. The former is much more common.29

Hypothetical Peter visits the website of Goods by Post Ltd. He sees that various items are advertised for sale. There is also a ‘special offer’ which states: ‘Purchasers who order goods with a total price of more than $50 will receive a combination letter opener and corkscrew at no extra charge.’ Peter purchases items with a total price of $75. There is a collateral contract under which Goods must supply the combination letter opener and corkscrew at no extra charge. It is sufficient that a reasonable person would regard the statement by Goods as a promise. This contract is in addition to the main contract to supply the items selected by Peter. Entry into that contract is the consideration — moving from Peter as promisee — which enables Peter to enforce Goods’ promise as a contractual promise. [7-13] Requirements. The normal requirements of agreement apply to collateral contracts. Focus is usually directed to the nature of the statement relied on as a promise: is it an offer of a (collateral) contract or merely sales talk, a statement of opinion, or a representation? There is a collateral contract if the statement was held out as a promise, guarantee or assurance the consideration for which is entry into the main contract.30 But in a two party situation, the collateral contract must not contradict the main contract.31 As noted in the example given in the previous paragraph, the test is objective — what a reasonable person would conclude. To resolve that issue, use may be made [page 114]

of the factors referred to earlier.32 That is because the term is said to be found in the oral negotiations. Because the distinction between a term of a single contract and a promise under a collateral contract is largely one of form, whether there is merely one contract between the parties, or a main contract and a collateral contract, may be difficult to determine.33 [7-14] Two party situations. In a two party situation, the parties to the collateral contract are also the parties to the main contract. The applicable principle is that a collateral contract will exist between A and B if B’s entry into the main contract is consideration for A’s collateral promise. This depends on proof that B relied on A’s statement and that the statement was intended to have contractual effect.

In J J Savage & Sons Pty Ltd v Blakney,34 the purchaser of a cabin cruiser sought damages for breach of an alleged collateral contract that the vessel would have a maximum speed of 15 miles per hour. The engine which the purchaser chose was one which the seller had recommended during negotiations as having an ‘estimated speed’ of 15 miles per hour. The High Court held that there was no collateral contract because there was no intention to guarantee speed. This was shown by the nature of the statement, which was largely a matter of opinion. In addition, the detailed specifications present in the contractual document did not refer to maximum speed. Explaining the reversal of the decision of the Full Court of the Supreme Court of Victoria, the court said:35 The Full Court seems to have thought it sufficient in order to establish a collateral warranty that without the statement as to the estimated speed the contract of purchase would never have been made. But that circumstance is … in itself insufficient to support the conclusion that a warranty was given. So much can be said of an innocent representation inducing a contract. The question is whether there was a promise by the [seller] that the boat would in fact attain the stated speed if powered by the stipulated engine, the entry into the contract to purchase the boat providing the consideration to make the promise effective. The expression in De Lassalle v Guildford [1901] 2 KB 215 at 222 that without the statement the contract in that case would not have been made does not, in our opinion, provide an alternative and independent ground on which a collateral warranty can be established. Such a fact is but a step in some circumstances towards the only conclusion which will support a collateral warranty, namely, that the statement so relied on was promissory and not merely representational.

[page 115] By contrast, in Shepperd v Ryde Corporation36 a purchaser of land succeeded in establishing a collateral contract obliging the vendor to maintain an area near the land purchased as a park. A promise to that effect was made during negotiations. It was in consideration of this promise that the purchaser agreed to buy the land. A problem which confronts anyone alleging a collateral contract is that the collateral contract must not contradict the main contract. This requirement of consistency was emphasised by the High Court in Hoyt’s Pty Ltd v Spencer.37 Consider this example, with analogous facts. Freda leased a house from Glenn. She agreed to pay $500 per week as rent. The lease contains a term prohibiting Freda from keeping pets on the premises, breach of which entitles Glenn to terminate the lease. Prior to signing the lease Freda had shown Glenn her dog, Spencer, and said that she wanted to keep him with her. Since Glenn said that she could do so, Freda kept Spencer on the premises. When Glenn receives an offer from Mayfair Pty Ltd to lease the house for $800 per week he terminates Freda’s lease on the ground that she has breached the lease. Freda is evicted and Glenn leases the house to Mayfair. Even if the court is convinced that there was a promise that she could keep pets, and satisfied that Freda entered into the lease in reliance on the statement, she cannot establish a collateral contract with Glenn. That is because the collateral contract would contradict an express term of the main contract (the lease). Freda would therefore fail in a claim for breach of contract.38 Although it is patently obvious that this aspect of the law is not just, Freda may be able to obtain other remedies.39 Moreover, had she forced Glenn to take eviction proceedings Freda could have raised promissory estoppel as a defence.40 [7-15] Three party situations. In a three party situation, the collateral contract is a promise made by A to B in consideration of B’s entry into a contract with C. These situations are more complex.41 For example, assume that Peta says to John, ‘If you buy my brother’s electric guitar for $250, I will give you three guitar lessons.’ If John purchases the guitar from Peta’s brother, but she refuses to give him lessons, John may argue that Peta is in breach of a collateral contract. The main contract is the brother’s sale of his guitar to John. The collateral contract is between Peta (as promisor) and John (as promisee), and the promise is to give three guitar lessons to John.

Two technical points may be noted. First, no issue of consistency between the main contract and the collateral contract arises in this context. That is because the [page 116] promisor under the main contract (Peta’s brother in the example) is not a party to the collateral contract. Second, a third party collateral contract is a way of avoiding the rule of privity of contract.42 If, as in the example above, A makes a promise to B which causes B to enter into a contract with C, A is not a party to the contract between B and C. However, proof of a collateral contract between A and B enables B to sidestep the rule in an action against A.43

QUICK QUIZ Short answer (1) Explain the difference between a representation and a term. (2) What is a ‘warranty’? (3) What is the usual consideration for a collateral contract? True or false? (1) A representation is a term of the contract if the representor guaranteed its truth. (2) A statement made during negotiations cannot be a term of the contract if the parties sign a document which does not include the statement as a term. (3) Where A alleges that a contract with B includes as a term a statement made by B during negotiations, it is material to consider the length of time between the making of the statement and entry into the contract. Choose the best answer (1) A contract contains the statement: ‘In this agreement, “principal”

means ABC Ltd.’ This is best classified as: (a) a definitional term; (b) an exclusion clause; (c) an obligation; (d) a representation; or (e) a ‘puff’. (2) A contract contains the statement: ‘In this agreement, “person” includes a corporation.’ This is best classified as: (a) a warranty; (b) an interpretation term; (c) an obligation; (d) an exclusion clause; or (e) a ‘puff’. [page 117] (3) As a matter of law, a collateral contract must be consistent with the terms of the main contract: (a) in all cases; (b) never; (c) where the collateral contract is between the parties to the main contract; (d) where the collateral contract is with a third party; or (e) if the contract is in a deed. (4) In JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435 (see [7-14]), the High Court: (a) agreed with the Full Court; (b) decided in the purchaser’s favour; (c) considered that the speed statement was a warranty, but not a collateral contract; (d) disagreed with the trial judge; or (e) held that proof that the purchaser relied on the seller’s statement was material but inconclusive.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42

The same is true of the implied duties under CISG, art 35. See Chapters 10 and 11. The word is used generically. For a more technical sense see [16-24]. But see [10-14] (document may state expressly that it sets out the whole bargain). See generally D E Allan, ‘The Scope of the Contract’ (1967) 41 ALJ 274. See [10-10] (parol evidence rule). See also [2-06]. [1982] AC 225. [1982] AC 225 at 263 per Stephenson LJ (on appeal, the House of Lords did not discuss the issue). See Esso Petroleum Ltd v Commissioners of Customs and Excise [1976] 1 All ER 117 (see [5-07]). For the concept see [16-02], [22-01]. Remedies may be available under statute. See [7-09]. There may also be a right to terminate the contract for breach. See Chapter 16. See [23-10] (misrepresentation concerned with matters of fact). See Kleinwort Benson Ltd v Malaysia Mining Corp Berhad [1989] 1 WLR 379; Commonwealth Bank of Australia v TLI Management Pty Ltd [1990] VR 510. See [23-23], [28-01]. See also [23-04]–[23-17] (liability in tort for fraud or negligence). See [8-13] (‘express warranty’). See eg [1-39], [2-04]. For relevant factors see [7-11]. See J J Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435 (see [7-14]), admittedly in the context of ‘collateral’ contracts; but the rules are the same. If only reliance is proved, there may be a right to rescind. See [7-07]. [1965] 1 WLR 623 at 627, Cases and Materials, §10-10C. See Ellul v Oakes (1972) 3 SASR 377 at 387 (but cf at 388–9). Contrast Nemeth v Bayswater Road Pty Ltd [1988] 2 Qd R 406 at 417. (1915) 15 SR (NSW) 91. (1984) 156 CLR 41; 55 ALR 417. (1972) 3 SASR 377. [1957] 1 WLR 370. Cf Leaf v International Galleries [1950] 2 KB 86 at 89. See also [10-10]. In that situation, the collateral contract must be consistent with the main contract. See [7-14]. See JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435; Ross v Allis-Chalmers Pty Ltd (1980) 32 ALR 561. See [7-14]. See [7-11]. Cf Couchman v Hill [1947] KB 554. (1970) 119 CLR 435, Cases and Materials, §10-06C. (1970) 119 CLR 435 at 442. (1952) 85 CLR 1, Cases and Materials, §10-36C. Contrast Kitching v Phillips (2011) 278 ALR 551 at 567; [2011] WASCA 19 at [87]. (1919) 27 CLR 133. See Maybury v Atlantic Union Oil Co Ltd (1953) 89 CLR 507. Freda may have a claim for damages for misleading or deceptive conduct under the ACL. See [2323], [28-01]. She could apply for relief against forfeiture. See [33-29]. Cf Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 400–1; 76 ALR 513. See J C Phillips and J W Carter, ‘The Demise of Hoyt’s Pty Ltd v Spencer’ (1989) 2 JCL 181. Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 (see [2-06]) was probably such a case. See generally Chapter 13.

43

See also Wells (Merstham) Ltd v Buckland Sand and Silica Ltd [1965] 2 QB 170. Contrast Hercules Motors Pty Ltd v Schubert (1953) 53 SR (NSW) 301.

[page 118]

Chapter 8

Terms Impliedly Agreed and Consumer Guarantees [8-01] Introduction. Nearly all contracts contain implied as well as express terms.1 The main reasons for the implication of a term are: (1) to give business efficacy to a contract; (2) the nature of the contract; and (3) statute. The first reason leads to a category of terms ‘implied in fact’. These are ‘ad hoc implications’.2 The other reasons make up a category of terms ‘implied in law’. These are implied on a systematic basis. This reflects a difference of approach: ■ terms implied in fact — the presumption is that the contract does not include the term. The implication must therefore be proved; and ■ terms implied in law — the presumption is that the contract includes the term. It must be proved that the implication should not be made. There are three other, less important bases for implying a term: (1) construction;3 (2) custom or usage;4 and (3) course of dealing.5 These other bases for implying a term do not need to be discussed. Where the contract is stated in a document, construction always plays a role in implication. However, except in the relatively uncommon case where a term is a direct implication by construction,6 distinctive legal rules must be applied.7 [page 119]

Terms Implied in Fact Formal Contracts

[8-02] Requirements for implication. A term may be implied in fact to deal with the application of the contract to a specific factual situation which the parties have not expressly addressed. The requirements for implication depend in the first instance on the nature of the contract. Where the contract is a formal contract, complete on its face, there are five requirements to be satisfied in order for a term to be implied in fact.8 The term must: (1) be reasonable and equitable; (2) be necessary to give business efficacy to the contract; (3) be so obvious that it goes without saying; (4) be capable of clear expression; and (5) not contradict any express terms of the contract. These requirements are applied by construing the contract. All must be satisfied. In practice, these requirements apply to detailed commercial contracts. Although the requirements are formidable obstacles, terms have in many cases been implied. The key requirement is business efficacy. A term is implied because it is necessary to make the contract effective in a business sense in the fact situation at issue. It is unfortunate that this key feature should be regarded as simply one of five requirements, and that a practical question should be overlaid with such complexities. The requirement that the implied term not contradict express terms applies to other implication categories as well. It is therefore discussed separately.9 The reasonable and equitable requirement is so rarely determinative that it may be ignored.10 Three requirements remain for discussion. [8-03] Necessary to give business efficacy. For a term to be implied in fact into a formal contract it must be shown that the term is necessary to give business efficacy in the fact situation at issue. It is not sufficient that it would be reasonable to imply the term.

Hypothetical Assume that the owner of a business (Oswald) employs an agent (Alice) to find a purchaser. Oswald agrees to pay 5% commission on ‘completion’ of [page 120]

a sale of the business to a purchaser ‘introduced by’ Alice. The commission money is to be paid from the purchase money received by Oswald. What is the position if Oswald decides to sell the business to Peter, who is not a person introduced by Alice? Alice may contend that Oswald has acted wrongly — in breach of contract — because it is an implied term that Oswald can only sell to a person introduced by her. First, what if Oswald sells to Peter before Alice has introduced a purchaser? It can hardly be said that the implied term for which Alice contends is necessary to give business efficacy to the contract: it is too broad. Moreover, because there is no promise by Alice to do anything, the term is far from obvious.11 The position might be different if Oswald had granted Alice an exclusive agency in consideration of a promise to use her best endeavours to sell the business. Second, what if the facts are that Oswald sells to Peter after having contracted to sell to Denise, a purchaser introduced by Alice? Is Oswald in breach of his contract with Alice by cancelling the contract with Denise in order to sell the business to Peter? In this fact situation the term is narrower: Oswald will not deprive Alice of her commission by cancelling a contract with a purchaser introduced by her. This term would probably be implied.12 It gives business efficacy to the contract. (The term is also obvious and capable of clear expression.) Oswald must pay damages to Alice for breach of an implied term of the agency contract. [8-04] Obvious and capable of clear expression. The more extensive the negotiations, and the more detailed the resulting contract, the less likely it is that a term will be implied. Even if the term is assumed to pass the business efficacy test, it will not be implied unless it is both obvious and capable of clear expression.

The leading case is Codelfa Construction Pty Ltd v State Rail Authority of New South Wales.13 A contractor was engaged to excavate tunnels for an underground railway. It agreed to complete the work in 130 weeks. Work was delayed when local residents obtained an injunction restricting blasting operations. This contradicted what had been the ‘common understanding’ of

the parties, namely, that the contractor could not be prevented from carrying out the work on a three shifts per day basis.14 The contractor wanted more money, but could not point to any term in the contract entitling it to make a claim. It therefore alleged that the contract included an implied term. [page 121] Various attempts were made to formulate the term. Each had its own problems. The fact that various formulations were argued, with varying degrees of clarity, suggested that no particular term was both obvious and capable of clear expression. As Mason J put it:15 This is not a case in which an obvious provision was overlooked by the parties and omitted from the contract. Rather it was a case in which the parties made a common assumption which masked the need to explore what provision should be made to cover the event which occurred. In ordinary circumstances negotiation about that matter might have yielded any one of a number of alternative provisions, each being regarded as a reasonable solution.

Informal Contracts [8-05] Context. For a time the requirements set out above were thought also to apply to informal contracts. However, in that context they were criticised as being too rigid. In Byrne v Australian Airlines Ltd16 the High Court agreed with the following statement by Deane J in Hawkins v Clayton:17 The most that can be said consistently with the need for some degree of flexibility is that, in a case where it is apparent that the parties have not attempted to spell out the full terms of their contract, a court should imply a term by reference to the imputed intention of the parties if, but only if, it can be seen that the implication of the particular term is necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case.

Under this statement of principle, different rules apply in ‘a case where it is apparent that the parties have not attempted to spell out the full terms of their contract’. The contract may be oral, or it may be stated in a document. However, in the latter case it must be apparent that the parties have not attempted to state the contract terms exhaustively.18 Since the contract may be one in which a term is implied by law, it may not be necessary to resort to ad hoc implication. Everything depends on what issue arises. If the issue is unique to the contract,

Deane J’s statement must be applied. For example, the proprietor of a very popular restaurant may argue that it is an implied term of the contract that patrons must vacate their table at the conclusion of their meal. [8-06] Requirements for implication. Given Deane J’s statement quoted above, in order to be implied, the term must: [page 122] ■ be necessary for the reasonable or effective operation of a contract of the same nature as the contract at issue; and ■ be consistent with the express terms of the contract.

Illustration In Byrne v Australian Airlines Ltd19 certain employees were dismissed from their employment as baggage handlers when they were found pilfering from luggage. Although it was not set out in their contracts, the employees had the benefit of an industrial award which stated that termination of their employment would ‘not be harsh, unjust or unreasonable’. They argued that a term to the same effect was implied in their employment contracts. The High Court held that the term was not necessary for the reasonable or effective operation of the employment contracts.20

Terms Implied in Law and Consumer Guarantees Introduction [8-07] Concept. The concept of terms implied in law embraces two categories:21 (1) terms implied at common law; and (2) terms implied by statute. A term is implied at common law by reference to classes of contract. The purpose is to state an established incident of the contract.22 Such terms are found in commonly recurring contracts such as employment contracts, and contracts for the supply of goods and services.

A term may be implied by statute if the requirements for implication set out in the statute are satisfied.23

Terms Implied at Common Law [8-08] Illustrations of common law implication. Examples of legal incidents include terms dealing with the quality of performance, such as the standard of duty.24 For example, a term is implied in an employment contract requiring the employee to exercise reasonable care.25 [page 123] Established incidents of commonly occurring contracts include: ■ contracts for the provision of services — that the service provider will exercise proper or reasonable care or skill in performing the contract;26 ■ contracts for the provision of professional services — that the professional (such as a doctor or solicitor) will exercise that degree of care reasonably expected of a person having or professing to have the special skill;27 ■ bailment contracts — that the bailee will exercise reasonable care in relation to the goods, and not convert them;28 and ■ contracts for work and materials — that the contractor will exercise reasonable care in doing the work, and supply materials which are of good quality and reasonably fit for their intended purpose.29 These terms are implied unless excluded by the express terms.30 However, a term will not be implied if it would be unjust or unreasonable to do so.31 [8-09] New implications. In the illustrations above, the terms are described as ‘established incidents’ of the contracts because experience and judicial decision indicate what is expected of the parties. In order for a new implication to be made in a class of contract which already includes a term implied in law, it must be necessary to make the new implication.32 And a term may be implied even if clear and precise formulation is difficult. Even so, such implications are rare. For a new implied in law term, the concept of ‘necessity’ owes more to considerations of justice and fairness than business efficacy. McHugh and Gummow JJ explained in Byrne v Australian Airlines Ltd33 that the notion of

necessity reflects ‘the concern of the courts that, unless such a term be implied, the enjoyment of the rights conferred by the contract would or could be rendered nugatory, worthless, or, perhaps, be seriously undermined’.

Hypothetical Alan rents a flat in a high-rise building from a local council. Although there is a ‘rental agreement’, the landlord (who owns the building) makes no promises at all. Accordingly, there is no express promise to keep the common parts of the building (lifts, stairs and so on) in repair. Assume that the lifts are regularly out of order. It may be appropriate, and necessary, to imply a term which obliges the landlord to keep the common parts in reasonable repair.34 [page 124] New implications are difficult to establish. In Commonwealth Bank of Australia v Barker35 the High Court held that Australian law does not recognise the implied term of ‘trust and confidence’ established as an incident of contracts of employment under English law. A key ingredient of the decision was the view that the term would have been inconsistent with legislation regulating employment relationships. The decision is somewhat surprising; there was no actual inconsistency between the legislation and the term; and the legislation did not apply to all employment contracts. [8-10] Unjust or unreasonable term not implied. A term which is unjust or unreasonable will not be implied in law. However, this does not mean that courts enjoy a discretion in implication. Instead, the circumstances of the contract may show that the term normally implied is incompatible with the responsibilities undertaken.

Hypothetical Take, for instance, a building contract between Ben (a builder) and Karen (his customer). Assume the contract requires Ben to supply materials obtained from Dennis, as the supplier nominated by Karen’s architect. The issue is whether Ben should be liable to Karen if the materials are not fit for their intended purpose. There is normally an implied term to that

effect.36 Whether it would be unjust or unreasonable to imply the term depends on the circumstances. The fact that Ben is required to obtain the materials from the supplier nominated by Karen’s architect goes some way towards establishing that position: Ben cannot exercise his own skill and judgment. If, in addition, the contract between Ben and Dennis excludes the latter’s liability, the term should not be implied.37 It seems incompatible with the responsibilities undertaken that Ben should be liable to Karen, but have no rights against Dennis.

Consumer Guarantees and Statutory Implied Terms [8-11] Scope. Many statutes imply terms into contracts. The most important terms are implied by the sale of goods legislation.38 The ACL replaces the terms formerly implied by Pt V, Div 2 of the Trade Practices Act 1974 (Cth), with what are termed ‘consumer guarantees’.39 These are not implied terms. Liability for failure to comply with a consumer guarantee is therefore statutory, not contractual. The ACL is also broader than the sale of goods [page 125] legislation: it applies to the supply of goods or services. Moreover, the concept of supply of goods is not limited to sale transactions. [8-12] Consumer. In order to attract the consumer guarantees of the ACL,40 a contract must be for the supply of goods or services to a consumer (as defined by s 3). The principal features may be summarised as follows. First, in relation to the supply of goods: ■ lease included — ‘supply’ may be by way of sale or lease; ■ goods — the concept is broadly defined and includes gas and electricity, as well as computer software; and ■ resupply — a person who acquires goods for the purpose of resupply cannot be a consumer. Second, in relation to the supply of services, the concept is again defined

broadly.41 Third, assuming that the contract is for the supply of goods or services to which the ACL applies, the recipient must be a consumer. This depends on the price and the nature of the goods or services: ■ price does not exceed $40,000 — the ACL consumer guarantees will apply; and ■ are of a kind ordinarily acquired for personal, domestic or household use or consumption — the ACL consumer guarantees will apply and price does not matter. It follows that if the price exceeds $40,000, the ACL consumer guarantees do not apply unless the goods or services are of a kind ordinarily acquired for personal, domestic or household use or consumption. The only general qualification is that a person who acquires goods for resupply is not a consumer.

Hypothetical A Ltd manufactures 50 personal computers which it sells to B Ltd for $50,000. Assume that B Ltd sells one computer to C for home use; and 40 to D Ltd for use in its business. C paid $2000 and D Ltd $60,000. Which parties are ‘consumers’ for the purpose of the consumer guarantees? (1) B Ltd is not a consumer — it acquired the goods for resupply. (2) C is a consumer — the price does not exceed $40,000. (3) D Ltd is a consumer. Although the price exceeded $40,000, the goods are of a kind ordinarily acquired for personal, domestic or household use or consumption. [page 126] [8-13] Consumer guarantees. The various consumer guarantees are set out in ss 51–62 of the ACL. Except in relation to title to goods, consumer guarantees apply only if the supply is in trade or commerce. In relation to goods, the guarantees relate to: ■ ownership — title, undisturbed possession and undisclosed securities (ss

51–53); ■ quality — goods must be of ‘acceptable’ quality (s 54); ■ fitness — for intended purpose (s 55); ■ correspondence — with the goods’ contractual description (s 56); ■ conformity — with a sample or demonstration model (s 57); ■ repairs and spare parts — reasonably available for a reasonable period (s 58); and ■ express warranties — statements made during negotiations which have a natural tendency to induce persons to acquire the goods42 take effect as consumer guarantees (s 59). However, there are no consumer guarantees in relation to goods sold by auction. In relation to services, there are guarantees relating to: ■ care and skill — the supplier must exercise due care and skill (s 60); ■ fitness — of the services and any end product of the services for an intended purpose (s 61);43 and ■ time — supply within a reasonable time if no time is specified (s 62). Generally, failure of goods or services to conform with a consumer guarantee gives rise to a right to damages.44 In relation to the personal computers referred to above, C Ltd will have the benefit of most of the ACL consumer guarantees. For example, if B Ltd did not transfer ownership of the personal computer, C Ltd is entitled to damages. D Ltd is in the same position. If there is a major failure, a consumer is also entitled to reject goods, or terminate a contract for the supply of services.45 [8-14] Statutory implied terms. The most important statutory implications are made under the sale of goods legislation. Five matters are dealt with. Since the implied terms relate to the goods, they state promises made by the seller: (1) ownership — right to sell, quiet possession and freedom from charge or encumbrance; (2) correspondence — with the goods’ contractual description; (3) fitness — for intended purpose; (4) quality — goods must be of ‘merchantable’ quality; and (5) sample — goods sold by sample must correspond with the sample.

[page 127] The implication of each such term is subject to the satisfaction of specific requirements.

Hypothetical Super Tools Ltd places an advertisement in a trade magazine: ‘2014 machine tool for sale. Price $2000.’ Bay Manufacturing Ltd’s managing director sees the advertisement and asks whether the tool will shape metal. Super says it will. The tool is delivered to Bay 10 days later and the price is paid on delivery. Bay discovers that the tool is a 2012 model. Since the goods were described as a 2014 model, there is a breach of the implied condition46 that goods sold by description must conform to their description.47 Bay also communicated a particular purpose, namely, to ‘shape metal’. Bay has found that the tool will shape only wood. Super is therefore in breach of an implied term48 requiring the machine to be fit for the intended purpose communicated by Bay.49 In order for the merchantable quality term to be implied, it is necessary to show that:50 ■ the buyer bought the goods by reference to their description; ■ the seller dealt in goods of that description; and ■ if the buyer examined the goods, that the defect was not one which such an examination ought to have revealed. The concept of ‘merchantable quality’ is that the goods must be ‘saleable’ under the contract description without a substantial price reduction.51 If the goods suffer from a defect that renders them unfit for the purpose for which they are normally acquired, the goods are not of merchantable quality.52

Consistency [8-15] Implied terms. Whether alleged to be implied in fact or law, or under one of the subsidiary implication bases referred to earlier,53 a term cannot be implied if it contradicts the express terms.54 For example, an argument that a particular

[page 128] international sale of goods contract includes a term implied in fact requiring the buyer to obtain an import licence must fail if the contract states that the seller must obtain the licence. Similarly, there is no point arguing that a building contract includes a term implied in law requiring the builder to supply materials which are fit for their purpose if the contract states: ‘No condition or warranty is implied requiring the builder to supply materials fit for their purpose.’

Illustration In Hart v MacDonald55 MacDonald supplied a dairy plant and butter factory to Hart. The contract included an ‘entire agreement’ clause in terms: It is to be understood that there is no agreement or understanding between [the parties] not embodied [in the document].

Under the contract, Hart had to pay for the plant out of the proceeds of butter made by using it. It was therefore obvious that the agreement included an implied promise that Hart would commence to carry on the business once the plant was delivered. Did the entire agreement clause apply and prevent the implication of the term? The court said the implied term was consistent with the express terms. In the language of the entire agreement clause, the term was as much ‘embodied’ in the contract as the express terms.56 The decision shows that care must be taken not to read too much into general provisions, such as entire agreement clauses. However, the requirement of consistency does not apply if a term is mandated by statute.57 [8-16] Aspects of consistency. The discussion above illustrates two aspects of inconsistency: (1) inability to give effect to both the express terms and the implied term; and (2) express contrary intention. A further aspect is that the implied term must not deal with a matter dealt with sufficiently by the contract. For example, in Criss v Alexander58 an express term in a contract for the supply of a new lorry said that defective parts would be

replaced. The court implied a term requiring the lorry to be reasonably fit for a particular purpose. This was consistent with the contract because the express term did not deal exhaustively with the quality and fitness of the lorry. [page 129] [8-17] Consumer guarantees. If the ACL applies59 to a contract into which terms would otherwise be implied by statute, a consumer guarantee may displace any implied term dealing with the same subject matter.60 More importantly, the consumer guarantees are mandatory. For these contracts the parties cannot agree that the guarantees do not apply.61

QUICK QUIZ Short answer (1) Explain the difference between terms implied in law and terms implied in fact. (2) Summarise the requirements for a term to be implied at common law. (3) What is the role of consistency in the implication of terms? True or false? (1) All implied terms must be capable of clear expression. (2) One incident of a contract of employment is an implied term requiring the employee to exercise reasonable care. (3) Where a contract falls within a class in which a particular term is usually implied, it will be presumed that the contract includes the term. Choose the best answer (1) A term may be implied into a formal contract only if the term is capable of clear expression and: (a) necessary;

(b) obvious; (c) reasonable and equitable; (d) consistent with the express terms; or (e) all of the above. (2) If a term is sought to be implied into an informal contract: (a) the contract must be verbal; (b) the contract must be in writing; (c) the term must be consistent with the express terms; (d) there is a presumption in favour of implication; or (e) none of the above. (3) For a contract for the supply of goods to include a consumer guarantee under the ACL, the contract must: (a) be in writing (as defined); (b) relate to a motor vehicle (as defined); (c) provide for supply to a consumer (as defined); (d) refer to the guarantee; or (e) be a sale of goods.

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8

9 10 11 12 13 14

See J W Carter and Wayne Courtney, ‘Implied Terms in Contracts: Australian Law’ (2015) 43 ABLR 246. See H K Lücke, ‘Ad Hoc Implications in Written Contracts’ (1973) 5 Adel LR 32; J M Paterson, ‘Terms Implied in Fact: the Basis for Implication’ (1998) 13 JCL 103. See eg Winter Garden Theatre (London) Ltd v Millennium Productions Ltd [1948] AC 173. See eg Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226; 64 ALR 481. See [9-12]–[9-13]. Cf Hart v MacDonald (1910) 10 CLR 417. For a suggestion that there are no distinct legal requirements, see Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988; [2009] UKPC 10. See Wayne Courtney and J W Carter, ‘Implied Terms: What Is the Role of Construction?’ (2014) 31 JCL 151. Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 605– 6; 26 ALR 567 (adopting BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 282–3; 16 ALR 363). See [8-15]–[8-17]. But see Peters American Delicacy Co Ltd v Champion (1928) 41 CLR 316. See Luxor (Eastbourne) Ltd v Cooper [1941] AC 108. See also Gullett v Gardner (1948) 22 ALJ 151. See further [8-04]. Cf Alpha Trading Ltd v Dunnshaw-Patten Ltd [1981] QB 290. (1982) 149 CLR 337; 41 ALR 367. It was assumed that the contractor would have the benefit of the Rail Authority’s statutory

15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46

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49 50

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immunity from injunction. (1982) 149 CLR 337 at 355–6; 41 ALR 367. Stephen and Wilson JJ agreed. Contrast Hart v MacDonald (1910) 10 CLR 417 (see [8-15]). (1995) 185 CLR 410; 131 ALR 422, Cases and Materials, §11-06C. (1988) 164 CLR 539 at 573; 78 ALR 69. But the contract must be complete in the sense referred to in [4-05]. (1995) 185 CLR 410; 131 ALR 422, Cases and Materials, §11-06C. See also Breen v Williams (1996) 186 CLR 71; 138 ALR 259. See Gregory Tolhurst and J W Carter, ‘The New Law on Implied Terms’ (1996) 11 JCL 76. See [8-01]. For an additional category see [8-09]. See [8-11]. For discussion of this concept see [15-10]–[15-20]. See eg X v Commonwealth of Australia (1999) 200 CLR 177 at 187–8; 167 ALR 529. See eg Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 at 193. See eg Rogers v Whitaker (1992) 175 CLR 479; 109 ALR 625. See eg Smith v Welden (1922) 30 CLR 585 at 603. See eg Young & Marten Ltd v McManus Childs Ltd [1969] 1 AC 454; Reg Glass Pty Ltd v Rivers Locking Systems Pty Ltd (1968) 120 CLR 516 at 521. See [8-15]–[8-16]. See also [8-17] (consumer guarantees). See [8-10]. See Elisabeth Peden, ‘Policy Concerns in Terms Implied in Law’ (2001) 117 LQR 459. (1995) 185 CLR 410 at 450; 131 ALR 422. The circumstances are analogous to those in Liverpool City Council v Irwin [1977] AC 239. (2014) 253 CLR 169; 312 ALR 356; [2014] HCA 32. See [8-08]. Cf Gloucestershire County Council v Richardson [1969] 1 AC 480; Helicopter Sales (Australia) Pty Ltd v Rotor-Work Pty Ltd (1974) 132 CLR 1; 4 ALR 77. See [8-14]. See J W Carter, ‘The Commercial Side of Australian Consumer Protection Law’ (2010) 26 JCL 221. There is no requirement of consistency with express terms: [8-15]. But some specific categories are excluded. See ACL, s 63. See ACL, s 2(1). This is not applicable to the services of a qualified architect or engineer. See ACL, ss 259(4), 267(4). See [27-23], [27-41]. See [16-09]. See ACT: Sale of Goods Act 1954, s 17; NSW: Sale of Goods Act 1923, s 17; NT: Sale of Goods Act 1972, s 17; Qld: Sale of Goods Act 1896, s 15; SA: Sale of Goods Act 1895, s 12; Tas: Sale of Goods Act 1896, s 17; Vic: Goods Act 1958, s 17; WA: Sale of Goods Act 1895, s 12. Cf Varley v Whipp [1900] 1 QB 513. See ACT: Sale of Goods Act 1954, s 19(1), (2); NSW: Sale of Goods Act 1923, s 19(1); NT: Sale of Goods Act 1972, s 19(a); Qld: Sale of Goods Act 1896, s 17(1); SA: Sale of Goods Act 1895, s 14(b); Tas: Sale of Goods Act 1896, s 19(a); Vic: Goods Act 1958, s 19(a); WA: Sale of Goods Act 1895, s 14(i). Cf David Jones Ltd v Willis (1934) 52 CLR 110. See ACT: Sale of Goods Act 1954, s 19(4); NSW: Sale of Goods Act 1923, s 19(2); NT: Sale of Goods Act 1972, s 19(b); Qld: Sale of Goods Act 1896, s 17(2); SA: Sale of Goods Act 1895, s 14(b); Tas: Sale of Goods Act 1896, s 19(b); Vic: Goods Act 1958, s 19(b); WA: Sale of Goods Act 1895, s 14(ii). See eg George Wills & Co Ltd v Davids Pty Ltd (1957) 98 CLR 77. Cf B S Brown & Son Ltd v Craiks Ltd [1970] 1 WLR 752. See eg Grant v Australian Knitting Mills Ltd [1936] AC 85.

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See [8-01]. See eg Maybury v Atlantic Union Oil Co Ltd (1953) 89 CLR 507 at 519; Commonwealth Bank of Australia v Barker (2014) 253 CLR 169 at 189, 206; 312 ALR 356; [2014] HCA 32 at [29], [76]. See also [8-02], [8-06]. (1910) 10 CLR 417. See also Etna v Arif [1999] 2 VR 353. See Australian Securities and Investments Commission Act 2001 (Cth), s 12EB (financial services). (1928) 28 SR (NSW) 297. Contrast Gemmell Power Farming Co Ltd v Nies (1935) 35 SR (NSW) 469 (contract included express warranty and exclusion of liability). See [8-11]–[8-13]. And note Australian Consumer Law and Fair Trading Act 2012 (Vic), s 31 (implied terms provisions of the Goods Act 1958 (Vic) do not apply). See [11-28]–[11-29].

[page 130]

Chapter 9

Incorporated Terms [9-01] Ways of incorporating terms. The concept of an incorporated term cuts across the distinction between express and implied terms. Such terms may be set out in a document, notice or another contract between the same parties. For example, if A pays for admission to a concert and sees a sign saying that patrons cannot take photographs of the performers, the question is whether the statement on the sign has been incorporated as an express term of the contract. In other situations, the term may be implied, for example, from a course of dealing between the parties. Whether a term has been incorporated depends on the intention of the parties. The issue may arise whether the contract is verbal or in writing, and whether or not any document is signed.1 This chapter discusses the four principal methods for incorporating terms: (1) by signature; (2) by reasonable notice; (3) under the principles established in the ticket cases; and (4) by a course of dealing. Terms may also be incorporated by reference. For example, the terms of the employer’s redundancy policy may be incorporated into an employment contract if it refers to the policy as an incorporated document. [9-02] Oral and written contracts. There is a contrast between written contracts and oral contracts.2 The latter includes contracts the terms of which are evidenced by a document.3 Usually, a written contract is present because the parties have signed a document.4 But the concept also includes some unsigned documents. For example, if a written offer is accepted by words or conduct, the contract is in writing. The most obvious illustration of an oral contract is one which is formed by a verbal exchange of offer and acceptance. However, the concept also includes any transaction in which a document (whether signed or not) is merely intended to

evidence the contract. For example, A and B may agree the principal terms of a sale [page 131] of goods contract over the telephone, and incorporate as other terms those set out in a document prepared by a trade association. [9-03] Attitude of the courts. The usual issue is whether an exclusion clause5 has been incorporated, rather than whether there are additional promissory terms. Although that merely reflects the usual type of case, it does help to explain why some of the incorporation rules are applied quite strictly. Particularly in consumer situations, judges have never been sympathetic to attempts to incorporate terms in unsigned documents into contracts. Exclusion clauses restrict rights which would otherwise flow from a breach of contract. Since they only apply if incorporated into the contract, the courts have often manipulated the incorporation rules. Even in commercial transactions, clear evidence is required to incorporate an onerous or unusual term.6

Signature [9-04] The rule. If a document is signed the words on the document are incorporated as terms of the contract. Provided a reasonable person would regard the document as contractual in nature, it will take effect as a written contract. The important point is that the terms in the document are incorporated even if the person who signed the document did not read it. This is known as the ‘rule in L’Estrange v Graucob’.7

In L’Estrange v F Graucob Ltd,8 Ms L’Estrange purchased an automatic vending machine. She signed a ‘sales agreement’ without reading it. The document contained a number of terms, some in rather small print. One term excluded the implied terms of the sale of goods legislation.9 The machine did not work satisfactorily, and L’Estrange wanted to return it to the seller. She failed. The seller was entitled to rely on the terms of the document, even though

L’Estrange had not read them. Scrutton LJ said:10 In cases in which the contract is contained in a railway ticket or other unsigned document, it is necessary to prove that the alleged party was aware, or ought to have been aware, of its terms and conditions. These cases have no application when the document has been signed. When a document containing contractual terms is signed, then, in the absence of fraud, or … misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not. [page 132] The decision appears a little harsh. In practice, people do not read their contracts. But the sentiment of the case is clearly that if people do not read their contracts that is their bad luck. However, the law is not entirely heartless. Scrutton LJ acknowledged qualifications to the rule (‘fraud, or … misrepresentation’).11

Nowadays, consumers — including some business consumers — have the benefit of statutory provisions which regulate exclusion clauses in contracts for the supply of goods or services.12 Although the incorporated term may end up being invalid, that does not affect the rule in L’Estrange v Graucob. The rule was acknowledged by the High Court in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd.13 In that case a carrier of goods was held to be entitled to rely on a set of standard terms even though they had not been read. The terms were on the back of an ‘Application for Credit’ which was signed by the customer. [9-05] Qualifications. The words of a signed contract will not be incorporated as a term of the contract if their effect was misrepresented.14

Illustration In Curtis v Chemical Cleaning and Dyeing Co,15 Ms Curtis signed a document headed ‘receipt’ when she left her dress with dry cleaners. When she asked why her signature was necessary, she was told that damage to beads and sequins was not within the dry cleaners’ responsibility. In fact, the document included a broad exclusion of liability. The dress was damaged by the cleaners’ negligence. Because the sales assistant had misrepresented the scope of the exclusion, the clause was not incorporated, or could not be relied upon. In order for the rule in L’Estrange v Graucob to apply, the document must be contractual in nature.16 This qualification was applied in Le Mans Grand Prix Circuits Pty Ltd v Iliadis.17 Although a printed document which included clauses

set out in the format of contractual terms was signed, the court said it was not a contractual document. Accordingly, it did not incorporate the terms into the contract. Although that was a great decision for the respondent, it is not entirely clear why a reasonable person would not have regarded the document as contractual. [page 133]

Notice [9-06] Incorporation by notice. In a sense, notice is the key to all forms of incorporation. A person is only bound by terms of which reasonable notice has been given. In effect, the rule in L’Estrange v Graucob deems reasonable notice to have been given to a person who signs a contractual document. However, as a separate basis for incorporation, ‘notice’ refers to situations in which the basis for incorporation is that reasonable steps have been taken to bring a term to the other party’s attention.18 The legal rule is therefore that reasonable notice must be given of the term.19 Typically, the cases involve verbal contracts. For example, if a theatre owner puts a notice at the box office window saying that, by purchasing tickets, ‘customers agree to abide by the following rules’, and sets out the rules in, say, six lines of easily read print, the owner’s intention is clear. Arguably, reasonable notice has been given. Therefore, the words of the notice will be incorporated as contractual terms, whether or not the patron has actually read the notice. As in the case of a signed document, it would be wrong to penalise vigilance by holding as bound only those people who take the trouble to read notices. [9-07] Reasonable notice sufficient. Because the notice must be ‘reasonable’, the particular circumstances are important. For example, many years ago, at the point of entry to the wharf of the Manly ferry at Sydney’s Circular Quay, there was a notice saying that 3d was payable on leaving the wharf, whether or not the passenger actually took a ferry. Archibald Robertson went through the turnstiles but unfortunately missed his ferry to Manly. He tried — eventually successfully — to get back through the turnstiles without paying the 3d fee. He was annoyed at being asked to pay for a journey which he had not taken, that is, for travel from Manly. His protestations went unheeded all the way to the Privy Council.

Reasonable notice of the term had been given because the notice was prominently displayed.20 Apart from prominence, factors to be taken into account in relation to the notice itself include the time at which it was given,21 accessibility and legibility. It may also be relevant to consider: ■ the nature of the term; and ■ the characteristics of the people to whom notice is being given. These factors reflect the concept of good faith which underlies all the rules and principles of contract law.22 In Causer v Browne,23 Ms Causer claimed damages for negligent cleaning of her dress. The dry cleaner relied on a term of a docket which protected the dry cleaner [page 134] from such claims. It was held that insufficient notice of the term had been given. The docket was received when the dress was handed in. But because a reasonable person would have viewed the docket as a mere receipt, more should have been done to bring the term to Causer’s attention. [9-08] Time of notice. To be reasonable, the notice must be given prior to or at the time of entry into the contract. Accordingly, notice will come too late to incorporate terms if given after the contract was agreed. Assume that a person visits a hotel and pays in advance at the reception desk for one night’s accommodation. In the room is a notice saying that no responsibility is taken for valuables not handed in at the desk for safe custody. Can the guest say that the notice is not incorporated as a contractual term? The answer is ‘yes’. Because the contract is formed at the desk, the notice in the room comes too late to be effective to incorporate a term into the contract.24

Ticket Cases [9-09] Introduction. Standard form contracts became very common in consumer transactions in England in the 19th century, particularly in carriage contracts. Indeed, part and parcel of affordable rail travel was the ability of

railway companies to issue railway tickets printed by machines. These are probably the first examples of mass-produced standard form contracts. The terms might be on the front or back of the ticket, or the ticket might refer to terms on a notice board or in a timetable. Whether the tickets were effective to incorporate terms into contracts between passengers and railway companies became an important question. The theory adopted by the courts relies on offer and acceptance analysis.25 Proffering a ticket is the making of an offer which contains or refers to contractual terms. By accepting the ticket the recipient accepts the offer.26 However, the fact that a contract is formed does not necessarily mean that the terms on (or referred to by) the ticket are incorporated into the contract. [9-10] Requirements. The requirements for incorporation of a term by ticket are usually expressed in three questions.27 (1) Did the recipient of the ticket know there was writing on the ticket? (2) Did the recipient know that the ticket contained or referred to the term? (3) Did the person relying on the ticket do all that was reasonable to bring the term to the recipient’s attention? [page 135] These requirements relate to the particular term relied on, rather than all the terms on (or referred to by) the ticket. A negative answer to question (1) means that the term is not incorporated. However, a negative answer to question (2) is inconclusive. Accordingly, if question (3) is answered affirmatively, a failure to reject the ticket will usually mean that the recipient is bound. It does not matter that the recipient did not in fact know that the ticket contained or referred to the term at issue.

Case study In Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd,28 Interfoto ran a business which included hiring out photographs. Stiletto wished to consider

some photographs for a client presentation. One of its directors asked Interfoto to send him some photographs: 47 were sent. Included with the photographs was a delivery note. Clause 2 said: All transparencies must be returned to us within 14 days from the date of posting/delivery/collection. A holding fee of £5 plus VAT per day will be charged for each transparency which is retained by you longer than the said period of 14 days save where a copyright licence is granted or we agree a longer period in writing with you.

Stiletto, which was unaware of the ‘holding fee’, retained the photographs for nearly a month. Accordingly, Stiletto was hit with a bill for £3783.50. Clearly, the fee was ‘exorbitant’.29 Applying the ticket cases, the court held that because of the onerous consequences of the clause, Interfoto had not done all that was reasonable to bring the term to Stiletto’s attention.30 Bingham LJ observed:31 The well-known cases on sufficiency of notice are … [at] one level … concerned with a question of pure contractual analysis, whether one party has done enough to give the other notice of the incorporation of a term in the contract. At another level they are concerned with a somewhat different question, whether it would in all the circumstances be fair (or reasonable) to hold a party bound by any conditions or by a particular condition of an unusual and stringent nature.

Bingham LJ’s point was that the rules governing the incorporation of terms on the basis of the offer expressed in a ticket embody a requirement of good faith, or at least must be applied with a view to the promotion of good faith in the contracting process. [page 136] [9-11] Relationship with incorporation by notice. It is easier to incorporate terms by ticket than by notice alone.32 It is not easy to see why this should be so. Perhaps the key point is that for the ticket cases to apply the document relied on must be one which a reasonable person would regard as contractual in nature. Once the document is established as a written offer, the recipient will usually be bound, even if the terms have not been read, unless the term at issue is unusual or particularly onerous. Words on a receipt or docket are not easily incorporated as contractual terms because, unlike tickets, they are not normally contractual documents. In order to incorporate words on a document not reasonably regarded as being a contractual

document, there must be a clear and prominent statement visible at the point of contractual formation that the document contains (or refers to) contractual terms. However, it is the function of the document which is important, not what label is used. In theory, there is another distinction. In the notice cases, negotiation of the terms of the contract is not contemplated. But the ticket cases assume that the recipient can negotiate the terms of the contract. Although this is almost invariably a fiction, an inability to negotiate the terms of the contract may prevent application of the ticket cases.

Illustration These ideas are illustrated by Thornton v Shoe Lane Parking Ltd.33 Mr Thornton parked his car at Shoe Lane’s parking station. Unfortunately, he was badly injured in an accident. When he claimed damages, Shoe Lane said it was not liable because of the terms under which Thornton had parked his vehicle. The relevant term excluded liability for personal injury suffered by a patron while on Shoe Lane’s premises. It was argued that Thornton was bound by the term because it was incorporated into the contract by means of a ticket issued (in now familiar fashion) by an automatic machine inside the car park entrance. To read the terms referred to, Thornton would have had to leave his car and go to a pillar opposite the machine. Lord Denning MR said that the ticket cases did not apply because Thornton could not negotiate the terms of the contract. In his usual colourful manner, he described Thornton’s position: ‘He may protest to the machine, even swear at it; but it will remain unmoved.’34 However, on the assumption that ‘an automatic machine is a booking clerk in disguise’,35 so that the ticket cases applied, the legal requirements were not [page 137] satisfied for the term Shoe Lane relied on. Notice of the term was insufficient because, for the type of contract at issue, the term was: ■ unusually wide;36

■ ■

unusual;37 or a stringent term.38

Course of Dealing [9-12] Incorporation by course of dealing. Expressed in general terms, the description ‘course of dealing’ refers to a series of contracts on substantially similar terms agreed in the same manner. If there is a course of dealing, that may have the effect of incorporating terms into a subsequent contract between the same people.39 Clearly, it is only necessary to have regard to a course of dealing if the term in question would not be incorporated into the contract on any of the bases discussed above. Therefore, a course of dealing may be relied on because: ■ there is insufficient knowledge of the term; ■ the rule in L’Estrange v Graucob does not apply — there is no signed contract in writing; ■ incorporation by notice cannot be relied on — notice is given after formation of the contract; and ■ the ticket cases do not apply — the terms are not stated in a written offer. A typical commercial situation confronted the court in Henry Kendall & Sons v William Lillico & Sons Ltd.40 The parties to sale of goods contracts had a long and consistent course of dealing under which the contracts were evidenced by certain ‘sold notes’. It was concluded that these documents incorporated terms into the contracts notwithstanding that each sold note was received after the contract had been formed. Nor did it matter that there was no actual knowledge of the terms of the sold notes. [9-13] Requirements for incorporation. Whether there is a sufficiently long and consistent series of transactions is a question of fact. The particular circumstances of each case must be considered. In Henry Kendall & Sons v William Lillico & Sons Ltd,41 there were many transactions over several years. That was sufficient. But in Hollier v Rambler Motors (AMC) Ltd,42 three or four transactions spread over a period of years was not. [page 138]

Once the course of dealing is established, evidence of assent to the terms is usually found in the failure to object to the term at issue. Moreover, decisions such as Henry Kendall show that actual knowledge of the terms is not required. However, this aspect of the law is unclear in Australia.

Case study D J Hill & Co Pty Ltd v Walter H Wright Pty Ltd43 concerned the parties to a contract for the carriage of machinery. There was some history of dealing. This comprised several occasions on which two documents were signed when the machinery arrived at its destination. These referred to ‘terms and conditions’ on the back of the documents, one of which was an exclusion clause. The dispute between the parties was a claim for damages which was made because machinery was damaged in transit. The defendant relied on the exclusion clause. It was held that there was no course of dealing. That was a decision on the facts. But the case also raises an issue of law. Had there been a course of dealing, the court said that the exclusion clause would not have been incorporated. That was because the documents were not contractual in character. It was emphasised that, on each occasion, signature occurred after the contract had been performed. The court said:44 [W]e can see no justification for holding that any of the subsequent contracts was in any different position from the first, or that in any of them the form became a contractual document. It is true that by the time the second and subsequent contracts were made the respondent had knowledge of the existence of the form, but it was unaware of the content of the terms and conditions on the back of it and regarded it, being presented when it was, as nothing more than an acknowledgment by it of delivery of the goods. These circumstances, in our view, afford no basis for regarding the form as a contractual document in any of the subsequent contracts or for importing the terms and conditions endorsed thereon as terms of the subsequent contract.

Earlier cases, such as Henry Kendall (to which the court in Hill referred), did not decide that incorporation of a term by a course of dealing requires the document to be contractual. The nature of the document is irrelevant because the question is whether each party has led the other reasonably to believe that their rights and liabilities are regulated by the document. The contract is oral:45

the document merely evidences the terms. Therefore, it is sufficient that course of dealing puts the party on notice that terms exist.46 [page 139]

QUICK QUIZ Short answer (1) Why do the courts take a strict approach to the incorporation of terms? (2) What is the relevance of the time at which notice is given when incorporation is by notice? (3) What are the requirements for incorporation of a term under the ‘ticket cases’? True or false? (1) A party who signs a written contract is only bound by terms of which it has actual knowledge. (2) In the ‘ticket cases’, the ticket is a contractual document. (3) For a term to be incorporated by a course of dealing, at least 50 similar contracts between the same parties must be established. Choose the best answer (1) To conclude that a document is a written contract for the purposes of the incorporation of a term: (a) it is necessary to prove that both parties signed the document; (b) the document must be headed ‘contract’; (c) it is necessary to prove that at least one party signed the document; (d) the document must be a deed; or (e) it is sufficient that the document was the offer of a contract which the other party accepted. (2) Where the ‘ticket cases’ are relied on to incorporate a term:

it is not essential for the recipient to know that there was writing on the ticket; (b) it is essential for the ticket to be an offer of a contract; (c) the question is whether a ticket is the usual way of doing business; (d) it is essential for the contract to be one of carriage; or (e) it is irrelevant whether the term is unusual, given the type of contract in question. (3) Where a course of dealing is relied on as the basis for incorporating a term: (a) there must be actual knowledge of the term; (b) the course of dealing must be sufficiently long and consistent; (c) the contract must be in writing; (d) the contract must be of a commercial nature; or (e) it is a good defence to show that the document was received after formation of the contract. (a)

1 2 3 4 5 6 7 8 9 10 11 12 13 14

15 16 17 18

See [9-02]. See also Elizabeth Macdonald, ‘Incorporation of Standard Terms in Website Contracting — Clicking “I Agree”’ (2011) 27 JCL 198. See Carter, Construction, Chapter 10. See eg Hardwick Game Farm v Suffolk Agricultural Poultry Producers Association [1966] 1 WLR 287 at 340 (affirmed [1969] 2 AC 31). See [9-04]. For the concept of exclusion clause see [11-01]. See [9-10], [9-11]. See J R Spencer, ‘Signature, Consent, and the Rule in L’Estrange v Graucob’ [1973] CLJ 104. [1934] 2 KB 394, Cases and Materials, §10-46C. See [8-14]. [1934] 2 KB 394 at 403. See [9-05]. See eg [11-28], [11-29]. (2004) 219 CLR 165; 211 ALR 342; [2004] HCA 52. See J W Carter and Elisabeth Peden, ‘Incorporation of Terms by Signature: L’Estrange Rules!’ (2005) 21 JCL 96. The plea of non est factum (see [24-19]–[24-20]) would also be a good defence. See Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 at 482–3; 211 ALR 101; [2004] HCA 55 at [32]. [1951] 1 KB 805. See [9-04]. See also J Spurling Ltd v Bradshaw [1956] 1 WLR 461 at 809 (rule may not apply where signed document is headed ‘receipt’). [1998] 4 VR 661. See Malcolm Clarke, ‘Notice of Contractual Terms’ [1976] CLJ 51.

19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46

See further [9-07]. See Balmain New Ferry Co Ltd v Robertson (1906) 4 CLR 379; [1910] AC 295. See [9-08]. See [1-20]. See also [9-11] (ticket cases). [1952] VLR 1, Cases and Materials, §10-51C. See also Chapelton v Barry Urban District Council [1940] 1 KB 532. See Olley v Marlborough Court Ltd [1949] 1 KB 532. See also Oceanic Sun Line Special Shipping Co Inc v Fay (1988) 165 CLR 197; 79 ALR 9. See generally Chapter 2. See [9-10]. See MacRobertson Miller Airline Services v Commissioner of State Taxation (WA) (1975) 133 CLR 125; 8 ALR 131. They are derived from Parker v South Eastern Railway Co (1877) 2 CPD 416 at 423. [1989] QB 433. Contrast Maxitherm Boilers Pty Ltd v Pacific Dunlop Ltd [1998] 4 VR 559 at 569; Ange v First East Auction Holdings Pty Ltd (2011) 284 ALR 638 at 650; [2011] VSCA 335 at [67]. [1989] QB 433 at 436 per Dillon LJ. In the result £3.50 per transparency per week was allowed on a reasonable fee basis. The clause may have been a penalty. See generally [27-51]–[27-56]. [1989] QB 433 at 439 (see Cases and Materials, §10-76). See eg Chapelton v Barry Urban District Council [1940] 1 KB 532; Causer v Browne [1952] VLR 1. [1971] 2 QB 163, Cases and Materials, §10-55C. [1971] 2 QB 163 at 169. [1971] 2 QB 163 at 169. [1971] 2 QB 163 at 170. [1971] 2 QB 163 at 172. See also Oceanic Sun Line Special Shipping Co Inc v Fay (1988) 165 CLR 197 at 229; 79 ALR 9. [1971] 2 QB 163 at 174. See Jane Swanton, ‘Incorporation of Contractual Terms by a Course of Dealing’ (1989) 1 JCL 223. [1969] 2 AC 31, Cases and Materials, §10-61C. [1969] 2 AC 31 (see [9-12]). [1972] 2 QB 71. [1971] VR 749, Cases and Materials, §10-67C. [1971] VR 749 at 753. See also NSW Leather Co Pty Ltd v Vanguard Insurance Co Ltd (1991) 25 NSWLR 699. Cf Eggleston v Marley Engineers Pty Ltd (1979) 21 SASR 51 at 64–5.

[page 141]

Part D

What Do the Terms Mean?

[page 142]

Chapter 10

Principles of Construction [10-01] What is construction? Just about every issue in contract law ultimately depends on the intention of the parties. Since in most cases ‘construction’ is the process used to determine intention when the parties have adopted a document to state the terms of their contract, an understanding of construction is crucial to an understanding of contract law. ‘Construction’ is therefore the process by which the intention of the parties is determined and given effect to.1 As we have seen, ‘intention’ is usually worked out by applying an objective approach.2 Therefore, what may actually have been in the minds of the parties is not the issue. Rather, the question is what each party has led the other reasonably to believe.3 A conclusion reached by construction may therefore differ from either party’s actual intention. This may seem odd. In part, it is justified by the fact that there are two parties to a contract. The concern is with common intention. It would be contrary to good faith for either party to be bound by the uncommunicated intention of the other. Once a document has been adopted to state (or evidence) the terms of the contract, the parties are bound by the understanding of a reasonable person situated in the same position as the parties.4 The principles of construction also apply (if only by analogy) to other documents created in connection with the contract, such as a notice given under the contract.5 This again shows the significance of construction principles.

Issues and Distinctions [10-02] Issues of construction. Most contracts which come before the courts are documented agreements. Therefore, a great many issues are resolved by construction. Since these issues vary, construction has several functions.6 ‘Construction’ is a very big topic. To understand the scope of this chapter three different things should be distinguished:

(1) rules regulating the construction process; (2) the use of those rules to resolve particular construction issues, such as what a contract means; and [page 143] (3) the application of contract doctrine by construction. This chapter is primarily concerned with (1) and (2). Other chapters consider further aspects of (2).7 Illustrations of (3) are given later.8 [10-03] Classification of intention. There are three categories of ‘intention’:9 (1) ‘actual’ intention — that subjectively held by the parties; (2) ‘expressed’ intention — that expressly stated in the contract; and (3) ‘inferred’ intention — that attributed to the parties by construction when there is no expressed intention.10 Since construction is an objective process, it is concerned with (2) and (3). Therefore, although the purpose is to establish (1), usually this is arrived at by applying a presumption, namely, that objective intention is actual intention. By placing restrictions on the use of evidence of actual intention,11 construction rules prevent the parties from contradicting objectively established intention. [10-04] Written and oral contracts. ‘Construction’ refers to the construction of a document. The idea that construction is an objective process can be expressed in terms of a perspective rule. ‘Intention’ is then attributed from the perspective of a person who knows what the parties know.12 For a written contract, that knowledge always includes the terms of the document and the background (‘context’) to the contract.13 If a contract is oral, but the terms of the contract are evidenced by writing,14 there is still a document to construe. The approach is therefore the same. If the contract is purely verbal, or some of the contract terms are of that nature, the perspective rule still applies. However, the process differs somewhat because the content of the terms must be worked out before ‘construction’ can begin. There is also a technical distinction. Whereas the meaning of spoken words is an issue of fact, the construction of a document is always one of law.15

Functions [10-05] Meaning. The principal function of construction is interpretive, that is, to work out what a contract means.16 Under the perspective rule, meaning is worked out in accordance with the standard of interpretation applicable to the words at issue. The reasonable person who is taken to construe the contract is [page 144] assumed to have the same vocabulary as the parties. Since contracts are written in ordinary English by ordinary members of the community at large, ‘vocabulary’ always includes the ordinary meanings of words. References in the cases to ‘plain’, ‘ordinary’ or ‘common’ meaning invoke usages found in an appropriate dictionary. The parties may also have a specialised vocabulary. For example, members of a particular trade or industry may use some words (or expressions) in specialised senses, or employ words not in common use. If so, these usages must be taken into account. It follows that the standard of interpretation for particular words may be a specialised one. Exceptionally, the parties may have used a unique code. In that situation, the standard of interpretation is party-specific.17 However, the mere fact that the parties define certain words does not of itself illustrate a unique standard. There is a difference between using a code, for example, by using ‘brillig’ to mean ‘buy’, and attributing a particular sense to a word, for example, by saying that ‘person’ includes a ‘corporation’. The former illustrates a unique usage, the latter does not. To discuss general construction principles, specialised and unique usages can be ignored. However, it is important to make the point that a contract is not the sum of the dictionary meanings of words. Construction always focuses on what the contract means. Dictionaries are useful only at the level of words, that is, to identify what meanings are in common use. Therefore, it is not always useful to think in terms of a presumption in favour of a particular ‘common’ meaning.18 And it is clearly wrong to conceive that words have ‘fixed’ meanings. [10-06] Other functions. There is much more to construction than the search for meaning. Construction may also be used to apply contract doctrine.19 Illustrations include:

■ terms implied in fact;20 ■ discharge for breach of a term;21 and ■ discharge by frustration.22 In situations such as these, construction is used to apply doctrinal requirements. The conclusions state the legal effect of a contract. For example, assume A breaches a term of a contract with B. One question may be whether B is entitled to terminate the contract. If there is no express right to terminate, the contract must be construed. There is a right to terminate if A breached a condition. Construction is used to apply the legal tests which determine whether the term is a condition. When a contract is applied to the facts, legal rights and obligations are established. These are conclusions about legal effect. Although it would be easy to assume that [page 145] application of a contract simply gives effect to a prior conclusion about meaning, in many cases application of a contract is a distinct stage in construction. For example, although an exclusion clause may say that the promisor has no liability to the promisee for ‘any breach’ of the contract, the literal meaning of that expression is not a reliable guide to the intended application of the contract.23 Therefore, whatever meaning might be given to a word or expression as a matter of ordinary English, questions may also arise as to its intended scope of application. Although meaning and legal effect are distinct concepts, the law adopts a single criterion for both, namely, the intention of the parties. The difference lies in what is taken into account when applying the perspective rule. Where doctrine is applied, the process is directed by specific criteria. It follows that a great many construction issues can only be resolved by lawyers. In that respect, construction must be seen as a specialised process.24 Indeed, taking an objective approach of itself characterises construction as a specialised process. The contrast between what a contract means and its effect as a matter of law is sometimes expressed in a contrast between ‘interpretation’ and ‘construction’.25 However, refined terminology is unnecessary.

Commercial Construction [10-07] Concept. The idea that contracts should be construed in a commercial way is not new. However, in recent years certain incidents of commercial construction have become prominent. While the cases reflect older precedents, the modern decisions take a broader approach. The word ‘commercial’ describes the preferred result: it is irrelevant whether the contract is of a ‘commercial’ character.26 Therefore it applies, for example, to conveyancing and consumer transactions. Incidents of commercial construction include:27 ■ universal approach — the same construction principles apply no matter what the form or nature of the contract;28 ■ contract construed as a whole — whatever function of construction is being employed, the whole contract must be considered;29 ■ construction difficulties overcome — construction difficulties such as lack of clarity and ambiguity are resolved by giving the contract a ‘commercial construction’; [page 146] ■ commercial purpose — microscopic examination defeating the commercial purpose of a contract is not appropriate;30 and ■ reasonable results — a preference is applied in favour of reasonable results, and against unreasonable results.31 Although the overall impact is that a commercial approach is taken to construction issues, in some contexts a narrower approach is applied, even if this leads to decisions which might otherwise be regarded as ‘uncommercial’. One illustration is the construction of conditions precedent in contracts of guarantee.32 The usual justification is the promotion of certainty. [10-08] Raw material. The legal rules regulating construction focus on process. A large component concerns what raw material — other than the contract — may be used as an aid to construction. There are two issues. (1) What evidence can be put before a court? (2) How can that evidence be used?

Notwithstanding that references to ‘evidence’ suggest procedural issues, the restrictions are stated in substantive rules of contract law.33

The Exclusionary Rule General [10-09] Aspects of the rule. The rules governing the use of raw material in construction are complex and somewhat confusing. However, they focus on a concept of ‘extrinsic evidence’. There are three categories: (1) direct evidence of actual intention; (2) prior negotiations; and (3) subsequent conduct. In this book, the rule which prohibits the use of extrinsic evidence is termed the ‘exclusionary rule’. As explained below, the rule has two different applications. [10-10] Evidence of additional terms. If the parties have adopted a document to state all expressly agreed terms, extrinsic evidence cannot be used to establish additional express terms. [page 147] It is convenient to describe this application of the exclusionary rule as the ‘parol evidence rule’.34 A typical statement of the rule was made by the Privy Council in Bank of Australasia v Palmer:35 [P]arol testimony cannot be received to contradict, vary, add to or subtract from the terms of a written contract, or the terms in which the parties have deliberately agreed to record any part of their contract.

[10-11] Construction of a contract document. The other application of the exclusionary rule prevents the use of extrinsic evidence as an aid to construction of a document which states a term of a contract. This aspect of the exclusionary rule also applies to the construction of most unilateral documents, such as a written offer or acceptance. [10-12] Evidence need not be oral. ‘Extrinsic evidence’ may be written or

oral.36 Accordingly, although the word ‘parol’ in the ‘parol evidence rule’ sounds like a reference to oral evidence, the restriction is more general. The most important aspect of the exclusionary rule is that it prohibits recourse to the negotiations of the parties which led to the adoption of the contractual document.37

Application of the Parol Evidence Rule [10-13] What is the contract? The cases are far from uniform in their approach to application of the parol evidence rule. Logically, in every case the first question to ask is ‘What is the contract?’. In the recent cases, the parol evidence rule is applied after the terms of the bargain have been identified.

The recent cases reject the approach taken in decisions such as L G Thorne & Co Pty Ltd v Thomas Borthwick & Sons (A/Asia) Ltd.38 Buyers of a substance known as ‘neatsfoot oil’ sought damages because the goods supplied did not have the same characteristics as a sample provided by the sellers before the contract was agreed. To succeed in their claim, the buyers had to prove — as a term of the contract — that the sale was ‘by sample’. A majority of the court thought that because the contract document appeared to state all the express terms, and made no reference to the sale being by sample, that was the end of the matter. The parol evidence rule therefore operated to exclude evidence of what was said when the sample was shown to the buyers. It did not matter that [page 148] the evidence might well have established as a term of the contract that it was a ‘sale by sample’. Herron J dissented. He said:39 The writing must in a proper case be compared with the negotiations, which must be provisionally received in evidence, before it can safely be said what was covered by the suggested final writing. Thus, the applicability of the rule and the effect of the rule are distinct things.

The judgment of Herron J in Thorne states the current approach.40 [10-14] Integration. Under the current approach, the parol evidence rule operates only if the document was intended by the parties to be a complete statement of the bargain — so far as dealt with by the document. This suggests a concept of integration.41 A contract may be: ■ wholly integrated — all the express terms are stated in the document adopted by the parties; or ■ partially integrated — all the express terms of a distinct part of the bargain are stated in the document. An intention to integrate a contract must be proved. In some cases, this can be established by construction of the document. The document may state expressly that it sets out the whole bargain. Such an ‘entire agreement’ clause42 is very common in practice.

Illustration In Hope v RCA Photophone of Australia Pty Ltd,43 a term in a written contract for the hire of ‘electrical sound-reproduction’ equipment said that the document contained the ‘entire understanding’ of the parties ‘with reference to the subject matter hereof’. Since the clause integrated the bargain in the document, the defendant was not able to ask for the negotiations to be considered to establish its allegation that the parties agreed to an oral term obliging the supplier to deliver ‘new’ equipment.44 [10-15] Total integration. A contract is totally integrated if all the express terms of the bargain are stated in documentary form. Even an oral contract can be wholly integrated in a document — if the document is adopted as conclusive evidence of [page 149] the terms of the contract. Once a document has been adopted with an intention to integrate the whole bargain, no further express terms can be proved. In the absence of an entire agreement clause (or similar provision), the intention to integrate must be proved. Although that may be relatively

straightforward in relation to a detailed contract document, it is not sufficient that the document looks to be a complete statement.

Key case In J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd,45 Evans’s machinery was frequently carried by ship. Because of the risk of rust, the machines were always carried in crates stored below deck. In the 1970s, container transport became common. Andrea Merzario planned to use containers. However, they expressly assured Evans that its machinery would be stored below deck. Evans’s moulding machine was stored in a container carried on deck on a voyage from Rotterdam to Tilbury. It was lost when the container fell overboard. Evans claimed damages, asserting that Andrea Merzario’s assurance was a term of the contract. Even though the term was not included in the contract document, Evans was successful. Roskill LJ said:46 The court is entitled to look at and should look at all the evidence from start to finish in order to see what the bargain was that was struck between the parties.

This decision adopts the correct sequence of inquiry. As McHugh JA said in State Rail Authority of New South Wales v Heath Outdoor Pty Ltd,47 the parol evidence rule has ‘no operation until it is first determined’ that all the terms of the contract are in writing. Any other approach would put the cart before the horse. [10-16] Partial integration. A contract is partially integrated if the parties intend all of the express terms for a distinct part of their bargain to be stated in a document. In such a case, the parol evidence rule applies to the subject matter of the integrating document. Accordingly, no additional terms may be proved in relation to that part of the bargain.48

Possible Exceptions to the Parol Evidence Rule [10-17] Introduction. The list of exceptions to the parol evidence rule would be very long if every case in which the court had purported to apply an exception was taken at face value. For two reasons there is no need to do so.

[page 150] First, many of the cases illustrate situations which are outside the scope of the rule.49 For example, while it has sometimes been said that the use of evidence of subsequent conduct to prove a variation is received under an exception to the rule,50 that is now regarded as incorrect.51 The evidence establishes agreement to a new contract. Even an integrated contract can be varied by a later agreement. More generally, if the issue is whether the parties concluded an agreement evidenced by written documents, subsequent conduct may be admissible. For example, in Howard Smith & Co Ltd v Varawa52 Griffith CJ referred to the relevance of ‘statements or conduct’ after the date of alleged formation ‘inconsistent with the existence of a concluded contract’. Second, other alleged exceptions can be accounted for by saying that the sequence of events referred to above53 has only fairly recently been recognised. The parol evidence rule does not operate merely because a document looks to state all the express terms. Exceptions invented to justify consideration of prior negotiations are therefore false exceptions. Three possible exceptions are discussed below: (1) conditions precedent; (2) collateral contracts; and (3) rectification and estoppel. In the absence of an entire agreement clause, the current approach requires a court to consider all the evidence before reaching a conclusion on the content of the bargain. An exception to the parol evidence rule would operate notwithstanding a conclusion that the parties did intend to integrate their bargain in the document. Since none of the exceptions are expressed in that way, it is doubtful whether there are any genuine exceptions to the rule. [10-18] Conditions precedent. In Pym v Campbell,54 a written memorandum of an agreement provided for the sale by Pym to the defendants of part of the benefits to be received from an invention. Two engineers were appointed by the defendants to consider the invention. One did not approve it. The defendants alleged that it was a term of the agreement that no contract would arise unless both engineers approved. It was held that even though the memorandum did not include the term, it could be proved by evidence. The reasoning was that because

the term stated a condition precedent to contract formation,55 it could be proved under an exception to the parol evidence rule.56 [page 151] Pym can be explained simply on the basis that the memorandum did not integrate the bargain. Therefore, it would not have mattered if the condition precedent had merely postponed performance.57 However, on the reasoning in Pym, extrinsic evidence would not have been admissible if only performance had been postponed. That would not be a sensible distinction. [10-19] Collateral contract. The fact that the parties have reduced one contract to writing does not prevent proof of a second contract, even if it is connected with the first contract. Evidence may therefore be given of a collateral contract, the consideration for which is entry into another (main) contract.58 This has often been treated as illustrating an exception to the parol evidence rule.

Illustration We saw that in L G Thorne & Co Pty Ltd v Thomas Borthwick & Sons (A/Asia) Ltd59 a majority held that prior negotiations could not be used to prove that the sale contract was ‘by sample’. The buyers’ alternative contention was that there were two contracts: a contract of sale (main contract); and a collateral contract. The latter contract was to the effect that the main contract was a sale by sample. A different majority of the court held that an exception to the parol evidence rule permitted prior negotiations to be used to prove the collateral contract. A new trial was ordered to consider the evidence. This was simply a different perspective on the same evidence that was rejected in relation to the allegation that there was a single contract. The decision therefore highlights the artificiality of the court’s analysis. There is no need to treat evidence of a collateral contract as received on an exceptional basis. The objectives of the parol evidence rule are adequately dealt with by the rule in Hoyt’s Pty Ltd v Spencer.60 [10-20] Rectification and estoppel. If a document — it need not be a contract — does not conform to the parties’ agreement, evidence may be given to prove

what the document should have said.61 If it is alleged that a term of the contract was omitted from the document by mistake, evidence of actual intention and the parties’ negotiations may be used to establish the necessary common intention to include the term.62 If the intention continued until the signing of the document, rectification will be ordered.63 Rectification illustrates a situation which is outside [page 152] the scope of the exclusionary rule.64 Accordingly, it is not an exception to the parol evidence rule, which is a sub-set of that rule. Much the same may be said in relation to estoppel.65 Whether based on prior negotiations or subsequent conduct, proof of estoppel is not affected by the exclusionary rule.66

Evidence in Construction General [10-21] Introduction. The exclusionary rule restricts the raw material which can be used when construing a contract.67 Therefore, the three categories of evidence identified68 as extrinsic evidence are not admissible in construction unless an exception to the rule operates. In order for this aspect of the exclusionary rule to apply, it is sufficient that the document being construed includes a term of the contract. Whether the contract is integrated in the document does not matter. Nor does it matter that the issue is one of legal effect, rather than meaning. For example, in deciding whether a promissory term is a condition, a warranty or an intermediate term69 regard cannot be had to extrinsic evidence.70 As with the parol evidence rule, it is important to keep the scope of the rule in mind. The issue must be one which is resolved by construction. For example, deciding what damages are available for a breach of contract71 is not a question of construction. Similarly, evidence which cannot be deployed in construction can be used for other purposes. For example, although prior negotiations cannot be used as an aid to construction, they can be used to establish misrepresentation.

It follows that there are very few genuine exceptions to this aspect of the exclusionary rule. It is also possible for another contract rule to ‘trump’ the exclusionary rule.72 [10-22] Impact of objective theory. Much of the confusion in relation to the use of evidence in aid of construction is derived from different views about the impact of the objective theory of contract. The perspective rule73 gives effect to the objective theory. A depersonalised approach is taken, so that the relevant question is [page 153] what each party has led the other reasonably to believe by adopting the document.74 The parties are bound by what they said in their document, rather than by what they may have intended to say,75 and direct evidence of their actual intention is inadmissible. This probably comes as a surprise to the layperson, who may well consider the parties’ views to be the best evidence of what a contract means. However, the treatment of direct evidence of intention as extrinsic evidence reflects the objective theory. It would be perfectly rational to regard evidence of prior negotiations as admissible, but to insist that only the objective meaning of those negotiations be taken into account. Accordingly, the inclusion of prior negotiations within the extrinsic evidence concept seems more a matter of policy than strict logic.76

Context [10-23] Role of context. In the study of language it is trite to say that the meaning of any statement depends on its context. This suggests that a contract document should be construed in light of the context in which it was agreed. However, the scope of the legal concept is necessarily narrower than the ‘true’ context of a statement, namely, the sum of knowledge and experience of the author of the statement.77 Nevertheless, in addition to the internal context — the document as a whole — regard may be had to external context. There is some variety in the terminology. Australian courts seem to prefer the 19th century description ‘surrounding circumstances’. For a time, English

courts preferred ‘factual matrix’. For example, in Prenn v Simmonds78 Lord Wilberforce said: The time has long passed when agreements, even those under seal, were isolated from the matrix of facts on which they were set and interpreted purely on internal linguistic considerations. The more recent English cases tend to use ‘context’ or ‘background’. However, ‘context’, ‘surrounding circumstances’, ‘factual matrix’ and ‘background’ should all be regarded as referring to the same concept. There are two legal questions. (1) What does context comprise? (2) How is context used? [10-24] What context comprises. Under the objective theory, context is narrower than in ordinary life. The perspective rule is applied on the basis that the reasonable [page 154] person who construes the contract is situated in the ‘same position as the parties to the contract were placed’,79 that is, knowing what both parties knew. Context comprises:80 ■ the general commercial background of the contract; ■ the genesis of the contract; and ■ such other material as is required to determine, objectively, the purpose, aim or object of the contract. Five points may be made. First, the general commercial background against which the parties contracted must always be taken into account.81 This includes legal context, usually the general features of any legislation which formed part of the background of the contract.82 But it does not include applicable statute or the general law of contract. Commercial background does not usually need to be proved as a contextual fact. Second, the ‘genesis’ of a contract refers to the factual circumstances which led to the contract.83 Third, commercial purpose, aim and object of the contract refer to objective

concepts.84 The concern is with what purpose a reasonable person in the position of the parties would have.85 Fourth, context is limited to matters within the knowledge of both parties, or at least capable of being known by them.86 ‘Mutually known facts’87 may be crucial in construction. Fifth, prior negotiations may be used to establish context, that is, to generate matters of fact.88 [10-25] How context can be used. A contract should never be construed without taking context into account.89 However, context is an indirect or circumstantial guide to the intention of the parties.90 Because context is a circumstantial guide, one view is that context should influence construction only when there is a construction difficulty. [page 155]

In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales,91 Codelfa carried out building work on a three shifts per day basis until local residents obtained an injunction which restricted its hours of work. Codelfa argued that the construction of its contract with the Rail Authority should take into account the parties’ common assumption that residents would not be able to obtain the injunction. A majority of the court agreed. The common assumption was an element of context even though the prior negotiations of the parties were used to generate the assumption. This was on the basis that the court examined the negotiations as ‘discussions’, rather than as statements about the meaning of the contract. This proved to be crucial to one construction issue: whether the contract was frustrated.92 However, the present concern is with the court’s statement of principle on the use of context. Having considered leading English cases such as Prenn v Simmonds,93 as well as the older authorities, Mason J stated a ‘true rule’ to explain the use of context. He said:94 The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one

meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning.

Under Mason J’s ‘true rule’, context (‘surrounding circumstances’) can influence construction only when ‘the language is ambiguous or susceptible of more than one meaning’. In short, if the document is clear on its face, context cannot be used to give the contract a different meaning. Analysis along the same lines as in Codelfa has been rejected in most other countries, including England and New Zealand.95 Apart from the fact that all English words are ‘susceptible of more than one meaning’, the argument against the ‘true rule’ is that what is at issue is the meaning of the contract, not the document. It is therefore wrong to seek to assign a meaning to a contract by construing the parties’ document independently of context.96 The ‘true rule’ was approved in Royal Botanic Gardens and Domain Trust v South Sydney City Council.97 However, the High Court has often appeared to ignore it. For example, in Pacific Carriers Ltd v BNP Paribas,98 the issue was whether a document [page 156] stamped and signed by an employee of a bank bound the bank to an indemnity. Treating this as a question of construction, the court said that the issue required ‘consideration, not only of the text of the documents, but also the surrounding circumstances … and the purpose and object of the transaction’. More recently, in Electricity Generation Corporation v Woodside Energy Ltd,99 where the construction of a reasonable endeavours obligation was at issue, it was said:100 The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean … [This requires] consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract.

On the basis of statements such as these, some lower courts have held that the ‘true rule’ no longer applies.101 The two different approaches to the use of context suggest contrasting views about the extrinsic evidence concept. The ‘true rule’ treats ‘context’ as ‘extrinsic’. Therefore, it can be brought to bear in construction only when there is a construction difficulty, such as patent ambiguity.102 However, the exclusionary

rule is a restriction on the direct use of material falling within three specific categories of extrinsic evidence. Since that is not how ‘context’ is used, evidence of context is not ‘extrinsic’. Therefore, the better view is that the ‘true rule’ is wrong.103 Unfortunately, uncertainty on this issue makes analysis of the case law quite difficult.

Interaction Between Context and Extrinsic Evidence [10-26] Identification of subject matter. The context of the contract may be used to identify the subject matter of a contract. For example, if a contract describes the subject matter as ‘your wool’,104 evidence may be given to identify what the parties were contracting about. At one time this was seen as an exception to the exclusionary rule. However, that is no longer the position.105 Similarly, context may be used to explain the meaning of a descriptive term. [page 157]

Illustration In White v Australian and New Zealand Theatres Ltd,106 theatrical artists agreed to provide their ‘sole professional services’ for a revue (‘Thumbs Up’). They complained that they were not permitted to produce the revue; and gave evidence that this was one of their functions in an earlier production (‘Funny Side Up’) on which Thumbs Up was based. The court held that in order to explain ‘sole professional services’, reliance could be placed on evidence of what had been done in the earlier revue, how it had been advertised, and so on. [10-27] Patent ambiguity. Any ambiguity in the meaning or application of a contract must be resolved. The concept operates at two levels. ‘Patent’ ambiguity is contrasted with ‘latent’ ambiguity. The former is apparent on the face of a document,107 whereas the latter emerges only when the contract is sought to be applied to the facts.108 No regard may be had to extrinsic evidence in resolving patent ambiguity. It follows that the law regards patent ambiguity as nothing more than a construction difficulty. In this connection, the ‘true rule’109 has created confusion.

Confusing case! In Royal Botanic Gardens and Domain Trust v South Sydney City Council,110 a term in a lease entitled the lessor to decide the amount of rent payable by the lessee. The question was what factors it could take into account. In stating that the lessor could have ‘regard to additional costs and expenses’ the lease raised a question of construction: were these the only factors? The lessee’s argument in favour of that construction was accepted. Accordingly, the lessor could not take into account the commercial benefits enjoyed by the lessee, so as to fix a full market rental. The lease was held to be ambiguous because it did not say expressly that the lessor could not take other factors into account. Applying the ‘true rule’, the court held that admissible evidence included the prior negotiations of the parties, as embodied in a prior draft of the clause. These showed that the clause ‘contained a statement of the totality of the matters to be taken into account in fixing’111 the rent. [page 158] The Royal Botanic case is confusing because application of the ‘true rule’ should not have permitted the use of extrinsic evidence, namely, the prior draft. Only evidence of context ought to have been admissible. [10-28] Latent ambiguity. Latent ambiguity arises when a contract which appears to refer to only one person or thing is found to be equally applicable to more than one person or thing. By contrast with patent ambiguity, extrinsic evidence is admissible under an exception to the exclusionary rule. A famous case is Raffles v Wichelhouse.112 A contract for the sale of cotton described the goods as due to arrive on the ship Peerless from Bombay. The ambiguous nature of this statement became apparent when it was sought to apply the contract. Two ships by that name were due to leave Bombay at about this time, one in October, the other in December. Extrinsic evidence — the actual intention of the parties — was treated as admissible. Because that evidence showed that the parties intended different ships, there was no contract.113 In order for a case of latent ambiguity to arise, usually the contract must concern a specific subject matter, or name (or describe) a specific person.

Hope v RCA Photophone of Australia Pty Ltd114 concerned a contract to supply ‘electrical sound reproduction’ equipment. The contract did not expressly say that the equipment had to be ‘new’. However, Hope alleged breach by the plaintiff in supplying second-hand equipment. It was held that no latent ambiguity arose. Therefore, the parties’ negotiations could not be relied on by Hope to establish that construction. Latham CJ made a number of points.115 First, he said no patent ambiguity arose: It is true that the contract does not describe the equipment as either new or old, but this circumstance does not … create ambiguity in any relevant sense. There is no patent ambiguity. It is not suggested that the meaning of the words is not clear to all who understand the terminology used for the purpose of describing sound-reproducing apparatus.

Second, he explained the latent ambiguity concept: Latent ambiguity exists when a description, evidently meant to apply to only one person or thing, is shown to be equally applicable to more than one person or thing …

For example, a promise to sell ‘my blue car’ is latently ambiguous if the promisor owns two blue cars. Third, he explained the impact of latent ambiguity, and its scope: [page 159] In such a case the ambiguity is raised by extrinsic evidence and it is allowed to be removed by similar evidence. But the existence of ambiguity is not established by the fact that a general description applies to all persons or things falling within a certain class. If this is ambiguity, then all general terms are ambiguous. All class terms, such as [electrical sound reproduction equipment] are in their very nature applicable to the indefinite number of things which possess the attributes which are characteristic of the class …

Fourth, Latham CJ stated the application of these principles to the facts: Thus, when a right to adduce extrinsic evidence is claimed for the purpose of showing that the equipment referred to in the agreement in this case was new equipment, an attempt is being made, not to explain or to apply a contract, as in the special cases when such evidence is admissible, but to vary it by adding a new term. This is just what the law does not allow …

While there was no latent ambiguity, the contract was somewhat indeterminate. It was potentially applicable to an indeterminate range of different fact situations. Dixon J correctly pointed out116 that the context of

such a contract may show that the parties contracted for a subject matter having attributes in addition to those identified expressly in a specification. Consider a contract to supply ‘50 personal computers’ to a department store. On Dixon J’s approach in RCA Photophone, there would be no difficulty in saying that it would be a breach of contract to supply second-hand computers. The supplier would understand that the department store would have no interest in second-hand computers. [10-29] Identification of parties. Identifying the parties to a contract is not necessarily a question of construction.117 However, to the extent that it is, any problems which arise must be resolved by the use of context.

Illustration In Giliberto v Kenny118 a sale of land contract said that Mrs Kenny agreed to purchase the land; but also that the vendor agreed to sell the land to Mr Kenny. In fact, Mr and Mrs Kenny were purchasing the property jointly. The court held that the evidence enabled it to conclude that Mrs Kenny acted for herself and as agent for her husband. Although the evidence was described as ‘extrinsic’, it went no further than context, namely, ‘mutually known facts’. [10-30] Prior negotiations. Under the exclusionary rule, prior negotiations are not admissible as an aid to construction.119 Notwithstanding Royal Botanic Gardens [page 160] and Domain Trust v South Sydney City Council,120 that is true even if there is patent ambiguity. However, construction in light of context will not always give effect to the literal meaning of a contract.

In Prenn v Simmonds,121 Mr Simmonds was the leading technician of Airmec Ltd, which was owned by Radio & Television Trust Ltd (RTT). Prenn purchased

RTT in order to secure the services of Simmonds. Prenn and Simmonds also entered into a contract, and cl 1 gave the latter a conditional right to acquire a 4% interest in RTT. Clause 2(b) stated the contingency: The aggregate profits of RTT earned during the four years ending 19 August 1963 and available for dividend on the ordinary stock units for the time being issued whether declared or not shall have amounted to £300,000 after payment or provision for income tax and profits tax …

The issue was whether ‘aggregate profits of RTT’ meant the profits of RTT alone, or those of RTT and its subsidiaries. Although the contract defined ‘RTT’ to mean that entity alone, Simmonds argued ‘aggregate profits’ should be construed by reference to exchanges between the parties in their negotiations. The court held that the evidence could not be relied on. Lord Wilberforce said:122 The reason for not admitting evidence of these exchanges is not a technical one or even mainly one of convenience, (though the attempt to admit it did greatly prolong the case and add to its expense). It is simply that such evidence is unhelpful. By the nature of things, where negotiations are difficult, the parties’ positions, with each passing letter, are changing and until the final agreement, though converging, still divergent. It is only the final document which records a consensus. If the previous documents use different expressions, how does construction of those expressions, itself a doubtful process, help on the construction of the contractual words? If the same expressions are used, nothing is gained by looking back; indeed, something may be lost since the relevant surrounding circumstances may be different.

Accordingly, the contract had to be construed without the aid of such evidence. But having regard to context — including commercial purpose — ‘aggregate profits’ meant ‘aggregate profits of RTT and its subsidiaries’. Simmonds therefore won the case. Prenn is a good illustration of commercial construction. Literal application of the contract was rejected in favour of a more commercial result arrived at with the aid of context.123 [page 161] [10-31] Subsequent conduct. For the purposes of construction, the parties’ conduct after the contract was agreed is extrinsic evidence.124 There are no

exceptions to this aspect of the exclusionary rule. It does not matter that the contract is ambiguous.

Illustration In L Schuler AG v Wickman Machine Tool Sales Ltd,125 Wickman was a distributor of Schuler’s products. One of its important tasks was to make regular visits to Schuler’s customers. A weekly visit to each client was a ‘condition’ of the contract. Some visits were missed, and Schuler claimed it was entitled to terminate the contract. Schuler alleged that Wickman had breached a ‘condition’, that is, an essential term of the contract.126 Wickman contended that the clause should not be so construed. Wickman sought to rely on evidence of the parties’ conduct during contract performance. This was said to show that they had construed the term in accordance with its construction. The court held that the evidence was not admissible even if the word ‘condition’, as used in the clause, was ambiguous. Nevertheless, the court held in favour of Wickman’s construction of the contract. It would clearly be unsatisfactory for a contract to mean one thing when it was agreed, but something else at a subsequent time. Ultimately, the treatment of subsequent conduct as extrinsic evidence is simply an application of the idea that the meaning or legal effect of a contract must be established at the time of agreement. However, this treatment of subsequent conduct has been criticised, and it does not always apply under New Zealand law.127 [10-32] Implied terms. Courts imply terms into contracts on a variety of bases.128 Given that variety, it would be surprising if the exclusionary rule operated in the same way for every implication basis. For a term to be implied in fact, the party relying on the term must rebut the presumption that the contract does not include the term. In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales129 the High Court held that the legal rules governing implication do not permit reliance on extrinsic evidence. Only context can be relied on. However, the position is different if a term is implied in law. Extrinsic evidence may sometimes be used, to support or rebut the presumption that the contract

[page 162] includes the implied term. The former may be explained on the basis that implication rules can ‘trump’ the exclusionary rule. For example, in Gillespie Bros & Co v Cheney Eggar & Co130 the question was whether it was an implied term of a contract for the sale of goods that the goods would be fit for the buyers’ purpose.131 The court held that evidence of a pre-contractual conversation could be relied on to show that the buyers had communicated the purpose for which the goods were required in such a way as to show reliance on the sellers’ skill or judgment. The evidence justified the implication of the term.132 An illustration of rebuttal based on subsequent conduct is Mears v Safecar Security Ltd.133 A normal implication of an employment contract, that sick pay will be paid when the employee is off work through illness, was not made. The conduct of the parties was inconsistent with agreement with the implied term.

QUICK QUIZ Short answer (1) To what does ‘construction’ refer? (2) What is meant by ‘commercial construction’? (3) State the categories of extrinsic evidence. (4) State the parol evidence rule. (5) To what does ‘context’ refer? True or false? (1) Construction is an unimportant part of contract law. (2) The exclusionary rule is a rule of contract law, not a rule of evidence. (3) Actual intention may differ from objectively determined intention. (4) Evidence of contract variation is not received under an exception to the exclusionary rule. (5) No evidence may be given of a contract collateral to a written contract.

Choose the best answer (1) Under the SAMPLE SALE OF GOODS CONTRACT, Buyer obtains title to the Goods: (a) when risk passes; (b) on payment of part of the Price; (c) when the Goods leave Seller’s Depot; (d) 30 days after the Delivery Date; or (e) on payment of the Price. [page 163] (2) Consider cl 8.4 of the SAMPLE SALE OF GOODS CONTRACT: (a) it should be inferred that the parties intend the Expert to act as an arbitrator; (b) the parties’ expressed intention is for the Expert not to act as an arbitrator; (c) the clause cannot be given a meaning; (d) the clause should be construed as an exclusion of liability; or (e) extrinsic evidence must be taken into account when construing the clause. (3) ‘Context’ refers to: (a) the surrounding circumstances, background or factual matrix; (b) extrinsic evidence; (c) subsequent conduct; (d) the court’s understanding of the contract; or (e) the law of contract. (4) In the SAMPLE SERVICES CONTRACT: (a) extrinsic evidence would be admissible to determine the meaning of ‘reasonable control’ in the definition of force majeure; (b) construction of the contract would take context into account; (c) the parties have not expressed their intention in relation to Term; (d) there are no express warranties by Provider; or (e) the meaning of cl 7.4 is a question of fact.

(5) In Prenn v Simmonds [1971] 1 WLR 1381 (see [10-30]): (a) the parties’ prior negotiations were used to construe the contract; (b) the court arrived at an uncommercial construction; (c) the parties’ subsequent conduct formed the basis for the decision; (d) context played no role in the court’s construction; or (e) ‘aggregate profits’ meant ‘aggregate profits of RTT and its subsidiaries’.

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Carter, Construction, §1-04. See [1-39]. See further [10-03], [10-22]. For verbal contracts see [10-04]. Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749. See further [10-05]–[10-06]. See especially Chapter 11 (exclusion clauses). See [10-06]. See Carter, Construction, Chapter 2. Sometimes referred to as ‘implied’, ‘presumed’ or ‘imputed’ intention. See further [10-09]–[10-22] (‘exclusionary rule’). See further [10-22]. See [10-21]–[10-23]. See [9-02]. See Francis v Lyon (1907) 4 CLR 1023 at 1040. See generally on the functions of construction Carter, Construction, Chapter 1. See Falck v Williams [1900] AC 176. But cf Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 347; 41 ALR 367. See [10-02]. See Chapter 8. See Chapter 17. See Chapter 20. See generally on exclusion clauses Chapter 11. Contrast Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 per Lord Hoffmann. See Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60 at 78. See J W Carter, ‘The Construction of Commercial Contracts’ (2014) 28(4) CLQ 3. Carter, Construction, §1-23. See eg Prenn v Simmonds [1971] 1 WLR 1381 at 1383–4 (adopted Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; 41 ALR 367). See eg Australian Casualty Co Ltd v Federico (1986) 160 CLR 513 at 525; 66 ALR 99. Antaios Compania Naviera SA v Salen Rederierna AB (The Antaios) [1985] AC 191 at 201 (adopted

31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68

Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at 198; 185 ALR 152; [2001] HCA 70 at [43]). See Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900; [2011] UKSC 50. Cf J Kitchen & Sons Pty Ltd v Stewart’s Cash & Carry Stores (1942) 66 CLR 116 at 124–5. See Tricontinental Corp Ltd v HDFI Ltd (1990) 21 NSWLR 689. See also Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424 at 437; 206 ALR 387; [2004] HCA 28 at [23] (third party indemnity). See Prenn v Simmonds [1971] 1 WLR 1381 at 1385; Wilson v Anderson (2002) 213 CLR 401 at 418–19; 190 ALR 313; [2002] HCA 29 at [9]. See [10-13]–[10-20]. However, in many of the cases that expression has been used in the sense given in [10-09] to ‘exclusionary rule’. [1897] AC 540 at 545 (applied Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133 at 144). See eg Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 606; 26 ALR 567 (oral negotiations). See eg Prenn v Simmonds [1971] 1 WLR 1381 at 1384 (exchanges of draft clauses). (1955) 56 SR (NSW) 81. See also on the case [10-19]. (1955) 56 SR (NSW) 81 at 94 (italics supplied). See [10-15]. See generally Carter, Construction, §§10-14–10-38. See cl 9.1 of the SAMPLE SALE OF GOODS CONTRACT. (1937) 59 CLR 348, Cases and Materials, §12-30C. See also [10-28]. In a contract for the supply of goods to a consumer, an entire agreement clause may be invalid under ACL, s 64. [1976] 2 All ER 930, Cases and Materials, §12-44C. See also Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309. [1976] 2 All ER 930 at 935. (1986) 7 NSWLR 170 at 191. See Bank of Australasia v Palmer [1897] AC 540 at 545; Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133 at 144. See generally Carter, Construction, Chapter 9. See Narich Pty Ltd v Commissioner of Pay-Roll Tax [1983] 2 NSWLR 597 at 601; (1983) 50 ALR 417. See Carter, Construction, §18-11. (1907) 5 CLR 68 at 78. See [10-15]. (1856) 6 E & B 370; 119 ER 903, Cases and Materials, §12-23C. See [4-02]. See also B Seppelt & Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9147. For the distinction see [4-21]. See generally [7-12]–[7-15]. See also Carter, Construction, §10-27. (1955) 56 SR (NSW) 81 (see [10-13]). (1919) 27 CLR 133 (see [7-14]). See generally [24-21]–[24-23]. See Pukallus v Cameron (1982) 180 CLR 447; 43 ALR 243. See Australian Performing Rights Association Ltd v Austarama Television Pty Ltd [1973] 2 NSWLR 467. See Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 at 1121; [2009] UKHL 38 at [42]; Byrnes v Kendle (2011) 243 CLR 253 at 286; 279 ALR 212; [2011] HCA 26 at [101]. See generally on estoppel [6-05]–[6-18], [32-09]–[32-12]. See Carter, Construction, §9-18. See Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; 41 ALR 367. See [10-09].

69 70 71 72 73 74

For the classification of terms see Chapter 17. See [17-05]. For an illustration see [10-31]. See generally Chapter 27. See [10-32] (implied terms). See [10-04]. See Farmer v Honan (1919) 26 CLR 183 at 195; Bahr v Nicolay (No 2) (1988) 164 CLR 604 at 616–17, 651; 78 ALR 1. 75 Compare Alice’s statement at the Mad Hatter’s Tea Party in Lewis Carroll’s Alice’s Adventures in Wonderland: ‘I say what I mean’ is equivalent to ‘I mean what I say’. 76 See [10-25]. 77 Carter, Construction, §5-09. 78 [1971] 1 WLR 1381 at 1383–4 (adopted Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; 41 ALR 367). 79 Charrington & Co Ltd v Wooder [1914] AC 71 at 82 per Lord Dunedin. 80 Carter, Construction, §6-22. 81 See eg Inglis v John Buttery & Co (1878) 3 App Cas 552 at 577; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 350–1; 41 ALR 367. 82 See eg Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115; 241 ALR 88; [2007] HCA 61. 83 See eg Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 at 163. 84 See eg Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989; Woodside Offshore Petroleum Pty Ltd v Atwood Oceanics Inc [1986] WAR 253 at 267. 85 See DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 429; 19 ALR 223. 86 See Carter, Construction, §7-16. 87 Prenn v Simmonds [1971] 1 WLR 1381 at 1383–4; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 351–2; 41 ALR 367. 88 See [10-25]. 89 See Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 997 (adopted Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 351; 41 ALR 367). 90 See J W Carter, ‘Commercial Construction and Contract Doctrine’ (2009) 25 JCL 83. 91 (1982) 149 CLR 337; 41 ALR 367. For further facts see [8-04]. 92 See [20-07]. 93 [1971] 1 WLR 1381. 94 (1982) 149 CLR 337 at 352; 41 ALR 367. Stephen and Wilson JJ agreed. The rule is derived from Great Western Railway v Bristol Corporation (1918) 87 LJ Ch 414 at 418–19. 95 See Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 913; Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444 at 458, 471; [2010] NZSC 5 at [22], [66]. 96 See Charter Reinsurance Co Ltd v Fagan [1997] AC 313 at 392 per Lord Hoffmann (‘artificial to start with an acontextual preconception’). 97 (2002) 240 CLR 45; 186 ALR 289; [2002] HCA 5 (see [10-27]). 98 (2004) 218 CLR 451; 208 ALR 213. See Elisabeth Peden and J W Carter, ‘Taking Stock: the High Court and Contract Construction’ (2005) 21 JCL 172. 99 (2014) 251 CLR 640; 306 ALR 25; [2014] HCA 7. 100 (2014) 251 CLR 640 at 656–7; 306 ALR 25; [2014] HCA 7 at [35] per French CJ, Hayne, Crennan and Kiefel JJ. 101 See eg Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 310 ALR 113 at 134; [2014] NSWCA 184 at [86]; Stratton Finance Pty Limited v Webb (2014) 314 ALR 166 at 174; [2014] FCAFC 110 at [40]. Contrast Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd (2014) 48 WAR 261; [2014] WASCA 164 at [45].

102 For ‘patent ambiguity’ see [10-27]. 103 See J W Carter, Wayne Courtney and Gregory Tolhurst, ‘“Reasonable Endeavours” in Contract Construction’ (2014) 32 JCL 36. 104 See Macdonald v Longbottom (1860) 1 E & E 987; 120 ER 1181. 105 See Carter, Construction, §18-23. 106 (1943) 67 CLR 266. See also Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989. 107 See further [10-29] (identification of parties). 108 See [10-28]. 109 See [10-25]. 110 (2002) 240 CLR 45; 186 ALR 289; [2002] HCA 5. See J W Carter and Andrew Stewart, ‘Interpretation, Good Faith and the “True Meaning” of Contracts: The Royal Botanic Decision’ (2002) 18 JCL 182. 111 (2002) 240 CLR 45 at 62; 186 ALR 289; [2002] HCA 5 at [36] per Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ. 112 (1864) 2 H & C 906; 159 ER 375. 113 Other views of the facts are possible. See [24-10]. 114 (1937) 59 CLR 348 (see [10-14]), Cases and Materials, §12-30C. See also R W Cameron & Co v L Slutzkin Pty Ltd (1923) 32 CLR 81. 115 (1937) 59 CLR 348 at 356–7. 116 (1937) 59 CLR 348 at 362. Rich J agreed. 117 See Carter, Construction, §9-51. 118 (1983) 48 ALR 620, Cases and Materials, §12-39C. 119 See [10-09]. 120 (2002) 240 CLR 45; 186 ALR 289; [2002] HCA 5 (see [10-27]). 121 [1971] 1 WLR 1381, Cases and Materials, §12-13C. 122 [1971] 1 WLR 1381 at 1384-5. The other members of the House of Lords agreed. 123 See J W Carter, ‘Context and Literalism in Construction’ (2014) 31 JCL 100. 124 Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570 at 582; 251 ALR 322; [2008] HCA 57 at [35]. 125 [1974] AC 235. 126 See [16-19]. 127 See Gibbons Holdings Ltd v Wholesale Distributors Ltd [2008] 1 NZLR 277; [2007] NZSC 37. 128 See Chapter 8. 129 (1982) 149 CLR 337; 41 ALR 367. For a possible exception see (1982) 149 CLR 337 at 352; 41 ALR 367. 130 [1896] 2 QB 59. Cf Criss v Alexander (1928) 28 SR (NSW) 297. 131 See [8-14]. 132 See also Liverpool City Council v Irwin [1977] AC 239. 133 [1983] QB 54.

[page 164]

Chapter 11

Exclusion Clauses [11-01] Definition. An exclusion clause, sometimes termed an exception or exemption clause, is a term of the contract which excludes, qualifies or limits the liability of the party benefited by the clause (the ‘proferens‘). The rights of the other party are correspondingly reduced, or subjected to certain limitations. Usually, the clause will focus on liability for breach of contract. However, the liability and rights affected need not be contractual in nature. For example, liability in tort for negligence might be excluded. Subject to statute,1 the scope of application of the clause is a question of construction. Exclusion clauses are usually treated as potential defences to an established liability.2 That defence may be partial or complete. For example, assume that Apex Ltd agrees to carry a cargo of coal being sent by Black Ltd from Melbourne to Newcastle. If a term of the contract provides that Apex’s liability for negligent carriage is limited to the payment of $1000, the clause provides a partial defence for Apex to any action for negligence.

Forms, Functions and Abuses Forms [11-02] Clauses which exclude. In relation to matters within its scope, a clause excludes liability if it states that there is no liability at all. The question is whether an alleged liability is within the scope of the clause.

Illustration In Davis v Pearce Parking Station Pty Ltd,3 Pearce Parking operated a parking station at which Davis garaged her car. Because of Pearce Parking’s negligence, the car was stolen and recovered in a damaged state. When Davis claimed damages, Pearce Parking relied on a receipt which said that the vehicle was ‘garaged at owner’s risk’ and excluded its

responsibility for loss or damage of any description. This was held to exclude Pearce Parking’s liability. [11-03] Clauses which qualify. Rather than being excluded altogether, liability for a breach of a duty may be qualified (or restricted). For example, a clause [page 165] may qualify a party’s performance obligation, thus preventing any liability from arising in respect of matters within its scope. In Photo Production Ltd v Securicor Transport Ltd,4 cl 1 of a contract for the provision of a night patrol service at Photo Production’s factory said that Securicor (who was to provide the service) would under ‘no circumstances’ be ‘responsible for any injurious act or default by any employee … unless such act or default could have been foreseen and avoided by the exercise of due diligence’ by Securicor. When its employee set fire to the premises, Securicor was not liable because there was no evidence that its qualified obligation had been breached. Alternatively, a clause may exclude liability for particular categories of loss. A common clause is an exclusion of liability for ‘consequential loss’. Such a clause was present in Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd,5 which concerned a contract for the supply of machinery. Because the goods were defective, the supplier was liable in damages. However, the effect of the clause was to exclude liability for any loss which was not a ‘normal’ loss. The court gave loss of profit as an example of consequential loss, that is, a loss which would not fall within the category of ‘normal’ loss. [11-04] Clauses which limit. Finally, a clause may limit liability. For example, in H & E Van Der Sterren v Cibernetics (Holdings) Pty Ltd6 an exclusion clause stated that no claim could be made for defects in products supplied unless the claim was made within 14 days of delivery. The effect of the clause was to limit the supplier’s liability to those claims brought within the time period specified. Alternatively, liability may be limited to a money sum.7 For example, in Alderslade v Hendon Laundry Ltd8 a clause in a contract to launder handkerchiefs limited the defendants’ liability to a sum equal to 20 times the charge made for laundering. (Of course, the smaller the sum the more a limitation resembles a total exclusion.)

Functions and Abuses [11-05] Introduction. Whether an exclusion clause applies in the circumstances which have occurred is a question of construction.9 As explained below, how the clause functions is also a question of construction. At common law, the only restriction on the use of an exclusion clause is that it is invalid if it purports to qualify liability for fraud (deceit).10 [page 166] However, the use of exclusion clauses is often restricted by statute.11 Statutory intervention is a response to abuse of the freedom of contract principle. [11-06] Function. The traditional approach to exclusion clauses treats them as possible defences to an action for breach of duty, such as a breach of contract. So regarded, they are taken into account after a breach of duty has been established.12 The alternative view distinguishes exclusion clauses which have a defensive function from those which define the obligations of the parties.13 For example, a contract between Apex Ltd and Black Ltd to carry a cargo of coal might provide that Apex is responsible for damage to the goods during carriage which could have been avoided by the exercise of due diligence. The effect of this provision is to define Apex’s performance obligations: Apex is not in breach of contract if it has exercised due diligence. Although the defining function is sometimes acknowledged,14 it is convenient to follow the traditional approach. [11-07] Abuses. The common law assumes that all clauses in a contract have been negotiated, but exclusion clauses are frequently found in standard terms which are not the subject of negotiation. There is then a tension between the general principle of freedom of contract15 and the concern that people who breach their contracts should be liable for doing so. If the freedom of contract idea is permitted to dominate, anyone who has the benefit of a superior bargaining position may abuse that position by insisting on wide exclusions provided on a ‘take it or leave it’ basis. The potential for abuse is particularly significant in the consumer context. Courts do not have a discretion in construing a contract: effect must be given to the intention of the parties. However, courts have sought to deal with the

competing considerations referred to above by the use of special construction rules designed to limit the application of exclusion clauses. Unfortunately, indiscriminate hostility to exclusion clauses does not allow for the greater justification for exclusion clauses in negotiated contracts of a commercial character. Accordingly, in recent years the courts have sought to play down the role of special construction rules, in favour of a more commercial approach to exclusion clauses in such contracts. This is possible because of the statutory protection given to consumers.16 [page 167]

Construction at Common Law Introduction [11-08] Intention of the parties. The operation of an exclusion clause depends on the intention of the parties. Therefore, whether an exclusion clause applies to a given set of circumstances depends on the construction of the contract.17

In Darlington Futures Ltd v Delco Australia Pty Ltd,18 Delco instructed a commodity broker (Darlington) to engage in commodity futures dealings on its behalf. The relevant provisions were: ■ Clause 6 — Darlington was not ‘responsible for any loss arising in any way out of any trading activity undertaken on behalf of [Delco] whether pursuant to [the] Agreement or not’; and ■ Clause 7 — Darlington’s liability was limited to $100 ‘in respect of any claim arising out of or in connection with the relationship established by [the] Agreement or any conduct under it or any orders or instructions given’. Purporting to act on behalf of Delco, Darlington engaged in ‘day trading’ which exposed Delco to the market for one day. Although Darlington expected that this would make profits for Delco, it did not. In fact, Delco had not authorised day trading. Accordingly, it said Darlington was responsible for

the losses which occurred. Delco sued for $279,715 damages. Delco looked to have a strong case, particularly given that some of the losses were sustained because the contracts were left open for more than one day. Darlington invoked the two clauses quoted above. The High Court stated the applicable principle in these terms:19 [T]he interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity.

Applying this principle, the High Court made two points. First, cl 6 did not apply to the unauthorised trading activity. This was because:20 It can scarcely be supposed that the parties intended to exclude liability on the part of the appellant for losses arising from trading activity in which it presumed to engage on behalf of the respondent when the appellant had no authority so to do.

Second, cl 7 did apply. This was because the claim arose:21 [page 168] … in connexion with the relationship of broker and client established by the contract between the parties, notwithstanding the finding that the relevant transactions were not authorised.

Therefore, although the Darlington had breached the contract, its liability was limited to $100. The distinction drawn in Delco between cll 6 and 7 seems subtle. The court thought that the former was qualified: it was inconsistent with the intention of the parties for unauthorised trading to be considered as being ‘undertaken on behalf’ of Delco. However, that was not true of cl 7: unauthorised trading occurred ‘in connexion with the relationship’. [11-09] Secondary rules. In order to establish the intended construction of a contract, reliance can also be placed on secondary rules. These provide bases for inferring the parties’ intention where none has been expressed. The main rules comprise:22 ■ the ‘contra proferentem’ rule; ■ the main purpose rule;

■ the deviation rule; ■ the four corners rule; and ■ special rules dealing with exclusion of liability for negligence. Some English cases23 suggest that the use of a secondary rule may depend on the type of clause at issue. A stricter approach should be taken to a total exclusion than a clause limiting liability. In Darlington Futures Ltd v Delco Australia Pty Ltd,24 the High Court refused to make that distinction. It said:25 [T]he principle, in the form in which we have expressed it, does no more than express the general approach to the interpretation of contracts and it is of sufficient generality to accommodate the different considerations that may arise in the interpretation of a wide variety of exclusion and limitation clauses in formal commercial contracts between business people where no question of the reasonableness or fairness of the clause arises.

However, this conclusion is a little ironic. The decision of the court was that although the limitation of liability applied, the total exclusion did not. [11-10] Termination. The construction principle is not affected by the fact that the contract may have been terminated for breach.26 Accordingly, even if that [page 169] has occurred, whether the exclusion clause is applicable remains a question of construction.

This was established in Photo Production Ltd v Securicor Transport Ltd.27 Photo Production engaged Securicor to provide a night patrol service at its factory. The contract was a standard form, cl 1 of which stated: Under no circumstances shall the company be responsible for any injurious act or default by any employee of the company unless such act or default could have been foreseen and avoided by the exercise of due diligence on the part of the company as his employer; …

The night patrolman was Mr Musgrove. One night he got bored with his job and started a fire to amuse himself. In the English Court of Appeal, Lord Denning MR described what happened:28 [Musgrove] lit a match and threw it on a cardboard box. It burst into flames. He says he only meant it to be a small fire and intended to put it out within a minute or two. But it got beyond

his control. He was terrified and dialled 999 for the fire brigade. He tried to stop it spreading. He lost his glasses and false teeth. His right hand and arm were burnt … Musgrove was afterwards charged with arson. He pleaded guilty to malicious damage and was sentenced to three years’ imprisonment.

Not surprisingly, Photo Production claimed that Securicor had committed a serious breach of contract. For good measure, it also claimed that the breach was so serious that the contract could be terminated. However, the House of Lords said the question was whether cl 1 applied. Lord Wilberforce said29 that Securicor had failed to comply with an implied term requiring the provision of the service with due and proper regard to the safety and security of Photo Production’s premises. The question, therefore, was whether the exclusion clause was a defence to liability for that breach of contract. In his view, construed naturally and fairly, cl 1 excluded Securicor’s liability. Lord Diplock said30 that, putting cl 1 to one side, Securicor was subject to an (implied) ‘absolute obligation to procure that the visits by the night patrol to the factory were conducted by natural persons who would exercise reasonable skill and care for the safety of the factory’. However, he explained that this obligation was qualified by cl 1.31 Securicor was not responsible for the damage to the factory because the conduct of Musgrove did not arise from a failure by Securicor to exercise due diligence. [page 170] Under both approaches, once it was concluded that the parties intended the clause to apply to the events which occurred, it was irrelevant that the contract may have been discharged by termination.

Secondary Construction Rules [11-11] Introduction. It seems clear from Darlington Futures Ltd v Delco Australia Pty Ltd,32 and also Photo Production Ltd v Securicor Transport Ltd,33 that the secondary construction rules still apply.34 However, both cases require a commercial approach to be taken to the construction of exclusion clauses, including when secondary rules are employed.

Construction ‘contra proferentem’ [11-12] The rule. Under the ‘contra proferentem’ rule, an exclusion clause is construed against the interests of the party benefited by the clause (the ‘proferens’).35 In Darlington Futures Ltd v Delco Australia Pty Ltd36 this construction rule was singled out for specific mention, and restricted to ambiguous exclusion clauses. It would seem to follow from this that the High Court disapproved the approach of finding ambiguity artificially — by a process of strict or strained construction.37 Accordingly, if no ambiguity arises when the words of the clause are applied in their ‘natural and ordinary’ sense, the clause will protect the party benefited (proferens) if it is applicable to the facts. Of course, there may be room for debate on what constitutes ‘ambiguity’. For example, in McRae v Commonwealth Disposals Commission38 an exclusion of liability for breach of ‘warranty’ was held not to apply to a breach of ‘condition’. Since the case is still good law, it must be rationalised on the basis that the word ‘warranty’ is ambiguous. When used in a general sense of binding promise, a ‘condition’ is a particular type of ‘warranty’. However, the word ‘warranty’ also has a specific sense: a promise the breach of which does not give rise to a right of termination.39 Given those two possible constructions, it was open to the High Court to restrict the word to its more specific sense.40 [11-13] Application of the rule. It is possible to find many statements in the older cases that exclusion clauses are construed strictly. Indeed, this was stated in two [page 171] cases41 which the High Court approved in Darlington Futures Ltd v Delco Australia Pty Ltd.42 The purpose of this approach is to activate the contra proferentem rule. Accordingly, a device of the courts was to restrict the operation of exclusion clauses by: (1) finding an ambiguity by strict construction; and (2) treating the clause as inapplicable by construction contra proferentem. The high water mark was the decision in Ernest Beck & Co v K Szymanowski & Co.43 A quantity of cotton thread was sold to buyers under a contract which

stated that the ‘goods delivered’ were to be ‘deemed to be in all respects in accordance with the contract’ unless the buyers notified the sellers within 14 days of any matter by reason of which they claimed the ‘goods’ were ‘not in accordance with the contract’. The contract specified that the cotton would be in reels of 200 yards. Some 18 months after delivery the buyers claimed that the reels contained less than 200 yards of cotton. It was held that the exclusion clause did not apply. The claim was in relation to goods not delivered, but the clause applied only to claims in relation to goods actually delivered. It is no longer legitimate to find ambiguity in an exclusion clause by a process of strict construction. Guided by Delco, a different result would now be reached on the facts of Beck, because the decision can only be justified by the strained approach deprecated in Delco.

Seriousness of breach [11-14] General. If the contract does not indicate expressly that the exclusion clause is applicable to the facts which have occurred, the parties’ intention must be inferred. It has always been recognised that the more serious the breach of contract the less likely it is that the parties intended the clause to apply. Unfortunately, the obvious proposition that seriousness of breach is relevant has given rise to much confusion. Nearly all of the secondary rules focus on particular aspects of seriousness. Nevertheless, no matter how serious the breach, whether the clause applies is a matter of construction. Even a deliberate breach may be within the scope of an exclusion clause.44 However, if the clause makes no express reference to deliberate breach it is usually legitimate to infer that the parties did not intend the clause to apply. In Kamil Export (Aust) Pty Ltd v NPL (Australia) Pty Ltd,45 the question was whether a contractor was liable for loss resulting from a deliberate release of the goods to their consignee [page 172] without the shipper’s consent. The contract included an exclusion clause. However, the court refused to infer that the parties intended the clause to apply. [11-15] Four corners rule. Under the ‘four corners’ rule, if a person undertakes to do some particular thing in a particular way, such as to keep goods

in a particular place, an exclusion clause may not apply if the promisor steps outside the four corners of the contract by not doing the ‘particular thing’ as required by the contract. This rule has principally been applied to bailment contracts.46

The leading case is Sydney Corporation v West.47 Mr West parked his car at the Domain parking station.48 When he returned to collect it, the car could not be found. It was subsequently located in a damaged condition some distance from the car park. When West sued for damages, the Corporation relied on terms stated on the parking ticket received by West when he parked the car. One term said the Corporation ‘did not accept any responsibility for … damage’ to the vehicle. Another provided that the ticket had to be presented ‘before taking delivery of the vehicle’. It was established that a thief (Robinson) obtained West’s vehicle. He pretended he had lost his ticket and tricked the attendant into issuing a duplicate. The High Court held that the Corporation was not protected by the terms on the ticket. Barwick CJ and Taylor J said this was because the Corporation had been negligent and dealt with West’s property in a way which was outside the four corners of the contract. The Corporation’s act was neither authorised nor permitted by the contract. They said:49 [T]he act of the [car park] attendant in permitting ‘Robinson’ to proceed after handing over the duplicate ticket which he had obtained constituted an unauthorised delivery of possession by him to ‘Robinson’ and not a mere act of negligence in relation to some act authorised by the contract of bailment.

Windeyer J said that by releasing the vehicle the Corporation had not done what it had contracted to do in the way in which it had contracted to do it. This was because the contract required the presentation of West’s ticket.50 The four corners rule was approved by the High Court in Darlington Futures Ltd v Delco Australia Pty Ltd.51 The rule sounds very straightforward and simple. However, it must not be read too broadly. Every contract has specific obligations [page 173]

and the four corners rule does not operate simply because a specific obligation has been breached. Although the rule is not limited to contracts involving the custody of goods, that has usually been the context of its application. The custody aspect enables the identification of a specific (particular) thing to be done. But in deciding what is authorised by the contract it is necessary to bring the exclusion clause into account.52 [11-16] Main purpose rule. It seems sensible to say that if it is possible to identify the main purpose of a contract as an element of context, the parties probably do not intend a breach which defeats the main purpose to be covered by an exclusion of liability. The main purpose rule is therefore that a court should infer that the parties intend any exclusion clause to operate in a way which will not defeat the main purpose of the contract. This rule has often been applied. For example, in Glynn v Margetson & Co53 a contract for the carriage of oranges from Malaga to Liverpool included a ‘deviation clause’ which allowed the carrier to ‘proceed to and stay’ at a series of ports ‘for the purpose of delivering coals, cargo, or passengers, or for any other purpose whatsoever’. The vessel deviated from the usual journey, and the voyage took so long that the oranges were in a poor condition when they arrived. It was held that the deviation clause was intended to be applied consistently with the main purpose of the contract. That purpose was the delivery of perishable goods. The clause did not provide a defence for the carrier because its application would have defeated the main purpose of the contract. However, the main purpose rule will not apply if the parties have expressly agreed to the contrary.54 [11-17] Deviation rule. Unless the contract includes a liberty to deviate, a carrier of goods generally loses the benefit of any exclusion clause if it deviates from the agreed course of carriage.55 Therefore, under the ‘deviation rule’ it will generally be inferred that exclusion clauses which might otherwise protect a carrier do not apply once the carrier deviates from the agreed course. The rule has most frequently been applied to the carriage of goods by sea. However, land carriage is also within its scope.

Leading case In Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd56 TNT agreed to carry May & Baker’s goods by road.

Because TNT’s depot had closed for the night by the time the driver had collected all the [page 174] goods he was required to collect, the driver took them to his home. They were there destroyed by fire. The contract stated that TNT did not accept ‘responsibility for any damage’ to the goods while in its possession, whether ‘in transit or in storage for any reason whatsoever’. A majority of the High Court held that the clause did not protect TNT once it deviated from the contract by allowing the goods to be taken to the driver’s home. Like the ‘four corners’ rule, the deviation rule applies chiefly to bailment contracts. Historically, it is bound up with assumptions about insurance arrangements. The rule has been applied in many cases. However, except perhaps in relation to contracts for the carriage of goods by sea, it is not a rule of law.57 Accordingly, whether an exclusion clause applies to a breach by deviation remains a question of construction. [11-18] Fundamental breach. Most controversial has been the ‘fundamental breach rule’. This is a rule that, if the promisor breaches a very important (‘fundamental’) term, or performs the contract in a way which is fundamentally different from that envisaged by the contract, an exclusion clause may not apply. To the extent that ‘fundamental breach’ simply describes a very serious breach, the rules so far considered could be said to illustrate a fundamental breach rule. For example, where goods are carried by sea, deviation58 is the breach of a fundamental term of the contract. Australian courts have recognised that any fundamental breach ‘rule’ is merely a secondary rule of construction.59 It is simply a rationale for inferring that the parties did not intend an exclusion clause to apply.60 The inference cannot be drawn if the clause expressly applies to facts which amount to a fundamental breach. And even if the clause is not expressly applicable, it may be concluded that the parties intend the clause to apply. That was the position in Photo Production Ltd v Securicor Transport Ltd,61 and also Darlington Futures Ltd v Delco Australia Pty Ltd.62 Because ‘fundamental breach’ is no more than a convenient description of

serious breach, there is no magic in the description. It is therefore better to think in terms of degrees of seriousness than labels.63 That there is no special rule is consistent with the recent cases. In Photo Production the House of Lords criticised the use of the fundamental breach rule and overruled cases where it had been used to override the parties’ intention. And in Delco the High Court agreed with those criticisms. [page 175]

Negligence [11-19] Generally. Many cases have discussed the proper approach to be taken when the question is whether an exclusion clause should be construed as applying to negligence. In the present context, the ‘negligence’ refers to a breach of a contractual term (express or implied) arising from a failure to exercise reasonable care. Generally, in such cases there are causes of action in both contract and tort. Negligence may be a serious matter. It may cause personal injury or damage to property. If the exclusion clause is applicable the injured person may have no claim at all.64 It is therefore not surprising that the courts have been astute to ensure that exclusion clauses do not protect contracting parties who are negligent unless that intention is expressly stated.65 [11-20] The traditional rules. Traditionally, the courts have applied three rules to determine whether a particular exclusion clause applies to negligence. These are sometimes termed the Canada SS rules,66 after the decision in Canada SS Lines Ltd v R.67 Summarising the earlier cases they were formulated as: (1) an express exclusion of liability for negligence will protect the defendant; (2) if there is no express reference to negligence the defendant may be protected if, as a matter of construction, negligence is within the literal scope of the clause; and (3) even if the exclusion is wide enough to cover liability for negligence, it will not apply if there is some ground other than negligence on which liability may be based, and against which it is legitimate to infer that the defendant sought to be protected. [11-21] Express reference to negligence. An exclusion clause is usually

effective to exclude liability for negligence if it expressly refers to negligence. Although this sounds straightforward enough, is it necessary for the word ‘negligence’ to be used? The narrow view is that the clause must either use the word ‘negligence’ or an accepted synonym.68 However, today this may be too strict an approach.69 [11-22] Clause capable of applying. Whereas the first rule relies on the expressed intention of the parties, the second rule relates to the literal meaning of the clause. Accordingly, the case will be decided against the party relying on the exclusion clause if it is not capable of including negligence. (In such cases, the third rule is not reached.) Traditionally, the cases have drawn a distinction between exclusions referring to ‘all liability’ (or ‘any loss or damage’) and those referring to loss ‘howsoever caused’ [page 176] (or ‘whatever its cause’).70 The latter, but not the former, have been regarded as capable of applying to negligence. However, it is doubtful whether that distinction can be drawn today. Contractual provisions in commercial contracts excluding ‘all liability’ or liability for ‘any loss or damage’ can be effective to exclude liability for negligence.71 At least, no doubt should be regarded as arising at the second rule stage. Moreover, if negligence is the only realistic basis for the plaintiff’s claim, it will usually be inferred that a general exclusion of liability is intended to apply to negligence. In these cases, the decision will be in favour of the party relying on the clause.

Illustration In Davis v Pearce Parking Station Pty Ltd,72 Davis’s car was stolen while it was garaged at the parking station. Although Pearce Parking was negligent, it was protected by the exclusion clause in a receipt. Because the contract was a bailment, Pearce Parking could not (as a bailee) be held liable for loss or damage without negligence. It was therefore sensible to infer that the exclusion clause was intended to

exclude liability for negligence even though the word ‘negligence’ was not used. Accordingly, that was the decision of the High Court. [11-23] Ground other than negligence. Contracts may include various obligations, capable of being breached in various ways. Some duties may be strict while others depend on proof of negligence.73 Moreover, one set of facts may give rise to two or more bases for liability, or different kinds of loss, not all of which depend on negligence. The third rule in Canada SS Lines Ltd v R74 deals with these situations. If the exclusion clause does not expressly deal with the situation which has arisen, but it is capable of applying to negligence, the question is whether the contrary intention should be inferred. The object of the third rule is therefore clear enough: the inference (against application of the clause) should occur if some other objective for the clause can be seen. For example, in White v John Warwick & Co Ltd75 the plaintiff hired a bicycle under a contract which excluded liability for personal injury suffered by riders. The plaintiff was injured due to the saddle on the cycle shifting forward. There were two breaches of duty: ■ breach of the strict contractual duty to supply a cycle which was not defective; and ■ negligence, that is, breach of a duty of care to maintain the machine. [page 177] It was conceded that the exclusion protected the defendants from liability in contract, which did not depend on proof of negligence. However, the court held that it did not also protect them from the claim in tort based on negligence. But the mere ability to frame alternative causes of action in contract and tort is not of itself sufficient. For example, in Alderslade v Hendon Laundry Ltd76 launderers who lost handkerchiefs belonging to Alderslade were protected by a clause which limited their liability ‘for lost or damaged article’ to an amount equal to 20 times the laundering charge. Assuming that the claim arose from negligence, it could have been maintained in either contract or tort. But since both claims depended on proof of breach of a duty of care it would not have been sensible to treat the clause as inapplicable to liability in tort. [11-24] Indemnity clauses. Some of the cases on the exclusion clause rules have actually concerned indemnity clauses. An indemnity is a promise to

compensate a person for loss. The promise will operate in much the same way as an exclusion clause if it applies loss caused by the indemnified party’s own breach of duty.77 For example, assume that A contracts to carry B’s goods, and that B promises to indemnify A for any loss it sustains in connection with the contract, including due to A’s breach of contract. Because of the indemnity, there is no point in B suing A for breach of contract. The judgment of the court would be in A’s favour, on the basis that the indemnity cancels out B’s claim.78 It is easy to understand that a court would be very reluctant to infer that an indemnity expressed in general terms is intended to apply when the indemnified party is negligent. In fact, there is a special rule.

In Andar Transport Pty Ltd v Brambles Ltd,79 Mr Wail was employed to drive Andar’s delivery truck. He was injured using a trolley supplied by Brambles to Andar. The injury occurred because Brambles was negligent. Under its contract with Brambles, Andar promised to indemnify Brambles. When Wail sued Brambles in tort, Brambles contended it was entitled to be indemnified by Andar in respect of the claim. Whether that contention was correct depended on the construction of the indemnity. The indemnity applied to actions against Brambles in respect of ‘loss, damage, injury or accidental death’ in a variety of situations. The question was whether Brambles’ own negligence was one of those situations. [page 178] It was held that a principle of strict construction applies to indemnity promises. Therefore, it had to be clear that the indemnity applied not only to a claim made by Wail (as an employee of Andar) but also to a claim resulting from negligence by Brambles. Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ made three points.80 First, the indemnity did not refer ‘expressly’ to injuries suffered by Andar’s employees. Second, to the extent that the indemnity promise was therefore ambiguous, the principle of strict construction required the promise ‘to be construed in favour of Andar’.

Third, because Wail’s claim arose from Brambles’ negligence, the indemnity promise did not apply. Therefore although an indemnity may have the same practical effect as an exclusion clause, the approach stated in Darlington Futures Ltd v Delco Australia Pty Ltd81 does not apply.82

Reasonableness [11-25] Reasonableness in construction. One incident of commercial construction83 is that when seeking to infer the parties’ intention, a court should prefer the construction which leads to a reasonable result. This incident applies to exclusion clauses. Therefore, if two constructions of an exclusion clause are tenable, and construing the exclusion as applicable to the breach of contract at issue would lead to an unreasonable result having regard to the context of the contract, the court will infer that the parties did not intend the clause to apply.84 But the need to make a choice must arise: a court cannot refuse to enforce an exclusion clause because it considers it unreasonably wide.

Pre-contractual statements [11-26] Inconsistent promise or representation. Sometimes, parties discuss liability prior to entering into the contract. Those discussions may be inconsistent with the contract including a term which excludes liability in relation to a breach which subsequently occurs. If so, the promisor will be liable even if the contract includes an exclusion clause which would otherwise apply.

Hypothetical Prior to entry into a contract with Fred, Wilma said that the exclusion clause in the contract was limited in its coverage to certain events. In fact, it has a wider operation. Wilma subsequently breaches the contract. If she seeks to [page 179]

rely on the exclusion, Wilma will not be protected if application of the clause would be inconsistent with her pre-contractual statement. There may be more than one justification for this result: ■

clause not incorporated — the clause may not be incorporated into the contract, even if Fred signs it;85 ■ oral promise — Fred may be able to sue on Wilma’s statement as an oral promise;86 or ■ clause overridden — Wilma’s statement may override the written term. An illustration is Mendelssohn v Normand Ltd.87 A ticket issued at a parking station purported to exclude liability for loss of the contents of a parked vehicle. However, the attendant said that he would see to it that the vehicle was locked. This statement was held to override the exclusion. Accordingly, when a suitcase was stolen because the vehicle was not locked, the parking station was liable.

Impact of Statute [11-27] Introduction. There are two ways in which legislation may affect the operation of exclusion clauses. First, an exclusion clause will not operate if it is prohibited by statute. In this case, the relevant legislation is aimed directly at exclusion clauses. The chief example is s 64 of the ACL. Second, general legislation may operate to prevent reliance on an exclusion clause. For example, the legislation may confer jurisdiction on courts to declare void unjust or unfair terms. Alternatively, reliance on an exclusion clause may be inconsistent with the policy of legislation regulating particular classes of conduct in trade or commerce.

Direct Regulation [11-28] Prohibited exclusions. Section 64 of the ACL88 prohibits certain exclusion clauses. They are therefore void. The provision operates where a consumer has the benefit of the consumer guarantees regime in Pt 3-2, Div 1 of the ACL in respect of a contract for the supply of goods or services.89 A provision is void if it purports to exclude, restrict or modify (or would have that effect): ■ the application of the consumer guarantee regime; ■ the exercise of a right conferred by the regime; or

■ any liability of the supplier for a failure to comply with a consumer guarantee. [page 180]

Hypothetical Sales Ltd sells a television to Ben for $2000. Unfortunately, the television is not of ‘acceptable quality’. This is one of the consumer guarantees with which Sales must comply under the ACL.90 Clause 3 of the contract says: Sales’ liability for any defects in the television supplied under this contract is limited to paying Ben the cost of repairing it.

Because the television is not of acceptable quality, Ben is entitled to damages under the ACL. His entitlement is not affected by cl 3. Under s 64 of the ACL, that clause is void. [11-29] Exclusions subjected to a requirement of reasonableness. Section 64A of the ACL91 qualifies s 64. It operates if the contract is to supply goods or services to a consumer and they are not of a kind ordinarily acquired for personal, domestic or household use or consumption. The consumer guarantees cannot be excluded. However, liability for certain consumer guarantees may be limited if s 64A is complied with. First, in the case of goods, an exclusion clause may be valid if it limits liability to one or more of the following: ■ replacement (or the supply of equivalent goods); ■ repair of the goods; ■ payment of the cost of replacement (or of acquiring equivalent goods); or ■ payment of the cost of repair. But s 64A does not permit liability to be limited for the consumer guarantees relating to title, undisturbed possession and undisclosed encumbrances. Second, in the case of services, liability may be limited to either: ■ supplying the services again; or ■ payment of the cost of having the services supplied again. Whether the contract relates to goods or services, s 64A is inapplicable if the consumer establishes that it was not ‘fair or reasonable’ for the supplier to rely on the clause.92 When deciding whether or not reliance would be fair or reasonable

the court must have regard to ‘all the circumstances of the case’.93 Four matters are set out to which the court must pay particular attention:94 (1) the relative bargaining strength of the parties, including the availability of alternative sources of supply; [page 181] (2) any inducement to the consumer to agree to the term, and whether there was an opportunity to acquire equivalent goods or services under a contract without the limitation of liability; (3) whether the consumer knew or ought to have known of the existence and extent of the clause; and (4) in relation to goods, whether they were manufactured, produced or adapted to the special order of the consumer.

Hypothetical In the earlier95 hypothetical, cl 3 is void under s 64 of the ACL because the television failed to comply with the consumer guarantee of acceptable quality. The clause is not saved by s 64A. That is because televisions are goods ordinarily acquired for household use. However, if we change the subject matter of the contract to a pneumatic drill, the position is different. The drill is not within the concept of goods of a kind ordinarily acquired for personal, domestic or household use or consumption. Section 64A therefore applies. Accordingly, unless Ben can establish that it is not ‘fair or reasonable’ for Sales to rely on cl 3, its liability is limited to payment of the cost of repairing the drill. [11-30] Scope of direct regulation. As can be seen from the above, there are three limitations on the scope of ss 64 and 64A of the ACL. First, they are limited to contracts for the supply of goods or services. However, that is not a major limitation. Most economic activity revolves around such supplies. Second, the provisions apply only when goods or services are supplied to a ‘consumer’.96 However, since a corporation may be a consumer, and because s 64A is inapplicable if the goods or services are of a kind ordinarily acquired for

personal, domestic or household use or consumption, exclusion clauses in many commercial contracts are affected by s 64. Third, ss 64 and 64A do not protect rights under express contractual terms in contracts for the supply of services.97 Subject to the more general legislation referred to below, the common law principles of construction apply.

More General Legislation [11-31] Scope. The approach of general legislation is variable. Under legislation dealt with later,98 an exclusion clause will not operate if the clause is declared void as an unjust or unfair term. [page 182] There is another possibility. The ACL prohibits certain classes of conduct in trade or commerce.99 The ACL does not expressly confer on courts the right to refuse to enforce provisions excluding liability for prohibited conduct. However, when necessary to give effect to the policy basis for the prohibitions, an exclusion clause will be ignored.100 The position may be summarised as follows. (1) Unjust terms — if legislation confers jurisdiction to declare certain terms as ‘unjust’ by reference to statutory criteria, this may include an exclusion clause. (2) Unfair terms — the ACL renders void any provision of a ‘consumer contract’101 which is unfair.102 Accordingly, an exclusion clause may be void if found to be an unfair term. (3) Prohibited conduct — if conduct prohibited by the ACL occurs, such as unconscionable conduct or misleading or deceptive conduct, statutory remedies are available. It is open to the court to refuse to enforce an exclusion clause which would impact on those remedies.

QUICK QUIZ Short answer

(1) What is an exclusion clause? (2) Why have the courts shown antagonism towards exclusion clauses? (3) Identify any exclusion clause in the SAMPLE SALE OF GOODS CONTRACT. (4) How do courts decide whether an exclusion clause applies? (5) List two secondary construction rules. True or false? (1) Exclusion clauses are always construed strictly. (2) Statute may render an exclusion clause void. (3) It is contrary to public policy to exclude liability for negligence. (4) An exclusion clause may define the obligations of the parties. (5) Section 64 of the ACL applies only to exclusion clauses in contracts for the supply of goods. [page 183] Choose the best answer (1) The four corners rule: (a) is a rule named after a famous television program; (b) applies mainly to contracts of bailment; (c) does not apply under Australian law; (d) applies only to written contracts; or (e) applies only if damages are claimed for personal injury. (2) In Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500; 68 ALR 385 (see [11-08]), the High Court was concerned to: (a) stamp out the use of exclusion clauses; (b) emphasise that a limitation of liability should be governed by stricter rules than those applicable to exclusion clauses in general; (c) adopt the concept of fundamental breach; (d) emphasise the role of general construction principles in relation to exclusion clauses; or (e) emphasise that exclusion clauses are always strictly construed.

(3) If a contract is terminated for breach, any exclusion clause in the contract: (a) ceases to apply; (b) ceases to apply if the contract was terminated for breach by the party who relies on the clause; (c) ceases to apply if the contract was terminated for the breach by the party whose rights are affected by the clause; (d) must be construed to determine whether it applies; or (e) becomes void. (4) Under the common law, if the question is whether an exclusion clause applies to negligence: (a) courts have traditionally applied very strict rules; (b) it is presumed to apply; (c) it does not apply if the defendant is liable in tort; (d) it must refer expressly to ‘negligence’; (e) it does not apply if the plaintiff suffered personal injury. (5) Under s 64A of the ACL, an exclusion clause in a contract for the supply of goods to a consumer: (a) is always void; (b) is effective if the goods are of a kind ordinarily acquired for personal, domestic or household use or consumption; (c) is void if it limits the liability of the supplier to the cost of replacing the goods; (d) is always valid; or (e) may be valid if it limits liability to payment of the cost of repairing goods.

1 2 3 4 5 6 7 8

See [11-27]–[11-31]. See further [11-06]. (1954) 91 CLR 642. See Cases and Materials, §14-40. [1980] AC 827 (see [11-10]), Cases and Materials, §14-06C. (2008) 19 VR 358; [2008] VSCA 26. See J W Carter, ‘Exclusion of Liability for Consequential Loss’ (2009) 25 JCL 118. (1970) 44 ALJR 157. Cf Wallaby Grip Ltd v QBE Insurance (Australia) Ltd (2010) 240 CLR 444 at 459; 264 ALR 425; [2010] HCA 9 at [35]. [1945] 1 KB 189.

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

See [11-01], [11-08]. See eg S Pearson & Son Ltd v Dublin Corporation [1907] AC 351; Suburban Homes Pty Ltd v Topper (1929) 35 ALR 294. See [11-27]–[11-31]. See [11-01]. See Brian Coote, Exception Clauses, Sweet & Maxwell, London, 1964, Chapter 1. See eg Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353 at 385. See also [11-03], [11-10]. See [1-21]. See [11-27]–[11-31]. See generally Chapter 10. (1986) 161 CLR 500; 68 ALR 385, Cases and Materials, §14-12C. (1986) 161 CLR 500 at 510; 68 ALR 385. (1986) 161 CLR 500 at 511; 68 ALR 385. (1986) 161 CLR 500 at 511; 68 ALR 385. See [11-11]–[11-25]. See eg Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 WLR 964. See Carter, Construction, §§17-16–17-17. (1986) 161 CLR 500; 68 ALR 385 (see [11-08]). (1986) 161 CLR 500 at 510–11; 68 ALR 385. See generally on the consequences and scope of termination (discharge) Chapter 21. [1980] AC 827, Cases and Materials, §14-06C. [1978] 1 WLR 856 at 860. Lords Salmon, Keith and Scarman agreed. [1980] AC 827 at 851. See [11-03]. (1986) 161 CLR 500; 68 ALR 385 (see [11-08]), Cases and Materials, §14-12C. [1980] AC 827 (see [11-10]), Cases and Materials, §14-06C. Even so, the extent to which the secondary rules apply is not entirely clear. Cf [11-24]. That is also usually the party who drafted the clause. (1986) 161 CLR 500 at 510; 68 ALR 385. See further [11-13]. (1951) 84 CLR 377 at 398. See also Wallis v Pratt [1911] AC 394. See [16-24]. But see Carter, Construction, §17-23 (specific rule of ‘legal interpretation’). Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353 at 376; Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 at 850. (1986) 161 CLR 500 at 510; 68 ALR 385. [1924] AC 43. Cf Insight Vacations Pty Ltd v Young (2011) 243 CLR 149; 276 ALR 497; [2011] HCA 16. See eg Suisse Atlantique Société d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361. (1993) [1996] 1 VR 538. See Brian Coote, ‘Exception Clauses, Deliberate Acts and the Onus of Proof in Bailment Cases’ (1997) 12 JCL 169. For an explanation of the concept see [15-18]. (1965) 114 CLR 481, Cases and Materials, §14-19C. For the history of the parking station see Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45; 186 ALR 289; [2002] HCA 5. (1965) 114 CLR 481 at 489. See also Walton Stores Ltd v Sydney City Council [1968] 2 NSWR 109 (unsuccessful drafting attempt to get around the High Court’s decision).

51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91

(1986) 161 CLR 500; 68 ALR 385. See Glebe Island Terminals Pty Ltd v Continental Seagram Pty Ltd (The Antwerpen) (1993) 40 NSWLR 206. See Ashby v Tolhurst [1937] 2 KB 242. [1893] AC 351. See Nissho Iwai Australia Ltd v Malaysian International Shipping Corp Berhad (1989) 167 CLR 219; 86 ALR 375. See Brian Coote, ‘Deviation and the Ordinary Law’ in F D Rose, ed, Lex Mercatoria: Essays on International Commercial Law in Honour of Francis Reynolds, LLP, London, 2000, p 13. (1966) 115 CLR 353, Cases and Materials, §14-27C. Cf Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 at 845. See [11-17]. See eg Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353 at 387. Cf UGS Finance Ltd v National Mortgage Bank of Greece [1964] 1 Lloyd’s Rep 446 at 453. [1980] AC 827 (see [11-10]). (1986) 161 CLR 500; 68 ALR 385 (see [11-08]). See Brian Coote, ‘The Second Rise and Fall of Fundamental Breach’ (1981) 55 ALJ 788. Unless the exclusion clause is invalid under the ACL. See [11-28]–[11-29]. Cf Stewart v White (2011) 284 ALR 432 at 436–7; [2011] QCA 291 at [22]–[23]. See J W Carter, ‘“Commercial” Construction and the Canada SS Rules’ (1995) 8 JCL 69. [1952] AC 192 at 208. See further [11-24] (indemnity clauses). See Smith v South Wales Switchgear Co Ltd [1978] 1 WLR 165 at 168, 173. See HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] 2 Lloyd’s Rep 61; [2003] UKHL 6. See Carter, Construction, §17-29. See BHP Petroleum Ltd v British Steel Plc [2000] 2 Lloyd’s Rep 277 at 285, 289. (1954) 91 CLR 642 (see [11-02]). See also Alderslade v Hendon Laundry Ltd [1945] 1 KB 189 (see [1123]); Davis v Commissioner for Main Roads (1968) 117 CLR 529. See [15-11]. [1952] AC 192 at 208 (see [11-20]). [1953] 1 WLR 1285. [1945] 1 KB 189, Cases and Materials, §14-34C. See Contractual Indemnities, §§3-14, 3-29. Cf Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] VR 834 (see Peter Brereton, (1991) 4 JCL 261). (2004) 217 CLR 424; 206 ALR 387; [2004] HCA 28. See J W Carter and David Yates, ‘Perspectives on Commercial Construction and the Canada SS Case’ (2004) 20 JCL 233. (2004) 217 CLR 424 at 437, 438; 206 ALR 387; [2004] HCA 28 at [25], [29]. (1986) 161 CLR 500 at 510; 68 ALR 385 (see [11-08]). See F & D Normoyle Pty Ltd v Transfield Pty Ltd T/as Transfield Bouygues Joint Venture (2005) 63 NSWLR 502 at 511, 512; [2005] NSWCA 193 at [60], [64]. See [10-07]. Cf Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 511; 68 ALR 385. See Curtis v Chemical Cleaning and Dyeing Co [1951] 1 KB 805 (see [9-05]). Cf J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 2 All ER 930 (see [10-15]). [1970] 1 QB 177. Replacing Trade Practices Act 1974 (Cth), s 68. See [8-11]–[8-13]. See [8-13]. Replacing Trade Practices Act 1974 (Cth), s 68A.

92 93 94 95 96 97 98 99 100

See ACL., s 64A(2). See ACL., s 64A(3). See ACL., s 64A(4). See [11-28]. See [8-12]. In a supply of goods, ‘express warranties’ are consumer guarantees. See [8-13]. See Chapter 26. See eg [23-20]–[23-30] (misleading or deceptive conduct). See eg Byers v Dorotea Pty Ltd (1986) 69 ALR 715; Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 46; 110 ALR 608 at 624. See also [11-07], [23-26]. 101 See [26-20]. The concept is different from ‘consumer’ (see [8-12]), as used for consumer guarantees. 102 See [26-20]–[26-22].

[page 185]

Part E

Who Can Enforce the Contract?

[page 186]

Chapter 12

Capacity and Parties [12-01] Issues. Three issues are discussed in this part of the book: (1) What legal characteristics must a person have in order to be entitled to contract? (2) Who are the parties to the contract? (3) What is the position where there are more than two parties? This chapter deals mainly with (1). It is concerned with whether those who purported to contract had legal capacity to do so. This chapter also deals briefly with (3), from the perspective of the legal effect of two or more parties making the same promise to another party. The next chapter deals mainly with (2), which concerns privity of contract. [12-02] Concepts. Capacity and privity are fundamental concepts. The requirements for both must be satisfied for a contract to be binding. ‘Capacity’ is concerned with legal recognition: ‘Does the law recognise those who purported to contract as being entitled to do so?’ At one time this issue was raised quite regularly. That is not the position today. The concept of privity is in principle simple. It states only persons who are actually parties to a contract may: ■ obtain enforceable rights under it; or ■ be burdened by it. For example, assume Mary and Bert enter into a contract which states that, in consideration of the payment of $100 by Mary to Bert, Uncle Albert will deliver goods to Mary. It would be absurd to suggest that those facts alone are sufficient to impose a contractual obligation on Uncle Albert. But it is not so obvious that Mary and Bert should be unable to confer a contractual right on Uncle Albert. However, the privity rule also applies if Bert promises Mary that he will supply a kite to Uncle Albert. [12-03] Identifying parties. Usually, the parties to a contract comprise those who make and receive promises.1 If the contract is in a document, it is

reasonable to assume not only that everyone named as such is a party, but also that only those named are parties. However, a person who is not named,2 or who is ambiguously [page 187] named,3 in a document may be recognised as a party if that was intended. And a person named as a promisee may be a party even though not a promisor.4 In most cases, the process outlined above leads to the identification of only two contracting parties. But sometimes a contract will have three or more parties. For example, the terms of a mining joint venture may be set out in a contract between many parties. However, three or more people may sign a single document because the document sets out two (or more) contracts, each having two parties. For example, the document expressing the SAMPLE SERVICES CONTRACT sets out the terms of two contracts: one for the provision of services to Client Ltd, and the other a contract of guarantee.5

Capacity General [12-04] Introduction. Being able to enter into a contract is an incident of the legal capacity of a person.6 Indeed, when a contract is agreed there is a presumption of capacity to do so.7 Proof of lack of capacity rebuts the presumption. Accordingly, a person who wishes to rely on incapacity to contract bears the onus of proof. A reference to a ‘person’ is not limited to a ‘natural person’, that is, an individual. Therefore, any legally recognised entity, such as the Crown or a corporation, may be a contracting party. The legal personality of the latter derives from statute. By contrast, collections of people, such as a partnership or an unincorporated association,8 are not legal entities. They therefore have no legal capacity separate from that of the individuals themselves.9 [12-05] Persons who lack capacity. The capacity of natural persons (and the

Crown) is usually unlimited. However, the extent of capacity of bodies incorporated under statute depends on the legislation. Although that might suggest that capacity issues are more likely to arise for a corporation than a natural person, in practice that is not the case. [page 188] For individuals, issues of capacity arise if some disqualifying feature is present.10 Persons under 18 (minors), as well as mentally disabled people, are disqualified by their age or disability from having the legal capacity to enter into contracts.11 It follows from the points made above (and in the previous paragraph) that there are four contexts for issues of incapacity to arise: (1) minors; (2) mentally disabled people; (3) corporations and unincorporated associations; and (4) the Crown. [12-06] Effect of incapacity. The impact of incapacity varies. Lack of capacity to contract often means that the contract is void. However, sometimes the contract is merely unenforceable against the incapable person. Even if the contract is void, the person who dealt with a person who lacked capacity is not necessarily without remedy. For example, restitution may be available.12 Moreover, in some jurisdictions orders may be made rendering a contract binding on a minor.13

Minors General [12-07] Age of majority. At common law, individuals obtained capacity to contract on reaching the age of 21. However, legislation has reduced the age of majority to 18 years.14 In the old cases a person under the age of majority was referred to as an ‘infant’. Today, the more usual terminology is ‘minor’. Therefore, a minor is a person under the age of 18.

[12-08] Scope of incapacity. Not all contracts entered into during minority are devoid of legal effect. Obviously, since the law is concerned to protect minors, some contracts with minors will have legal effect. This can be seen in the contrast between contracts for necessaries and other contracts. [page 189]

Contracts for necessaries [12-09] The concept. In all jurisdictions other than New South Wales, where the concept has no relevance, ‘necessaries’ are goods or services suitable to the condition in life of the minor, and to the minor’s actual requirements at the time of performance. This description tracks the definition in the sale of goods legislation.15 Although that definition is limited to necessary goods, since it is a summary of the common law, necessary services are analogous. The concept is not an abstract one: the position of a particular minor must be considered when deciding whether the contract is for necessaries. [12-10] Scope of the concept. The necessaries concept is not restricted to the necessities of life.16 It extends beyond food, drink and essential clothing and services. Accordingly, contracts for employment, education, dry cleaning, professional services, and so on, may be binding on a minor.

Contrasting illustrations In McLaughlin v Darcy,17 a solicitor engaged by a professional boxer to assist him in obtaining a passport for a tour of the United States was entitled to be paid. By contrast, in Stocks v Wilson18 curios and snuffboxes were not necessaries. That was because the concept does not include all goods and services which a minor may consider to be beneficial, even if they are in fact beneficial. Again, in Nash v Inman19 the fancy waistcoats which an undergraduate purchased were not necessaries, even if they were capable of falling within the concept. That was because he was already adequately supplied with clothing.

Moreover, if a contract would otherwise be for necessaries, the minor will not be bound if the contract is not for the minor’s overall benefit.20 [12-11] Obligation of the minor. The sale of goods legislation21 states that a minor must ‘pay a reasonable price’ for necessaries ‘sold and delivered’. Accordingly, the contract price is payable only if that is a reasonable amount. This contrasts with [page 190] the position under contracts not affected by minority. If the goods are delivered and ownership is transferred to the buyer, the obligation is to pay the agreed price.22 The same is true for services which are necessaries. But these are governed by the common law. Because the obligation is to pay a reasonable sum, the liability of the minor may be restitutionary in character.23 Another view is that contracts for necessaries are an exception to the general rule of incapacity. But even if that view is correct, a minor need only pay for necessaries supplied.

Other contracts [12-12] General position. Except in New South Wales,24 the position of minors under contracts not for necessaries is somewhat unclear. In most cases, the contract is voidable at the option of the minor, but may be adopted (‘ratified’) and enforced by the minor on attaining majority. Generally, the other party to the contract cannot set up the minor’s incapacity as a basis for not performing the contract. [12-13] Contracts which are void. Under the general law, some minors’ contracts that would be ratifiable are not capable of ratification. However, this is a narrow class of necessarily prejudicial contracts.25 Various statutory provisions regulate minors’ contracts, and their ratification. These serve to restrict or prevent ratification.26 The impact is that sometimes the contract is void. [12-14] Contracts which may be avoided. If there is any general rule in relation to minors’ contracts (other than that a reasonable sum must be paid for necessaries) it is that most contracts are voidable by a minor. This category

includes contracts for the overall benefit of the minor. Illustrations include contracts with continuing obligations, such as partnerships and apprenticeships,27 and also sale of business contracts.28 A minor may avoid such a contract before or within a reasonable time after attaining majority.29 Indeed, avoidance may be postponed until an action is brought against the minor, even though the contract has been performed by the other party. If the minor paid money under the contract prior to avoidance, the minor is entitled to recover the money in a claim for restitution.30 [page 191]

New South Wales [12-15] Contracting as civil act. The Minors (Property and Contracts) Act 1970 (NSW) was passed to codify the law relating to minors in New South Wales.31 It employs a concept of a ‘civil act’, defined by s 6(1) to include ‘any act relating to contractual or proprietary rights’. It follows that entering into a contract is a civil act. [12-16] When civil act binding. Under s 19 of the Minors (Property and Contracts) Act 1970 (NSW), if a minor has entered into a contract which is for the minor’s benefit, that contract is ‘presumptively binding’. This is true whether or not the contract has been performed. Under this approach, the concept of ‘necessaries’32 plays no role. A contract which would not be within that concept may well be for the benefit of the minor, and on that basis presumptively binding. [12-17] Affirmation. Section 39 of the Minors (Property and Contracts) Act 1970 (NSW) states that a minor cannot enforce a contract which is not presumptively binding. However, under s 30(4) a minor may, by words or conduct, affirm on attaining majority any contract previously entered into. The contract is then presumptively binding. If affirmation would be for the minor’s benefit, under s 30 the court may affirm the contract on behalf of the minor during minority. [12-18] Power of repudiation. Under the Minors (Property and Contracts) Act 1970 (NSW), where a contract is entered into by a minor it is subject to a right to disavow the contract — termed ‘repudiation’.33

Summary of rules The rules applicable to repudiation may be summarised as follows. First, repudiation may occur at any time prior to the minor’s nineteenth birthday (s 31(1)). Written notice must be given (s 33). Failure by the minor to repudiate the contract in time renders it presumptively binding (s 38). Second, repudiation by a minor does not have effect if it appears that, at the time of the repudiation, the contract was for the minor’s benefit (s 31(2)). Third, the court may repudiate a contract on the minor’s behalf, provided the contract does not appear to be for the minor’s benefit (s 34). This may occur at any time prior to the minor’s eighteenth birthday. Fourth, to avoid uncertainty, and possible injustice to the other contracting party, any person interested in a minor’s contract may require a court to elect to affirm or repudiate it on the minor’s behalf (s 36). [page 192] [12-19] Effect of repudiation. One significant feature of the Minors (Property and Contracts) Act 1970 (NSW) is that it attempts to provide a fair and satisfactory means of dealing with the impact of repudiation of a minor’s contract. Section 37 confers jurisdiction on the court to adjust the parties’ rights. The general objective of adjustment under s 37 is restoration of the parties to their pre-contractual positions. Even so, the court may, if it thinks fit, enforce the contract in whole or in part. Where one party has received performance, the court may order the other to pay compensation for what was received. However, the minor can be ordered to pay compensation only to the extent that the performance was beneficial.

Mental Disability [12-20] General. Two categories of people are regarded as suffering from ‘mental disability’: (1) those who have been certified as mentally ill; and (2) those suffering from unsoundness of mind, either inherently or because of

intoxication or the influence of drugs. We are only concerned with (2). However, there is a tension between the general principle and the recognition of this category. The general principle is that unless a person has been certified, contractual responsibility cannot be denied on the basis of mental disability. To some extent the tension is relieved by the requirement34 that incapacity can be raised only if the other party knew of the mental disability. The law also responds to unconscionable conduct.35 [12-21] Effect on the contract. If one party was suffering from mental disability to the knowledge of the other at the time of the contract, the contract is not a nullity. Rather, it is voidable, that is, liable to be rescinded. Generally, whether the contract has been performed is irrelevant. Being merely voidable, the disabled party may choose to adopt the contract if capacity is later obtained.36 [12-22] Degree of incapacity. It is not easy to define the degree of mental disability necessary for a person to lack capacity, or the ‘degree of capacity’ which the law requires for a contract to be binding. In Gibbons v Wright,37 the High Court put forward the test38 that there must be such soundness of mind that a person is ‘capable of understanding the general nature’ of what they are doing by their ‘participation’ or ‘capacity to understand the nature of [the particular] transaction when it is explained’. Assuming that under [page 193] this test capacity is lacking, the contract is voidable if the other party had sufficient knowledge of the mental disability. [12-23] Knowledge and conduct of the plaintiff. Therefore, even if one party (the defendant) was mentally disabled, unless the facts show that the party seeking to enforce the contract (the plaintiff) had sufficient knowledge of the disability, the presumption of capacity to contract is not rebutted. That is the case even though the defendant made a bad bargain.39 Even so, in Blomley v Ryan40 the High Court held that the degree of incapacity is relevant to whether the plaintiff engaged in unconscionable conduct. Therefore, if the plaintiff took advantage of the defendant’s diminished capacity

through mental disability (including intoxication), and obtained an unconscionable bargain, the contract may be set aside under general principles even though capacity to contract was present.41 In addition, a defendant who fails under general principles may be granted relief under the Contracts Review Act 1980 (NSW).42 And if a statutory prohibition on unconscionable conduct has been contravened there are remedies under the ACL.43 [12-24] Necessaries. As in the case of minors, contracts for necessaries are specially treated. The sale of goods legislation44 provides that ‘where necessaries are sold and delivered to a person who, by reason of mental incapacity or drunkenness, is incompetent to contract’, that person must pay a ‘reasonable price’. The scope of the concept is the same as when goods are supplied to minors.45 The general law applies to contracts for the supply of services. However, the same considerations apply.46

Corporations and Associations [12-25] The concept. Where several people wish to associate together to participate in a business or social enterprise, there are various ways by which they can do so. These include: ■ agency — by appointing one as agent to contract on behalf of them all as principals; ■ partnership — by entering into a partnership agreement (usually a deed) and becoming partners in the enterprise; [page 194] ■ unincorporated association — by forming a club, agreeing to be bound by a set of rules and establishing a committee to implement the decisions of members; and ■ corporation — by forming a corporation (which issues one or more shares to each person). Since partners are agents of each other, under the agency and partnership

options, when a contract is entered into all participants are personally bound (as principals) by agreements that the agent is authorised to make on their behalf. Where people associate themselves together as a club, they generally enter into contracts through a governing body. However, that body has no legal status.47 Under the corporation option, the enterprise is carried on by an artificial legal entity. Since it has a distinct legal personality, shareholders are not parties to its contracts. Corporations formed under the Corporations Act 2001 (Cth) owe their contractual capacity to that statute. [12-26] Problems of contracting. Given that a corporation is not a natural person, it must contract through those who are. The company’s officers and employees are its mind, hands and legs. This creates certain issues with contracting. These include: ■ ‘vires’ — a contract must be within its power (capacity); and ■ contractual assent — natural persons must express a corporation’s contractual assent. [12-27] Vires. If the corporation purports to enter into a contract that is beyond its capacity, the contract is ultra vires and therefore void.

Old law Previously, capacity depended on the terms of the company’s constitution and memorandum of association. This led those drafting such documents to formulate objects in the widest possible terms. At the same time, the fate of any contract might depend on the construction of documents which would not always be available to those contracting with the corporation.

Current law Since s 124 of the Corporations Act 2001 (Cth)48 now provides that a corporation has the legal capacity of a natural person, issues of capacity rarely arise for corporations registered under the Act. However, s 125(1) states that, if a company has a constitution, this may set out the company’s objects, and state restrictions on the exercise of any of its powers. But the provision also states that ‘exercise of a power by the company is not invalid’ merely because it is contrary to any such restriction.

[page 195] Similarly, s 125(2) states that an ‘act of the company is not invalid merely because it is contrary to or beyond any objects in the company’s constitution’. Accordingly, the grant of capacity by s 124 is not affected by the company’s constitution. The practical effect is to abolish the doctrine of ultra vires for Corporations Act companies. However, not all corporations are registered under the Act. For example, State-owned corporations are incorporated under specific legislation which may limit the capacity of the corporation. [12-28] Assent to contracts. A corporation must rely on natural persons to effect entry into the contract: by expressing the corporation’s assent to the contract. Much of the law of companies’ contracts is therefore the law of agency. By expressing the corporation’s assent to the contract, an officer or employee of a company who executes a written contract may bind the company directly. Accordingly, a director (J Smith) may sign a contract: ‘By ABC Ltd, by J Smith, director.’ It is therefore important for the other party to know whether the person who signed was authorised to bind the company. Alternatively, an officer or employee may sign ‘on behalf of’ the company. This will signify reliance on agency. In such a case, the signature is still that of the company, and the contract is the company’s contract.49 But, again, it is important for the other party to know whether the contract was authorised by the company. The authority of an officer or employee may be express, implied or apparent (ostensible) authority.50 Therefore, a contract binds a corporation if it was: ■ expressly authorised — for example, by a board resolution; ■ impliedly authorised — given the company’s business, the contract is of such a nature that authority can be implied; or ■ apparently authorised — the officer or employee was held out by the company as having authority. Even if the officer or employee did not have authority, the corporation may later ‘ratify’ the contract, that is, adopt it. Contracts on behalf of companies may be made by even the most junior employees, as in the purchase of goods at a department store. However, the more important the contract the higher up in the hierarchy of the company the

counterparty should expect to go to find a person with requisite authority. A managing director can be assumed to have authority to sign most contracts. Of course, if there are doubts about the matter, the counterparty may insist on seeing an express conferral or authority.

Legislation The Corporations Act 2001 (Cth) recognises the two forms of execution described above. Section 126 states that a ‘company’s power to make … a [page 196] contract may be exercised by an individual acting with the company’s express or implied authority and on behalf of the company’. Section 127 deals with documents (including contracts) executed to bind the company directly. Under s 127(1),51 the document may be signed by: (a) two directors; (b) a director and a company secretary; or (c) if the company has a sole director who is also the sole company secretary — that director. The execution clauses in the SAMPLE CONTRACTS conform to the requirements of s 127. The importance of s 127 is shown by s 129(5). This states52 that a person may assume that a document has been duly executed if it appears to have been signed in accordance with s 127(1). [12-29] Unincorporated associations. Whereas a corporation has a legal personality distinct from that of its shareholders,53 unincorporated associations are no more than collections of persons (usually individuals). The association is indistinguishable from its members and therefore does not have its own capacity to contract.54 But an association may need to enter into contracts with third parties. For example, the members of a social club may wish to enter into a contract to build a club house. The task of arranging the contract will generally fall to a management committee.55 The contractual capacity of such associations is co-extensive with the capacity of its members. Because no separate entity exists, it is impossible to contract with

‘the association’. Therefore, if the management committee purports to enter into a contract, the question may arise: ‘Who is the contracting party?’ If it is the management committee, its members are personally liable to perform the contract. But if the contract purports to be with the members of the association from time to time, it is void. Where there is no statement of intention as to the contracting party, it will usually be inferred that the contract is with the management committee. However, that may be difficult if performance of the contract extends beyond the period that the committee members hold office.56 All these difficulties are substantially overcome if the association is incorporated under statute.57 [page 197]

The Crown [12-30] Immunity. The common law immunity of the Crown (the government) from suit implies that, absent statutory provision, the Crown has no liability in respect of its contracts. That immunity has largely been removed by legislation.58 However, there are still problems which confront anyone who seeks to enforce a contract against the Crown.59 That is particularly true in Australia where, as well as eight State and Territory governments, there is a Commonwealth government having legislative powers enumerated in the Constitution (Cth). [12-31] Ultra vires. The doctrine of ultra vires applies to contracts entered into by the executive, or by government corporations, commissions, boards, and so on, created by Act of parliament. A contract which is ultra vires the statute does not bind the body in question. However, where the Crown contracts in the ordinary course of administering a recognised part of the government of the state, no specific statutory authority is necessary for a contract.60 In a unitary system contracts made by the executive are binding. As mentioned above, the Australian federal system creates problems. It might be argued that the capacity of each government to contract is limited by its legislative capacity. On this view, the federal government is bound only by contracts within its enumerated legislative powers. While it is incorrect to

assume that it is necessary to tie all contracts to a specific head of power,61 a contract entered into by the executive without statutory authority may be challenged as being ultra vires.62 [12-32] Money and discretion. Money spent on government contracts is appropriated by parliament from consolidated revenue. But the validity of a contract with the Crown does not depend on the appropriation of money towards the contract.63 The absence of parliamentary appropriation simply means that a money judgment arising out of the contract cannot be enforced. However, the absence of such an appropriation may throw doubt on the government’s intention to contract.64 Any contract entered into by the Crown may be rescinded by legislation. Such conduct is commercially and politically inappropriate. Nevertheless, the problem arises whether a government may, by contract, fetter its discretion to make laws in the public interest. The better view is that any restrictions on the ability to fetter discretion do not affect contracting capacity. [page 198]

Plurality of Parties [12-33] Multiparty contracts. Most discussions of contracts presume a (bilateral) contract between two parties, say Adam and Brian. However, there is no limit on the number of people who can be parties to a single contract. Accordingly, some agreements are more complex, involving three or more parties.65 For example, three people may enter into a joint venture contract. If so, they are all bound by the same terms, and each is both a promisor and a promisee in relation to the agreed obligations. Such examples of multiparty contracts create no particular problems. The only unusual feature is that several people make different promises having the same content. [12-34] Co-promisors. Things get complicated, conceptually, when we introduce the idea of co-promisors and co-promisees.66 Co-promisors are two or more people who join in making the same promise, that is, a single promise.67 Assume that Adam, Brian and Catherine are parties to a contract which states ‘Adam and Brian promise to pay Catherine $1000’. The statement of the promise

is ambiguous. One possibility is that Adam and Brian are co-promisors together making a single promise. They may be: (1) joint promisors — Catherine is entitled to receive $1000; or (2) joint and several promisors — Catherine is again entitled to receive $1000. Alternatively, they have made separate promises which happen to have the same content. Rather than being co-promisors, they are: (3) several promisors — Catherine is entitled to receive $1000 from each, that is, $2000 in total. In (1) there is only a single joint promise to pay $1000, for which both Adam and Brian are together liable. In (2) there is a joint promise and also two several promises. However, in (3), because Adam and Brian have made separate (several) promises, Catherine is entitled to receive $1000 from each. The point of distinction between the several promises in (2) and (3) is that the several promises in (2) are not cumulative. Once two or more people are found to be co-promisors, the common law presumption is that their promise is joint. However, the question is one of intention which is to be determined by construction of the contract.68 [12-35] Enforcement against co-promisors. The rules relating to enforcement of claims against co-promisors are complex. Using the example above (‘Adam [page 199] and Brian promise to pay Catherine $1000’), the position may be summarised as follows:69 (1) joint promisors — Catherine should sue both; and (2) joint and several promisors — Catherine may sue either or both. If Adam and Brian make separate promises (they are not co-promisors): (3) several promisors — Catherine may sue either Adam or Brian but, since neither is responsible for the other’s promise, must sue both if she wants to recover the full sum ($2000). If Catherine sues only Adam, and Adam does not satisfy the judgment (at all or in full) an important distinction between (1) and (2) becomes relevant. In (1), Catherine can no longer sue Brian. That is because judgment against either joint

promisor discharges both. However, in (2), although the cause of action on the joint promise is discharged, Catherine can fall back on the several promise. She can still sue Brian to recover the difference between the amount recovered from Adam and $1000. Another tricky issue is release of co-promisors (in both (1) and (2)). If Catherine releases Adam, Brian is also released. If she wishes to preserve her rights against Brian, Catherine must not release Adam. Instead, she must promise not to sue him.

QUICK QUIZ Short answer (1) Explain the concept of capacity to contract. (2) What persons, or categories of persons, are regarded as lacking full contractual capacity? (3) Summarise the regime which governs minors’ contracts in New South Wales. (4) What are joint promises? True or false? (1) A minor is liable to pay for necessaries supplied. (2) A corporation only has capacity to enter into contracts in relation to matters described in its constitution. (3) An unincorporated association has no contractual capacity as such. (4) If A and B contract, as joint promisors, to pay C $100, C is entitled to receive $200. [page 200] Choose the best answer (1) In the context of incapacity, ‘necessaries’: (a) are always services; (b) are essential goods or services;

(c) are always goods; (d) must be paid for if received by a minor or mentally incompetent person; or (e) include goods or services of which a minor has adequate supplies. (2) The law of minors: (a) is impossible to understand; (b) is very clear; (c) assumes that persons obtain contractual capacity at the age of 21 years; (d) is different in New South Wales from other jurisdictions; or (e) suggests that minors are never bound by contracts for the provision of services. (3) The Crown: (a) has no capacity to contract; (b) is bound by contracts which fall within its legislative powers; (c) always has unlimited capacity to contract; (d) is not bound by a contract unless it is in writing; or (e) is not bound by a contract unless there is appropriation of funds from consolidated revenue. (4) When A and B contract as joint and several promisors to pay C $100: (a) C is entitled to receive $200; (b) C must sue both A and B if no payment is made; (c) C may sue either A or B if no payment is made; (d) B is not released if C releases A; or (e) none of the above.

1 2 3 4 5 6 7

See [1-02] (each party a promisor and promisee). See [13-11]. See Giliberto v Kenny (1983) 48 ALR 620 (see [10-29]). See [3-13]. See [SC-03]. See Haugesund Kommune v Depfa ACS Bank (Wikborg Rein & Co Part 20 defendant) [2012] QB 549 at 569; [2010] EWCA Civ 579 at [43]. Assuming that any individual is 18 years old. See [12-07].

8 9 10 11 12 13 14

15

16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42

See [12-25], [12-29]. See Commissioner of State Taxation v Cyril Henschke Pty Ltd (2010) 242 CLR 508 at 513; 272 ALR 440; [2010] HCA 43 at [10]. See further [12-25], [12-29]. The common law rule that a married woman has no legal capacity distinct from that of her husband was long ago abolished by statute. Bankruptcy does not deprive a person of contractual capacity. However, the validity of a contract entered into by a bankrupt may be affected by statute. See eg Mason and Carter, §1017. See generally on restitution Chapter 30. See Minors (Property and Contracts) Act 1970 (NSW); Minors’ Contracts (Miscellaneous Provisions) Act 1979 (SA), ss 6, 8. In New South Wales this is part of a code. See ACT: Age of Majority Act 1974; NSW: Minors (Property and Contracts) Act 1970; NT: Age of Majority Act 1981; Qld: Law Reform Act 1995, s 17; SA: Age of Majority (Reduction) Act 1970; Tas: Age of Majority Act 1973; Vic: Age of Majority Act 1977; WA: Age of Majority Act 1972. See ACT: Sale of Goods Act 1954, s 7; NT: Sale of Goods Act 1972, s 7; Qld: Sale of Goods Act 1896, s 5; SA: Sale of Goods Act 1895, s 2; Tas: Sale of Goods Act 1896, s 7; Vic: Goods Act 1958, s 7; WA: Sale of Goods Act 1895, s 2. See Cases and Materials, §15-07S. See generally R W Clarke, ‘Contracts for Sale of Non-necessary Goods; Vendor’s Remedies Against an Infant Purchaser’ (1981) 7 Univ Tas LR 85. (1918) 18 SR (NSW) 585. Contrast Proform Sports Management Ltd v Proactive Sports Management Ltd [2007] Bus LR 93 at 106; [2006] EWHC 2903 (Ch) at [39]. [1913] 2 KB 235. [1908] 2 KB 1, Cases and Materials, §15-10C. See De Francesco v Barnum (1890) 45 Ch D 430. See [12-09]. See [14-22]. See Mason and Carter, §1040. See generally on restitution Chapter 30. See [12-15]–[12-19]. See Hamilton v Lethbridge (1912) 14 CLR 236 at 255–6. See eg Supreme Court Act 1986 (Vic), s 50. See Lovell & Christmas v Beauchamp [1894] AC 607; Hamilton v Lethbridge (1912) 14 CLR 236. See Aroney v Christianus (1915) 15 SR (NSW) 118. See Hamilton v Lethbridge (1912) 14 CLR 236 at 242, 262–3; Fisher v Brooker [2009] 1 WLR 1764 at 1772; [2009] UKHL 41 at [25]. For a more general right see Minors’ Contracts (Miscellaneous Provisions) Act 1979 (SA), s 7. See generally D J Harland, Law of Minors in Relation to Contracts and Property, Butterworths, Sydney, 1974. See [12-09]. This concept is therefore different from ‘repudiation’ in the sense of a wrongful refusal to perform discussed in Chapter 18. See Molton v Camroux (1848) 2 Ex 487 at 501; 154 ER 584 at 589 (affirmed (1849) 4 Ex 17; 154 ER 1107). See [12-23]. Gibbons v Wright (1954) 91 CLR 423 at 441–3, 449. (1954) 91 CLR 423, Cases and Materials, §15-23C. (1954) 91 CLR 423 at 437, 438. See Hart v O’Connor [1985] 1 AC 1000. (1956) 99 CLR 362. See generally Chapter 26. See Ford (by his tutor Watkinson) v Perpetual Trustees Victoria Ltd (2009) 75 NSWLR 42; 257 ALR 658; [2009] NSWCA 186. See generally [26-08], [26-16]–[26-19].

43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69

See [26-09]–[26-13], [28-16]–[28-19]. See [12-07]. See also Sale of Goods Act 1923 (NSW), s 7. See [12-09]–[12-10]. See also Mason and Carter, §1040. See further [12-29]. Cases and Materials, §15-30S. See MYT Engineering Pty Ltd v Mulcon Pty Ltd (1999) 195 CLR 636 at 647–8; 162 ALR 441. See Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146; 93 ALR 385. Section 127(1). Section 127 ‘does not limit the ways in which a company may execute a document (including a deed)’: s 127(4). See also Corporations Act 2001 (Cth), s 128. See [12-25]. See [12-04]. See K L Fletcher, ‘Unincorporated Associations and Contract: The Development of Committee Liability and Unresolved Issues’ (1979) 11 UQLJ 53. See Carlton Cricket & Football Social Club v Joseph [1970] VR 487. See eg Associations Incorporation Act 2009 (NSW). See eg Judiciary Act 1903, Pts IX and IXA (Cth); Crown Proceedings Act 1988 (NSW). See also [5-08] (intention to contract). See New South Wales v Bardolph (1934) 52 CLR 455 at 496, 502–3, 508, 514. See eg Commonwealth v Ling (1993) 118 ALR 309 at 341 (affirmed (1994) 51 FCR 88; 123 ALR 65). See Williams v The Commonwealth (2012) 248 CLR 156; 288 ALR 410; [2012] HCA 23. See New South Wales v Bardolph (1934) 52 CLR 455 (advertising contract). See Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 92 CLR 424 (affirmed (1955) 93 CLR 546). See [12-03] See G L Williams, Joint Obligations, Butterworths, London, 1949. For co-promisees see [3-12], [13-04]. See generally on construction Chapter 10. The rules are subject to statute and rules of court.

[page 201]

Chapter 13

Privity of Contract [13-01] The rule. The rule of privity of contract is that only the parties to a contract may enforce it or be bound by it.1 The rule was established in 1861.2 Since the beginning of the 20th century the courts have treated the rule as axiomatic.3 It seems logical to say that if Alfred and Ben make a contract to which Cynthia is not a party, she should neither be bound by nor entitled to enforce the contract. The justice of the burden aspect is generally irrefutable.4 However, the justice of the privity rule is not so obvious if Alfred and Ben’s contract purports to confer a benefit on Cynthia.5 Accordingly, the operation of the rule in that context — a ‘third party benefit contract’ — has been questioned. The decision in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd6 indicates that some aspects of the law are unsatisfactory. In several jurisdictions the privity rule has been substantially removed by statute for third party benefit contracts.7

Application of the Rule [13-02] Privity and consideration. The rule that consideration must move from the promisee was discussed earlier.8 There is some difficulty in distinguishing that rule from the privity rule. Assume that Ben promises Alfred that he will paint the exterior of Alfred’s house. The agreed price is $1000. Ben wants the $1000 to be paid to Cynthia. Consider two situations. (1) the promisee is Cynthia — Alfred promises to pay Cynthia and the promise is made to her; or (2) the promisee is Ben — Alfred promises to pay Cynthia but the promise is made to Ben. If the arrangement is carried out it is obviously irrelevant whether the promisee was Cynthia or Ben. But what happens if Alfred fails to pay the money? Can

Cynthia sue to recover it? In each situation the answer is no, but the rationale is different. [page 202] In (1), there is no contract. Although Cynthia is the promisee, she has not provided consideration. She cannot enforce the contract even if she was intended to be a party. In (2), because Ben has provided consideration there is a contract. The parties are Alfred and Ben. Since no promise was made to Cynthia, she is not a party. Cynthia is the beneficiary under a third party benefit contract.9 Ben can sue Alfred for breach of contract if the $1000 is not paid to Cynthia. But in a claim for damages the criterion is his loss, not Cynthia’s loss. [13-03] Typical situations. Two common situations illustrate the privity rule. First, assume that M manufactures woollen underwear, and that one such garment is ultimately acquired by a consumer (C). The distribution chain might comprise three contracts of sale between: (1) M and a wholesaler (W); (2) W and a retailer (R); and (3) R and C. It is easy to see that, as we move up the distribution chain, each buyer is a party to an immediate contract of sale but a stranger to all prior contracts. C is a stranger to both the contract between R and W and that between W and M. If there is a defect in the underwear, each contract in the chain may well have been breached. Accordingly, each buyer can sue its immediate seller.10 But what the privity rule says is that C does not acquire any contractual rights against M (who probably caused the defect) under C’s contract with R. But C may be able to sue M in tort11 or under statute.12 This may not be the end of the trail for the woollen underwear. For example, C might give the goods to D as a present. D has no contractual rights against anyone. Second, although it is natural when examining the privity rule to focus on promises, other provisions such as exclusion clauses may be important, particularly in the commercial context. Assume, for example, that ABC Ltd enters into a contract with DEF Ltd under which ABC promises DEF that it will provide services to DEF and GHI Ltd (a subsidiary of DEF). GHI is not a party to

the contract. However, cl 1 states that ABC has no liability to DEF or GHI ‘in tort or contract’ if the services are not rendered with due care and skill. Even though the privity rule means that GHI cannot sue ABC in contract, if ABC is negligent GHI may have the right to sue ABC in tort. If ABC seeks to rely on the exclusion clause (cl 1) it will fail. Not being a party to the contract, GHI’s rights in tort are not affected by the clause. [page 203] This illustration shows that the privity rule may upset commercial expectations. It also shows that the privity rule is mandatory: parties cannot contract out of the rule.

Exceptions to the Rule Exceptions under the General Law [13-04] Introduction. It is doubtful whether there are any genuine common law exceptions to the privity rule.13 Nevertheless, there are some apparent exceptions, and also situations in which the rule does not operate. In addition to the ‘exceptions’ discussed below, reference can be made to two other situations where the privity rule does not apply: (1) enforcement by a joint promisee who has provided no consideration;14 and (2) three-party collateral contracts.15 [13-05] Trident. It is possible that, ultimately, courts will treat third party benefit contracts as a common law exception to privity. At present, general exceptions operate only under statute.16 And specific exceptions to deal with particular situations are rarely recognised.

The decision of the High Court in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd17 is an illustration. Trident (A) issued a policy of insurance to Blue Circle Southern Cement Ltd (B). The contract defined the persons insured to

include Blue Circle’s contractors. McNiece (C) was one such contractor. The relationships may be expressed as: ■ promisor and promisee — A (promisor) made a promise to B (promisee); ■ parties — the parties to the insurance contract were A and B (but not C); ■ scope of promise — A’s promise to B was that it would benefit (indemnify) each of B and C; and ■ third party beneficiary — although not a party to the contract, C was a third party beneficiary. A worker who sustained personal injuries at the site successfully sued C. Therefore, C suffered a loss (liability on the judgment) within the scope of A’s promise. A refused to indemnify C. Under the privity rule, C had no claim. Deane J explained the nature and effect of the privity rule:18 [page 204] [T]he rule of privity is not properly to be seen as a rule of exclusion of rights of action which would otherwise exist. It is a statement or reflection of an aspect of the nature of a contract, namely, that a contract between two or more parties does not, of itself, directly confer rights or impose liabilities upon persons who are not parties to it.

Nevertheless, a majority of the court decided in favour of C. It was entitled to sue directly on the contract by reason of a special exception to the privity rule limited to insurance contracts of the kind at issue.19 [13-06] Agency. One person (the principal) may authorise another (the agent) to make a contract on the principal’s behalf. When the agent does so, the principal (not the agent) is the contracting party. Accordingly, no exception to the privity rule is involved in allowing the principal to sue or be sued. But the agent is not a party to the contract and cannot be sued. Closer to a privity exception is a situation where Alfred enters into a contract with Ben without disclosing that he (Alfred) is acting as agent for Cynthia. Cynthia is then termed an ‘undisclosed principal’. So far as Ben is concerned, the contract is with Alfred. However, under the doctrine of the undisclosed principal, Cynthia may intervene as the contracting party and enforce the contract against Ben.20 Of course, she can also be sued on it. And by way of contrast with the disclosed principal scenario, Ben may sue Alfred.

[13-07] Exclusion clauses. Another context in which courts have evaded the privity rule is where a third party seeks to take the benefit of an exclusion clause in a contract for the carriage of goods. By manipulating the rules on contract formation the courts have managed to get around the privity rule to give effect to the parties’ agreement.21 The leading case is New Zealand Shipping Co Ltd v A M Satterthwaite & Co Ltd,22 on which the hypothetical is based.

Hypothetical Alfred Ltd contracts to carry Ben Ltd’s goods from Sydney to Melbourne. The contract excludes Alfred’s liability for damage to the goods caused by negligent carriage. Alfred contracts with Cynthia Ltd, as subcontractor, to carry the goods to their destination. If the goods are damaged due to Cynthia’s negligence, Ben may have a right to claim damages from Cynthia in tort. But what if the exclusion clause in the contract between Alfred and Ben states that it also protects any third person (such as Cynthia) who actually carries the goods? [page 205] Since Cynthia is not a party to the contract between Alfred and Ben, the privity rule looks to be an insurmountable obstacle.23 However, satisfaction of four requirements will see Cynthia protected: (1) the contract must make it clear that Cynthia is intended to be protected; (2) Alfred must have contracted as agent for Cynthia; (3) Alfred must have been authorised by Cynthia; and (4) consideration must move from Cynthia. Both (1) and (2) are assumed to be satisfied on the facts. As we have seen,24 agency depends on arrangements between Alfred and Cynthia. It is not difficult to establish the agency, and authority (requirement (3)).25 Requirement (4) has proved problematic. However, greater regard has been paid to commercial realities (particularly Ben’s ability to protect itself by insurance), rather than legal technicalities. There are two arguments.

There is no express promise by Cynthia to Ben. However, consideration may take the form of doing an act — in this case carrying the goods. Carrying the goods is therefore at the one time: ■ acceptance of an offer of a unilateral contract; and ■ consideration for obtaining the benefit of the exclusion clause. Alternatively, Cynthia may be regarded as having the benefit of the exclusion as a principal contracting party by virtue of a bilateral contract with Ben through the agency of Alfred. On both approaches, Cynthia has a defence to Ben’s action in tort. However, neither relies on an exception to the privity rule. What about the fact that Cynthia is obliged by the contract with Alfred to carry the goods? This is overcome because performance of an existing duty26 is good consideration if the duty is owed to a third party.27 [13-08] Assignment. Generally speaking, one party (the assignor) is entitled to transfer (‘assign’) rights which it enjoys under a contract to a third party (the assignee). Following assignment, the assignee is entitled to receive performance of the contract. Assignment is an exception to the privity rule in the sense that the assignee can enforce the assignor’s rights even though it has not become a party. But because the assignee is not a party it is not required to perform the assignor’s obligations. The most common case of assignment is where a debtor (A) owes money to a creditor (B). The right to receive payment of the debt is intangible property termed [page 206] a ‘chose in action’. B is entitled to assign the debt to C, so that (after assignment) A must pay the debt to C. The right to receive performance of a contract is also a chose in action. Several issues may arise if a promisee (the person who ‘owns’ the right to receive performance) seeks to assign the benefit of a promise to a third party (assignee):28 ■ formalities — assignments should (not must) be in writing signed personally by the assignor;29

■ consideration — consideration is not required for an immediate assignment, but a promise to assign must be supported by consideration;30 ■ assignment prohibited — a term of the contract may state that assignment is not permitted;31 ■ nature of rights — not all rights are assignable. Assignment is not permitted if the right in question is personal to the promisee-assignor;32 ■ ‘bare’ rights of action — assignment after the promise has been breached may be ineffective due to the public policy rule that a ‘bare’ right of action is not assignable;33 and ■ legislation — certain assignments are prohibited by statute. Consider the SAMPLE SERVICES CONTRACT. Clause 9.7 prohibits assignment by Client without Provider’s consent. Assume that Client obtains Provider’s consent to assign the benefit of the contract to D Ltd. What is the effect of the assignment? D does not become a party to the contract. Only Provider and Client are parties to the contract. Even so, after assignment, D is (as assignee) entitled to receive Provider’s performance, and can sue for contract damages if Provider breaches the contract. There is no simple explanation of why this is so, other than that the law focuses on the benefit of Provider’s promises as an item of property. By contrast, if Client does not obtain Provider’s consent, the assignment is not binding on Provider. (Provider remains entitled to provide the services for Client.) Assignment relates to contractual benefits, that is, rights. A contractual burden cannot be assigned. Therefore, Provider Ltd cannot assign its obligations under the contract under the SAMPLE SERVICES CONTRACT. A second contract must be agreed. This is termed a ‘novation’.34 Accordingly, Provider, Client and D Ltd can agree that D will replace Provider. This results in the creation of a new contract — not the [page 207] assignment of a right. The old contract between Provider and Client is novated to become a contract between D and Client.35 [13-09] Trust. Relationships between a trustee and beneficiary are enforced

independently of the law of contract. It is therefore possible to avoid the privity rule by the use of a trust.36 This is another difficult area. Under a trust, one person (the trustee) holds property for the benefit of another (the beneficiary).37 The beneficiary is the real (‘beneficial’) owner of the property. As mentioned above,38 the right to receive performance of a contract is a benefit which, as a chose in action, is a kind of property. It may therefore be held by one person as trustee for another.

Hypothetical Robin is the promisee under a contract with Marian. He can therefore declare himself trustee of the right to receive Marian’s performance in favour of Derwent, who is then the beneficiary under the trust. Under this arrangement, Robin and Marian remain the contracting parties, but Robin must enforce the contract for Derwent’s benefit.39 Therefore, if Marian breaches the contract, Robin may sue her for damages. But he must hold the benefit of the damages award on trust for (‘for the benefit of’) Derwent. As the beneficiary, Derwent is entitled to ‘call the shots’. Therefore, if Robin refuses to sue Marian, Derwent can sue in Robin’s name. To that extent, there is an exception to the privity rule. The crucial element is proof of an intention to create a trust. In the above example, the trust is created expressly. More difficult to know is when a court will imply or infer a trust. For example, if Robin enters into a contract with Marian, and the contract states that Marian must pay Robin the amount of any loss suffered by Derwent, should it be inferred that Robin entered into the contract as trustee for Derwent? Deane J considered that the insurance policy in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd40 created a trust even though the contract did not expressly say so. However, trusts are rarely inferred. [page 208]

Exceptions under Statute [13-10] General statutory exceptions. For third party benefit contracts, the privity rule has been substantially removed in Queensland41 and Western

Australia.42 The Queensland provision has been adopted in the Northern Territory.43 Section 11(2) of the Property Law Act 1969 (WA) states that a contract which expressly confers benefits directly on a person (the ‘third party’) not named in the contract as a party is enforceable by the third party.44 Unless the contract provides otherwise, the contract may be modified or cancelled by the agreement of the other parties at any time before a third party has adopted it (s 11(3)). If we refer to the third party as the plaintiff and the promisor under the contract as the defendant, three points are relevant to enforcement (s 11(2)): (1) the defendant has the benefit of all defences that would have been available had the plaintiff been named as a party to the contract; (2) each named party to the contract must be joined in the claim; and (3) the defendant is entitled to enforce against the plaintiff any obligations which the contract imposed on the plaintiff. More complex is s 55 of the Property Law Act 1974 (Qld).45 It operates if a promisor promises to do or to refrain from doing an act for the benefit of an identified third party (‘beneficiary’). Once there has been ‘acceptance’ by the beneficiary,46 the beneficiary’s consent is necessary for any variation or discharge of the contract.47 Under s 55(1), the promisor is then subject to a duty to perform the promise which is enforceable by the beneficiary. Section 55(3) provides that the beneficiary is entitled to such remedies and relief as may be ‘just and convenient’, but the beneficiary is bound to do anything that the promise requires it to do. Three further points may be noted where an action is brought by the beneficiary.48 Two relate to matters which would arise in proceedings not brought in reliance on s 55. A promise which would be ineffective is ineffective in proceedings brought in reliance on the provision. And a defence which would be available is also available in proceedings brought in reliance on the provision. The third point is that nothing affects any right or remedy which is available apart from the provision. In both jurisdictions, the third party is effectively in the same position as a party to the contract. However, there are two contrasting features of the provisions. [page 209]

(1) In Western Australia, it is sufficient that there is an intention to benefit the third party. In Queensland there must, in addition, be an intention that the third party is entitled to sue. (2) In Queensland the beneficiary is entitled to such remedies and relief as are just and convenient for the enforcement of the duty of the promisor. There is no such restriction in Western Australia. [13-11] Specific statutory provisions. Although specific in their operation, a number of statutes include important exceptions to the privity rule. For example, a person may obtain the benefit of any covenant under a deed in relation to land or other property even though not named in the deed.49 But there must be a promise in favour of the party. In practice, the most relevant legislative provisions are in the ACL.50 These confer direct rights of action against manufacturers of goods. For example, assume that a manufacturer’s sales brochure states that its cabin cruiser has a certain top speed. Assume this statement is incorrect but influences a consumer51 (Cedric) to purchase the goods from a retailer. The statement is an ‘express warranty’52 by the manufacturer which takes effect as a consumer guarantee. Under the ACL, Cedric can recover damages from the manufacturer.53

Third Party Benefit Contracts [13-12] Concept. Examples of third party benefit contracts have already been given.54 Also consider this hypothetical.

Hypothetical A owes C $500. A is about to enter into a contract with B under which A will provide services to B for a price of $500. A sees this as an opportunity to pay off the $500 debt which A owes to C. Therefore, the contract between A and B includes a term: B promises A to pay the price ($500) to C.

The contract is a valid contract. However, because of the privity rule, only A can enforce B’s promise. C cannot enforce it. The discussion below examines A’s common law remedies, and their impact on C.55

[page 210] [13-13] Damages. In order to claim damages in contract, it is sufficient for the promisee to establish a breach by the promisor. However, in relation to a third party benefit contract, courts have debated whether damages ought to be purely nominal,56 because it is the third party who suffers loss. The preferred view was explained by Windeyer J in Coulls v Bagot’s Executor and Trustee Co Ltd57 when he said: I can see no reason why in such cases the damages which A would suffer upon B’s breach of his contract to pay C $500 would be merely nominal: I think that, in accordance with the ordinary rules for the assessment of damages for breach of contract, they could be substantial. They would not necessarily be $500; they could I think be less, or more.

In the hypothetical, since A still owes $500 to C, it seems commercially naive to deny that B’s breach causes loss to A. Applying Windeyer J’s statement, A can recover a substantial sum. [13-14] Specific performance. An order for specific performance directs a party to perform as required by the contract.58 It differs from an order for damages because the promisee obtains the very thing which was promised, rather than the amount of loss it has suffered as a result of the breach. Specific performance is only available if damages would be an inadequate remedy.59 If the damages recoverable by the promisee under a third party benefit contract would be inadequate, a court may order specific performance of the promise. In Coulis v Bagot’s Executor and Trustee Co Ltd60 Windeyer J said:61 It seems to me that contracts to pay money or transfer property to a third person are always, or at all events very often, contracts for breach of which damages would be an inadequate remedy — all the more so if it be right (I do not think it is) that damages recoverable by the promisee are only nominal. Nominal or substantial, the question seems to be the same, for when specific relief is given in lieu of damages it is because the remedy, damages, cannot satisfy the demands of justice.

Leading case In Beswick v Beswick,62 Peter (A) sold his coal merchant’s business to John (B). Part of the price was a promise by B (made to A) to pay A’s wife (C) £5 per week after A’s death. When A died, B refused to pay C. Although she had not been made a party to the contract, C was A’s legal personal representative.

[page 211] Accordingly, she was entitled to enforce A’s rights under the contract. In that capacity, she was awarded specific performance. One reason for granting that remedy was that damages for B’s breach might have been purely nominal, and therefore an inadequate remedy.

QUICK QUIZ Short answer (1) Explain the principle of privity of contract. (2) List three exceptions to the privity rule. (3) Describe a third party benefit contract. (4) In what jurisdictions do general third party benefit statutes operate? (5) How is the burden of a contract transferred? True or false? (1) The privity rule relates solely to the burden of a contract. (2) The privity of contract is a mandatory rule. (3) The privity rule differs from the rule that consideration must move from the promisee. (4) It is not possible to assign the benefit of a contractual right. (5) If B contracts with A who acts as agent for C, the contract is between B and C. Choose the best answer (1) If A and B enter into a contract under which B promises that B’s employee, Fred, will not on termination of his employment work for C: (a) Fred is not bound by the promise; (b) only B may enforce the promise against Fred; (c) only A may enforce the promise against Fred;

(d) either A or B may enforce the promise against Fred; or (e) B may obtain an injunction against C if it employs Fred. (2) If Kristin promises Emma that she will pay $400 to Melanie in consideration of a promise made by Emma to Kristin to sell Kristin her gnome: (a) the contract is void; (b) the contract is valid, but Kristin cannot enforce it; (c) the contract is valid, but Emma cannot enforce it; (d) the contract is valid, but Melanie cannot enforce it; or (e) Melanie has provided good consideration. (3) A trust will arise between Alan and Claudia if Bill makes a promise to Alan, and the contract states that Alan is acting: (a) on behalf of Claudia; (b) for the benefit of Claudia; (c) as agent for Claudia; (d) as trustee for Claudia; or (e) as promisee. [page 212] (4) In Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; 80 ALR 574 (see [13-05]), the High Court: (a) abolished the privity rule; (b) created an exception to the privity rule for certain insurance contracts; (c) abolished the privity rule in its application to third party benefit contracts; (d) found in favour of McNiece on the basis that Blue Circle was trustee of Trident’s indemnity promise; or (e) decided nothing of any lasting value as a matter of precedent. (5) In order for C to have the benefit of an exclusion clause in a contract between A and B which protects B, it is not essential for C to prove: (a) that C provided consideration; (b) that B acted on C’s behalf;

(c) that the contract is intended to benefit C; (d) that B breached the contract; or (e) that B had authority to act on C’s behalf.

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See [12-02]. See Tweddle v Atkinson (1861) 1 B & S 393; 121 ER 762. See eg Wilson v Darling Island Stevedoring & Lighterage Co Ltd (1956) 95 CLR 43 at 66, 67, 80. See [12-02]. See [13-04]. (1988) 165 CLR 107; 80 ALR 574 (see [13-05]). See [13-10]. See [3-10], [3-12]. See further [3-12]–[3-14]. Subject to effective exclusionary provisions. See Grant v Australian Knitting Mills Ltd [1936] AC 85. See [13-11]. See Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 at 143; 80 ALR 574. See [3-13]. See [7-15]. See [13-10]. (1988) 165 CLR 107; 80 ALR 574, Cases and Materials, §16-07C. See Peter Kincaid, ‘The Trident Insurance Case: Death of Contract?’ (1989) 2 JCL 160. (1988) 165 CLR 107 at 143; 80 ALR 574. See now Insurance Contracts Act 1984 (Cth), s 48. It is assumed that the contract does not expressly exclude persons other than those disclosed as parties. Cf Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) 155 CLR 541; 58 ALR 411. See eg Hugh Beale, ‘Privity of Contract: Judicial and Legislative Reform’ (1995) 9 JCL 103. [1975] AC 154. See [13-03]. See [13-06]. This need not be present initially: Cynthia can ‘ratify’ the arrangement after Alfred and Ben enter into the contract. See generally [3-16], [3-18]–[3-30]. See Scotson v Pegg (1861) 6 H & N 295; 158 ER 121. See generally Tolhurst. See ACT: Civil Law (Property) Act 2006, s 205; NSW: Conveyancing Act 1919, s 12; NT: Law of Property Act 2000, s 182(1); Qld: Property Law Act 1974, s 199; SA: Law of Property Act 1936, s 15; Tas: Conveyancing and Law of Property Act 1884, s 86; Vic: Property Law Act 1958, s 134; WA: Property Law Act 1969, s 20. See Cases and Materials, §17-08S. Whereas the assignment of a right to receive payment is the assignment of a present right even if payment is not due, the assignment of the future payments themselves relates to ‘future property’. See Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 and generally G J Tolhurst and J W Carter, ‘Prohibitions and Assignment: A Choice to be Made’ [2014] CLJ 405. See eg Brian v Tyley (1916) 21 CLR 277 at 284, 289. See eg Cummings v Claremont Petroleum NL (1996) 185 CLR 124 at 145; 137 ALR 1. See generally

34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62

[34-26]. See generally Julian Bailey, ‘Novation’ (1999) 14 JCL 189. See eg Vickery v Woods (1952) 85 CLR 336 at 349–50. See generally David Wright, ‘Trusts Involving Enforceable Promises’ (1996) 70 ALJ 911. Usually, the terms are set out in a trust deed, as in a superannuation trust. However, the trust of a contractual promise does not follow that pattern. See [13-08]. See Ryder v Taylor (1935) 36 SR (NSW) 31. (1988) 165 CLR 107; 80 ALR 574 (see [13-05]), Cases and Materials, §16-07C. See also Bahr v Nicolay (No 2) (1988) 164 CLR 604 at 618–19; 78 ALR 1. See Cases and Materials, §16-35S. See Cases and Materials, §16-33S. See Law of Property Act 2000 (NT), s 56. See Jones v Bartlett (2000) 205 CLR 166; 176 ALR 137. See Hyatt Australia Ltd v LTCB Australia Ltd [1996] 1 Qd R 260. ‘Acceptance’ is assent by words or conduct: s 55(6)(a). See s 55(3). Prior to acceptance, the contract may be varied or discharged without the beneficiary’s consent: s 55(2). See s 55(4) (subject to s 55(1)). See eg Conveyancing Act 1919 (NSW), s 36c; Property Law Act 1958 (Vic), s 56(1). See also Insurance Contracts Act 1984 (Cth), s 48. See [8-12]. ACL, s 2(1). See [8-13]. ACL, s 59(1). See also ACL, Pt 5-4, Div 2. See [13-02]. See Justice Andrew Rogers, ‘Contract and Third Parties’ in Essays on Contract, p 81. For the concept see [27-10]. (1967) 119 CLR 460 at 501–2. See also Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277. For a more precise definition see [29-04]. See generally Chapter 29. (1967) 119 CLR 460. (1967) 119 CLR 460 at 503. See also (1967) 119 CLR 460 at 478. [1968] AC 58, Cases and Materials, §16-21C.

[page 213]

Part F

Has the Contract Been Performed?

[page 214]

Chapter 14

Performance of the Contract [14-01] Concept. Every contract states (although not necessarily expressly) the obligations of the parties. Carrying out those obligations is termed ‘performance of the contract’. The rules which determine whether performance is in accordance with the contract are important. An obligation which has been properly performed is said to be ‘discharged’. This chapter is therefore about the discharge of contractual obligations by performance. [14-02] Contract price. For most contracts, whereas one party’s performance involves doing one or more acts, that of the other party is principally to pay a money sum. The latter is conventionally described as an obligation to pay the contract price. It is a species of ‘liquidated sum’, that is, an amount of money ‘fixed’ or ‘determined’ by the terms of the contract. Once the contract price becomes payable, the obligation of the promisor (sometimes termed the ‘obligor’) is to discharge a contract debt. An important issue is therefore what the party to whom the price is payable (sometimes termed the ‘obligee’) must do in order to become entitled to enforce the promise to pay. It is convenient to refer to the party seeking to recover payment as the ‘plaintiff’. Stating the general principle is easy. The plaintiff must establish that it has earned the contract price.1 There is, of course, considerable variety in performance obligations. The idea that a contract involves the payment of a single money sum in return for the doing of an act does not always apply. For example, A and B might agree to exchange their motor vehicles. Each vehicle is the ‘price’ of the other vehicle. And where the price is a money sum, it is not always payable as a single amount.2 For example, if C agrees to deliver goods by instalments to D, each instalment delivery may have its own price. Again, in a one-year contract for the supply of services, there may be a monthly payment.

Performance Rules Time and Order of Performance [14-03] Time of performance. A provision which states the time for performance is a ‘time stipulation’. [page 215] Express time stipulations take various forms, including: ■ specific date — ‘the seller must deliver the goods on 1 May’; ■ time period — ‘the machinery must be delivered within six months’; or ■ agreed event — ‘payment must be made on delivery of the goods’. If no time is expressly stated, it is implied that performance must occur within a reasonable time.3 [14-04] Whose turn first? The question ‘Whose turn first’ is concerned with the order of performance. Since this depends on the intention of the parties, for written contracts it is a question of construction.4 Often, this is an easy matter. Most contracts set out the order for performance. However, particularly in dealing with verbal contracts, reliance can be placed on presumptions. These are applied as ‘default rules’ to fill any gap in the parties’ stated intention. The relevant rule reflects normal commercial understandings. In common contracts, such as sale, employment, lease, hire and so on, there are established default rules which determine the order of performance unless the parties have stated a contrary agreement.5 You do not need to be a lawyer to know most of these. If a person walks into a retail store and chooses a bottle of perfume to purchase, we know from experience that payment and performance by the seller will occur more or less simultaneously. Employers do not pay in advance of work to be done under an ordinary employment contract. Therefore, anyone who agrees to work during their vacation at a shop selling perfume knows that wages are paid after the expiry of some period of work, say, two weeks. [14-05] Dependent and independent promises. The device originally used to determine the order of performance is a distinction between dependent and independent promises. If the obligation to pay is dependent on performance by

the other party, that other party must perform first. For example, in Kingston v Preston,6 a case decided in 1773, one party to a sale of business contract agreed to provide security for performance. It was held that, because the other party’s obligation to perform was dependent on the giving of the security, it was not obliged to perform until the security was given. Prior performance is an event which is termed a ‘condition precedent’.7 Therefore, a dependent promise is one which becomes due for performance on the occurrence of a condition precedent. By contrast, the performance of an independent promise is an unconditional obligation. Therefore, an independent promise is one which is not subject to a condition precedent. [page 216] If both parties’ obligations are independent the order of performance is immaterial. In this situation — unlikely under the modern law of contract — either party may call for performance at any time, or after the arrival of any agreed time. Whether or not the party seeking to enforce the contract has performed is irrelevant. For example, in Pordage v Cole,8 a case decided in 1669, a vendor could recover the price of the land, even though no title had been conveyed. The purchaser promised to pay ‘before Midsummer’. This was construed as an independent promise and it was sufficient that the action was brought after Midsummer. Since the order of performance depends on the intention of the parties, in one sense the two cases referred to above are quite consistent with each other. The decisions reflect different conclusions about different contracts. However, there is more to it than that. The examples are 100 years apart. In that period, the law changed significantly.9 At the time of Pordage v Cole the courts took the view that unless the parties had used particular words to link performance, the promises should be construed as independent. By the time of Kingston v Preston the law had changed. Unless the contract said something different, the default rule became that non-monetary performance precedes payment. Therefore, the promise to pay was presumed to be a dependent promise. This remains the position today.10 [14-06] Concurrent performance. If parties perform sequentially (one after

the other), the effect is that one gives credit to the other. Employees gives credit to their employers because during the period prior to payment falling due the employer has the benefit of the employee’s labours without paying for them. But not all contracts require sequential performance. Some contracts, particularly contracts for the sale of land or goods, contemplate performance at the same time. In this situation, performance obligations are concurrent in nature. Neither party is required to give credit to the other. Applying a presumption of dependency of obligation appears to create a stalemate in this situation. If A agrees to sell goods to B, and the performance obligation of each is dependent, how can B receive A’s goods without allowing A credit? This problem was solved towards the end of the 18th century. It was held that either party could call for the other’s performance if ready and willing to perform in accordance with the contract.11 The same is true today. Unless the parties have agreed otherwise, contracts for the sale of land or goods are intended to be performed concurrently. For example, a seller’s obligation to deliver is dependent on the buyer being ready and willing to pay the price — and vice versa.12 This means that, in the example above, if A [page 217] tenders (offers to deliver) goods which comply with the contract, but B is not ready and willing to accept and pay for the goods, A can sue B for damages. However, A is not entitled to the price of the goods. [14-07] Performance must be exact. The general rule is that a promisor is discharged only if its performance complies exactly with the requirements of the contract. Unless any discrepancy is so minute as to have no significance,13 the promisor will have breached the contract.14 However, there is a distinction between whether one party breached the contract and whether the other party is liable to pay the contract price. Even a plaintiff who has breached the contract will often be entitled to claim the contract price.15 Before looking at that it is necessary to set out the rules governing the method of performance.

Method of Performance

[14-08] Demand of performance. If an obligation has fallen due for performance the other party is not required to make a demand for performance unless the contract says so. There are several further rules, including: ■ if payment of a debt is due ‘on demand’, the debtor is entitled to a reasonable time to comply with the demand;16 ■ a demand for goods must be made at a reasonable hour;17 and ■ performance cannot be demanded prior to the time specified by the contract. [14-09] Tender of performance. A party must tender (proffer) performance to the promisee.18

Rule summary The applicable rules include the following: ■ place — the tender must be at the intended place, such as the other party’s place of business; ■ conforming — the tender must conform in quantity and quality to the requirements of the contract; ■ unconditional — the tender must not be made subject to a requirement which is not in the contract; [page 218] ■ ■ ■ ■

timely — tender must be at or within the time specified by the contract; not early — a tender on a date earlier than that required by the contract need not be accepted; cash — if the contract requires payment in cash, the tender must not be non-monetary;19 and legal tender — a tender in cash must be of ‘legal tender’, that is, of notes or coin issued by the Reserve Bank.20

If a defective tender of performance is made prior to expiry of the time for performance, a fresh tender may be made. For example, assume a seller must

deliver goods ‘before 30 April’. If the seller tenders the goods on 20 April, but the goods are rejected because they do not conform to the contract, the buyer must accept compliant goods tendered on, say, 25 April.21 [14-10] Payment. Where a contract requires payment in cash, the promisee (creditor) is not bound to accept a negotiable instrument other than a bank cheque. Therefore, a promisor’s (debtor’s) personal cheque need not be accepted.22 If a creditor accepts a negotiable instrument in place of cash, the effect depends on the intention of the parties.23 There are two possibilities. The negotiable instrument may be accepted as: (1) conditional payment; or (2) a discharge of the debtor’s obligation. The default rule is that payment is conditional.24 Accordingly, the parties are presumed to intend that the debtor is discharged only if the negotiable instrument is honoured — so that cash is received. If the instrument is dishonoured, the creditor can sue on the contract or the negotiable instrument. However, if the default rule does not apply, the creditor can only sue on the negotiable instrument. Because in this situation the instrument has been accepted in satisfaction of the debtor’s contractual obligation, that obligation is discharged. If the creditor accepts payment by credit card, the debtor is discharged and has no further liability.25 [14-11] Vicarious performance. We saw earlier26 that although the benefit of a contract is usually assignable, the burden of performance is not. However, the performance of most contractual obligations can be delegated to a subcontractor. [page 219] This means that a promisor can contract with a subcontractor to perform on its behalf. But the promisor remains responsible for performance.

Hypothetical Assume that Developer Ltd (principal) is developing land which it owns. It contracts with Apex Constructions Ltd (contractor) to build a block of

home units on the land. Some of the building work may be specialised, and Apex might engage Subby Pty Ltd (subcontractor) to do the fancy ceilings in the units. The work done by Subby is performance by Apex of its obligation to Developer. This is not personal performance. Rather, it is a vicarious performance through Subby. Apex must therefore ensure that Subby’s work conforms to the contract. If the (vicarious) performance does not conform, Apex has breached the contract with Developer. (Of course, Subby will also have breached its contract with Apex.) Subcontracting is not always permitted. Consent must be obtained in two situations: (1) express term — the contract states that consent must be obtained before subcontracting occurs (or prohibits subcontracting); and (2) personal contract — consent is also necessary if there is an element of personal skill, expertise or confidence in the work. Generally, business-to-business contracts may be performed vicariously. British Waggon Co v Lea & Co27 illustrates that this is because personal skill or expertise is not usually an essential element of performance. The case concerned an owner’s repair obligation under a contract for the hire of railway wagons. The plaintiffs did not do the work personally. Instead, they contracted for a subcontractor to carry out the repairs. Because there was no element of personal skill, expertise or confidence, the plaintiffs were entitled to subcontract the work. [14-12] Good faith performance. The expression ‘good faith’ describes a requirement which has various shades of meaning. One is ‘honesty’. Clearly, contracting parties must act honestly.28 Another sense requires one party to act in the interests of the other. Only rarely is this required. A partnership contract is the best example. So far as contracts in general are concerned, there is a middle ground in which ‘good faith’ describes the impact of two relevant general performance rules. (1) no prevention — neither party is entitled to take a step which would prevent the other party from performing the contract;29 and [page 220]

(2) co-operation — if performance of the contract requires co-operation between the parties, each must take any steps necessary for performance to occur.30 To the same effect, in Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd31 the High Court approved the following statement of principle:32 It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract.

These cases do not refer, in terms, to ‘good faith’. At the level of terminology, there is therefore a contrast with the position in the United States, as summarised in §205 of the Restatement (2d) Contracts (1979). That provision refers to a ‘duty of good faith and fair dealing in … performance’.33 Whether there is any difference in substance can be debated. However, in recent years the question has been discussed34 whether courts should imply a term formulated to require ‘good faith’ in performance. The view that all contracts include a ‘good faith’ term has been rejected.35 For a contract to include such a term it must therefore be stated expressly or satisfy the implied terms rules.36 The latter is unusual.37

Recovery of the Contract Price General [14-13] Issues. Whether the plaintiff has earned the contract price is an issue which can be viewed from more than one angle. Therefore, several questions may need to be considered: ■ discharge — must the plaintiff have performed exactly in accordance with the contract? ■ quality of performance — what quality must performance have in order for the contract price to be payable? ■ payment — what is the position if the contract provides for several payments, rather than a single lump sum? [page 221]

■ order of performance — what is the relevance of the order of performance? ■ nature of the contract — do the same principles apply to all contracts? [14-14] Lump sum payments. The contract price may be a single lump sum.

Examples Three common examples are: (1) Pat (purchaser) agrees to pay Vince (vendor) $500,000 for Vince’s land: the contract price is $500,000; (2) Basil (buyer) agrees to pay $10,000 to Sybil (seller) for Sybil’s motor car: the contract price is $10,000; and (3) Cathy (customer) agrees to pay $80,000 to Bob (builder) to build a garage on her land: the contract price is $80,000. In each example, the contract is an ‘entire’ contract because a single (lump sum) payment obligation falls due on completion of performance. That is true even if, in (3), Cathy must make four $20,000 progress payments to Bob on pouring the cement, building the frame and so on. Because building the garage is a single performance obligation, it is still a lump sum contract.38 Each $20,000 payment is made towards the lump sum. [14-15] Other payments. The contract price may be payable in more than one instalment. In addition to the progress payments referred to above, there are three main situations. First, the parties may have measured off — ‘apportioned’ — their performances. For example, assume Alpha Ltd agrees to sell 10,000 tonnes of wheat to Beta Ltd, and that the contract provides for delivery in 1000-tonne lots. If the contract provides for separate $100,000 payments for each instalment, the total contract price ($1 million) has been apportioned to each delivery. This illustrates what is termed a ‘severable’ (or divisible) contract.39 Second, the promisor may be required to pay the total contract price in instalments on specific dates. For example, Pat may agree to purchase land from Vince for a price of $500,000 payable in 10 equal monthly instalments prior to a conveyance of title.40 The contract is a lump sum contract, but payment is apportioned over time. Third, a contract may require payment for the use or enjoyment of the subject matter. For example, a hirer of goods might agree to pay hire of $350 per week.

Payment is made for the opportunity to use the goods. Even though the contract may be for a definite duration, the hirer does not come under an obligation to pay [page 222] the hire for the whole term unless in fact the contract lasts that long. This is another kind of severable contract. [14-16] Condition precedent. An important concept in relation to recovery of the contract price is the idea of ‘condition precedent’.41 If the contract price is payable on the occurrence of a particular event, that event is termed a condition precedent. For example, if a householder agrees to pay a gardener $50 for mowing the lawn, completion of the mowing is the condition precedent. Similarly, in the SAMPLE SALE OF GOODS CONTRACT, delivery of the Goods is a condition precedent to the right to be paid the Price ($1000). It follows that, from the perspective of a plaintiff seeking to recover the contract price, there are two crucial issues: (1) what is the condition precedent? (2) when is the condition precedent satisfied? Unfortunately, some of the learning on these issues is rather ancient, and does not always work well for modern contracts. In seeking to achieve just and fair results, courts have made the law rather complex.

Entire Contracts [14-17] General principle. An entire contract is one in which completion of performance by the plaintiff is a condition precedent to recovery of the contract price.42 For most contracts, the condition precedent is satisfied if performance is substantially complete.43 But if the condition precedent fails, the contract price is not recoverable. This is the ‘doctrine of the entire contract’. Whether the reason for failure is breach of contract does not matter. The classic illustration is Cutter v Powell.44 Cutter agreed to act as a crew member on a voyage from Jamaica to Liverpool, with payment to be made on arrival of the vessel. His executrix could not claim payment because Cutter died before the

ship reached Liverpool: he had not served for the entire voyage.45 Since the contract was not divisible, no claim could be made for part of the agreed wages. The position is no different where the contract provides for progress payments.

Leading case Sumpter v Hedges46 concerned an ordinary building contract under which the builder agreed to do the work for a lump sum. Progress payments were made, but the builder abandoned the job before it was finished. The court thought it [page 223] self-evident that the condition precedent to the customer’s obligation to pay had not been satisfied. Accordingly, the customer had no further contractual liability.47 Because the work was done on the customer’s land, he retained the benefit of the builder’s work. However, the result is not as unjust as it appears. Because progress payments were made, much of the work done had been paid for. The builder did not have to return that money. The case shows that the doctrine of the entire contract also applies when the claim is for the balance of the contract price. [14-18] Substantial performance. Notwithstanding the cases discussed above, under the modern law the general principle is that the contract price is recoverable if the plaintiff has substantially performed the contract. Of course, that assumes that the contract does not expressly provide to the contrary. The idea that failure of a condition precedent prevents recovery of the contract price reflects a conclusion on the order of performance.48 If the plaintiff is required to perform first, it cannot claim the contract price unless performance has been substantially completed. Most cases concern problems with the quality of performance.

Origin of the law In Boone v Eyre49 the defendant paid £5000 in return for a conveyance by the plaintiff of title to a plantation in the West Indies. That included its

stock of slaves. The defendant promised that if the plaintiff ‘well and truly’ performed his obligations, the defendant would also pay a sum of £160 yearly. For his part, the plaintiff promised that he had good title to the plantation and was lawfully in possession of the slaves. The defendant failed to make the yearly payments, and raised as a defence to the plaintiff’s claim for payment that he was not lawfully possessed of the slaves. This was treated as a complaint about the quality of performance. Lord Mansfield stated a general principle:50 The distinction is very clear, where mutual covenants go to the whole of the consideration on both sides, they are mutual conditions, the one precedent to the other. But where they go only to a part, where a breach may be paid for in damages, there the defendant has a remedy on his covenant, and shall not plead it as a condition precedent.

Later cases interpreted this as a statement that the contract price is payable if the plaintiff substantially performed the contract. [page 224]

The plaintiff in Hoenig v Isaacs51 was an interior decorator and furniture designer who contracted to decorate the defendant’s flat, and to supply certain furniture. The price, £750, was payable ‘net cash, as the work proceeds; and balance on completion’. The defendant paid £300. However, she complained that the work was defective, paid a further £100 and said that was all she would pay. The plaintiff successfully sued to recover the balance of the price — £350. Denning LJ said:52 It was a lump sum contract, but that does not mean that entire performance was a condition precedent to payment. When a contract provides for a specific sum to be paid on completion of specified work, the courts lean against a construction of the contract which would deprive the contractor of any payment at all simply because there are some defects or omissions.

The court reasoned that because the plaintiff’s performance was substantially in accordance with the contract, he was entitled to recover the full price. However, the defendant was entitled to compensation (for breach of contract) sufficient to enable her to remedy defects in the work.

Severable Contracts [14-19] Concept. A severable contract is one in which payment obligations are apportioned in accordance with performance.53 Such contracts provide for severable payments. If Alpha Ltd agrees to sell 10,000 tonnes of wheat to Beta Ltd, the contract is severable if it provides for delivery in 1000-tonne lots, to be separately paid for at a price of $100,000. This is because the total contract price ($1 million) is apportioned to each delivery. Alpha can recover the price of any instalment accepted by Beta. That is true even if, having delivered the first instalment, Alpha refuses to make further deliveries. By contrast, although the Goods in the SAMPLE SALE OF GOODS CONTRACT consist of 100 boxes, there is a single delivery and a single — lump sum — price, namely, $1000. It is not a severable contract to pay $10 per box. [14-20] Substantial performance. The obligation of the plaintiff under a severable contract is to perform each severable part. Unless the parties have agreed otherwise, the condition precedent to recovery of the price is substantial performance of the severable part in respect of which payment is sought. [page 225]

In Steele v Tardiani54 employees sought to recover the agreed price for the work done in cutting 1500 tons of timber into firewood. Under the contract they were promised six shillings per ton. Steele was their employer. His complaint was that the timber was not cut to the correct dimensions. The High Court said that the agreement was not an ‘entire’ contract. Rather, as Dixon J explained,55 it was ‘infinitely divisible’. This followed from the statement of the contract price as a rate — per ton. However, the employees still failed in their contract claim.56 Dixon J said:57 But it can hardly be denied that the consideration which the employees were to give for the remuneration is firewood cut according to contract and, so to speak, only those billets or

sticks can be counted which qualify by substantial or reasonable compliance with the specifications. In this sense the terms of remuneration are ‘entire’, or, in other words, each divisible application of the contract is entire and is only satisfied by performance, not partial, but substantially complete.

Therefore, in order to recover any divisible (per ton) payment it was essential for the work to be substantially in accordance with the contract. Since much of the timber was not cut to the correct dimensions, the employees had substantially performed only a small number of divisible parts.

Other Matters [14-21] Mechanics and scope of substantial performance. The impact of the above discussion is that in most cases a plaintiff is entitled to recover the contract price if it has substantially performed the whole contract (entire contract) or substantially performed a severable part of the contract (severable contract). Three further questions arise. First, what is the criterion or test for deciding whether performance is ‘substantial’? Hoenig v Isaacs58 illustrates the usual criterion, namely, the cost of curing defects in the work done. This is the cost of making the defective performance conform to the contract. If the cost of cure is material, relative to the contract price, the plaintiff’s work performance is not ‘substantial performance’. In Bolton v Mahadeva59 work was badly done by a contractor in supplying and installing a heating and hot water system. The defendant had to pay £174 to another contractor to remedy defects in the work. By comparison with the contract price £560, £174 was a substantial sum. It was therefore held that the plaintiff’s performance was not [page 226] substantial. What seems odd (if not unjust) is that £174 was all that the defendant had to pay to get his £560 heating and hot water system! However, a court is not required to adopt the cost of cure as the measure of whether substantial performance has occurred. Sometimes that is better judged by reference to the value of what has actually been done.60 This may help the

plaintiff — the performance may have substantial value even though it would cost a lot of money to cure defects in the work. Ultimately, the matter should depend on whether, from a damages perspective, it would be unreasonable for the defendant to remedy defects in the work.61 The second question is how the defendant should be compensated for the plaintiff’s breach. There are two points to make: (1) claim for damages — when the plaintiff sues for the contract price the defendant can claim for damages for breach of contract. The amount is deducted from the contract price; and (2) measure of damages — most of the cases concern building work done on the defendant’s land. In that situation, cost of cure is the usual way of measuring damages.62 However, if it would be unreasonable for the defendant to cure the defects, a court will award the difference between the value of work actually done and the contract price. Third, there is a question of scope: when does the substantial performance criterion apply? Several points may be made here: ■ substantial performance generally sufficient — the better view is that substantial performance is sufficient unless excluded by the contract;63 ■ severable contracts — the doctrine applies to severable contracts;64 and ■ breach necessary — substantial performance by the plaintiff is regarded as sufficient because in cases of breach of contract compensation can be awarded to the defendant. The criterion does not apply if neither party was at fault.65

[14-22] Concurrent performance. Where performance is intended to take place concurrently, rather than sequentially, the defendant can refuse to perform its side of the bargain if the plaintiff is not ready and willing to perform. For example, if S agrees to sell goods to B for cash on delivery, S is not required to hand over the goods except in return for payment. What is the position if S then sues B for the contract price? Under the sale of goods legislation,66 the general rule is that the [page 227] contract price can be recovered only if performance has been accepted, and title to the goods transferred. Therefore, S is not entitled to the price.67 Even more clearly, if S tenders goods which are so defective that B is entitled to reject them, S cannot claim the price.68 However, if B chooses to accept the goods, it must pay the price. Because of the defects, B can claim damages for breach of warranty.69 [14-23] Statute. The common law position explained above is sometimes qualified by statute.

Under the apportionment legislation, ‘all rents, annuities, dividends and other periodical payments in the nature of income’ are considered as accruing from day to day and are ‘apportionable in respect of time accordingly’.70 However, the legislation does not apply if the contract states that apportionment is not to occur. The legislation has also been restrictively interpreted.71 But it may be relevant where payments under a contract are made, say, on a monthly basis and the contract comes to an end part way through the month. The legislation may entitle the plaintiff to claim payment for the number of days during which performance was received. For example, assume E agrees to pay O a licence fee of $30,000 at the conclusion of each month. If the licence comes to an end 10 days into a 30-day month, O is entitled to $10,000 even though at common law O might have no claim at all. When considering an employee’s right to wages for performance of an employment contract, statutory provisions may need to be taken into account.72 For example, if the contract provides for payment at fortnightly intervals, and the employee is lawfully dismissed in the middle of one of these periods, the employee would fail at common law in an action for a fortnightly wage payment. Since under statute, or an instrument registered under statute, the employee’s wages may be stated to accrue daily (or hourly), recovery for the days (or hours) actually worked may be possible. In this situation, a different (and obligatory) method for determining wages is substituted.73 [page 228]

QUICK QUIZ Short answer (1) What is meant by ‘performance’ of a contract? (2) What is a ‘time stipulation’? (3) Explain the order of performance concept. (4) What is meant by ‘concurrent’ performance? (5) Explain the vicarious performance concept. True or false?

(1) (2) (3) (4) (5)

The obligation to perform a dependent promise is postponed until the occurrence of a condition precedent. As a general rule, a promisor is not obliged to perform until the promisee demands performance. If a contract requires payment in cash, payment may be made by personal cheque. A promisor who has substantially performed a contract is usually entitled to recover the contract price. Sumpter v Hedges [1898] 1 QB 673 (see [14-17]) would be decided differently today.

Choose the best answer (1) E agrees to work for B for 12 months commencing on 1 February 2014. The contract provides that E’s wages are $3000 per month. Unless the contract says otherwise, E is entitled to receive: (a) $3000 at the beginning of each month; (b) $36,000 on 1 February 2014; (c) $3000 at the end of each month; (d) $3000 at the end of each month, provided E has not breached the contract; or (e) $36,000 on 1 February 2015. (2) A tender of performance: (a) is never necessary; (b) should occur at the promisor’s place of business; (c) must occur within a reasonable time; (d) is a proffer of performance; or (e) can always be rejected. (3) D owes $400 to C, payable in cash. C accepts D’s personal cheque as payment. It can be presumed that: (a) D’s debt has been paid if D has $400 in the bank; (b) D’s debt has not been paid; (c) C is very foolish; (d) D’s debt has been paid; (e) the cheque is a conditional payment.

[page 229] (4) B contracts to build a house for C for $420,000. There are defects in the work. As built, the house is worth $350,000. If it will cost C $120,000 to cure the defects in the work: (a) B is discharged by performance; (b) it is clear that B has substantially performed the contract; (c) probably B has not substantially performed the contract; (d) C is not entitled to damages; or (e) the contract is a severable contract. (5) In relation to payment of the Fee under the SAMPLE SERVICES CONTRACT: (a) the relevant condition precedent is the provision of Services for 36 months; (b) the relevant condition precedent is the provision of Services for each month; (c) the Fee does not include GST; (d) $1000 must be paid each month whether or not Services are provided; or (e) Fees for 36 months become payable if any payment is not made within seven days of the Due Date.

1 2 3 4 5 6 7 8 9 10 11 12

13 14 15

See [14-13]–[14-23]. See further [14-14], [14-15]. See eg Carlton SS Co Ltd v Castle Mail Packets Co Ltd [1898] AC 486 at 490; Canning v Temby (1905) 3 CLR 419 at 424. See further [15-09]. See generally on construction Chapter 10. See generally Automatic Fire Sprinklers Pty Ltd v Watson (1946) 72 CLR 435. (1773) 2 Doug 689; 99 ER 437. See Cases and Materials, §28-12. See [14-16]. (1669) 1 Wms Saund 319; 85 ER 449. See S J Stoljar, ‘Dependent and Independent Promises’ (1957) 2 Syd LR 217. See Carter’s Breach of Contract, §§1-21–1-24. See also [14-22]. ‘Ready and willing’ is legal shorthand for ‘ready, willing and able’. See [18-03]. See ACT: Sale of Goods Act 1954, s 32; NSW: Sale of Goods Act 1923, s 31; NT: Sale of Goods Act 1972, s 31; Qld: Sale of Goods Act 1896, s 30; SA: Sale of Goods Act 1895, s 28; Tas: Sale of Goods Act 1896, s 33; Vic: Goods Act 1958, s 35; WA: Sale of Goods Act 1895, s 28. See Carter’s Breach of Contract, §2-05 (de minimis rule). For how breach is proved see [15-02]. See [14-13]–[14-23].

16 17

18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

38 39 40 41 42 43 44 45 46 47 48 49 50 51 52

See Bunbury Foods Pty Ltd v National Bank of Australasia Ltd (1984) 153 CLR 491; 51 ALR 609. See ACT: Sale of Goods Act 1954, s 33(5); NSW: Sale of Goods Act 1923, s 32(4); NT: Sale of Goods Act 1972, s 32(5); Qld: Sale of Goods Act 1896, s 31(4); SA: Sale of Goods Act 1895, s 29(4); Tas: Sale of Goods Act 1896, s 34(4); Vic: Goods Act 1958, s 36(4); WA: Sale of Goods Act 1895, s 29(4). See eg Wilson v Kingsgate Mining Industries Pty Ltd [1973] 2 NSWLR 713 at 726; Ireland v Leigh [1982] Qd R 145 at 148. See further [14-10]. See Reserve Bank Act 1959 (Cth), s 36(1). For the permitted denominations see Currency Act 1965 (Cth), s 16. See eg Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India (The Kanchenjunga) [1990] 1 Lloyd’s Rep 391 at 399. See [14-09]. See eg Tilley v Official Receiver in Bankruptcy (1960) 103 CLR 529. See eg Saffron v Société Minière Cafrika (1958) 100 CLR 231. See Re Charge Card Services Ltd [1989] Ch 497. See [13-08]. (1880) 5 QBD 149. See also Australis Media Holdings Pty Ltd v Telstra Corp Ltd (1998) 43 NSWLR 104 at 120. See [1-20] and generally Peden, Good Faith. See eg Stirling v Maitland (1864) 5 B & S 840 at 852; 122 ER 1043 at 1047; Commissioner for Main Roads v Reed & Stuart Pty Ltd (1974) 131 CLR 378 at 384–5; 4 ALR 571. See eg Mackay v Dick (1881) 6 App Cas 251 at 263; Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 448; 131 ALR 422. (1979) 144 CLR 596 at 607; 26 ALR 567. Butt v M’Donald (1896) 7 QLJ 68 at 70–1 per Griffith CJ. Cooper and Power JJ concurred. See E A Farnsworth, ‘Good Faith in Contract Performance’ in Beatson and Friedmann, p 153. See eg Elisabeth Peden, ‘Incorporating Terms of Good Faith in Contract Law in Australia’ (2001) 23 Syd LR 222. See further Chapter 33 (exercise of rights). See CGU Workers Compensation (NSW) Ltd v Garcia (2007) 69 NSWLR 680; [2007] NSWCA 193. See Chapter 8. See Burger King Corp v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558; [2001] NSWCA 187. Contrast Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84 at 91–2; 117 ALR 393 at 401–2. See eg Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 at 717. See Government of Newfoundland v Newfoundland Railway Co (1888) 13 App Cas 199. Normally, Vince would not agree to transfer ownership of the land until the final instalment is paid. See eg McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457. See also [14-05]. See G L Williams, ‘Partial Performance of Entire Contracts’ (1941) 57 LQR 373; Carter’s Breach of Contract, §§6-91–6-93. See [14-18]. (1795) 6 TR 320; 101 ER 573, Cases and Materials, §28-06C. In fact, she only claimed restitution. See [30-23]. [1898] 1 QB 673, Cases and Materials, §38-14C. In fact, the builder claimed restitution. See [30-23]. See [14-03]–[14-07]. (1777) 1 H Bl 273n; 126 ER 160. (1777) 1 H Bl 273n; 126 ER 160. [1952] 2 All ER 176, Cases and Materials, §28-22C. [1952] 2 All ER 176 at 180.

53 54 55 56 57 58 59 60 61 62 63 64 65 66

67 68 69 70

71 72 73

See [14-15]. (1946) 72 CLR 386, Cases and Materials, §38-20C. (1946) 72 CLR 386 at 401. McTiernan J agreed. The plaintiffs were awarded restitution. See [30-21]. (1946) 72 CLR 386 at 401. [1952] 2 All ER 176 (see [14-18]). [1972] 1 WLR 1009, Cases and Materials, §28-29C. See Jacob & Youngs Inc v Kent 129 NE 889 (1921). See further [27-47]. See further [27-47]. See [14-18]. See [14-20]. See O’Sullivan v O’Leary [1955] VLR 52 at 58. See ACT: Sale of Goods Act 1954, s 52; NSW: Sale of Goods Act 1923, s 51; NT: Sale of Goods Act 1972, s 51; Qld: Sale of Goods Act 1896, s 50; SA: Sale of Goods Act 1895, s 48; Tas: Sale of Goods Act 1896, s 53; Vic: Goods Act 1958, s 55; WA: Sale of Goods Act 1895, s 48. The same provision states that performance is not necessary if the price is payable on a day certain irrespective of delivery. In that situation performance is not concurrent. See [14-05]. B is entitled to terminate the contract and recover damages for non-delivery. See [31-04]. See [27-45]–[27-46]. See ACT: Civil Law (Property) Act 2006, s 250; NSW: Conveyancing Act 1919, s 144(1); NT: Law of Property Act 2000, s 212(1); Qld: Property Law Act 1974, s 232; SA: Law of Property Act 1936, s 64; Tas: Apportionment Act 1871, s 2; Vic: Supreme Court Act 1986, s 54; WA: Property Law Act 1969, s 131. See eg Bans Pty Ltd v Ling (1995) 36 NSWLR 435 at 438–9. See G J McCarry, ‘No Work, No Pay’ (1983) 57 ALJ 378. See Mallinson v Scottish Australian Investment Co Ltd (1920) 28 CLR 66 at 72–3; Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 419-20; 131 ALR 422.

[page 230]

Chapter 15

Breach of Contract [15-01] Issues. Where the question of breach of contract is raised there are two issues to consider:1 (1) whether a breach has occurred; and (2) the consequences of any proved breach. This chapter is concerned with (1). It deals with the forms which a breach of contract may take, as well as what must be proved to establish that a particular obligation was breached. Several other chapters deal with the consequences of breach. However, it is worth noting what rights one party (the promisee) is likely to assert against the other (the promisor). These are: ■ damages — is the promisee entitled to damages? The answer is ‘yes’. This leads to further issues about how damages are assessed;2 and ■ premature discharge — is the promisee entitled to bring the contract to an end? The usual answer is ‘no’: breach of contract does not usually entitle the promisee to elect to terminate the contract. The bases for premature discharge are considered in the next chapter. The mere fact that the promisor breached the contract does not prevent recovery of the contract price. However, as was discussed in the previous chapter, the contract must have been substantially performed.3 [15-02] Fundamental issue. Whether a contract has been breached is one of the most important questions in contract law. Potentially, any failure to discharge an obligation is a breach of contract.4 Since breach is usually the ‘flip side’ of performance, performance which is not in accordance with the contract is usually a breach of contract. However, the fact that the parties do not reach point t4 (the discharge point) in the contract continuum5 does not always mean that the contract was breached. It is still necessary to ask why point t4 was not reached. In McRae v Commonwealth Disposals Commission,6 Dixon and Fullagar JJ

described as ‘fundamental’ the question: ‘What did the promisor really promise?’ [page 231] This question has two aspects.7 The first is the scope of a promisor’s duty. If Allan promises to deliver goods to Betty on 1 July, a failure to deliver on that day is usually a breach of contract. However, delivery may have been prevented by circumstances which are not within the scope of Allan’s promise. If so, there is no breach. The second aspect is standard of duty.8 A breach of contract occurs if the relevant obligation has not been performed in accordance with the applicable standard of duty. Contract law draws a contrast between: ■ strict duties — these are breached even though a promisor may have done its best to perform; and ■ other duties — if a duty is not strict, that is because a standard of care, skill or diligence applies. If Allan promises to supply goods to Betty, and he delivers goods not of the contract quality, Allan has breached the contract. It does not matter that he has done his best to perform, for example, by obtaining the goods from a reputable manufacturer.9 By contrast, if a licence is necessary before the goods can be delivered, and Allan promised to use reasonable endeavours to obtain it, there is no breach of contract if the licensing authority refuses to grant him a licence despite Allan’s reasonable endeavours.

Forms of Breach [15-03] Failure to perform. The most common form of breach of contract is a ‘failure to perform’.10 This will occur if the promisor does not discharge its performance obligation in accordance with the applicable standard of duty. Breach may take various forms: ■ non-performance — there is no performance at all, including where the promisee validly rejects any performance proffered or received; ■ defective performance — performance which is not of the quality or quantity required by the contract is accepted by the promisee; and ■ late performance — performance which is otherwise in accordance with

the contract is accepted by the promisee after expiry of the time allowed for performance. Two other points can be noted. First, late performance is a breach even if time is not ‘of the essence’.11 Second, non-performance will occur if performance which is defective or late is rejected and the contract validly terminated for breach. [page 232] [15-04] Illustrations. The three forms of failure to perform can be illustrated by the SAMPLE SALE OF GOODS CONTRACT.

Using Sample Contract Seller Ltd is required to deliver the Goods (100 boxes of Onion Seed) to Buyer Ltd on a specified date (1 June 2014). Examples of defective performance include Seller’s delivery of 10 boxes, or Onion Seed which is not of ‘best quality’. Late performance occurs if Seller delivers after midnight on 1 June. Non-performance occurs if no Goods are ‘tendered’ (proffered for delivery) by Seller. It also occurs if Seller’s tender is late, or the goods are defective, and Buyer validly rejects the goods (thereby terminating the contract). It follows that breach by defective or late performance occurs only if Buyer receives and retains Seller’s performance. In each case, Buyer is entitled to compensation. [15-05] Anticipatory breach. The other form of breach is termed ‘anticipatory breach’. This has two peculiar features. One is that it occurs before expiry of the time for performance. The other is that there is a breach only if the promisee terminates the contract. The usual case is a refusal by the promisor to perform. Such a refusal is termed a ‘repudiation’. Accordingly, an anticipatory breach usually has three elements: (1) refusal by the promisor to perform; (2) the refusal occurred before the time for performance by the promisor, that is, in the t2–t3 period in the contract continuum;12 and

(3) the promisee elected to terminate the contract. However, the repudiation concept is broader in scope than anticipatory breach.13 A refusal to perform in the t3–t4 period is also a repudiation. For example, if Anne refuses to perform her contract of employment after it has commenced by telling her employer (Edward) that she does not intend to do any more work, that is a repudiation. Edward can elect to terminate the contract. However, there is no need to describe the breach as ‘anticipatory’. [15-06] Burden of proof. The burden of proving a breach of contract is on the promisee.14 This rule applies to both failure to perform and anticipatory breach. It is irrelevant whether the issue relates to an express or implied term of the contract. [page 233]

Establishing a Failure to Perform [15-07] Introduction. It follows from the above that breach of contract depends on two matters:15 (1) whether performance was due; and (2) the standard of duty applicable to the performance obligation.

Is Performance Due? [15-08] Expressly agreed time. A breach by failure to perform cannot occur until the time for performance has arrived.16 Express agreements on the time for performance include the following: ■ ‘on’, ‘before’ or ‘about’ a named date; ■ ‘within’ a stated period; ■ ‘as soon as possible’;17 and ■ on the occurrence of a specified event.18 To decide whether performance has actually fallen due, it may also be necessary to take account of the relationship between the parties’ obligations.19 For example, if Vince agrees to sell land to Pat, and the contract specifies 1 April as the date for completion, Pat is not necessarily in breach merely because that

date has passed and she has not paid the price. The intention was for Pat to pay in exchange for documents necessary to enable her to become the owner of the land. Pat has breached the contract only if Vince was ready and willing to hand over the necessary documents in exchange for her money. Accordingly, even though she did not pay the price, if on 1 April Pat was ready to pay, but Vince was not ready to hand over the necessary documents, Vince (not Pat) has breached the contract. [15-09] Reasonable time. If there is no express time stipulation, it is implied that the parties intend performance to occur within a ‘reasonable’ time.20 Failure to perform within that period is a breach of contract. If the performance is agreed to be concurrent,21 as under a sale of land, then each party is entitled to the same reasonable time. But the issue arises only if performance is to occur at a future date. For example, if a person walks into a retail store and chooses a bottle of perfume to purchase, payment must be made then and there. [page 234] What constitutes a reasonable time is impossible to predict in advance. It is a question of fact22 which depends on the circumstances, including the nature of the contract and obligation. Proving that a reasonable time has expired can therefore be somewhat problematic. The relevant time for looking at the issue is when the reasonable time is alleged to have expired, rather than when the contract was agreed.23 For example, congestion in a port could be taken into account when determining the reasonable time for arrival of a vessel.24

Standard of Duty General [15-10] The concept. It is simple enough to say that there is a breach of contract if the promisee does not receive what was promised within the time agreed. However, this assumes that not receiving performance is synonymous with a failure to perform by the promisor. That need not be the case. There must be a standard against which to judge whether the promisor has complied with the contract. ‘Standard of duty’ is the concept which deals with this.25

As noted earlier,26 the concept concerns the degree of care a promisor must exercise. The applicable standard of duty may be: ■ expressly agreed — an express term states the standard of duty; or ■ impliedly agreed — an implied term states the standard of duty. Every contractual obligation has a standard of duty. It is inconsistent with the idea of ‘obligation’ that the parties should have agreed that performance is entirely discretionary.27 Equally, a promisor may have taken responsibility for something which it was never possible to achieve. For example, in McRae v Commonwealth Disposals Commission28 a seller promised to transfer ownership in a tanker which did not in fact exist. [15-11] Possible standards. There is a spectrum of possible standards of duty. As we have seen,29 strict duties are contrasted with those requiring the exercise of care, skill or diligence. It is generally open to the parties to specify expressly the applicable standard.30 Strict duties are, of course, more onerous than those requiring care, skill or diligence. Accordingly, it is quite common for duties to be expressed in terms of ‘reasonable care’, ‘reasonable endeavours’, ‘due diligence’, and so on. However, [page 235] this is unusual for money obligations. For example, a landowner is not likely to grant a lease to someone who wants the lease to say ‘the lessee will use reasonable endeavours to pay the rent’. Courts have often equated the strict standard with an ‘absolute’ standard. This reflects the fact that for many obligations, such as the obligation of a buyer to pay for goods delivered, there are very few excuses which can be put forward if the money is not paid when it falls due. However, ‘absolute’ means ‘unconditional’ and it is inconsistent with the presumption of dependency of obligation31 to equate ‘strict’ with ‘absolute’. In the example just given, the buyer’s obligation to pay the price is conditional on delivery of the goods. [15-12] What needs to be proved. Although in all cases the promisee has the burden of proof,32 the distinction between strict duties and other duties carries with it a difference of approach. Assume that Hayley claims Todd has breached their contract. If the standard

of duty of Todd’s promise is strict, Hayley establishes a prima facie case by proving that she has not received the performance promised by Todd. If Todd does not show that he has some excuse for not performing, he will have breached the contract.33 The position is different if Todd’s duty is to use care, skill or diligence. Hayley must prove a failure to exercise the requisite degree of care, skill or diligence. [15-13] Determining the standard. The discussion above leads to the principle that the applicable standard of duty depends on the intention of the parties. Very often, however, the parties do not expressly address the issue. The position is obvious for an informal verbal contract. However, even if the contract is in writing — so that the issue is one of construction — the document may not deal expressly with the issue.34 In these cases, the agreed standard must be implied from the terms of the contract and the nature of the obligation. Because experience suggests common understandings for particular kinds of contract, there is nearly always a presumed standard, that is, default rule. Effect is usually given to presumed standards by the implication of a term.35 The impact is that even if the contract is in writing a term will be implied to state the presumed standard unless construction of the contract shows a different intention. The parties may be found to have agreed to a standard which is less onerous or more onerous than the presumed standard.36 [page 236]

Strict duty [15-14] Cases of strict liability. The common law of contract has been dominated by decisions on sale of goods and sale of land contracts. Generally, for promises made under such contracts the duties of the parties are strict. Accordingly, these contracts create strict liabilities. More generally, the duty to perform a promise to pay money is almost invariably strict. In the SAMPLE SALE OF GOODS CONTRACT, there is no point in Buyer Ltd saying that it did its best to find the money to pay for the goods. If the goods are delivered, it is a breach of contract if Buyer does not pay within 30 days. Contracts for the supply of goods are the best illustrations of non-monetary obligations to which a strict standard applies. For example, in Frost v Aylesbury

Dairy Co Ltd37 a supplier of milk breached an implied term that the milk would be fit for its purpose (human consumption) even though the supplier had exercised reasonable care. Without microscopic examination, the defect in the milk — that it contained typhoid fever germs — could not have been detected by the seller. Similarly, in the SAMPLE SALE OF GOODS CONTRACT, Seller Ltd’s promise to deliver ‘best quality’ Onion Seed is strict. So is its duty to deliver 100 boxes. Contracts for the supply of goods by way of hire or lease are analysed in the same way.38 However, even for a strict duty, the promisee’s complaint must be within the scope of the promisor’s duty.

Illustration In Reg Glass Pty Ltd v Rivers Locking Systems Pty Ltd,39 contractors agreed to construct and supply a burglar-proof door. Burglars managed to force the door out of position. It was held that the contractors breached the contract. That was not because the duty was to ensure that burglars would be kept out no matter what force they used. The scope of the contractors’ duty did not extend that far: the duty was to ensure that the door was reasonably fit for its purpose. That was not the case. [15-15] Excuses. Proving breach of a strict duty is straightforward. As explained above, the promisee makes out a prima facie case merely by showing that the promisor has not provided performance within the time stipulated by the contract. This shifts the burden to the promisor to establish some excuse. The contract may include a specific provision, such as an exclusion of liability,40 or a force majeure clause.41 The SAMPLE SERVICES CONTRACT has such a provision. Whether it applies is a question of construction. The question is whether the particular event relied on was ‘beyond the reasonable control of Provider’. [page 237] At common law, only limited excuses are available to a promisor who is subject to a strict duty.42 For example, it is a good defence that the whole contract has been discharged by frustration.43

Duty to use care [15-16] Introduction. Every contractual duty which is not strict requires the exercise of care, skill or diligence. The parties may have expressly so agreed. For example, in Electricity Generation Corporation v Woodside Energy Ltd44 a contract for the supply of gas included an obligation to use ‘reasonable endeavours’ to supply supplemental quantities. That standard requires reasonable diligence. Clause 3.2 of the SAMPLE SERVICES CONTRACT states expressly that Provider must use reasonable care and skill to comply with the Service Standards. Often, however, the matter is dealt with by implication.45 Common contexts are employment contracts and contracts for the supply of services. So far as the quality of performance is concerned, the duty is to use proper or reasonable care or skill in performance.46 [15-17] Standard of care. If there is a duty to exercise care, skill or diligence, the standard is a relative one. It is therefore analysed in terms of what is ‘reasonable’ in the circumstances. The promisor must exercise the degree of care, skill or diligence which a reasonable person in the position of the promisee would expect, having regard to the circumstances. However, there is an important difference between ordinary employees and professional people. Since the latter hold themselves out as possessing a special skill, the standard is that reasonably expected of a person exercising, or professing to have, that special skill. For example, if a client engages a solicitor to run a piece of litigation, there is no implication that the solicitor has undertaken to win the case. But there is a duty to exercise a special skill. Therefore, if a breach of contract is alleged, failure to exercise the degree of care and skill reasonably expected of the solicitor must be established. There are three further points. First, if the promisor professed special skill, evidence of usual practice is a useful guide to what should reasonably be expected. However, it is not conclusive that the promisor has acted in accordance with the usual practices of those in the relevant industry or profession.47 Second, breach of a contractual duty of care is established by proof of negligence. Often, the promisor will also be liable for the tort of negligence. For example, if a

[page 238] professional person is negligent, there may be concurrent liability in both contract and tort.48 Third, although it is always important to construe a contract to see if the parties have defined the standard of duty, fine distinctions should not be drawn.49 For example, in Transfield Properties Pty Ltd v Arlo International Ltd50 Mason J said that a ‘best endeavours’ clause ‘prescribes a standard of behaviour which is measured by what is reasonable in the circumstances’. So also does a ‘reasonable endeavours’ clause.

Special cases [15-18] Bailment contracts. Under a bailment contract, goods are lent or hired by one person (bailor) to another (bailee) who obtains possession of the goods. Usually, that is in return for the promise to pay a fee for use.51 The duty of the bailee is to take reasonable care of the goods. Subject to the terms of the contract, this is an incident of the bailor–bailee relationship which is an implied term of the contract.52 An ‘anomalous’53 feature of bailment is onus of proof. If the goods are lost, or returned in a damaged condition, it is presumed that the bailee breached its duty of care. The onus is therefore on the bailee (promisor) to disprove negligence, that is, to establish that the loss or damage occurred despite the exercise of reasonable care.54 In that respect, the position differs from the situations considered above,55 where the onus rests with the promisee. [15-19] Statutory standards. Where statute implies a term into a contract, or imposes a statutory duty, there may be an express statement of the standard of duty. For example, the consumer guarantee provided under s 60 of the ACL requires a supplier of services to a consumer56 to exercise ‘due care and skill’.57 If there is no express statement, the analysis made above is used to infer the applicable standard of duty. Accordingly, where the implied term or statutory obligation relates to the quality of goods, the supplier’s standard of duty is strict unless the statute says otherwise.58 [page 239]

Under some statutes59 the parties are free to agree to a less onerous duty than the legislative standard. However, that is not permitted by the ACL where goods or services are supplied to a consumer.60 The standards applicable to consumer guarantees are minimum mandatory standards. The only freedom of contract is to agree to a more onerous standard. [15-20] Mixed obligations. It is a little simplistic to think of all contracts as involving no more than an obligation for one party to do something in kind (deliver goods, provide services, and so on) and for the other to pay money.61 Often, the paying party will also have obligations. For example, the lessee of a warehouse may agree to keep it in good repair. Similarly, the principal focus for the discussion in this part of the chapter, namely, whether the standard of duty of a supplier of goods or services is strict or care-based, is also a little simplistic. The supplier will often be subject to obligations with different standards of duty — some strict, and others carebased. In other words, there are often mixed obligations. For example, in a work and materials contract the contractor must exercise reasonable care in doing the work, but is subject to a strict standard of duty to supply materials which are of good quality and reasonably fit for the purpose for which they are supplied.62 In fact, a promise expressed as a single obligation may create two or more duties with different standards. For example, if a valuer agrees to value a nominated property, the standard of duty in the valuation process is one of care. But there is a strict duty to ensure that the correct property is valued. Therefore, if the valuer values the next-door property that is the breach of a strict duty.63

QUICK QUIZ Short answer Explain the following concepts in relation to breach of contract: (1) failure to perform; (2) standard of duty; (3) onus of proof; and (4) reasonable time. True or false? (1) A agrees to paint B’s house on 1 April. A commences to paint on 2

April. A’s breach is late performance. [page 240] (2) A agrees to paint B’s house with Delux paint. Instead, A uses Average paint. A’s breach is non-performance. (3) A sale of land contract between V and P provides for completion on 1 May. If V validly terminates the contract on 2 May because P did not tender the purchase price on 1 May, P’s breach is late performance. (4) P agrees to buy land from V. Prior to completion V tells P that the land has been sold to X. P terminates the contract. V’s breach is anticipatory. (5) The usual standard of duty for a supplier of services is to exercise care or skill. Choose the best answer (1) A agrees to paint B’s house but abandons the job when A has painted eight of the nine rooms: (a) A’s substantial performance means that it has not breached the contract; (b) A has committed fraud; (c) A has defectively performed the contract; (d) A has committed an anticipatory breach; or (e) A has committed a breach by late performance. (2) Philip agrees to repair John’s air-conditioning unit: (a) Philip must use reasonable care when doing the work; (b) John can establish a breach of contract by proving that the unit does not work after Philip says the repairs are complete; (c) the contract is one of bailment; (d) Philip is in breach of contract if he does not supply a new unit; or (e) John must pay in advance for the work. (3) Lisa hires her personal computer to Sarah under a contract of bailment. When Sarah returns it, the computer does not work:

(a) Lisa breached the contract; (b) Sarah breached the contract; (c) the onus is on Lisa to prove that Sarah was negligent; (d) the onus is on Sarah to prove that she was not negligent; or (e) Lisa must make a claim against her insurer. (4) Under the SAMPLE SERVICES CONTRACT, if Client Ltd does not make a monthly payment on the due date: (a) it is a good defence for Client to prove that Provider breached the contract; (b) Client is in breach if it has $10,000 in its bank account; (c) Client is not in breach if it has only $100 in its bank account; (d) Client is not in breach if it promises to pay interest; or (e) Client is presumed to have breached the contract.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Carter’s Breach of Contract, §1-01. See Chapter 27. See [14-18]. See [14-07]. See [1-10]. (1951) 84 CLR 377 at 407–8. See Carter’s Breach of Contract, §§2-01–2-29. See [15-10]–[15-20]. Allan may be able to establish an excuse. See [15-15]. See Carter’s Breach of Contract, Chapter 2. See [19-02], [19-04]. See [1-10]. See Chapter 18. See eg Hart v MacDonald (1910) 10 CLR 417 at 428, 433. See also [15-02]. See also [15-03]. See Bowes v Chaleyer (1923) 32 CLR 159. See [14-03]. See [14-04]–[14-07]. See [14-03]. See [14-06]. See eg Cavallari v Premier Refrigeration Co Pty Ltd (1952) 85 CLR 20 at 26, 27. See eg Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 567–8; 41 ALR 441. See Postlethwaite v Freeland (1880) 5 App Cas 599. See Carter’s Breach of Contract, §§2-30–2-56. See [14-02], [15-02]. See [3-32] (illusory promise). Strictly, discretion relates to scope of obligation. (1951) 84 CLR 377 (see [24-07]), Cases and Materials, §20-06C. Sometimes an issue of mistake may

29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63

arise. See Chapter 24. See [15-02]. But see [15-19] (consumer guarantees). See [14-05]. See [15-06]. See [15-15]. See generally on construction Chapter 10. See [15-10]. See also [15-17], [15-19]. See eg Greaves & Co (Contractors) Ltd v Baynham Meikle & Partners [1975] 1 WLR 1095 at 1100–1 (consultant engineer). [1905] 1 KB 608. See also [15-19]. (1968) 120 CLR 516 (see [27-21]), Cases and Materials, §35-27C. See Chapter 11. See [20-05]. Contrast [15-14], [21-03]. See generally Chapter 20. (2014) 251 CLR 640; 306 ALR 25; [2014] HCA 7. See J W Carter, Wayne Courtney and Gregory Tolhurst, ‘“Reasonable Endeavours” in Contract Construction’ (2014) 32 JCL 36. See [15-13]. See also [9-08]. Rogers v Whitaker (1992) 175 CLR 479; 109 ALR 625. Compare the position under the civil liability legislation. See eg Civil Liability Act 2002 (NSW), s 5o. See Jane Swanton, ‘Concurrent Liability in Tort and Contract: the Problem of Defining the Limits’ (1996) 10 JCL 21. See further [27-29] (contributory negligence). But cf Cypjayne Pty Ltd v Babcock & Brown International Pty Ltd (2011) 282 ALR 152 at 163; [2011] NSWCA 173 at [68] (‘reasonable commercial endeavours’). (1980) 144 CLR 83 at 101; 30 ALR 201. A bailment may arise independently of contract. The bailee is still liable for negligence, proved as described in the text. See also [8-08]. See Hobbs v Petersham Transport Co Pty Ltd (1971) 124 CLR 220 at 241 per Windeyer J. See Carter’s Breach of Contract, §2-70. [15-16]–[15-17]. See [8-12]. See [8-13]. In practice, qualifications will usually relate to scope of the supplier’s duty. See eg ACL, s 54(6)(b) (goods damaged by abnormal use). That is true of both the sale of goods legislation and CISG. See [11-28]–[11-29]. See [14-02]. See eg Young & Marten Ltd v McManus Childs Ltd [1969] 1 AC 454. See also [8-08], [15-14]. See Platform Funding Ltd v Bank of Scotland Plc (formerly Halifax Plc) [2009] 1 QB 426; [2008] EWCA Civ 930.

[page 241]

Part G

Has the Contract Been Prematurely Discharged?

[page 242]

Chapter 16

Bases for Discharge [16-01] Introduction. This part of the book discusses ‘premature discharge’. The aim of this chapter is to set the scene for the discussion in Chapters 17–21. It does so by identifying when a contract is discharged. It is useful to start with the contract continuum.1 When expressed in the form: t1----------t2----------t3----------t4 the usual basis for saying that the parties are discharged is that they have reached point t4. When that is the position, discharge is by performance. We looked at that in Chapter 14. A simple example is a one-year contract between A and B for A to supply services to B. If all the services are supplied for one year, and also paid for, the contract is discharged by performance. In this part of the book, the assumption is that although the parties never reach point t4, they are nevertheless discharged. Since reaching t4 is the parties’ objective, discharge is ‘premature’. There are many reasons why this might occur, and therefore various bases for premature discharge. The most common reason is exercise by one party (the promisee) of a right to terminate the contract for breach by the other (the promisor) in the t3–t4 period. In the simple example above, if A does not provide any services for the first three months, and B then validly terminates the contract, the parties are discharged from further performance.

Summary Summarised as broad categories, there are five reasons for premature discharge: (1) later agreement; (2) exercise of an express right; (3) exercise of a common law right; (4) exercise of a statutory right; and (5) frustration of the contract.

These are discussed below, mainly from the perspective of whether discharge is associated with breach of contract. [page 243]

Concepts [16-02] The concept of discharge. The words ‘terminate’ and ‘discharge’ are generally synonyms. However, it is useful to use the latter to describe the effect of the former. Of course, when we speak of a contract being ‘terminated’, the word is not used literally. Rather, it is a shorthand metaphorical description. What is actually terminated (or ‘discharged’) is:2 The duty of the parties to perform (or further perform) all obligations which were unperformed at the time of termination.

Two points flow from this. First, contract terms can continue to regulate the rights of the parties. For example, the promisor can still rely on any exclusion clause even though the parties are discharged.3 Second, discharge is contrasted with rescission. The latter refers to exercise of a right to treat the contract as if it never existed. Looking at the contract continuum,4 conduct justifying rescission occurs in the t1–t2 period,5 rather than the t3–t4 period with which we are concerned. For example, assume X induces Y to enter into a sale of land contract by representing that the land is zoned ‘commercial’. In fact, X knows it is zoned ‘residential’. Because of X’s misleading conduct, Y is entitled to rescind the contract. Rather than being discharged, contract is taken never to have existed. Latin descriptions are sometimes used draw this contrast. Discharge by termination is said to operate ‘in futuro’ (for the future) and rescission ‘ab initio’ (from the beginning). [16-03] Discharge by agreement. One basis for saying that the parties are discharged is that they have entered into a second contract to terminate their existing contract. This form of discharge raises different issues from those discussed in this part of the book.6

[16-04] Discharge without breach. Putting discharge by agreement to one side, there are two principal bases for saying that a contract is discharged without breach: (1) exercise of an express right to terminate; and (2) frustration of the contract. Contracts often include express termination rights which do not depend on breach. For example, in the SAMPLE SERVICES CONTRACT, Client Ltd may terminate the contract by giving one month’s notice of termination — after expiry of the [page 244] Minimum Term. Such provisions do not call for separate treatment.7 The same is true of implied terms. For example, if a contract is of indefinite duration it may be implied that the contract can be terminated by giving reasonable notice.8 The doctrine of frustration operates where an unforeseen event puts the parties in a position which is substantially different from anything contemplated by their contract.9 In such cases, discharge is automatic.10 [16-05] Discharge for breach. The general rule is that breach of contract by a promisor does not entitle the promisee to terminate the contract.11 However, the right may arise under the contract, statute or the general (‘common’) law. The generic description is that discharge is for breach or repudiation.12 Unlike frustration, discharge for breach (or repudiation) is not automatic.13 Therefore, discharge only occurs if the promisee exercises its right to terminate. That is termed an ‘election’14 to terminate. [16-06] No rescission for breach. By contrast with misleading conduct,15 or another vitiating factor,16 there is no right under the general law to rescind a contract for breach or repudiation.17 However, the contract (or statute) may expressly confer the right. The logic is that since a breach occurs after the contract was agreed, the contractual allocation of risk is not affected. Therefore, breach does not permit either party to say the contract should be treated as if it never existed. By contrast, events such as misleading conduct occur prior to entry into the contract. Accordingly, one party is entitled to say that the contractual allocation

of risk is not binding: but for the relevant conduct, the contract would not have been agreed.

Contract continuum In terms of the contract continuum,18 breach or repudiation occurs in the performance period (t3–t4)19 and therefore does not impact on the formation period (t1–t2). By contrast, even though a right to rescind is exercised after point t2 is reached, the contract is treated as if it had never existed because consent to the contract was vitiated by events during negotiation. [page 245] Courts sometimes use the word ‘rescission’ generically, so as to include discharge.20 This has led to confusion.21 Since ‘discharge’ (‘terminate’ and ‘termination’) is different, it is better not to use ‘rescind’ (or ‘rescission’) to mean discharge.

Existence of the Right to Terminate [16-07] General. The discussion above establishes that premature discharge may occur in three ways. First, it may occur automatically under the doctrine of frustration. Second, the parties may agree to terminate the contract. Third, the promisee may have elected to exercise a right to terminate conferred by an express termination clause or by law. The balance of this chapter is concerned with the basic rules applicable to discharge by election. [16-08] Fact of breach not usually sufficient. Every breach of contract gives rise to a right to damages.22 However, a right to terminate for breach is exceptional.23 Such a right may be conferred by: ■ statute; ■ a termination clause — the right is expressly stated in the contract; or ■ the common law. We are mainly concerned with rights arising under the general law (‘common

law’) activated by ‘breach or repudiation’. There are three categories: (1) breach of condition; (2) breach of an intermediate term having sufficiently serious consequences; and (3) repudiation of the contract. The basic distinction is between reliance by the promisee on the breach of a particular type of term (condition or intermediate term) and reliance on particular conduct (repudiation). A promisor’s conduct is a repudiation if it is a refusal to perform the contract. Breach of a term may be evidence of repudiation. [16-09] Statute: discharge under the ACL. We saw earlier that the ACL confers rights on ‘consumers’24 under contracts for the supply of goods or services by imposing consumer guarantees on suppliers. Although somewhat analogous, the guarantees are not implied contractual terms. Therefore, the rights conferred by the ACL if goods or services do not conform to a consumer guarantee are statutory [page 246] rights. These include rights to terminate. Strictly, the rights are not activated by breach of contract. But, again, the position is analogous. A consumer is entitled to terminate a contract25 for a major failure26 to comply with a consumer guarantee.27 In relation to goods, what constitutes a major failure is set out in s 260 of the ACL. For services, the relevant provision is s 268. These provisions employ various concepts. The chief concept is that the goods or services ‘would not have been acquired by a reasonable consumer fully acquainted with the nature and extent of the failure’.28 Alternatively, the actual failure must have had a significant impact. [16-10] Election. For the parties to be discharged, the promisee must have a right to terminate and must elect29 to exercise the right. If there is no right to terminate, any attempt to do so will be wrongful (and ineffective). An ‘election’ is a choice between alternative or inconsistent rights.30 In the present context, a promisee who elects to terminate gives up an alternative right, namely, to continue to receive performance of the contract. Unless the contract

(or statute) states additional requirements, an election to terminate requires unequivocal words or conduct communicated to the promisor.31 The ACL includes express statements of what a consumer must do to exercise any statutory right to terminate the contract32 for failure of goods or services to comply with a consumer guarantee. [16-11] No obligation to terminate. The idea that discharge is a matter of election means that a promisee who is entitled to terminate is not obliged to do so. Nor can the promisor require the promisee to terminate the contract. Therefore, the promisee may choose to ‘affirm’ the contract and continue to perform, and to receive further performance. The decision to affirm may be made expressly. Alternatively, it may be an inference from what the promisee has said and done. It follows that affirmation may occur even though that was not the promisee’s actual intention. [16-12] Treatment. Having identified the various reasons for discharge, the next step is to explain their treatment. There are four points. First, Chapters 17 to 19 work through the categories of termination for breach or repudiation. That includes an additional category not so far mentioned — delay. Although discharge based on delay involves exercise of a right to terminate for breach or repudiation, for historical reasons it is usually treated separately. But it is useful to include some examples in the chapters on breach and repudiation. [page 247] Second, Chapter 20 discusses discharge by frustration. Third, the consequences (and scope) of discharge, that is, the impact of termination, are discussed in Chapter 21. Since the general consequences are the same whether discharge is for breach (or repudiation) or by frustration, it saves space to treat these in one chapter. Fourth, the concept of election applies to both discharge and rescission. It avoids unnecessary duplication to discuss that concept in a single chapter. Moreover, because the usual issue is whether the party entitled to terminate or rescind validly exercised the right, that is most appropriately located in defences.33

Tripartite Classification Introduction [16-13] Types of terms. To decide whether breach of a contractual term gives rise to a right to terminate under the common law, a tripartite classification34 is used. This classification applies to terms which state promises.35 It is derived from the English Court of Appeal’s decision in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd,36 and was adopted by the High Court in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd.37 The classification answers the question of when a promisee can terminate for breach of a term: (1) breach of condition — always; (2) breach of warranty — never; or (3) breach of intermediate term — only for fundamental breach. [16-14] Using the classification. Whether a term is a condition, warranty or an intermediate term is an issue of construction.38

Using Sample Contract Take, for instance, cl 4.2 of the SAMPLE SALE OF GOODS CONTRACT. This states that ‘Goods must be of the Contract Quality’. Given the definition in cl 1, Seller Ltd must deliver ‘best quality’ Goods. The term is breached if Seller delivers Goods of a lesser quality. Buyer Ltd is entitled to terminate the contract (by rejecting the goods) if cl 4.2 is a condition, but not if it is a warranty. If the term is intermediate (which seems most likely), Buyer must prove that the breach is ‘fundamental’, [page 248] in the sense that the goods actually delivered are worth substantially less than best quality goods. [16-15] Basis for classification. The basis for classifying a term as a condition, warranty or intermediate term is the intention of the parties. This means that terms are classified by construction of the contract.39 From the promisee’s

perspective, the crucial issue is whether the term is a condition. If so, there is an immediate right to terminate. There are two possibilities: express or implied40 agreement that the term is a condition. In practice, the former is unusual. Even if the parties have attached the label ‘condition’, the whole contract must be construed. The label is not conclusive; it is merely a factor to take into account. When the whole contract is construed in light of the decided cases, the term may be found to be a warranty or an intermediate term. Accordingly, in most cases the rationale for a conclusion that the term is a condition is an implied agreement. The question is what intention should be deduced by construing the whole contract. This is very much a lawyer’s issue. Although the conclusion necessarily depends on the particular contract at issue, case law has established certain rules of thumb.41

Scope of the Classification [16-16] Introduction. There are two important points about the scope of the tripartite classification: (1) it applies to both express and implied terms; and (2) it applies only to terms which state (or embody) promises. Therefore, non-promissory terms are not subject to the classification.42 [16-17] Statutory classification. If a term is implied by statute, it will usually also classify the term as either a condition or warranty. That can be seen in the sale of goods legislation. Most of the various implied terms43 are classified as conditions. For example, the term requiring goods sold by description to correspond with their description is implied as a condition. By contrast, the implied terms relating to quiet possession and freedom from charge or encumbrance are warranties.44 The parties to a sale of goods contract can agree that a term which would otherwise be implied as a condition (or a warranty) operates as a warranty (or [page 249] condition) or an intermediate term. Whether they have done so is a question of construction.45

[16-18] Criterion for application. A term is subject to the classification if it states or embodies a promise, and is therefore capable of being breached. A ‘promise’ is an undertaking of responsibility for the occurrence of an event or for a state of affairs.46 Therefore, a term which states that goods will be delivered on a particular day is subject to the classification. But so also is a term which says ‘this car is roadworthy’.47 The tripartite classification applies because the latter is a promise in the form of an undertaking of contractual responsibility for the truth of a fact.48 The position is different when a term merely states a contingency. Such terms refer to events which are not certain to occur, as where a contract for the sale of land states that performance of the contract is ‘subject to the Minister’s consent’. Unless fulfilment of the contingency is promised, the tripartite classification does not apply.49

Condition [16-19] Meaning within the tripartite classification. Under the tripartite classification, a condition is an essential term of the contract (or ‘vital promise’) in the sense that every breach, no matter how minor, entitles the promisee to terminate. In addition, the promisee can claim damages. In other contexts, ‘condition’ can have a different meaning. [16-20] Condition meaning ‘term’. To the layperson ‘condition’ is probably synonymous with ‘term of the contract’. For example, the front of a standard form contract to hire a car might say ‘for conditions see back’. On turning over the document the hirer will see terms of various types. Some will be definitions, some promises and others will regulate the rights of the parties. Only terms which embody promises are within the tripartite classification. Even for promises, the mere use of the word ‘condition’ to describe the terms does not mean that they are all essential terms.50 [16-21] Condition meaning ‘contingency’. A contingency is an event which is not certain to occur. This is an important concept in the context of conditional contracts.51 These are contracts which include terms such as ‘subject to finance’. However, contingencies can be found in any contract. Unfortunately, since the [page 250]

contingency is often described as a ‘condition’ we are not helped by terminology here. A common example is a term in an option52 contract.

Hypothetical O grants E an option to buy O’s motorcycle. Clause 1 states that the option must be exercised by 30 April. If E gives notice purporting to exercise the option on 1 May, that is not a breach of cl 1. The whole point of the option is that E was not willing to promise to buy the cycle. Notice by 30 April ‘conditions’ O’s obligation to sell. As there is no promise to exercise the option, cl 1 states a contingency. Since the contingency has not been fulfilled, E’s exercise of the option is invalid. Therefore, even though E did not breach the contract, O is not obliged to sell the cycle to E.53 No question of discharge for breach arises on the facts. Of course, a great many contracts include a promise that a contingency will be fulfilled. The tripartite classification then applies.54 If the term is a ‘condition’ (essential term), the promisee is entitled to terminate.55 But that will not always be the case. [16-22] Condition precedent. We have already met the ‘condition precedent’ concept, in the context of conditional contracts and in relation to recovery of the contract price.56 The expression is best approached, at least to begin with, by reference to the third meaning of condition (‘contingency’). The ‘condition’ referred to is an event, the occurrence of which affects the parties’ relations.57 The event may be ‘precedent’ to:58 (1) formation of the contract; or (2) performance of the contract. In order for the failure of the condition precedent to be a breach of contract, the condition must go to performance. Therefore, only (2) is relevant. The promise in relation to the condition (precedent) may be that it will occur. Failure of the condition is then a breach of contract. Alternatively, the promise may be to use reasonable endeavours. Even though the condition fails, there is a breach of contract only if is proved that the promisor did not exercise reasonable endeavours. Whereas the former is usually a condition (essential term), the latter is usually an intermediate term. But it all depends on construction of the contract.

[page 251] [16-23] Condition subsequent. The law suggests a contrast between a condition precedent and a ‘condition subsequent’. The latter relates to an event the occurrence of which brings to an end a contractual relationship or obligation to perform.59 The event is again a contingency. Whether an event is a condition subsequent or a condition precedent is a question of construction. However, because a condition subsequent can usually be formulated as a condition precedent, the difference between the concepts is largely semantic.60

Warranty [16-24] Meaning in the tripartite classification. Under the tripartite classification, breach of a ‘warranty’ confers a right to claim damages, but not a right to terminate the contract. A warranty is therefore an ‘unimportant promise’ (or ‘non-essential term’). However, there are two other meanings. When used in a contract, the intended meaning of the word is a question of construction.61 [16-25] Warranty meaning ‘condition’. At one time it was quite common to speak of discharge for breach of warranty.62 In other words, ‘warranty’ meant ‘condition’ in the sense of essential term. This meaning of ‘warranty’ fell from favour once the sale of goods legislation was enacted. But it was formerly common in relation to charterparties, and is still used for warranties in contracts of insurance.63 Care must therefore be taken when reading cases or statutes in the insurance context.64 [16-26] Warranty meaning ‘term’. Once breach of warranty came to be regarded as a breach of contract,65 the word ‘warranty’ was often used in a more general sense, to describe any binding promise. This usage can be seen in the description of pre-contractual statements which operate as terms of the contract.66 Because of the presence of an intention to guarantee the truth of a statement of fact, such statements are ‘warranties’, rather than representations.67 It is also common practice for commercial contracts to use the word ‘warranty’ in this general sense. Clause 6 of the SAMPLE SERVICES CONTRACT illustrates this. It states several ‘warranties’ by Provider Ltd. The description does

not prevent a court construing any as ‘conditions’ (essential terms) or intermediate terms.68 [page 252]

Intermediate Term [16-27] Derivation. The concept of an intermediate term69 has been used to explain the decision in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd,70 where a time charterparty stated that the vessel was ‘in every way fitted for ordinary cargo service’. The term was breached: the vessel had an insufficient and incompetent engine room staff. The charterers’ right to terminate the contract for breach of this term was held to depend on the seriousness of the breach. Diplock LJ said71 the term was too ‘complex’ to be classified as a condition (essential term) or a warranty (non-essential term). Such terms are ‘intermediate’, in the sense that they occupy the middle ground between a condition and a warranty. For an intermediate term, some breaches will have minor consequences, but others serious consequences. A promisee is entitled to terminate only if the consequences are serious:72 there must be a fundamental breach. Since the breach in Hongkong Fir was not fundamental, the charterers had no right to terminate.73 Recognising the intermediate term concept introduced a degree of flexibility which the original bipartite (condition–warranty) distinction lacked.74 The tripartite classification can be used for all contracts, including a sale of goods.75

QUICK QUIZ Short answer (1) When does a right to terminate arise? (2) In what circumstances does a contract terminate automatically? (3) Explain the difference between a condition and a warranty. (4) Explain how the ‘tripartite classification’ works. True or false?

(1) (2) (3) (4)

If a contract is discharged it is treated as if it never existed. A condition precedent is the same thing as a warranty. One meaning of the word ‘condition’ is ‘essential term’. Breach of an intermediate term may justify termination of the contract. [page 253]

Choose the best answer (1) In the context of breach of contract, ‘election’ refers to: (a) the process of choosing whether or not to terminate the contract; (b) interpretation of the contract; (c) the process of distinguishing between a condition and a warranty; (d) the choice between claiming damages or specific performance; or (e) none of the above. (2) A contract may be discharged: (a) for breach of condition; (b) for breach of an intermediate term; (c) in exercise of an express right; (d) for repudiation; or (e) all of the above. (3) Clause 1 of a contract between A and B states that A ‘warrants’ that the car which B is purchasing has travelled only 1000 kilometres. Under the tripartite classification, cl 1: (a) is not a warranty; (b) may be an intermediate term; (c) may be a condition; (d) all of the above; or (e) none of the above. (4) If a clause provides that the sale of a ship is ‘subject to satisfactory survey’, the clause states:

(a) (b) (c) (d) (e)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

a promise; an essential term; an intermediate term; a warranty by the buyer; or a contingency.

See [1-10]. See Carter’s Breach of Contract, §§3-43, 12-01. See [11-10]. See [11-01]. See [22-01], [22-02]. See [3-18]–[3-30] (renegotiation), [22-05]–[22-09] (rescission by agreement), [35-23] (lack of writing). See also [20-05] (force majeure clause). See eg Winter Garden Theatre (London) Ltd v Millennium Productions Ltd [1948] AC 173. See Chapter 20. See [20-02]. See [16-08]. See J W Carter, ‘Discharge as the Basis for Termination for Breach of Contract’ (2012) 128 LQR 283. For express rights which provide for automatic discharge see Carter’s Breach of Contract, §10-03. See further [16-10]. See the example in [16-02]. See [22-02]. See McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 477; Johnson v Agnew [1980] AC 367 at 383. See [16-01]. Exceptionally, an anticipatory breach is based on conduct in the period between t2 and See [1505]. See eg Associated Newspapers Ltd v Bancks (1951) 83 CLR 322 at 336. See Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 at 844. See the Latin descriptions in [16-02]. See [15-01], [27-10]. See [15-01]. See [8-12]. In relation to a supply of goods, this is expressed as a right to reject the goods. See ACL, ss 259(3), 267(3). See also ACL, ss 259(2), 267(2) (termination right for failure to remedy defects). ACL, ss 260(a), 268(a). See also [16-05], [21-01]. Contrast discharge by frustration. See [16-04]. See [33-03]. See [33-09]. See ACL, ss 259, 267. See Chapter 33. See also [27-35]–[27-38]. See Carter’s Breach of Contract, Chapter 4. See [16-18].

36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75

[1962] 2 QB 26 (see [16-27]). (2007) 233 CLR 115; 241 ALR 88; [2007] HCA 61. See [16-15]. See eg Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286; L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235. See generally on construction Chapter 10. This does not mean that the court implies a term. See [17-08]. See eg [19-11]. See [16-18]. See [8-14]. Not all statutes give ‘warranty’ the same meaning as the sale of goods legislation. See [16-25]. See [17-16]–[17-18]. See [1-02]. Cf Maredelanto Compania Naviera SA v Bergbau-Handel GmbH (The Mihalis Angelos) [1971] 1 QB 164 (‘expected ready to load’ clause in charterparty). It can also be termed, somewhat confusingly, a ‘warranty’. See [16-26]. See further [16-21]. See also [16-15]. See [4-20]–[4-29]. For the concept see [2-10]. See United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd [1968] 1 WLR 74. Cf Tricontinental Corp Ltd v HDFI Ltd (1990) 21 NSWLR 689. See also [16-21]. See [16-18]. See Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549; 70 ALR 641. See [14-05], [14-16]. See further [16-23] (condition subsequent). See generally J W Carter, ‘Conditions and Conditions Precedent’ (1991) 4 JCL 90. See [4-23]–[4-26]. See [4-20]. At one time the contrast was of significance in pleading contract claims. See [16-15]. See Carter’s Breach of Contract, §§1-20, 4-14–4-15. See Marine Insurance Act 1909 (Cth), s 39(1). For other contracts of insurance the right to terminate for breach of warranty is modified by the Insurance Contracts Act 1984 (Cth), s 54. And old charterparty cases. See eg Behn v Burness (1863) 3 B & S 751; 122 ER 281. This occurred towards the end of the 18th century. See [1-35]. See [7-05]. See [7-10]. See [16-15]. Intermediate terms are also referred to as ‘innominate’ terms. [1962] 2 QB 26, Cases and Materials, §13-06C. [1962] 2 QB 26 at 70. See [17-26]–[17-29]. See [17-29]. See Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115 at 139; 241 ALR 88; [2007] HCA 61 at [52]. Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Nord) [1976] QB 44. See J W Carter and C Hodgekiss, ‘Conditions and Warranties: Forebears and Descendants’ (1977) 8 Syd LR 31. See now Sale of Goods Act 1923 (NSW), s 4(5).

[page 254]

Chapter 17

Discharge for Breach of Term [17-01] Concerns. As was explained earlier,1 a right to terminate may be conferred by: ■ statute; ■ a termination clause; or ■ the common law. This chapter discusses the principles used to decide whether one party (the promisee) has a right to terminate a contract for breach by the other (the promisor) of a contractual term. If the right exists, an election to terminate the contract discharges the parties from further performance.2

Express and Statutory Rights [17-02] Express rights. Any contract may include a termination clause, that is, a provision which expressly confers a right to terminate.3 Typically, the trigger events include breach of a term of the contract. However, a termination clause may be triggered by events other than breach. Termination clauses are very common. But they rarely say that a contract can be terminated for every breach of any term of the contract.4 Usually, they are restricted to ‘material’ breaches, or the breach of particular terms. Often, the promisee is also required to provide the promisor with an opportunity to ‘remedy’ its breach. This is illustrated in the SAMPLE SERVICES CONTRACT: (1) under cl 7.3(a), either party may terminate if the other party commits a ‘material breach’; and (2) under cl 7.3(b) Provider Ltd may terminate if Client Ltd does not remedy its default by paying an overdue Fee within five days of Provider demanding payment by notice. The importance of termination clauses is that they render the rights of the parties more certain. They set out more precisely than the common law the

circumstances in which the contract can be terminated for breach. In theory, a promisee need [page 255] only be satisfied that the clause has been activated, and carry out the steps set out in the clause for exercise of the right. In practice, things are often more complex, sometimes because of poor drafting. Termination clauses often deal not only with the right of termination but also with the consequences of exercise of the right. The question may then arise whether these provisions are effective, or whether a court may grant relief against their operation.5 Another question is whether the clause displaces the common law termination bases. However, almost invariably termination clauses are construed as conferring additional rights.6 For example, in L Schuler AG v Wickman Machine Tool Sales Ltd7 the fact that there was an express right to terminate for ‘material’ breaches of the contract (under cl 11) did not prevent the question being raised whether a common law right of termination was enjoyed because a particular term (cl 7) was a condition. [17-03] Statutory rights. Statutory rights to terminate for breach of a contractual term are few in number. In the commercial context, the sale of goods legislation might be said to confer a right of termination for breach of ‘condition’.8 In truth, however, the legislation merely expressly recognises a common law right. Statutory termination rights exist under the ACL. However, the basis is failure to comply with a consumer guarantee, rather than the breach of a contractual term.9

Breach of Condition Introduction [17-04] Distinctions. In analysing breach of condition it is helpful to draw two distinctions: (1) between express and implied terms; and

(2) within each category, between: • an express agreement that the term is a condition; and • an implied agreement to the same effect. The only clear case of an express agreement that a term is a condition is where the contract states that time is ‘of the essence’.10 For example, if a contract for the sale of land says that time is of the essence, the term stating the time when completion must occur is a condition. [page 256] [17-05] Issue of construction. Whether a particular term is a condition depends on the intention of the parties. The question is whether the parties intend every breach to give rise to a right to terminate.11 For written agreements, the question is answered by construction of the contract.12 The general rules of construction apply. Therefore, ‘extrinsic evidence’13 is not admissible. In Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd14 Jordan CJ referred to a type of condition of which only a substantial breach gives rise to a right to terminate. Today, such a term is regarded as an intermediate term. [17-06] Conditions and termination clauses. Assume that a termination clause says that the contract may be terminated for any breach of a particular term. Superficially, this looks to make the particular term a condition, that is, an essential term.15 However, this is not correct: conferring an express right to terminate is not the same thing as defining the nature of a term. The converse is also true. Therefore, defining the nature of a term is not the same thing as conferring an express right to terminate. Accordingly, in Legione v Hateley16 Mason and Deane JJ pointed out that a clause stating that time was ‘of the essence’ defined the time stipulations to which it applied as conditions. It did not expressly confer a right to terminate for delay.17

Express Terms Express agreement [17-07] Use of the word ‘condition’. Because the word ‘condition’ has a variety of meanings,18 the mere use of that word in a clause does not of itself

mean that the parties have expressly agreed that the term is a condition (‘essential term’). Similarly, the fact that a sale of goods contract describes a particular term as a ‘condition of sale’, does not establish that the term is a condition in the sense of essential term. In every case, the whole contract must be construed in order to establish the parties’ intention. In L Schuler AG v Wickman Machine Tool Sales Ltd,19 a term requiring a distributor to make weekly visits to clients used the word ‘condition’ (‘shall be [a] condition’). The term was construed as an intermediate term. That was because construction of the contract as a whole indicated the parties did not intend every breach of the term to give rise to an immediate right to terminate the contract. [page 257]

Implied agreement [17-08] The concept. A term will be classified as a condition if, considered in context, the construction of the contract as a whole shows that to be the parties’ intention. The parties are then taken to have impliedly agreed that the term is a condition. This does not involve the implication of a term. A term will be classified as a condition if every breach is likely to have serious consequences. However, a term may be a condition even though that is not the case. In the commercial context, terms which appear to be quite insignificant are often construed as conditions. The rationale is the need for certainty in commercial contracts. [17-09] Relevant considerations. Although the question whether a term is a condition depends on construction of the particular contract at issue, the cases include ‘tests’ which are applied to decide the issue. Jordan CJ stated the following test in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd:20 [W]hether it appears from the general nature of the contract considered as a whole … that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict … performance of the promise … and that this ought to have been apparent to the promisor.

The test was approved by the High Court in Associated Newspapers Ltd v Bancks.21 In Bentsen v Taylor Sons & Co (No 2),22 Bowen LJ said that there is ‘no way of

deciding’ whether a term is a condition: [E]xcept by looking at the contract in the light of the surrounding circumstances, and then making up one’s mind whether the intention of the parties, as gathered from the instrument itself, will best be carried out by treating the promise as a warranty sounding only in damages, or as a condition … by the failure to perform which the other party is relieved of his liability.

This test was adopted by the High Court in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd.23 The fact that the High Court has used two different tests shows that there is no single test. (Indeed, many other tests could be quoted.) Accordingly, the assistance provided by ‘tests’ such as those quoted above lies in indicating factors which are likely to be indicative of what the parties, as reasonable persons, intended.24 Most of the main factors are discussed below. [page 258] [17-10] Prior cases. Whether a term is a condition is an issue of law. Therefore, prior cases are important. Many cases have involved the construction of standard forms prepared by a third party such as a trade association. Once a term in the standard form has been construed as a condition, unless they amend the form, parties who use it are regarded as having impliedly agreed to that construction.25 In order to promote certainty, the same approach may be taken if the term in issue is similar to one which has previously been construed as a condition — unless there is some distinguishing feature. So, in Maredelanto Compania Naviera SA v Bergbau-Handel GmbH (The Mihalis Angelos),26 a term in a charterparty which was similar to a term construed as a condition in earlier sale of goods cases was similarly construed. [17-11] Motivation for entry into the contract. In some cases, the key factor has been the objective motivation of the promisee when entering into the contract. A term is a condition if it is clear from construction of the contract (in light of context) that the promisee would not have agreed to the contract but for an implicit assurance of strict compliance with the term.27

In Associated Newspapers Ltd v Bancks,28 Bancks contracted to supply weekly drawings of a cartoon known as ‘Us Fellers’ to Associated Newspapers. Its principal character was ‘Ginger Meggs’.29 Associated Newspapers promised to publish the cartoon on the front page of the comic section. However, on several occasions the cartoon was published on another page.30 Bancks’s argument that the term was a condition was accepted by the High Court. The court noted that:31 The [promise] is really a composite undertaking comprising three ingredients: (1) to present a full-page drawing; (2) to present it weekly; and (3) to present it on the front page of the comic section. It is impossible to attach different values to [Bancks’s] obligation and [Associated Newspapers’] undertaking. [Associated Newspapers] would not have employed [Bancks] unless it had been assured that [he] would perform his promise, and [Bancks] would not have made the promise unless he was assured that his work would be published in a particular manner.

Given the importance of the reputation of Bancks, the court thought that it ought to have been apparent to a reasonable person in the position of Associated Newspapers that Bancks would not have entered into the contract but for an implicit assurance of [page 259] strict compliance with the promise to publish on the front page of the comic section. Accordingly, Bancks was entitled to terminate for breach of condition. [17-12] Form and structure. It is necessary to construe any term by reference to the contract as a whole, taking into account the particular words used and any relationship between the terms, as well as the context of the contract. Part of this process is an attempt to form an appreciation of how the contract is intended to work, including any interrelationship between its terms. In an ideal contractual world all contracts would be internally consistent. Each term would be clearly expressed, and any intended interrelation between terms apparent. Unfortunately, many contracts lack internal consistency, and are not clearly drafted. This may make it difficult to be confident about the parties’ intention as to whether a particular term is a condition.

Nevertheless, form and structure can be informative. The main aspects of this are: ■ form of expression — the more emphatic the words used the more likely it is to be seen as a condition; and ■ interrelation between terms — if the term at issue assumes the performance of another term which is a condition, that connection justifies the inference that the term at issue is a condition.

In Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd32 Tramways contracted to advertise Luna Park on the roof boards of Sydney trams. One term said: We [ie Tramways] guarantee that these boards will be on the tracks at least eight hours per day throughout your [ie Luna Park’s] season.

Applied literally, the term was very onerous. Every tram would have to be on the tracks for at least eight hours per day. Given that Tramways did not control the movement of the trams, and that some trams were bound to be off the tracks for repairs, and so on, it is difficult to understand why the term was drafted as it was. Unsurprisingly, the High Court did think the parties intended the clause to be applied literally. It construed the term as stating an obligation to ensure that every board was on the tracks for substantially eight hours per day. Accordingly, Latham CJ said33 the term ‘would not … be broken by small occasional deficiencies.’ Even so, it was still onerous and, even on the construction adopted by the court, had been breached. Luna Park alleged that the term was a condition. A majority of the court agreed. Key factors were the use of the emphatic word ‘guarantee’ and agreement to a specific time schedule. Latham CJ said:34 [page 260] The essential character of the clause in question appears both from its own terms and from the circumstances in which the contract was made. In the first place the words ‘we guarantee’ are particularly suited, in a contract drawn by laymen, to emphasise the importance of the clause which they introduce.

Associated Newspapers Ltd v Bancks35 illustrates interrelation between terms.

The court was influenced by the connection between Bancks’s promise to furnish weekly drawings and Associated Newspapers’ promise to publish them on the front page of the comic section. Since the former obligation was a condition, it was appropriate to construe the latter as a condition. By contrast, in L Schuler AG v Wickman Machine Tool Sales Ltd36 there was a contractual right to terminate (under cl 11) for a ‘material’ breach of the contract. That was an indication that the term in issue (cl 7) was not a condition. Construction of cl 7 as a condition would have meant that the manufacturer could terminate for every breach of cl 7, even though the breach might not be ‘material’.37 [17-13] Likely consequences of breach. If it can be predicted that every breach of a term is likely to be seriously prejudicial to the promisee, the term will be construed as a condition.38 However, if the degree of seriousness will vary according to the circumstances, the term is more likely to be construed as intermediate. Care must be taken with this factor. Whether a term is a condition is an issue of construction. Therefore, the actual (proved) consequences cannot be taken into account. That is why this factor focuses on consequences likely to flow from any breach of the term.

In Ankar Pty Ltd v National Westminster Finance (Australia) Ltd,39 a complex security deposit agreement secured the obligations of a lessee of goods from National Westminster (NW). Ankar deposited money with NW to secure payment by the lessee under the goods lease. Therefore, if the lessee failed to pay, NW could use the money deposited. Two terms of the security deposit agreement were breached. These stated promises by NW (promisor) in favour of Ankar (promisee): (1) clause 8 — a promise by NW to use best endeavours to ensure that the goods remained in the lessee’s possession; and (2) clause 9 — a promise by NW to notify Ankar of defaults by the lessee and to consult with Ankar to determine the appropriate course of action. Because each term was a condition, the High Court held that Ankar (as promisee) was justified in terminating the contract. In part this construction conclusion was based on

[page 261] the reasoning that breach by NW of either clause was likely to be seriously prejudicial to Ankar. If the lessee defaulted, Ankar would come under liability to NW. Whether the lessee defaulted, and consultations in relation to any default, were very important matters for Ankar. [17-14] Nature of term, subject matter and contract. One result of over 150 years of decisions on contractual terms is the ability to make general statements about the probable classification of terms, based on their nature and the subject matter with which they deal. This composite factor covers a lot of ground — and a large number of cases. Expressed in summary form, the main features are: ■ quality — because a term relating to the quality of the subject matter of a contract can be breached in various ways, it is unlikely to be a condition. Construction as an intermediate term is more likely;40 ■ description — a term relating to the description of the subject matter is often construed as a condition;41 ■ subject matter — terms relating to perishable goods or assets which have a fluctuating value are likely to be conditions;42 and ■ time — in a commercial contract, a term stating the time of performance (except the time for payment) is generally construed as a condition.43 However, the ‘rules’ stated above are only rules of thumb. Ultimately, the issue depends on the construction of the particular contract. Other factors may need to be taken into account. [17-15] Reasonableness and justice. Classification of a term is also a conclusion about the rights of the promisee. If a term is construed as a condition, the promisee can claim damages and terminate the contract as well. The reasonableness of the latter aspect must be taken into account when construing the contract. Accordingly, whether construction of the promise at issue as a condition would lead to a result which is objectively unreasonable is a factor to take into account.44 This influenced the decision in L Schuler AG v Wickman Machine Tool Sales Ltd.45 If cl 7 was a condition, the manufacturer could terminate the contract if the distributor missed one out of the many hundreds of client visits it

agreed to make. That result was so unreasonable that the court thought it was unlikely to have been intended by the parties. Accordingly, cl 7 was not a condition. [page 262] If a damages claim is likely to provide adequate protection for the promisee, a term is more likely to be construed as a warranty or intermediate term. However, if it is clear that damages would be inadequate protection from the consequences of breach, a court will be inclined to construe the term as a condition.46 Ankar Pty Ltd v National Westminster Finance (Australia) Ltd47 is an example. If National Westminster breached the terms in issue, the court did not consider that a damages award would always achieve a just result.

Implied Terms [17-16] Introduction. Most terms are implied:48 ■ by law — statute or the common law; or ■ in fact — to give business efficacy to the contract. The relevant statutory implied terms are those provided for by the sale of goods legislation.49 These are classified as conditions or warranties.50 If a promise is implied at common law, or to give business efficacy, classification may be a separate issue. But in all cases in which an implied term has an established classification, the construction question is whether the parties have agreed to a different classification. Since the consumer guarantees under the ACL are not implied terms,51 no issue of classification arises.52 [17-17] Express agreement. It is open to the parties to a sale of goods contract to agree expressly that the legislative classification does not apply. For example, the contract may say expressly that a term which would otherwise be implied as a warranty is a condition.53 The same is true for any term implied under the common law which has an established classification. But it is important not to be confused by labels. Often, terms implied (in law) as incidents of particular classes of contract are given descriptions that are purely ‘conventional’.54 For example, the obligation of

seaworthiness when a ship is chartered is described as an ‘implied warranty’ of seaworthiness.55 However, it is classified as an intermediate term unless the parties have expressly agreed otherwise. If a term is implied in fact, there is unlikely to be any express agreement about how it should be classified. The issue is one of implied agreement. [page 263] [17-18] Implied agreement. Whether the parties impliedly agreed that a particular implied term should be classified as a condition depends on construction of the contract as a whole. The factors referred to above56 are therefore relevant. Terms implied by the sale of goods legislation are also classified by the statute, usually as conditions. By entering into the contract, the parties are taken to have adopted that classification. Although in theory construction of the contract as a whole might lead to the conclusion that an implied condition should be classified as a warranty, that would be most unusual. As noted above, an express agreement is required. If a non-statutory term is implied, whether in law or in fact, there may be an implied agreement that the term is a condition. For example, in Shepherd v Felt and Textiles of Australia Ltd57 an agency contract included an implied term that the agent would render faithful service to his principal. This term was a condition because any breach was likely to have serious consequences for the principal. Moreover, the relationship between a principal and agent is one of confidence, and breach of the term would show that the principal could no longer trust the agent to act in the principal’s best interests.

Breach of Intermediate Term Terms Which Are Intermediate Express terms [17-19] Classification. Terms are classified as intermediate if that was the intention of the parties, as expressly or impliedly stated in the contract.58 General principles of construction59 apply. But the decided cases are also important.

In practice, classification of a term as intermediate tends to be a negative process. If construction of the contract shows that the term is not a condition, it is assumed to be intermediate.60 However, if the promisor argues that the term is actually a warranty, the contract must be construed to reach a conclusion on the issue. [17-20] Express agreement. In theory a contract could say expressly that a term of a contract is an intermediate term. In practice, this does not occur. But it is common for a termination clause to achieve a similar result. Assume that a termination clause entitles the promisee to terminate a contract for a ‘substantial’ breach of certain terms. Since the promisee must prove a serious breach, it is in much the same position as if the parties had agreed expressly that the terms to which the clause applies are intermediate in nature. However, strictly [page 264] speaking, the parties have not classified those terms as intermediate. Instead, they have agreed on the circumstances in which an express right to terminate arises.61 [17-21] Implied agreement. Most terms are classified as intermediate because construction of the contract shows an implied agreement to that effect. In addition, as mentioned above,62 if construction shows the term at issue is not a condition, it is assumed that the term is intermediate. For example, in Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Nord)63 cl 7 of the contract required goods to be shipped ‘in good condition’. The court concluded that the term was not a condition. It was therefore presumed to be intermediate. There is a more general basis. If a term is capable of being breached in various ways, with variable degrees of seriousness for the promisee, it will be inferred that the parties intend the term to operate as an intermediate term. That was the rationale for the decision in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd.64 Some breaches of the seaworthiness term would have major consequences, such as causing the vessel to sink. But others would have minor consequences, such as delaying the vessel. Similarly, the quality term in The Hansa Nord could be breached in various ways.

Implied terms [17-22] Classification. There are no examples of statutory terms implied as intermediate terms. However, there are two analogous situations. First, art 35 of CISG creates implied duties for sellers of goods. The general criterion for discharge under CISG is proof of ‘fundamental breach’.65 Second, consumer guarantees under the ACL66 are not implied terms.67 However, if goods or services fail to conform to a consumer guarantee, there is a statutory right to terminate when a ‘major failure’ is proved.68 Whether a non-statutory implied term operates as an intermediate term depends on the intention of the parties. An implied term which is a promise to use reasonable endeavours, or reasonable care and skill, is usually an intermediate term.69

Degree of Seriousness Required [17-23] Concept. Any breach of a condition entitles the promisee to terminate the contract. The breach of an intermediate term is different. Whether the promisee [page 265] is entitled to terminate requires analysis of the consequences of the promisor’s actual breach. The consequences of the breach must be serious, that is, amount to a ‘fundamental breach’.70 It is necessary to explain when that criterion is satisfied.71 An important feature is that both actual and foreseeable consequences may be relied on. [17-24] Interaction with express rights. Contracts often include termination clauses under which a promisee is entitled to terminate for a ‘material’ or ‘substantial’ breach.72 If the promisor breaches an intermediate term, the express criterion may be more easily satisfied than ‘fundamental’ breach. That would certainly be the case if the criterion is ‘material’ breach. Accordingly, in order to justify termination under the express provision the promisee does not need to prove fundamental breach.73 However, termination clauses usually require the promisee to provide the

promisor with an opportunity to remedy the breach.74 If the promisee did not follow that procedure, the termination clause cannot be relied on. But if the promisee can establish a fundamental breach, it can fall back on the common law right because that does not require to the promisor to be given any opportunity to remedy. [17-25] Fundamental breach. In order for the promisee to be entitled to terminate for breach of an intermediate term, the breach must be sufficiently serious.75 Criteria such as ‘fundamental breach’,76 and proof that the breach must go to the ‘root’ of the contract,77 emphasise that the breach must be serious. But in themselves the criteria are somewhat indeterminate. Content is given to the criterion by postulating a comparison. That comparison is between the position of the parties before breach of the intermediate term and their position once the consequences of the breach are taken into account. If comparison shows there is a substantial difference, the promisee is entitled to terminate. This process leads to considerations such as:78 ■ whether the breach makes further commercial performance of the contract impossible;79 and [page 266] ■ whether the breach deprives the promisee of substantially the whole benefit of the contract,80 or substantially increases its burden of performance. The common law requirement (fundamental breach) is difficult to satisfy. Although ‘fundamental breach’ is also the criterion stated in art 25 of CISG, it is more easily satisfied.

Actual and Foreseeable Consequences [17-26] Introduction. In deciding whether a fundamental breach of an intermediate term has been proved, regard may be had to both actual and foreseeable consequences. Actual consequences are those which have in fact occurred. Foreseeable consequences are those which were not unlikely to occur

as a result of the breach — determined at the time when the promisee terminated the contract. It is legitimate to add together actual and foreseeable consequences. Accordingly, if neither would justify termination, their combination may show the breach was fundamental. But Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd81 illustrates that this will not always be the case. [17-27] Seriousness. In classifying a term as a condition, warranty or intermediate term, the question is one of construction. Therefore, the actual breach cannot be taken into account.82 Moreover, once a term has classified as a condition, the actual consequences do not matter: the right to terminate flows from the nature of the term. By contrast, a fundamental breach must be proved by reference to the facts of the case — by analysis of the loss or damage sustained by the promisee as a matter of fact. For example, in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd83 an alternative ground for the decision was that, because the proved breaches by National Westminster had serious consequences, Ankar was entitled to terminate even if the terms at issue were intermediate. [17-28] Actual consequences. A fundamental breach is proved if the actual consequences are sufficiently serious. The position under the contract must be compared with the position following breach. [page 267]

In Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd,84 Koompahtoo agreed to make land available for development by Sanpine. The parties entered into a joint venture contract under which Sanpine agreed to do various things, including: ■ co-ordinate the development; ■ seek funding; ■ maintain records and documents; ■ formulate and regularly update a development program; and ■ make monthly reports.

In addition, under cl 16.5(a) Sanpine promised to ‘ensure that proper Books are kept so as to permit the affairs of the Joint Venture to be duly assessed,’ and enable Koompahtoo to ‘extract … information in relation to the affairs of the Joint Venture’. Sanpine breached a great many of its obligations in significant respects. This made it impossible for Koompahtoo to assess the financial position of the development. The High Court therefore held that Koompahtoo was justified in terminating the contract. Gleeson CJ, Gummow, Heydon and Crennan JJ said:85 Even if one were to accept that all of the contractual obligations with which Sanpine failed to comply were inessential in that, on the true construction of the contract, not every breach would justify termination and that the obligations were intermediate terms … nevertheless … the breaches of Sanpine were in a number of respects gross, and their consequences were serious. … [T]he breaches found by [the trial judge], and in particular the breaches of cl 16.5, went to the root of the contract … [B]reaches of that order deprived Koompahtoo of a substantial part of the benefit for which it contracted. Such breaches justified termination.

A contrasting decision is Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Nord).86 Bremer agreed to sell a quantity (12,000 tons) of citrus pulp pellets to be used in making animal feed. Cehave refused to accept the pellets when they arrived. Its complaint was breach of cl 7, which required the goods to be shipped ‘in good condition’. It was found that 1300 tonnes were substantially affected by heat. For the balance, the damage was minor (between 2% and 5%). Although the goods were then disposed of by auction, Cehave later acquired the goods and used them as an ingredient in cattle feed. This purpose was not substantially different from that originally envisaged (animal feed). Accordingly, there was no fundamental breach by Bremer. [17-29] Foreseeable consequences. Whether serious consequences were foreseeable must be decided objectively, at the time of the promisee’s election to terminate. Regard may be had to loss or damage not unlikely to be suffered by [page 268] the promisee. Particularly serious consequences, such as ruining the promisee’s commercial reputation, are sufficient.87 So also is likelihood of physical injury to the promisee.

As noted above,88 foreseeable and actual consequences can be combined.

Leading case Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd89 illustrates that the difficulties which confront a party relying on foreseeable consequences arise not so much because of the need for clear evidence (looking into the future is never easy!) but because the fundamental breach criterion is difficult to satisfy. The breach of the seaworthiness term90 in the charterparty led to the vessel being laid up for repairs on several occasions. During these periods, the vessel could not be used by the charterers to earn money. When they purported to terminate the contract some further delay was likely. However, the main reason for the delay in the first place was the incompetent crew. The replacement of the chief engineer meant any further delay was unlikely to be significant. Therefore, even when actual and foreseeable delay were combined, it was held that the shipowners’ breach was not sufficiently serious. An important consideration was that the charterers did not have to pay hire for the vessel while it was being repaired. Accordingly, although they sustained losses by not being able to earn money while the vessel was being repaired, the charterers’ burden of performance was not substantially increased.

QUICK QUIZ Short answer (1) When can a contract be terminated for breach of a contractual term? (2) What is a termination clause? (3) What is the difference between an express agreement that a term is a condition and an implied agreement to that effect? (4) Is there a ‘test’ to determine whether a term is a condition? (5) How serious must a breach be for a right to terminate to arise for breach of an intermediate term?

True or false? (1) In the SAMPLE SERVICES CONTRACT, cl 6(a) would be classified as a warranty. [page 269] (2) Adequacy of damages may be a relevant factor when deciding whether a term is a condition. (3) If a term is alleged to be a condition, the matter is resolved by reference to the actual consequences of breach of the term. (4) In a commercial contract, a term may be a condition for reasons of commercial certainty. (5) The statutory classification of an implied term as a condition is mandatory. Choose the best answer (1) In Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Nord) [1976] QB 44 (see [17-28]), the court held that: (a) cl 7 was a condition; (b) cl 7 was a warranty; (c) cl 7 was not a condition; (d) Cehave was entitled to terminate; or (e) the breach went to the ‘root’ of the contract. (2) If a contract includes a termination clause applicable on a ‘substantial’ breach of any term: (a) all terms of the contract are conditions; (b) either party is entitled to terminate for substantial breach by the other; (c) all terms of the contract are warranties; (d) the clause will not apply to the breach of any term classified as a warranty; or (e) whether a breach is substantial depends on the opinion of the promisee. (3) A hires an aircraft to B. Clause 1 of the contract states that when

delivered the aircraft must be safe to fly. Clause 1 is: (a) a warranty; (b) an intermediate term; (c) a condition; (d) a termination clause; or (e) none of the above. (4) In Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549; 70 ALR 641 (see [17-13]) the High Court held that: (a) adequacy of damages is not a relevant factor when deciding whether a term is a condition; (b) National Westminster was entitled to succeed; (c) the terms at issue were warranties; (d) on the facts, it did not matter whether the terms in issue were conditions or intermediate terms; or (e) the consequences of National Westminster breaches of contract were minor. (5) An express termination clause: (a) must relate to breach of contract; (b) must be in a deed; (c) is invalid; (d) may confer a right to terminate independently of breach; or (e) should never be agreed to.

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See [16-08]. For the consequences of discharge see Chapter 21. See J W Carter, ‘Termination Clauses’ (1990) 3 JCL 90. A clause expressed in those terms may not be applied literally. See Antaios Compania Naviera SA v Salen Rederierna AB (The Antaios) [1985] AC 191. Cf Amann Aviation Pty Ltd v The Commonwealth (1990) 92 ALR 601 (affirmed (1991) 174 CLR 64; 104 ALR 1). See eg [33-27], [33-30]. See further [17-24]. [1974] AC 235 (see [10-31]). See: ACT: Sale of Goods Act 1954, s 16(2); NSW: Sale of Goods Act 1923, s 16(2); NT: Sale of Goods Act 1972, s 16(2); Qld: Sale of Goods Act 1896, s 14(2); SA: Sale of Goods Act 1895, s 11(2); Tas: Sale of Goods Act 1896, s 16(2); Vic: Goods Act 1958, s 16(2); WA: Sale of Goods Act 1895, s 11(2). See [16-09]. See also [11-28], [16-17]. See [19-09]. See [16-19].

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55

See [16-15]. See [10-09]. (1938) 38 SR (NSW) 632 at 642 (reversed on other grounds (1938) 61 CLR 286). Sometimes, courts have assumed this to be the case. See Carter’s Breach of Contract, §5-08. (1983) 152 CLR 406 at 445; 46 ALR 1. This may be important when damages are assessed. See [31-05]. See [16-19]–[16-23]. [1974] AC 235. See also [10-31]. (1938) 38 SR (NSW) 632 at 641–2 (reversed on other grounds (1938) 61 CLR 286). (1951) 83 CLR 322. [1893] 2 QB 274 at 281. (1987) 162 CLR 549 at 556; 70 ALR 641. See Carter’s Breach of Contract, §5-14. See Carter, Construction, §2-46. [1971] 1 QB 164. See [17-09]. (1951) 83 CLR 322, Cases and Materials, §30-13C. A comic strip by that name still appears in some Australian newspapers under a different authorship. Although Bancks’s drawing appeared on the third page, that page was headed ‘Sunday Sun Comics’ and was intended to be read as the front page. (1951) 83 CLR 322 at 337–8. (1938) 61 CLR 286, Cases and Materials, §30-06C. (1938) 61 CLR 286 at 304. McTiernan J agreed. (1938) 61 CLR 286 at 302–3. (1951) 83 CLR 322 (see [17-11]). [1974] AC 235 (see also [17-07]). Although a material breach may have occurred, Schuler had not followed the procedure set out in cl 11. See [17-09]. (1987) 162 CLR 549; 70 ALR 641. See eg Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Nord) [1976] QB 44 (see [17-21]). See eg Bowes v Chaleyer (1923) 32 CLR 159. Note, however, the more discerning approach applied in Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989. See eg Guy-Pell v Foster [1930] 2 Ch 169 (shares). See [17-18]. See Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26. [1974] AC 235 (see [17-12]). See generally Roger Brownsword, ‘Retrieving Reasons, Retrieving Rationality? A New Look at the Right to Withdraw for Breach of Contract’ (1992) 5 JCL 83. (1987) 162 CLR 549; 70 ALR 641 (see [17-13]). See also Bunge Corp New York v Tradax Export SA Panama [1981] 1 WLR 711 (see [19-11]). See Chapter 8. See generally [8-11]–[8-13]. See [16-17]. See [16-09]. See further [17-22]. See also [16-17]. See Carter’s Breach of Contract, §5-37. See Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 at 37, 71.

56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90

See [17-08]–[17-15]. (1931) 45 CLR 370. See generally Carter’s Breach of Contract, Chapter 6. See [17-05]. See further [17-21]. See [17-24]. See [17-19]. [1976] QB 44 (see [17-28]). [1962] 2 QB 26 (see [17-29]). See further [17-25]. See [11-28]–[11-29]. See [16-09]. See [16-09]. See Seadrill Management Services Ltd v OAO Gazprom (The Ekha) [2010] 1 Lloyd’s Rep 543; [2009] EWHC 1530 (affirmed [2011] 1 All ER (Comm) 1077; [2010] EWCA Civ 691). See [16-13], [16-27]. See [17-25]–[17-29]. See [17-02], [17-20]. See also Carter’s Breach of Contract, §6-11. See [17-02]. See Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115 at 138; 241 ALR 88; [2007] HCA 61 at [49]. See eg Direct Acceptance Finance Ltd v Cumberland Furnishing Pty Ltd [1965] NSWR 1504 at 1511. See eg Shevill v Builders Licensing Board (1982) 149 CLR 620 at 626; 42 ALR 305. For other considerations see Carter’s Breach of Contract, §6-57. See eg Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 at 64. Cf Bowes v Chaleyer (1923) 32 CLR 159 at 178 (whether the breach frustrates the purpose of the contract). See eg Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 at 66. [1962] 2 QB 26 (see [17-29]). See [17-13]. (1987) 162 CLR 549; 70 ALR 641 (see [17-13]). (2007) 233 CLR 115; 241 ALR 88; [2007] HCA 61. See J W Carter, ‘Intermediate Terms Arrive in Australia and Singapore’ (2008) 24 JCL 226. (2007) 233 CLR 115 at 147; 241 ALR 88 at 110; [2007] HCA 61 at [71]. [1976] QB 44, Cases and Materials, §30-17C. See Federal Commerce and Navigation Co Ltd v Molena Alpha Inc [1979] AC 757. See [17-26]. [1962] 2 QB 26, Cases and Materials, §13-06C. See [16-27].

[page 270]

Chapter 18

Discharge for Repudiation [18-01] Forms of repudiation. ‘Repudiation’ means ‘repudiation of the obligation to perform a contract’. The word describes wrongful conduct.1 If there is a repudiation by one party (the promisor) the other (the promisee) is entitled to terminate the contract. If the promisee elects to terminate, the parties are discharged from further performance.2 The concept may be examined from two perspectives:3 (1) time of occurrence; and (2) bases for proving repudiation. If a repudiation occurs before the time for performance, termination creates an anticipatory breach of contract.4 Such a repudiation occurs in the period t2– t3 in the contract continuum.5 All other repudiations relate to (or include) promises which have already fallen due for performance, that is, in the period t3– t4. There are alternative bases for proving repudiation, according to whether the promisee relies on:6 ■ refusal to perform — the question is whether what the promisor has said and done clearly indicates a serious absence of readiness or willingness to perform; or ■ inability to perform — there is a repudiation if the evidence shows the promisor was in fact unable to perform the contract. The first is much easier to establish than the second.7 For example, if S agrees to sell goods to B, but later refuses to perform the contract, B may terminate for repudiation. It is irrelevant whether, as a matter of fact, S could have performed the contract. [18-02] Problem addressed. The doctrine of repudiation was developed in the 19th century to address a particular problem which arose out of the mutual dependency of performance obligations.8

[page 271] Assume that Alan contracts with Basha and that Alan must perform first. He might, for example, be an advertising agent engaged by Basha to prepare a plan to promote Basha’s products. Because their obligations are dependent, Alan is not entitled to the agreed price unless he performs. What is Alan to do if Basha says she is not going to pay Alan even if he does the work? Her statement shows that it would be pointless for Alan to continue. It would also be a waste of resources.9 But how can Alan enforce the contract against Basha unless he first performs? The doctrine of repudiation solves the problem. Alan can terminate the contract for Basha’s refusal to perform. If he exercises the right, the parties are discharged. Therefore, Alan does not have to prepare the plan, and Basha does not have to pay the price. However, she is liable in damages to Alan who can obtain compensation for the loss of the benefit of the contract.10

Elements Readiness and Willingness [18-03] Readiness and willingness. The doctrine of repudiation relies on the concept of ‘readiness and willingness’ to perform. Since the concept includes ability to perform,11 it is legal shorthand for ‘readiness, willingness and ability’ to perform. Under the concept: ■ readiness refers to preparedness — the promisor has in place everything necessary to perform; ■ willingness refers to disposition — the promisor actually wants to perform; and ■ ability refers to capability — the promisor is in fact able to perform. A promisor is therefore ready and willing to perform only if ready, willing and able to perform. [18-04] Absence of readiness or willingness. An absence of any one of readiness, willingness or ability has the same legal effect as an absence of all.12 The only positive obligation of a promisor is to be ready and willing at the time of performance. In most commercial transactions there is a time lag

between entry into a contract and its performance, as where S agrees to sell 10 tonnes of wheat, to be delivered to B six months later. There is no requirement that S own any wheat when the contract is agreed. However, for the purpose of repudiation there is also a negative perspective. Assume that S later tells B: ‘The market price of wheat has gone up. I am not going to perform.’ That is a repudiation — B has signalled an absence of willingness. [page 272]

The Requirement of Seriousness [18-05] General. Given that a right to terminate a contract arises only in exceptional circumstances,13 the mere fact that a promisor is in some respect not ready and willing is not a repudiation. There is a requirement of seriousness which must be satisfied.14 In other words, there must be a serious absence of readiness or willingness. It will be recalled15 that where breach of an intermediate term is relied on, the breach must be sufficiently serious. There must be a fundamental breach. While these are much the same ideas, there is a difference in focus: ■ repudiation — the focus is usually on what the promisor has said and done; and ■ fundamental breach — the focus is the impact of the promisor’s breach on the promisee. Nevertheless, discharge for breach of a term often overlaps with repudiation.16 [18-06] Categories. The requirement of a serious absence of readiness or willingness is analysed by reference to three categories: (1) refusal by the promisor to perform all, or substantially all, of its obligations; (2) prospective breach by the promisor of a term of the contract; and (3) inability to perform the contract. However, there is some overlap between the categories. [18-07] Refusal to perform. The requirement of seriousness is satisfied if a promisor clearly indicates an absence of readiness or willingness relating to all

(or substantially all) of its performance obligations. Such conduct is a refusal to perform the contract.

Origin of the law As an illustration, consider Hochster v De la Tour,17 where the defendant agreed to employ the plaintiff as a courier on the continent of Europe.18 Prior to commencement of the contract, which was to last for three months, the defendant said he did not require the plaintiff’s services. That was an express refusal to perform the whole contract. It was therefore a repudiation. Bringing the claim was an election by the plaintiff to terminate the contract. [page 273] The court held that the plaintiff was entitled to damages even though the repudiation occurred before performance was due to commence. This was the first case on anticipatory breach. The refusal in Hochster was both express and anticipatory. However, it is sufficient for the refusal to be implied or inferred from the promisor’s conduct.19 Nor does it matter that the refusal occurs in the course of performance. In all cases the requirement of seriousness must be satisfied. That includes situations in which the promisor’s conduct materially increases the risk that the promisee will not receive the performance promised.20 [18-08] Prospective breach. This is a more difficult idea. A prospective breach occurs if the promisor’s words or conduct show that it will, in the future, breach one or more contractual terms. For example, the promisor may threaten to breach a particular term. The requirement of seriousness is satisfied if the promisee would be entitled to terminate if the prospective breach became an actual breach. If the promisee terminates before the promisor carries out its threat, the court must extrapolate and ask: ‘Would the promisor be able to terminate for an actual failure to perform the term?’ This brings into play the analysis of breach of contractual terms in the previous chapter. Accordingly, there is a right to terminate if the prospective breach relates to a condition, but not if it relates to a warranty. If the term is intermediate in character, the consequences which would have resulted from the

breach need to be determined. A prospective fundamental breach must be proved.

The principles stated above were established in Federal Commerce and Navigation Co Ltd v Molena Alpha Inc.21 There was a prospective breach of three time charterparties. It happened in this way. There was a dispute between the parties. Clause 9 provided that the ships’ masters were under the orders of the charterers. However, in order to get their own way in the dispute, the shipowners threatened to instruct the masters to withdraw the charterers’ authority to sign bills of lading endorsed ‘freight prepaid’. Before the threat was acted on, the charterers terminated the contracts. They alleged repudiation by the shipowners. The court reasoned that: ■ had the owners carried out their threat, cl 9 would have been breached; ■ because cl 9 was an intermediate term, the threat to breach the term was not in itself a repudiation; but ■ the owners’ conduct was a serious matter. Had their threat been carried through, it would have been impossible for the charterers to carry out their contracts with third parties. [page 274] In these circumstances the charterers’ termination was justified because a prospective fundamental breach had been proved. [18-09] Inability to perform. One form of repudiation by refusal to perform is ‘declared’ inability, as where a promisor says ‘I am unable to perform the contract’. There are several other situations in which inability is a repudiation: ■ disabling act — the promisor does something that makes performance impossible; ■ inferred inability — the promisee reasonably infers that the promisor is unable to perform; and

■ factual inability — the promisor is wholly and finally disabled from performing the contract. These ways of proving repudiation are considered later.22

The Acceptance Requirement [18-10] Introduction. A refusal to perform amounting to a repudiation does not of itself terminate a contract. For the parties to be discharged, the promisee must elect to terminate the contract.23 This is termed ‘acceptance of the repudiation’. Unlike a failure to perform, a refusal to perform is not in itself a breach of contract. That is clearly the case where it precedes the time of performance. In order to make the refusal a breach of contract, the promisee must terminate the contract by accepting the repudiation.24 No claim for damages can be made unless that occurs.25 Therefore, if the contract comes to an end before the repudiation is accepted, the promisee cannot claim damages. That was the case in Avery v Bowden,26 where the contract was frustrated by the outbreak of the Crimean War before acceptance.27 The acceptance requirement also applies if the refusal to perform occurs after arrival of the time for performance. Of course, the word ‘accept’ is somewhat confusing. Usually, something is ‘accepted’ if it is ‘agreed to’.28 Because in this context it refers to an election, the sense is ‘treat as a basis for an election to terminate the contract’. [page 275] [18-11] Position where repudiation accepted. If a repudiation is accepted, the parties are discharged from further performance. The consequences are the same as when discharge is for breach of condition or fundamental breach.29 In most cases, the crucial issue is whether any repudiation occurred. Otherwise, there is nothing to ‘accept’. However, even in cases where a repudiation is established, the question may arise whether it was validly accepted. Events which occur between repudiation and acceptance can raise difficult issues. [18-12] Position where repudiation not accepted. Asquith LJ, a judge often inclined to the succinct metaphor, once described30 an unaccepted repudiation

as a ‘thing writ in water and of no value to anybody: it confers no legal rights of any sort or kind’.31 Although often quoted, this statement is neither accurate nor helpful. Even an unaccepted repudiation may have consequences. These are difficult to explain. Account must be taken of two matters: (1) the so-called ‘period of repentance’ allowed to a promisor; and (2) the effect of an unaccepted repudiation on the promisee’s duty to perform. [18-13] Period of repentance. As explained in the discussion above, acceptance of a repudiation discharges the parties. In the case of a refusal to perform prior to the time for performance, the promisee is only entitled to damages (for anticipatory breach) if the repudiation is accepted. It follows that, as a general rule, a promisor may withdraw or retract any refusal to perform prior to acceptance. The ability to do so means that the promisor enjoys a period of ‘repentance’.32 However, the general rule is qualified in two ways. First, if withdrawal occurs after the time for performance, the promisor will have breached the contract.33 It must compensate the promisee even though the promisee cannot accept the repudiation. Second, the promisor must give reasonable notice of withdrawal of the refusal to perform. This requirement ensures that the promisee is not prejudiced.34 If reasonable notice is not given, withdrawal is ineffective and the promisee is entitled to accept the repudiation. [18-14] Promisee’s duty to perform. What is the position if the promisee has relied on the promisor’s repudiation, but not actually accepted the repudiation? Withdrawal of the repudiation might produce very unfair results. By very complex means,35 the courts have found ways to protect a promisee who has relied on — but [page 276] not accepted — the repudiation. In particular, non-performance by the promisee is not a breach of contract if caused by reliance on the repudiation.

Case study Consider the following facts, based on the leading decision in Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd.36 A sale of goods contract between Stephanie and Bertie requires Stephanie to nominate by 1 April the port at which Bertie must take delivery. It also says that Bertie will pay on 2 May. Bertie tells Stephanie on 1 March that all his stores are full and he cannot accept delivery anywhere. This is a repudiation by Bertie. If she wished to do so, Stephanie could ‘accept’ the repudiation and terminate the contract. But Stephanie might wait, and explore with Bertie whether they can find a sub-buyer with storage space. Assume that the discussions end on 1 May without resolving the problem. Is Bertie entitled to terminate the contract, or sue Stephanie for damages, because she did not nominate a port by 1 April? Or is it still open to Stephanie to accept Bertie’s repudiation? In the Peter Turnbull case, Dixon CJ said:37 Now long before the doctrine of anticipatory breach of contract was developed it was always the law that, if a contracting party prevented the fulfilment by the opposite party to the contract of a condition precedent therein expressed or implied, it was equal to performance thereof: Hotham v East India Co (1787) 1 TR 638; 99 ER 1295. But a plaintiff may be dispensed from performing a condition by the defendant expressly or impliedly intimating that it is useless for him to perform it and requesting him not to do so. If the plaintiff acts upon the intimation it is just as effectual as actual prevention.

On our facts, Bertie’s repudiation made it clear to Stephanie that there was no point in her nominating a port by 1 April. Applying Dixon CJ’s principle, Bertie’s repudiation (although unaccepted) ‘dispensed’ with the requirement for Stephanie to nominate a port. Accordingly: ■ Stephanie did not breach;38 ■ Bertie cannot claim damages or terminate the contract; and ■ Stephanie can accept Bertie’s repudiation and sue for damages,39 assessed on the basis of non-acceptance of goods. It is crucial for Stephanie to prove a causal connection between Bertie’s repudiation and Stephanie’s failure to perform.

[page 277] On one view, the doctrinal basis for the above is estoppel.40

Repudiation Based on Words or Conduct Repudiation a Serious Matter [18-15] Introduction. On countless occasions the courts have said that repudiation is a serious matter, not to be found lightly.41 That means that the only easy cases are those involving an express refusal to perform. Nevertheless, a refusal to perform may be inferred or implied from conduct. Whether the refusal is express or implied, the promisee must prove that the requirement of seriousness was satisfied.42 [18-16] Express refusal to perform. If a promisor expressly refuses to perform all (or substantially all) of its contractual obligations, that is clearly a repudiation. It does not matter that the promisor’s obligation is subject to some contingency that might not have been fulfilled. For example, in Frost v Knight43 the defendant promised to marry the plaintiff when his father died. Before that event occurred, he announced that he did not intend to honour his promise. Even though the father was still alive, the plaintiff was successful in her claim for damages for repudiation. The refusal to perform extended to all the defendant’s performance obligations. It did not matter that the defendant might have died before his father. In practice, the most common case of a refusal to perform extending to all the promisor’s obligations is an invalid attempt to terminate the contract.44 Proof that a promisor has refused to perform part of a contract does not establish repudiation.45 However, the breach of one or more terms may be evidence of a refusal to perform the contract as a whole. For example, in Associated Newspapers Ltd v Bancks46 the High Court was satisfied that Associated Newspapers had repudiated the contract. The court said that even if the term in issue had been classified as a warranty, Associated Newspapers’ conduct would have amounted to a refusal to perform its side of the bargain. [18-17] Implied refusal to perform. A fairly stringent test has been applied to the case of alleged implied refusal to perform. It must be ‘quite plain’47 that the

[page 278] promisor is refusing to perform the contract. The words and conduct relied on must be the ‘intimation of an intention’48 to refuse to perform the contract. The standard is an objective one. It therefore depends on the conclusion which a reasonable person in the position of the promisee would reach. For example, in Maple Flock Co Ltd v Universal Furniture Products (Wembley) Ltd49 sellers agreed to supply goods (‘rag flock’) by instalments to be separately paid for. The contract was for 100 tons, to be delivered at a rate of three one-ton loads per week. Defective goods were delivered. The buyers said this was a repudiation. However, only one of the first 20 deliveries was defective. This was not a repudiation50 because: ■ the breach was quantitatively small — it related to only one ton; and ■ on the facts, it was very unlikely to be repeated in relation to later instalments. [18-18] Contingent refusal. Because an objective standard applies, a promisor may be held to have refused to perform even though that was not actually (subjectively) its intention. Nor does it matter that the promisor makes its conduct contingent.51 For example, assume a contract requires the promisor to do Y. If the promisor says, ‘I am going to do X, unless the contract requires me to do Y’, that will usually be a refusal to perform. There is a repudiation if Y is substantially different from X.

Illustration In Warinco AG v Samor SpA,52 a sale of rapeseed oil required the seller to deliver goods in two instalments. A tender of the first instalment was rejected by the buyer, who complained that the goods were not of good, wholesome, merchantable quality, as required by the contract. Factually, that was incorrect. Unsurprisingly, the seller asked whether there was any point in making the second delivery. When the buyer was non-committal, the seller elected to terminate the contract for repudiation. The question was whether it was entitled to do so, that is, whether the buyer had refused to perform. The court said the seller was entitled to infer that the second instalment would also be rejected, and therefore that the buyer had refused to

perform. Stephenson LJ said53 the buyer ‘could not proffer repudiation with one hand and take it back with the other’. [18-19] Bona fides. A wrongful assertion of rights may amount to a refusal to perform. In deciding that question, inquiry into the bona fides of the promisor may [page 279] be necessary. An apparent refusal to perform a contract may not be a repudiation if it was made in good faith. The usual context is a wrongful termination. Not only is such conduct ineffective to terminate the contract, usually it is also a refusal to perform.54 However, whether the promisor acted in good faith may need to be considered.

Case study An interesting decision is Woodar Investment Development Ltd v Wimpey Construction UK Ltd.55 Wimpey agreed to purchase land from Woodar. A termination clause said that Wimpey could ‘rescind’ the contract in certain circumstances. Prior to completion it purported to exercise the express right. On the facts, the clause did not apply. Wimpey had therefore wrongfully terminated the contract. Was that a repudiation? A majority of the court held that there was no repudiation: Wimpey had acted bona fide. Lord Wilberforce — one of the majority — said:56 [Wimpey] are entitled to succeed on the repudiation issue, and I would only add that it would be a regrettable development of the law of contract to hold that a party who bona fide relies upon an express stipulation in a contract in order to rescind or terminate a contract should, by that fact alone, be treated as having repudiated his contractual obligations if he turns out to be mistaken as to his rights.

Lord Salmon, who dissented, said:57 The fact that a party to a contract mistakenly believes that he has the right to refuse to perform it cannot avail him. Nor is there any authority for the proposition that if a party to a contract totally refuses to perform it, this refusal is any the less a repudiation of the contract

because he honestly but mistakenly believes that he is entitled by a condition of the contract to refuse to perform it. It would indeed be unfortunate if the law were otherwise.

In effect, the majority thought that, before treating Wimpey’s conduct as a repudiation, Woodar should have obtained a declaration as to whether the termination clause applied. But the minority thought that Wimpey should have done that. There is much to be said in favour of the minority view. The decision in Woodar actually illustrates a more general idea. Even if it does not lead to a wrongful termination, bona fides may be relevant where a promisor acts on an incorrect construction of the contract, or threatens to do so. The promisor’s conduct may not amount to a refusal to perform if the promisor honestly believed that its construction was correct. That everything depends on the circumstances is [page 280] illustrated by Federal Commerce and Navigation Co Ltd v Molena Alpha Inc.58 In that case, the shipowners wrongly construed the contract. Although they had acted in good faith, their conduct was still a refusal to perform. That was because, had it been carried out, the shipowners’ threat would have had very serious consequences for the charterers.

Typical Situations [18-20] Wrongful termination. The most common case of repudiation is wrongful termination of a contract. Such a termination is a ‘purported’ termination which is ineffective to discharge the parties. Subject to the issue of bona fides,59 the general rule is that giving notice of termination when there is no right to do so is a refusal to perform. It is irrelevant whether the promisor uses the word ‘terminate’. A notice by which the promisor purports to ‘cancel’, ‘end’ or ‘rescind’ the contract when there is no legal right to do so has the same legal effect. Since the promisor’s refusal extends to all remaining obligations, it is a repudiation which the promisee can ‘accept’ by terminating the contract. It does not matter whether the notice is given before or after the time for performance has arrived.

If each party purports to terminate when it is not entitled to do so, the contract may have to be treated as altogether abandoned by the parties. That unusual situation occurred in DTR Nominees Pty Ltd v Mona Homes Pty Ltd.60 [18-21] Erroneous construction of the contract. It is not a repudiation merely to express an incorrect view about the construction of a contract. However, a refusal to perform may be proved by reference to a promisor’s stated intention to perform in accordance with an erroneous construction. As illustrated above,61 account may need to be taken of whether the promisor acted bona fide. The requirement of seriousness must also be satisfied. Federal Commerce and Navigation Co Ltd v Molena Alpha Inc62 illustrates that a threat to act on the erroneous construction can be sufficient. A clearer case is where the promisor purports to perform in accordance with its construction.

Illustration The advertising company in Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd63 was held to have refused to perform the contract by performing it in accordance with the wrong construction of its obligations which it had adopted. [page 281] The company took the view that the contract merely required it to display each board for an average of eight hours. However, the contract actually required each board to be displayed for (substantially) eight hours per day. Because it was sufficiently serious, the refusal to perform was a repudiation.

Repudiation Based on Inability [18-22] Declared inability. Because readiness and willingness includes ability,64 a statement ‘I am unable to perform the contract’ is a refusal to perform.65 Since it relates to the contract as a whole, the confession of inability satisfies the requirement of seriousness. So also does a statement extending to substantially all of the promisor’s obligations. Even a profession of inability to perform on time may amount to a

repudiation. For example, in Foran v Wight66 vendors under a sale of land contract said they would be unable to complete on the agreed date. Because time was ‘of the essence’,67 the statement was a repudiation even though the vendors did not say they would never be able to complete. [18-23] Inability by disabling act. If a promisor does some act which makes it impossible for the promisor to perform the contract that will usually be a refusal to perform.

Hypothetical Vince owns a block of land. He agrees to sell the land to Pat. Prior to the completion of that contract, Vince transfers the land to Xavier. Vince’s conduct is a refusal to perform. Since it is impossible for Vince to transfer ownership to Pat, the requirement of seriousness is clearly satisfied. Vince’s disabling act is therefore a repudiation.68 Now it could be objected that it is not actually impossible for Vince to perform the contract with Pat. Before the date for completion of the contract with her, Vince might repurchase the land from Xavier. Indeed if Pat does not accept the repudiation, Vince has an opportunity to withdraw his repudiation by repurchasing the land from Xavier.69 However, once Pat has accepted Vince’s repudiation, he cannot change his mind. Of course, some disabling acts could never be ‘undone’. For example, assume Jerry agrees to sell ‘the one bottle of 1953 Beaujolais in my wine cellar’ to Jack for $500. If Jerry later drinks the wine, he has disabled himself from performing. Even [page 282] if Jerry could find another bottle of 1953 Beaujolais, because the contract concerns a specific bottle, there was only one bottle in the world that could be delivered to perform the contract. [18-24] Inferred inability. As has been explained, a refusal to perform may be express or implied from conduct.70 Application of the latter to cases of alleged inability can raise difficult issues. The question is whether a promisee should

reasonably infer that the promisor is unable to perform. There are two categories. First, inability may be inferred in the course of performance. If a promisor must perform a number of obligations, breach of one or more obligations may lead the promisee reasonably to infer that the promisor is unable to perform the contract.

Hypothetical S has agreed to sell a quantity of coal to B for $10,000. S must deliver 10 instalments, and B must pay $1000 when each is delivered. The first two deliveries are in accordance with the contract. However, the next two deliveries are validly rejected by B because they are not of the contract description. S has to make six more deliveries. However, B may infer that S is in fact unable to supply coal which conforms to the contract. If a reasonable person in B’s position would draw the same inference, B is entitled to terminate the contract for repudiation.71 The parties are discharged. Whether S is actually unable to perform does not matter. Should it subsequently be proved that S would have delivered coal of the contract description, the impact will be to reduce B’s damages. Second, inability may be inferred prior to the time for performance. However, it appears that the law does not permit termination in this situation. Devlin J said so in Universal Cargo Carriers Corp v Citati,72 one of the most famous cases on anticipatory breach. His view was that inability must be proved in fact. Supposition is insufficient, even if reasonable. However, it seems wrong to take this position. Provided the requirement of seriousness is satisfied, it ought to be sufficient that a reasonable person in the position of the promisee would infer that the promisor will not be able to perform when the time for performance arrives.73 Devlin J was troubled because he considered that if the promisor is in fact able to perform, the promisee would still recover full damages. However, that does not follow. Working out the amount of damages is a different issue. Other cases support the view that a promisor who was in fact able to perform would only have to pay a nominal sum.74 [page 283]

There is a further point. The common law does not entitle a promisee to demand an assurance of performance from the promisor prior to the arrival of the time for performance.75 Logically, this ought to make it more important for a promisee to be entitled to act on reasonable inferences. Both ideas come together under arts 71 and 72 of CISG.76 Under these provisions, a buyer (or seller) of goods under an international sale of goods is entitled to suspend performance if ‘it becomes apparent that the other party will not perform a substantial part of his obligations’. There is a right to demand an assurance of due performance from the other party, and (it seems) to terminate the contract if no adequate assurance is provided. [18-25] Factual inability. The most difficult situation is factual inability. If as a matter of fact, the promisor is ‘wholly and finally’77 disabled from performing the contract, the promisee is entitled to terminate the contract for repudiation. Inability is determined at the time when the promisee elected to terminate. Of course, in this situation there is no refusal to perform. The basis for proving repudiation is the actual position of the promisor. In very few cases has factual inability been established. Under this principle, even though there is no express or implied refusal to perform, the promisee is entitled to terminate the contract for repudiation. For example, assume that Vince enters into two contracts. Under the first contract he agrees to buy land from Celia. By the second contract, he agrees to sell the same land (still owned by Celia) to Pat. The second contract is perfectly valid: a vendor need only own land at the time of completion.78 However, if Celia breaches her contract with Vince by transferring ownership of the land to Dennis, it is impossible for Celia to transfer ownership to Vince. It follows that Vince cannot perform his contract with Pat. Although it may seem harsh, being unable to perform, Vince is in the same position as if he had refused to perform his contract with Pat. The repudiation arises from Vince’s inability to perform.

Case study In Universal Cargo Carriers Corp v Citati,79 a charterer (Citati) agreed to provide a cargo of scrap iron under a voyage charterparty. The purpose was carriage

of the scrap from Basrah to Buenos Aires. Citati promised to provide the cargo before expiry of the ‘lay days’. When the vessel arrived, Citati had no cargo. The shipowners sailed the vessel away before the lay days expired. That was a termination of the contract. Because Citati had until the end of the lay days to provide [page 284] a cargo, discharge was for anticipatory breach. The question was whether the owners were entitled to terminate. Citati had not refused to perform. Nor had he disabled himself from performing. But the owners’ contention was that he was unable to perform. It was clear that Citati could not load the cargo before expiry of the lay days. However, since the term stating his obligation to do so was not a condition, proof that some delay was inevitable did not establish inability. Investigation of the length of delay was therefore necessary. Relevantly, Devlin J made three points: (1) the issue was whether Citati was wholly and finally disabled from performing the contract; (2) the relevant time to resolve the issue was when the shipowners sailed away. However, they were not limited to facts within their knowledge; and (3) in a case of delay, a promisor is wholly and finally disabled if the delay would last so long as to frustrate the commercial purpose of the contract. On the facts found by the arbitrator, Devlin J was entitled to decide that the delay in providing the cargo would have been so long as to frustrate the commercial purpose of the contract. Accordingly, the owners were successful.80 Devlin J’s approach was adopted by the High Court in Sunbird Plaza Pty Ltd v Maloney.81

QUICK QUIZ Short answer (1) What is a repudiation? (2) Why does the law require ‘acceptance’ of a repudiation? (3) What is meant by ‘period of repentance’? (4) Why is bona fides sometimes taken into account in deciding whether a repudiation has occurred? (5) What is the test for repudiation by factual inability to perform? True or false? (1) An anticipatory breach may occur after the arrival of the time for performance. (2) If frustration occurs before a repudiation is accepted, the promisee is not entitled to damages. (3) Repudiation may be based on a refusal to perform part of a contract. (4) A wrongful, but bona fide, termination is never a repudiation. (5) In Universal Cargo Carriers Corp v Citati [1957] 2 QB 401 (see [18-25]), Citati was successful in defending the claim based on anticipatory breach. [page 285] Choose the best answer (1) A says to B, ‘I am not going to perform my contract with you’. This statement is a refusal to perform: (a) always; (b) unless A is able to perform; (c) only if A is unable to perform; (d) unless B has partly performed; or (e) only if B is a consumer. (2) On 1 June, A says to B, ‘I am not going to perform my contract with

you’. On 5 June, B fails to perform an obligation in reliance on A’s statement. On 6 June, A says to B, ‘I withdraw the statement I made on 1 June’. On 7 June, B terminates the contract. A court would conclude: (a) A has effectively withdrawn its statement on 1 June; (b) B’s termination on 7 June is effective; (c) B breached the contract on 5 June; (d) A breached the contract on 1 June; or (e) none of the above. (3) In Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277 (see [18-19]): (a) Wimpey won the case; (b) Woodar won the case; (c) both parties were successful; (d) Wimpey was entitled to rescind under an express clause of the contract; or (e) Woodar would have won the case had it acted bona fide. (4) If a promisor (A) communicates an erroneous construction of a contract to the promisee (B), the communication: (a) is necessarily a repudiation of the contract; (b) has no legal significance; (c) cannot be a repudiation if made in good faith; (d) is a repudiation unless the contract is oral; or (e) may be a repudiation of the contract.

1 2 3 4 5 6 7 8 9 10 11 12

Occasionally, ‘repudiation’ is used to describe a valid termination. For another usage see [12-18]. For the consequences of discharge see Chapter 21. See generally Carter’s Breach of Contract, Chapter 7. See also [15-05]. See [1-10]. For typical cases see [18-20]–[18-25]. See Universal Cargo Carriers Corp v Citati [1957] 2 QB 401 at 437 (see [18-25]). Cf Sir Michael Mustill, ‘Anticipatory Breach’, Butterworth Lectures 1989–90, Butterworths, London, 1990. On dependency of obligation see [14-06]. But see [27-36]. See [31-04] (‘loss of bargain’ damages). See [14-06]. See Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235 at 253.

13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

36 37 38 39 40

41 42 43 44 45 46 47 48 49 50

See [16-08]. See further [18-15]–[18-19]. See [17-25], [17-28]. See Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115 at 136; 241 ALR 88; [2007] HCA 61 at [44]. (1853) 2 E & B 678; 118 ER 922. That meant that the plaintiff agreed to accompany the defendant on the latter’s ‘Grand Tour’. See [18-17]. See Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 NZLR 289; [2002] UKPC 50. [1979] AC 757. See [18-22]–[18-25]. See [18-11]. See [15-05]. See eg Huppert v Stock Options of Australia Pty Ltd (1965) 112 CLR 414. (1856) 6 E & B 953; 119 ER 1119 (adopted Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235 at 250, 259). See generally on frustration Chapter 20. At one time there was thought to be an analogy with offer and acceptance. See Carter’s Breach of Contract, §7-18. See [21-01]–[21-09]. Howard v Pickford Tool Co Ltd [1951] 1 KB 417 at 421. The words ‘thing writ in water’ come from John Keats’s self-composed epitaph. Sometimes termed a ‘locus poenitentiae’. See Frost v Knight (1872) LR 7 Ex 111 at 112. But cf Foran v Wight (1989) 168 CLR 385; 88 ALR 413. See Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235 at 250. In Continental Contractors Co Ltd v Medway Oil & Storage Co Ltd (1925) 23 Ll L Rep 124 at 129 (reversed (1926) 25 Ll L Rep 288) Scrutton LJ described the principles as part of the ‘higher altitudes’ of contract law. (1954) 90 CLR 235. In that case it was the seller who repudiated. (1954) 90 CLR 235 at 246–7. The position is different if Stephanie affirms the contract. Failure to nominate a port would then be a breach of contract. See Bowes v Chaleyer (1923) 32 CLR 159. See also Mahoney v Lindsay (1980) 33 ALR 601 (specific performance). Foran v Wight (1989) 168 CLR 385; 88 ALR 413. But see J W Carter, ‘Discharge as the Basis for Termination for Breach of Contract’ (2012) 128 LQR 283 (estoppel explanation overly complex). See generally on estoppel [6-05]–[6-18], [32-09]–[32-12]. See eg Ross T Smyth & Co Ltd v T D Bailey Son & Co [1940] 3 All ER 60 at 71; Larratt v Bankers and Traders Insurance Co Ltd (1941) 41 SR (NSW) 215 at 233. See generally Carter’s Breach of Contract, Chapter 8. As to ‘seriousness’ see [18-05]–[18-09]. (1872) LR 7 Ex 111. See also Psaltis v Schultz (1948) 76 CLR 547. The action for breach of promise of marriage has been abolished. See [18-20]. See [18-08] (prospective breach). See also [18-05]. (1951) 83 CLR 322 (see [17-11]), Cases and Materials, §30-13C. Spettabile Consorzio Veneziano di Armamento e Navigazione v Northumberland Shipbuilding Co Ltd (1919) 121 LT 628 at 635 per Atkin LJ. See Freeth v Burr (1874) LR 9 CP 208 at 213 per Lord Coleridge CJ (adopted Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 at 647–8; 85 ALR 183). [1934] 1 KB 148 at 157. See also Hammer v Coca-Cola [1962] NZLR 723. Contrast eg Simpson v Surman (1922) 24 WALR 79 (consistent breach by seller of milk).

51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71

72 73 74 75 76 77

78 79 80 81

Cf Mersey Steel & Iron Co Ltd v Naylor Benzon & Co (1884) 9 App Cas 434 at 438–9. [1979] 1 Lloyd’s Rep 450. [1979] 1 Lloyd’s Rep 450 at 454. See also Federal Commerce and Navigation Co Ltd v Molena Alpha Inc [1979] AC 757 at 786–7. See [18-20]. [1980] 1 WLR 277. [1980] 1 WLR 277 at 283. [1980] 1 WLR 277 at 288. [1979] AC 757 (see [18-08], [18-21]). Contrast DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423; 19 ALR 223. See [18-19]. (1978) 138 CLR 423; 19 ALR 223. See [18-19]. [1979] AC 757 (see [18-08], [18-19]). (1938) 61 CLR 286, Cases and Materials, §30-06C. See also Summers v The Commonwealth (1918) 25 CLR 144 (affirmed (1919) 26 CLR 180). See [18-03]. See generally Carter’s Breach of Contract, Chapter 9. See Universal Cargo Carriers Corp v Citati [1957] 2 QB 401 at 437. See also Bell v Scott (1922) 30 CLR 387 at 395–6. (1989) 168 CLR 385; 88 ALR 413. See [19-08]. See eg Synge v Synge [1894] 1 QB 466 (contract to leave property by will). See [18-13]. See [18-17]. See Millars’ Karri and Jarrah Co (1902) v Weddel Turner & Co (1908) 14 Com Cas 25 at 29. See also Warinco AG v Samor SpA [1979] 1 Lloyd’s Rep 450 (see [18-18]). Contrast Maple Flock Co Ltd v Universal Furniture Products (Wembley) Ltd [1934] 1 KB 148 (see [18-17]). [1957] 2 QB 401 at 449. See J W Carter, ‘The Embiricos Principle and the Law of Anticipatory Breach’ (1984) 47 MLR 422. See Maredelanto Compania Naviera SA v Bergbau-Handel GmbH (The Mihalis Angelos) [1971] 1 QB 164. See J W Carter, ‘Suspending Contract Performance for Breach’, in Beatson and Friedmann, p 485. See J W Carter, ‘Anticipatory Breach’ in Current Developments in International Transfers of Goods and Services, Butterworths, Singapore, 1994, p 227. British and Beningtons Ltd v North Western Cachar Tea Co Ltd [1923] AC 48 at 72 per Lord Sumner (adopted Rawson v Hobbs (1961) 107 CLR 466). But see Foran v Wight (1989) 168 CLR 385 at 425; 88 ALR 413 (suggestion that ‘wholly and finally disabled’ is too demanding). See [18-04]. [1957] 2 QB 401, Cases and Materials, §30-59C. There were certain procedural complications. See Carter’s Breach of Contract, §9-19. (1988) 166 CLR 245; 77 ALR 205.

[page 286]

Chapter 19

Discharge for Delay [19-01] Forms of delay. Delay may give rise to a right to terminate the contract in two ways: (1) breach of time stipulation, that is, delay in performance; or (2) as a consequence of breach, as where defective goods supplied for immediate use have to be repaired. This chapter is principally about (1)1 The question is whether delay by one party (the promisor) entitles the other (the promisee) to terminate the contract. If so, and the promisee elects to terminate, the parties are discharged for delay.2 [19-02] Delay in performance. Delay in performance is a failure to comply with the contract’s time schedule.3 A provision stating the time for performance is termed a ‘time stipulation’.4 If there is no express provision, a time stipulation is implied — performance must occur within a reasonable time.5 Failure to perform on time is a breach of contract. As always, the right to terminate will only arise in exceptional circumstances.6 There are various categories: ■ termination clause — delay activates an express right to terminate; ■ condition — delay is breach of an essential time stipulation; ■ repudiation — delay evidences a refusal to perform, or inability; ■ fundamental breach — delay is the sufficiently serious breach of an intermediate term; and ■ notice — the promisor has failed to comply with a notice making time essential. [19-03] Delay as a consequence of breach. A promisor’s breach may delay enjoyment by the promisee of the benefit of the subject matter of the contract. Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd7 is an example. The main impact of breach of the seaworthiness term was for the charterers to suffer loss by not being able to carry as much cargo as would otherwise have been carried

[page 287] on the vessel. However, the charterers were not entitled to terminate because the breach was not fundamental.

Treatment of Time Stipulations [19-04] Types of time stipulation. Whether express or implied, time stipulations are classified as being essential or non-essential terms. In relation to the former, time is said to be ‘of the essence’. The distinction is important in deciding whether the promisee has a right to terminate the contract: ■ essential time stipulation — there is an immediate right to terminate;8 and ■ non-essential time stipulation — something more than the fact of breach must be proved.9 However, failure to perform on time is a breach of contract — for which damages can be claimed — whether or not time is of the essence.10 [19-05] The old law. The distinction between ‘law and equity’11 led to conflict between certain common law rules and those of equity. This was mainly because the common law was more influenced by form, and generally took a much sterner approach to contractual obligations than equity. The equity courts took a more lenient view of the effect of breach of a time stipulation. At common law, breach of a time stipulation was presumed to be a complete defence to an action to enforce the contract. Accordingly, a promisor who failed to perform on time could claim neither damages nor the contract price.12 In that sense, time was of the essence at common law. Courts of equity saw things differently. Breach of a time stipulation was not presumed to be a complete defence if an equitable remedy was sought by the promisor. Accordingly, provided the object of the contract was still obtainable, and the promisor paid compensation for its breach, the equity court would order specific performance of the contract.13 In that sense, time was not of the essence in equity. Although historically inaccurate,14 this conflict is today seen as a debate about termination rights. At common law, any delay entitled the promisee to terminate; but in equity only a delay affecting the substance of the contract would suffice.

[page 288] [19-06] The statutory rule. Towards the end of the 19th century, the administration of law and equity was fused.15 Conflicts between law and equity were resolved in favour of the latter. Statutory provisions now state a rule (the statutory rule) which adopts the equity view. Under the statutory rule,16 stipulations in contracts as to time, which would not previously have been deemed to be (or to have become) of the essence of such contracts in a court of equity, must receive in all courts the same construction and effect as they would have previously received in such a court. [19-07] Position where statutory rule applies. The statutory rule is not relevant to all time stipulations.17 A threshold question is whether the provision relates to a promise. Application of the equitable approach assumes that the court can compensate the promisee for the promisor’s delay. Therefore, the statutory rule is not relevant if there is no promissory element.

Hypothetical A grants B an option to purchase A’s business. The contract states that B has 14 days within which to exercise the option. B purports to exercise the option 15 days later. Although B is only one day late, B cannot rely on the statutory rule to argue that time is not of the essence. B did not promise to exercise the option within 14 days. Therefore, the statutory rule is not relevant.18 B is disentitled to enforce the contract because a contingency has failed.19 Accordingly, no order for specific performance will be made in B’s favour. A second requirement is that relief by way of specific performance (or injunction) must be relevant.20 On that basis, the statutory rule is irrelevant to contracts for the sale of commodities,21 where specific performance is never ordered. Even assuming that the statutory rule is otherwise relevant, it will be displaced in four situations:22 (1) where the time stipulation is an essential term as a matter of construction; (2) if delay activates an express right to terminate;23

[page 289] (3) if the delay is a refusal to perform the contract; or (4) if the promisor failed to comply with a notice to perform. In each situation, the promisee can elect to terminate the contract. The balance of the chapter is concerned with these situations.

Essential Time Stipulations [19-08] Basis for classification. If time is of the essence, the time stipulation is an essential term of the contract. Under the tripartite classification,24 the term is a condition. If time is not of the essence, the time stipulation is a non-essential term. Under the tripartite classification, the term is either an intermediate term or a warranty.25 Whether time is of the essence depends on the intention of the parties. It is therefore a question of construction.26 However, the impact of the statutory rule, and also the adoption of a tripartite classification for contractual terms, is that there is no general presumption that time is of the essence. In accordance with general principles, a time stipulation may be construed as a condition on the basis of the express agreement of the parties or their implied agreement. Of course, each case depends on its own facts. [19-09] Express agreement. An express agreement that time is essential is present if the contract expressly states that ‘time is of the essence’.27 The parties’ agreement may be general, or apply only to particular terms. If the contract includes a general statement, all the time stipulations are conditions. However, the statement may be given a more restrictive operation. For example, the contract might provide that ‘time of payment is of the essence’. Only the time stipulations relating to payment are conditions. The scope of the parties’ statement is a question of construction. In each case, the promisee can elect to terminate for breach of condition.28 Of course, the parties can always say expressly that ‘time is not of the essence’. [19-10] Implied agreement. If there is no express agreement that time is of the essence, a time stipulation may still be a condition. However, construction of the contract must show an ‘implied agreement’ to that effect. In this situation,

the issue usually relates to a particular term of the contract. The contract is construed as a whole, in light of context. Regard must also be had to the case law. The factors considered earlier29 for contractual terms in general can be applied. Case law suggests certain ‘rules of thumb’ for time stipulations: [page 290] ■ subject matter — the term is likely to be a condition if the subject matter is of a fluctuating or wasting nature, for example, the stock of a business sold as a going concern;30 ■ commercial contract — the term is likely to be a condition in a commercial contract;31 ■ conveyancing transaction — the term is unlikely to be a condition in a sale of land contract;32 ■ payment of money — even in a commercial contract the term is rarely a condition. However, a term stating the time for payment of a deposit is usually a condition;33 ■ procedural matters — promissory procedural terms are not usually conditions;34 and ■ implied time stipulation — if the term requires performance within a reasonable time it is not usually a condition.35 [19-11] Commercial contracts. For well over 100 years,36 the courts have insisted that commercial people generally regard timely performance as important. Time is therefore usually of the essence for express time stipulations dealing with matters other than payment. Accordingly, although the issue is always one of construction, such terms are usually construed as conditions. This approach is designed to promote certainty. There is no presumption of law. And time stipulations in commercial contracts are not always conditions.37

Bunge Corp New York v Tradax Export SA Panama38 concerned an international sale of goods contract.39 The buyers had to name a vessel to receive the goods. Under cl 7, the

buyers were required to give at least 15 days’ notice of the probable readiness of the vessel. The buyers’ notice did not allow the full 15 days. That was a breach of cl 7. Even though the breach would not necessarily cause substantial loss, cl 7 was construed as a condition. Time was therefore of the essence so far as giving the notice was concerned. Several reasons were given to justify this conclusion, including: [page 291] ■ precedent—there was a substantial body of law suggesting that time stipulations in commercial sale of goods contracts are usually intended to be conditions; ■ commercial convenience — it promoted certainty to treat time as of the essence. In other words, parties should know where they stand; ■ relationship between terms — cl 7 was directly related to the sellers’ obligation (also a condition) to nominate the loading port. Lord Roskill said:40 Until the 15 consecutive days’ notice had been given, the [sellers] could not know for certain which loading port they should nominate so as to ensure that the contract goods would be available for loading on the ship’s arrival at that port before the end of the shipment period. An Australian illustration is Bowes v Chaleyer.41 A contract for the sale of silk required shipment of half the goods ‘as soon as possible’ and half two months later. The term was construed as a condition in reliance on the same cases applied in Bunge. These decisions are not beyond reproach. For example, a buyer of goods is unlikely to terminate for delay in delivery if the market price of the goods has risen. This is because the buyer has made a good bargain. But if market prices have fallen the buyer will take advantage of the seller’s breach to extricate itself from a bad bargain.

Non-essential Time Stipulations

Repudiation [19-12] Refusal to perform. A repudiation of obligation is usually established by proving a refusal by the promisor to perform the contract.42 An express refusal to perform is not merely a statement that the contract’s time schedule will not be adhered to. Rather, it is a statement that the contract will not be performed at all. The issue is therefore when a refusal to perform on time is a repudiation. Two situations must be contrasted. First, a promisor’s statement that it will not perform on time is a repudiation if time is of the essence.43 The category of repudiation is ‘prospective breach’.44 Termination of the contract by the promisee brings about an anticipatory breach. Second, if time is not of the essence, there is a repudiation in two cases. One is where the promisor expressly states that it will delay its performance for a period of time which is unreasonably long. The other is where the promisor fails to perform [page 292] on time and its conduct would lead a reasonable person to infer a refusal to perform.45 That will be the position if the conduct of the promisor indicates that: ■ further delay which is unreasonably long will occur; or ■ it will perform when the promisor chooses to do so. The concept of ‘unreasonable’ delay is of course relative to the consequences for the promisee. Delay is unreasonable if seriously prejudicial. In commercial contracts, the criterion is delay ‘frustrating’ the commercial purpose of the contract.46 [19-13] Specific situations. A promisee is entitled to terminate for delay in four specific situations: (1) if there is an express or implied obligation to remedy defects in performance, delay in the remedying breach may be a repudiation;47 (2) the most common case in practice is failure to comply with a notice to perform;48 (3) a promisee who does not serve a notice to perform may rely on

anticipated failure to comply with a notice to perform. This requires proof that, had the notice been served, the promisor would not have complied with the notice;49 and (4) the decision in Universal Cargo Carriers Corp v Citati50 shows that anticipatory breach by inability can be established by reference to inevitable delay. Some of the above may alternatively be characterised as involving a fundamental breach by the promisor.

Fundamental Breach [19-14] Frustrating delay. If time is not of the essence, most time stipulations operate as intermediate terms.51 Therefore, under general principles,52 the promisee is entitled to terminate if delay amounts to a fundamental breach.

Illustration Phibro Energy AG v Nissho Iwai Corp (The Honam Jade)53 concerned a contract for the sale of Dubai crude oil. The oil was to be shipped from Dubai. [page 293] Shipment depended on allocation of space by the Dubai terminal coordinator. The sellers breached their obligation under the contract to seek an acceptance from the coordinator immediately on receipt of the buyers’ nomination of a vessel to ship the goods. The time stipulation was construed as an intermediate term. However, the delay which actually occurred frustrated the commercial purpose of the contract. Accordingly, there was a fundamental breach and the buyers’ termination of the contract was justified.

Failure to Comply with Notice [19-15] The notice procedure. If a promisor breaches a non-essential time

stipulation, the promisee is entitled to serve a notice to perform the term breached.54 For example, assume a sale of land contract between Vince and Pat requires completion on 1 March and that time is not of the essence. If Pat fails to tender payment on that day, Vince should serve a notice requiring Pat to complete the contract. If the requirements of the notice procedure are satisfied but Pat does not pay the price, Vince is entitled to terminate the contract.55 The contract is discharged for repudiation.

Summary The requirements under the notice procedure are:56 ■ trigger event — delay in performance by the promisor; ■ notice — the promisee must give notice to the promisor; ■ specified breach — the notice must specify the promise breached by the promisor; ■ specified reasonable time — the notice must specify a period for performance which is reasonable; ■ warning — the notice must warn the promisor that termination may occur if the notice is not complied with; and ■ qualification — the promisee must not be in breach when the notice is served. Usually, the context of the procedure is a conveyancing transaction. However, it is potentially applicable to any contract.57 [page 294] [19-16] Time of service. The trigger event for service of a notice is breach of a time stipulation. In other words, the agreed time for performance by the promisor must have expired. An express time stipulation nominates a specific date, period or event. It is therefore sufficient that the date has passed, the period has expired or the event has occurred.58 If the time stipulation is implied, the promisor must perform within a reasonable time. There is breach when that period expires. Accordingly, the promisee must wait for a reasonable time to elapse before serving the notice.59

For example, if a sale of land contract does not specify a date for completion, a reasonable time must expire before either party can serve a notice to perform. In order to be entitled to serve a notice to perform, the promisee must not be in breach of contract.60 The promisee must also be ready and willing to perform in accordance with the notice.61 [19-17] Content of notice. The form of the notice may be specified by the contract. If not, the notice must do three things:62 (1) specify the breach; (2) allow a specific time period which is reasonable in the circumstances; and (3) warn the promisor that termination may occur if the notice is not complied with. It follows from (1) that the notice must relate back to the promise breached.

Case study This was established in Louinder v Leis,63 the leading case on notices to complete sale of land contracts. Because the contract was for the sale of land, the purchaser promised to prepare the form for transfer of title. Clause 4 of the contract said that once the vendor had delivered its statement of title the purchaser had 28 days to provide the form of transfer to the vendor. This obligation was breached. The vendor then served a notice on the purchaser which required the purchaser to complete the contract (pay the price) within 21 days. When the notice was not complied with, the vendor purported to terminate the contract. The court held that the vendor was not entitled to do so. It reasoned this way. First, because no date for completion was stated in the contract, the purchaser promised to pay within a reasonable time. Second, since a reasonable time had not expired, the purchaser was not in breach of that obligation. [page 295]

Third, while the vendor might have given notice for the breach of cl 4, that breach did not entitle the vendor to serve a notice relating to a different obligation, namely, to complete the contract and pay the price. Mason J said:64 In principle breach of a non-essential term justifies the giving of a notice fixing a reasonable time for the performance of that term. Generally speaking it does not entitle the innocent party to give notice fixing a time for completion of the contract.

In the result, the vendor’s wrongful termination was a repudiation of the contract.65 [19-18] Effect of failure to comply. Several features of the notice procedure can be identified as the ‘effect of failure to comply’. First, assume a notice to perform is invalid, but the promisee purports to terminate the contract for the promisor’s failure to comply with the notice. That conduct will usually be a repudiation. Louinder v Leis66 is an illustration. Second, if the parties are required to perform concurrently, as in most contracts for the sale of land, a notice to complete the contract will bind both parties. For example, assume that a sale of land contract between V and P requires completion on 1 March. If P fails to complete on that day, V can serve a notice requiring P to complete within, say, 14 days. The notice also binds V. Therefore, if P is ready and willing to perform at the expiry of 14 days, but V is not, P is entitled to terminate the contract. Third, the failure to comply with a valid notice to perform entitles the promisee to terminate the contract. Failure to comply is a repudiation (or fundamental breach) of the contract.67 There is one further point. Courts speak of notices ‘making’ time of the essence. However, the notice does not convert a non-essential time stipulation into an essential time stipulation.68 What becomes ‘of the essence’ is compliance with the notice.

QUICK QUIZ Short answer (1) What is the difference between an essential time stipulation and a non-essential time stipulation?

[page 296] (2) How did common law and equity differ in their treatment of time stipulations? (3) If time is not expressly of the essence, how does a court decide whether time is of the essence? (4) Explain the notice procedure. True or false? (1) Time is always of the essence in commercial transactions. (2) Time is never of the essence in conveyancing transactions. (3) If time is of the essence, any delay entitles the promisee to terminate the contract. (4) If time is not of the essence any delay entitles the promisee to invoke the notice procedure. Choose the best answer (1) In the SAMPLE SALE OF GOODS CONTRACT: (a) time is expressly of the essence; (b) time is expressly not of the essence; (c) time of delivery may be of the essence; (d) time of payment is of the essence; or (e) failure by Seller Ltd to deliver on the Delivery Date is not a breach of contract. (2) In the SAMPLE SERVICES CONTRACT: (a) time of payment is expressly of the essence; (b) time of payment is expressly not of the essence; (c) cl 5 makes the time of payment an essential term of the contract; (d) the time for performance by Provider Ltd is expressly of the essence; or (e) failure by Client Ltd to pay one month after the Effective Date is a breach of contract. (3) In Bunge Corp New York v Tradax Export SA Panama [1981] 1 WLR 711 (see [19-11]), cl 7 was a condition because:

(a)

there is a presumption of law that time stipulations in commercial contracts are conditions; (b) the buyers had said so during negotiations; (c) this was the construction of the contract; (d) the contract concerned perishable goods; or (e) the sellers had served a notice to perform with which the buyers had not complied. (4) If time is not of the essence: (a) neither party can give a notice to perform within a reasonable time; (b) any delay by the promisor is always a fundamental breach of contract; (c) failure to perform on time may be a breach of condition; (d) in a sale of land contract, a party in breach can usually obtain specific performance; (e) failure to perform on time is a repudiation or fundamental breach of contract.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

17 18 19

For (2) see [19-03]. For the consequences of discharge see Chapter 21. See generally Lindgren, Time in Performance. See [14-03]. See [14-03]. See [16-08]. [1962] 2 QB 26 (see [17-29]), Cases and Materials, §13-06C. See [19-08]–[19-11]. See [19-12]–[19-18]. See Bell v Scott (1922) 30 CLR 387 at 397; Raineri v Miles [1981] AC 1050 at 1081. See [1-07]. See eg Canning v Temby (1905) 3 CLR 419 at 425. See eg Parkin v Thorold (1852) 16 Beav 59 at 66; 51 ER 698 at 701 (adopted Canning v Temby (1905) 3 CLR 419). See generally on specific performance Chapter 29. See Carter’s Breach of Contract, §§5-40–5-42. See [1-07]. See ACT: Civil Law (Property) Act 2006, s 501; NSW: Conveyancing Act 1919, s 13; NT: Law of Property Act 2000, s 65; Qld: Property Law Act 1974, s 62; SA: Law of Property Act 1936, s 16; Tas: Supreme Court Civil Procedure Act 1932, s 11(7); Vic: Property Law Act 1958, s 41; WA: Property Law Act 1969, s 21. See Cases and Materials, §29-06S. But cf United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904. See Hare v Nicoll [1966] 2 QB 130; Traywinds Pty Ltd v Cooper [1989] 1 Qd R 222. See [16-21].

20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45

46 47 48 49 50 51 52 53 54

55 56 57 58 59

See Holland v Wiltshire (1954) 90 CLR 409 at 418–19. See generally [29-01]–[29-12]. See [19-11]. But see [32-10] (relief against forfeiture). But see Hewitt v Debus (2004) 59 NSWLR 617; [2004] NSWCA 54. See also on termination clauses applicable to delay [17-02], [17-06]. See [16-13]. See Carter’s Breach of Contract, §§5-39–5-69. See generally on construction Chapter 10. See eg Mehmet v Benson (1965) 113 CLR 295. See [17-04]. See [17-09]. See Lock v Bell [1931] 1 Ch 35. See [19-11]. See eg Louinder v Leis (1982) 149 CLR 509; 41 ALR 187. See eg Brien v Dwyer (1978) 141 CLR 378; 22 ALR 485 (deposit payable under sale of land contract). See eg Gollin & Co Ltd v Karenlee Nominees Pty Ltd (1983) 153 CLR 455; 49 ALR 135 (time for invoking rent review procedure not essential). But see McDougall v Aeromarine of Emsworth Ltd [1958] 1 WLR 1126 (sale of yacht). Since Bowes v Shand (1877) 2 App Cas 455. See eg Phibro Energy Inc v Coastal (Bermuda) Ltd (The Aragon) (1987) [1991] 1 Lloyd’s Rep 61n at 66. [1981] 1 WLR 711, Cases and Materials, §30-29C. CISG did not apply to the contract. See [1981] 1 WLR 711 at 729. The other members of the House of Lords agreed. (1923) 32 CLR 159, Cases and Materials, §30-52C. See [18-07], [18-15]. See Foran v Wight (1989) 168 CLR 385 at 394–5, 416, 441; 88 ALR 413. See [18-08]. See eg Geipel v Smith (1872) LR 7 QB 404 at 411, 413, 414; Satellite Estate Pty Ltd v Jaquet (1968) 71 SR (NSW) 126 at 150; Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623; 85 ALR 183. See MacAndrew v Chapple (1866) LR 1 CP 643 at 648. See further [19-13]. If neither party breached the contract, the parties are discharged by frustration. See [20-16]. See Stanton v Richardson (1872) LR 7 CP 421 (affirmed (1874) LR 9 CP 390; (1875) 45 LJCP 78). See [19-15]–[19-18]. But this is rare in practice. See Etablissements Chainbaux SARL v Harbormaster Ltd [1955] 1 Lloyd’s Rep 303. [1957] 2 QB 401 (see [18-25]). See Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 562; 70 ALR 641. See [17-19]–[17-29]. [1991] 1 Lloyd’s Rep 38. See Peter Butt, ‘Notices to Perform Obligations in Conveyancing Transactions — A View From Down Under’ [1991] Conv 94; J E Stannard, ‘In the Contractual Last Chance Saloon: Notices Making Time of the Essence’ (2004) 120 LQR 137. See [19-18]. For the details see [19-16]–[19-17]. See Charles Rickards Ltd v Oppenhaim [1950] 1 KB 616. See Louinder v Leis (1982) 149 CLR 509 at 513–14; 41 ALR 187. See also Behzadi v Shaftesbury Hotels Ltd [1992] Ch 1. See Green v Sevin (1879) 13 Ch D 589 at 599.

60 61 62 63 64 65 66 67

68

See eg Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286 at 299; 3 ALR 151. See eg McNally v Waitzer [1981] 1 NSWLR 294. See [19-15]. (1982) 149 CLR 509; 41 ALR 187, Cases and Materials, §30-37C. (1982) 149 CLR 509 at 527; 41 ALR 187. Gibbs CJ, Stephen and Wilson JJ agreed. See generally [18-20]. (1982) 149 CLR 509; 41 ALR 187 (see [19-17]). Louinder v Leis (1982) 149 CLR 509; 41 ALR 187. Cf Ciavarella v Balmer (1983) 153 CLR 438 at 446; 48 ALR 407. But cf Samarenko v Dawn Hill House Ltd [2013] 1 Ch 36; [2011] EWCA Civ 1445 (see J W Carter (2013) 129 LQR 149). For another view see Citicorp Australia Ltd v Hendry (1985) 4 NSWLR 22. Louinder v Leis (1982) 149 CLR 509 at 632; 41 ALR 187.

[page 297]

Chapter 20

Discharge by Frustration [20-01] The principle. The doctrine of frustration may apply if unforeseen events after entry into the contract impact on the performance of a contract. Where the requirements are satisfied, the parties are discharged by frustration.1 Lord Radcliffe stated the modern principle in Davis Contractors Ltd v Fareham Urban District Council:2 [F]rustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.

This statement was adopted by the High Court in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales.3 The radical difference referred to in the principle is the result of a ‘frustrating’ event, but more than one event may contribute to frustration. Unlike the position in the context of discharge for breach or repudiation, discharge by frustration is automatic.4 Therefore, no election to terminate is required. [20-02] Impossibility of performance and scope of promise. Why do we need a concept of frustration? To a layperson it may seem self-evident that if performance of a contract is impossible as a matter of fact, there can be no obligation to perform. But it is never impossible to pay money, such as damages for breach of contract. The legal concept of ‘impossibility’ is therefore different and a contract is not frustrated merely because it is impossible to perform the contract. In practical terms, once it has become impossible to perform a contract, the question is whether one party (the promisor) is liable to compensate the other (the promisee) for breach of contract. This raises the fundamental question of what each party promised to do.5 The issue is one of construction.6 Frustration can only occur if construction of the contract shows that the scope of the promisor’s promise does not extend to the circumstances which have actually occurred.

[page 298]

Contrasting examples Jonathan agrees to sell his motor car to Janet. The car is destroyed by fire prior to delivery. It is impossible for Jonathan to supply the vehicle. If neither party caused the fire, the contract is frustrated.7 A contrasting example is a contract under which C charters U’s vessel to carry scrap iron. C intends to obtain the scrap from X, but X refuses to supply C. Since there are no other suppliers, it is impossible for C to perform its promise to provide a cargo for U to carry. However, the contract is not frustrated. Because the scope of C’s performance duty extends to the situation created by X’s default, C must pay compensation to U.8 [20-03] Both parties considered. Under the doctrine of frustration, both parties are discharged. Therefore, the scope of each party’s performance duty must be considered. If Jonathan agrees to sell his motor car to Janet, and the car is destroyed by fire before delivery, but neither party is at fault, an issue still arises as to Janet’s position. It is not impossible for her to pay the price. The question is whether her promise to pay extends to this situation. That depends on who bears the ‘risk’ of destruction, not who owned the vehicle when the fire occurred. Janet can rely on frustration if the risk did not pass to her under the contract.9 [20-04] Absolute obligations. The doctrine of frustration is sometimes seen as an exception to a general rule that contractual obligations are absolute. It then qualifies the ‘rule in Paradine v Jane’.10 In that case, the defendant was sued for non-payment of rent under a lease. His defence was that ‘a certain German prince, by the name Prince Rupert, an alien born, enemy to the King and kingdom, had invaded the realm’ and with force evicted the defendant from the land.11 The court held the defendant liable to pay. This ruling has been rationalised on the basis that the duty to pay rent was an absolute obligation.12 Whatever the position in the 17th century, today very few contracts create absolute performance obligations. So much follows from the presumption of dependency of obligation.13 But it is also contrary to common sense to start with an assumption that each party has promised to perform ‘come hell or high water’. Even promises expressed in absolute terms are seldom literally

construed.14 It follows that the doctrine of frustration is potentially applicable to any contract.15 [page 299] [20-05] Force majeure. Frustration does not merely provide a defence to an action for failure to perform a promise: the contract is discharged. There is a contrast with a concept of force majeure, used in some legal systems to excuse a failure to perform caused by an event beyond the promisor’s control. Australian law knows of no force majeure concept other than as agreed by the parties.16 The two basic points are: (1) the concept applies only if the parties have agreed to a force majeure clause; and (2) what the clause achieves depends on construction of the contract. Modern commercial contracts frequently include force majeure clauses. The purpose is to provide a defence for a failure to perform where an event (outside the parties’ control) impacts on performance but does not frustrate the contract.17 Although the concern is with a clause applying to events beyond the control of the parties, it need not be labelled ‘force majeure’. There will usually be a definition of ‘force majeure’ relating to matters such as a strike or bad weather affecting a building contract. How the clause operates will depend on its terms. For example, it may excuse a party or suspend performance.18 Force majeure clauses are usually construed narrowly. For example, an unexpected rise (or fall) in the market price of electricity is unlikely to be within the scope of a force majeure clause expressed in general terms — such as events ‘beyond the reasonable control of the parties’ — in a fixed price electricity supply contract.19 Although force majeure clauses are not promises,20 the ability to rely on the clause may depend on reasonable steps being taken. That may be expressly provided for.

Illustration B & S Contracts and Design Ltd v Victor Green Publications Ltd21 concerned a contract to erect certain exhibition stands. The force majeure clause began ‘[e]very effort will be made to carry out any contract’.

The clause was invoked when the contractor’s employees threatened not to erect the stands unless substantial payments were made by the contractor. However, the contractor had not made ‘every effort … to carry out’ the contract. Therefore, the clause did not apply. [page 300]

Elements of the Principle [20-06] Event. The first element of the frustration principle is the event which is put forward as frustrating the contract. In order to be capable of having that effect, the event must have certain characteristics: ■ impact — it had a radical impact on performance;22 ■ no fault — it was not caused by the promisor;23 ■ unforeseen — it was outside the reasonable contemplation of the parties;24 and ■ during performance — it occurred after entry into the contract.25 [20-07] Substantially different performance. In order to decide whether an event has had the ‘radical’ impact required to frustrate a contract, a comparison must be made. The situation after the event must be compared with what the parties contemplated. What was ‘contemplated’ by the contract is arrived at by construing the contract. What was each party obliged to do (and entitled to receive)? This is a question of law. Establishing the situation after the event is essentially a factual matter.26 Only if there is a ‘substantial’ difference between the two situations can the event be said to have had a ‘radical’ impact.27

In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales,28 a contractor agreed to excavate tunnels for the Eastern Suburbs Railway. Its intention, known to the Rail Authority, was to work three shifts per day, six days per week. Under statute, the Rail Authority enjoyed a certain immunity from court injunctions.

Having been engaged by the Rail Authority, everyone assumed that the contractor would have the benefit of the Authority’s immunity. However, that was incorrect. Local residents obtained an injunction which made it impossible for the contractor to carry out its work as intended. Although the work would take longer to complete, it could still be done. But was the contract nevertheless frustrated? Was there a substantial difference between the situation contemplated by the contract and the actual situation? Two features could be identified: [page 301] (1) considerable delay in completing the work; and (2) the contractor’s burden of performance would be increased significantly because it had no right to recover its increased costs. By majority, the High Court held that what had occurred was capable of frustrating the contract. The case was remitted to the arbitrator for a final decision, but the court regarded that as little more than a formality. [20-08] Absence of fault. A promisor who caused or contributed to the occurrence of the event cannot invoke frustration. Such frustration is said to be ‘self-induced’29 and the parties are not discharged. In this sense, fault prevents reliance on frustration. Therefore, in the example given earlier,30 the contract is not frustrated if John set fire to the car. Many statements about self-induced frustration refer to neither party being at fault.31 However, it is sufficient that the party relying on frustration is not at fault.32 Assume that an employee commits a criminal offence and is sentenced to a custodial term. Assume also the offence was not committed in performance of the contract. If the requirements for frustration are otherwise satisfied, the employee cannot rely on its criminal act as ‘fault’ and say that frustration was self-induced. It is sufficient that the employer was not at fault.33 [20-09] Discharge. The final element of the principle is that frustration discharges the parties. Both parties are discharged automatically.34 Neither party can require the other to perform the contract.35 For example, in Denny Mott & Dickson Ltd v James B Fraser & Co Ltd36 a trading agreement was frustrated by

defence regulations which made performance of the contract illegal. Once that occurred, the parties were discharged and an option to purchase which the contract included could not be exercised. The consequences of discharge by frustration can be complex.37 In some jurisdictions, statutory provisions apply.38 [page 302]

Frustrating Events General [20-10] Introduction. Frustration is a fairly narrow concept, in the sense that the requirements of the principle are rarely satisfied. Frustrating events are analysed by reference to three categories. Expressed generically, they are: (1) impossibility of performance; (2) frustration of the commercial venture; and (3) frustration of purpose.

Impossibility of Performance [20-11] Death and incapacity. If there is an element of personal service in a contract, the death or permanent incapacity of a contracting party discharges the parties. Each illustrates a frustrating event within the scope of ‘impossibility of performance’. For example, in Simmons Ltd v Hay39 a contract with a printery engineer was discharged by frustration when illness permanently incapacitated the employee. However, permanent incapacity is not always necessary. Prolonged incapacity may be sufficient.40 Without the personal service element, the death of a party does not frustrate the contract. For example, if a vendor agrees to sell land to a purchaser, the vendor’s legal personal representatives are bound to perform following the vendor’s death.41 [20-12] Destruction of subject matter. The doctrine of frustration originated in the context of destruction of the subject matter of the contract.

Origin of the Law In Taylor v Caldwell,42 Caldwell contracted to hire the Surrey Gardens and Music Hall to Taylor for four days. Caldwell would provide at his own expense:43 [F]or the amusement of the public and persons then in the said Gardens and Hall, an efficient and organised military and quadrille band a ballet or divertissement, if permitted; a wizard and Grecian statues; tight rope performances; … boats on the lake, and (weather permitting) aquatic sports … [And] Mr Sims Reeves and other artistes will sing at the said gardens .

[page 303] Taylor agreed to pay £100 per night, and to find the ‘necessary artistes’. He was entitled to all entrance fees. Before the festivities could take place, the hall was destroyed by fire. Taylor sued for damages. He failed because the court held that the contract was frustrated. It said:44 The principle seems to us to be that, in contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance.

The sale of goods legislation includes a provision45 which reflects Taylor v Caldwell. It states that a contract to sell specific goods is ‘avoided’ (frustrated) if the goods perish without fault by either party before risk passes to the buyer. The contract is not frustrated if destruction occurs when the goods are at the buyer’s risk.46 The rule is restricted to specific goods, that is, goods identified and agreed upon at the time of the contract. If City Cars Ltd agrees to sell a motor car identified as registration ABC123 to Brown, the contract relates to specific goods: the vehicle is identified by its registration number. By contrast, the subject matter of an agreement to sell ‘100 tonnes of wheat’ is not a specific parcel of wheat. For such contracts, frustration is governed by the general law.47 [20-13] No source of supply. Assume that a retailer agrees to sell ‘one Brand X television’, intending to deliver it from stock in its warehouse. What is the position of the retailer if the warehouse burns down before delivery? Superficially, this appears to be like Taylor v Caldwell.48 However, the contract is not frustrated. The retailer must source the television elsewhere. Otherwise, it

will breach the contract. If a contract does not nominate a particular source, the supplier bears the risk of its intended source drying up for some reason.49 Therefore, the contract would have been frustrated had it described the goods as ‘one Brand X television from those currently in our warehouse’.

Commercial Impossibility [20-14] Background. The most important frustration category in practice is ‘commercial impossibility’. Although performance may not be impossible as a matter of fact, it may be impossible in a commercial sense. Frustration occurs if an event [page 304] renders the commercial venture substantially different from that contemplated by the contract.50

Origin of the law Jackson v Union Marine Insurance Co Ltd51 was the first clear case. A vessel was chartered to load a cargo at Newport for transport to San Francisco. The vessel ran aground on the rocks in Carnarvon Bay on its way to Newport. Of course, it had to be got off and repaired before the cargo could be collected. There would necessarily be delay.52 In fact, it was clear that the delay would be so long as to make the venture substantially different from that contemplated by the contract. Therefore, the contract was frustrated. [20-15] Increase in burden of performance. The mere fact that the burden of performance of a contract is increased by an unforeseen event does not amount to frustration. Building contracts frequently end up being more onerous than contemplated. Even if the event which caused this was beyond the control of the contractor, cases of frustration are quite rare. Davis Contractors Ltd v Fareham Urban District Council53 is a typical example. In that case, contractors agreed to build 78 houses over a period of eight months for a price of about £95,000. It was anticipated that a sufficient labour force would be available. But there was a shortage of skilled labour after the war. The work ended up taking 22 months, at

an extra cost to the contractors exceeding £17,500. It was held that frustration had not occurred. Davis Contractors was distinguished in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales.54 The High Court’s decision may suggest a more generous approach to commercial impossibility. [20-16] Delay. Delay in performance is often relied on in cases of alleged frustration. Unsurprisingly, the criterion is ‘frustrating delay’.55 The criterion is satisfied if the commercial purpose of the contract has been frustrated. Jackson v Union Marine Insurance Co Ltd56 is an example. The time for assessing delay is the date when the contract was alleged to be frustrated. However, the party making the allegation is not limited to actual delay. Prospective delay can be taken into account. Indeed, to assist commercial parties in making their decisions, it is sufficient that a reasonable person in the position of the party alleging frustration would foresee a frustrating delay as likely to occur. This means that a contract may be frustrated even though the anticipated delay would not actually have happened. [page 305]

Illustration In Embiricos v Sydney Reid & Co,57 a vessel was chartered to load a cargo of grain at a port in the Sea of Azoff and carry it to the United Kingdom. The vessel sailed under the Greek flag. Following arrival at Temrieuk (her loading port), some cargo was received. Loading was discontinued when it was learned that Greek vessels were being seized by Turkish authorities at the Dardanelles, a narrow strait of water through which the vessel would have to pass. On 18 October 1912 war was declared between Greece and Turkey. The Turkish Government said Greek vessels could travel through the Dardanelles, but only until 24 October. Because it was impossible to complete loading before that date, the charterers cancelled the contract on 21 October. However, the period of permission was unexpectedly extended. Had they waited, the charterers could have loaded a complete cargo and passed safely through the Dardanelles. Scrutton J decided that because at the time of the charterers’

cancellation a reasonable person in their position would have predicted a frustrating delay, it did not matter that no such delay would have occurred. The contract was frustrated.

Illegality and War [20-17] Supervening illegality. If performance becomes illegal after it was agreed, the contract ceases to bind the parties. For example, in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd58 a sale of goods contract was frustrated because it provided for delivery to Gdynia, Poland. Once Poland was occupied by German forces, performance became illegal. The contract was frustrated. The decision illustrates that supervening illegality will frustrate a contract if lawful performance is impossible. However, the mere fact that legislation which affects the performance of a contract is enacted after the contract was agreed does not frustrate the contract. The impact must be ‘radical’. Scanlan’s New Neon Ltd v Tooheys Ltd59 concerned a contract to hire neon signs. Due to wartime orders, the signs could not be illuminated by day or night. This did not frustrate the contract. It was not illegal to leave the signs in place, and they continued to serve an advertising function in the daytime. [20-18] When war may frustrate a contract. Unless it makes performance of the contract illegal, as where performance would involve trading with the enemy, a declaration of war does not frustrate a contract. [page 306] The more usual case is therefore where acts done in furtherance of the war, or the war effort, impact on the contract. In accordance with the general principle, the contract is frustrated if what is done makes performance of the contract substantially different from that contemplated by the contract. In Metropolitan Water Board v Dick Kerr & Co Ltd60 work under a contract for the construction of a reservoir was ordered to cease by the Ministry of Munitions. The contract was frustrated because the order made lawful performance of the contract impossible for an unreasonably long period of time.

Frustration of Purpose [20-19] The principle of Krell v Henry. The last of the frustration categories relies on the idea that a contract may have as its ‘foundation’ a particular assumption which gives the contract a very specific purpose or objective. If the foundation proves to be incorrect, the contract is frustrated if the purpose or objective becomes substantially unattainable.

Case study This is derived from the decision in Krell v Henry,61 where Vaughan Williams LJ said:62 I think that you first have to ascertain, not necessarily from the terms of the contract, but, if required, from necessary inferences, drawn from surrounding circumstances recognised by both contracting parties, what is the substance of the contract, and then to ask the question whether that substantial contract needs for its foundation the assumption of the existence of a particular state of things. If it does, this will limit the operation of the general words, and in such case, if the contract becomes impossible of performance by reason of the non-existence of the state of things assumed by both contracting parties as the foundation of the contract, there will be no breach of the contract thus limited …

Krell was one of a number of ‘Coronation cases’. These arose out of the postponement of the Coronation of Edward VII due to his illness. In this case, Krell hired a flat in Pall Mall for two ‘days (but not the nights)’. The flat provided a vantage point to view the Coronation procession. The context of the agreement showed that the foundation of the contract was the procession, and that the objective was to view the event. When the procession was cancelled, the contract was frustrated. The principle was for a time regarded with suspicion.63 Care needs to be exercised when applying it. But perhaps the neatest — and certainly the briefest — statement of the idea behind Krell v Henry was made by Ackner LJ in Empresa Exportadora [page 307]

de Azucar v Industria Azucarera Nacional SA (The Playa Larga)64 when he said that non-occurrence of an event may render performance of a contract ‘pointless’. [20-20] Uncontemplated turn of events not necessarily sufficient. The principle of Krell v Henry65 does not apply unless the objective of the contract has become substantially unattainable. From this perspective, Krell is usually contrasted with another Coronation case: Herne Bay Steam Boat Co v Hutton.66 The purpose of the contract was to view a naval review which was part of the Coronation festivities. It was held that cancellation of the review did not frustrate the contract. The purpose of the contract was not defeated because, to quote the contract, it was still of value to take a ‘day’s cruise round the fleet’. Another situation which is outside the principle of Krell v Henry is where the expectations of one party are merely to some extent disappointed by an unforeseen event. For example, in Scanlan’s New Neon Ltd v Tooheys Ltd67 neon signs could not be illuminated due to wartime orders. The hirer’s expectations were to some extent disappointed. But because the signs could be read in daylight the purpose of the contract was not frustrated.

Contracts Involving Land [20-21] The problem. In many instances frustration has involved destruction of the subject matter of a contract.68 Land has a degree of permanency not shared by other subject matter: it rarely disappears. This narrows somewhat the range of events which may frustrate such contracts. There is also a technical problem. Although the purchaser does not become the legal owner until the contract is completed,69 the purchaser under a sale of land obtains an interest in the property. A lease confers an interest in land — exclusive possession for the duration of the lease. Another difference between sale and lease is that a lease creates a continuing contractual relationship. To hold that either type of transaction may be frustrated involves the conclusion that an interest in real property can come to an end by operation of law. Courts have had difficulty with this proposition. [20-22] Sale of land. Although there is little authority, the doctrine of frustration applies to sale of land contracts. It may therefore operate, but only in the period prior to completion of the contract.

[page 308] Subject to the contract (and statute),70 a purchaser of land takes certain risks, including: ■ house destroyed by fire — the risk that buildings on the land will be destroyed by fire;71 and ■ no development approval — the risk that government approval will not be given for a development on the land intended by the purchaser.72 Accordingly, only particularly serious events such as a landslip,73 or perhaps resumption of the land by the government,74 raise a frustration issue. [20-23] Leases. Most residential leases can be terminated at short notice. The property interest is therefore of marginal significance and such a lease can be frustrated. Leases for a term of years are a different matter. The law is in a confused state. A majority of the High Court held in Firth v Halloran75 that the doctrine of frustration does not apply to leases. Since this decision binds lower courts, it is surprising to find cases76 which purport to apply the doctrine. English law is clearer. It was held in National Carriers Ltd v Panalpina (Northern) Ltd77 that a lease can be frustrated. Assuming that the High Court ultimately decides that frustration does apply,78 frustration will depend on an analysis of the event in issue. Although the lease in Panalpina was held not to have been frustrated, it was said that frustration might occur by coastal erosion. The more difficult question is whether an event which merely prevents enjoyment of the land can amount to frustration. Panalpina also suggests there are two main factors: (1) the object of the lease; and (2) its duration. Accordingly, frustration is much more likely to occur in relation to a lease of five years than one for 50 years. In relation to the former, it would be easier to establish that the commercial purpose of the lease cannot be achieved because of the frustrating event. [page 309]

Foresight and Terms Dealing with Frustration [20-24] Foresight. Just about any event is foreseeable, even if the odds against it occurring are a million to one, such as winning a lottery! To deny the application of the frustration doctrine simply because the event was foreseeable in that sense would considerably reduce its utility. Therefore, frustration is more concerned with unforeseen than unforeseeable events. Three questions may arise. First, did the parties in fact foresee that the event would occur? If they did not, the contract may be frustrated. Second, if parties did foresee that the event might occur, does the contract allocate the risk of the event? This is a question of construction. It may be inferred from a failure to deal expressly with the matter that the parties intended to let the risk lie where it falls.79 The contract is unlikely to have been frustrated. Third, what is the position if the parties ought to have foreseen the occurrence of the event? The general rule here is not so much that frustration does not occur as that it is more difficult to prove. A fairly stringent criterion is applied. The event must have been likely to occur. For example, in Simmons Ltd v Hay80 an employment contract was frustrated by the employee’s illness even though he was not in good health when the contract was entered into. Obviously, it was foreseeable that the illness might (ultimately) permanently incapacitate the employee. However, that was not a likely consequence of the illness. By contrast, in Davis Contractors Ltd v Fareham Urban District Council81 the ‘possibility of enough labour and materials not being available was before their eyes and could have been the subject of special contractual stipulation’. That was at least a factor supporting the conclusion that the building contract at issue had not been frustrated. [20-25] Terms. Parties may exclude the doctrine of frustration by allocating the risk of events which would otherwise frustrate the contract to one or other of the parties.82 However, the term must not infringe public policy.83 For example, the parties cannot agree under a force majeure clause to suspend performance for the duration of a war if the contract has become illegal.84 The mere fact that a term in the contract deals to some extent with the event alleged to frustrate the contract does not mean that the parties have dealt with the matter. The contract must be construed to see whether the term is a comprehensive statement. For example, in Metropolitan Water Board v Dick

Kerr & Co Ltd85 a construction contract was frustrated when the Minister of Munitions ordered the [page 310] work to cease for an indeterminate period. The contract gave an engineer the power to extend the time for the work to be completed if it was delayed by ‘any difficulties or impediments … whatsoever and howsoever occasioned’. The court held that the Minister’s order went beyond anything contemplated by the clause. It was therefore inapplicable and the contract was frustrated. Commercial contracts sometimes include termination clauses86 referring to events other than breach, including those which might frustrate the contract.87 One purpose is to avoid the uncertainty involved in predicting the conclusion of a court applying common law principles. The scope of these clauses is a question of construction. For example, if a contract between A and B confers a termination right on A when event X occurs, B may still be able to rely on frustration in relation to the same event if A does not exercise its express right.88

Self-induced Frustration [20-26] The concept. If frustration occurs due to the fault of one of the parties, ‘frustration’ is said to be ‘self-induced’.89 That is, of course, something of a contradiction. There is in point of law no frustration if the promisor caused the event alleged to frustrate the contract. In other words, the parties are not discharged.

Illustration Maritime National Fish Ltd v Ocean Trawlers Ltd90 illustrates the concept. The facts are a bit confusing. Five fishing trawlers were operated by Maritime National in the fishing industry. One of the vessels (the St Cuthbert) was under charter from Ocean Trawlers. Licences were required for the otter trawls with which the five vessels were fitted. Unfortunately, the minister granted only three licences. Maritime National decided not to apply any of the licences to the St

Cuthbert. They asked Ocean Trawlers to take the vessel back, claiming that the contract was frustrated. It was held that frustration had not occurred. The event on which Maritime National relied (that there was no licence for the St Cuthbert) was caused by its own act. Any ‘frustration’ was self-induced. [20-27] Scope of the concept. Frustration cannot occur if there is ‘fault’ (or ‘default’).91 The scope of the concept has never been authoritatively stated. However, there is no requirement for the act relied upon to be intentional, or that it be a breach of contract.92 That the act will often be a breach of contract is reflected in the [page 311] rule that the onus of proving fault rests on the party who asserts that frustration was self-induced.93

Illustration In J Lauritzen AS v Wijsmuller BV (The Super Servant Two),94 a contract was agreed for the transport of a large drilling rig. The defendants owned two vessels: the Super Servant One (SS1); and the Super Servant Two (SS2). Under the contract, the defendants had the option to use either vessel. Their intention was to transport the rig on the SS2. However, the SS2 sank before they exercised their option to choose it. Since the SS1 was being used for another contract, no vessel could be nominated under the contract. Were the defendants correct in saying that the contract had been frustrated? The court said no. Because the defendants had not nominated the SS2, they breached the contract by not ensuring that the SS1 could carry the rig.

Theories of Frustration [20-28] Construction. Of the various theories of frustration that have been put forward over the years, the theory applied in the recent authorities is ‘construction’.95 The parties are discharged because construction of the contract

shows that they did not agree to be bound in the circumstances created by the frustrating event. Therefore, the requirements of the doctrine are applied by construing the contract.96 [20-29] Implied term. For a long time, frustration was based on an implied term of the contract.97 In other words, an event frustrates a contract if the agreement includes an implied term under which the parties are discharged by the event.98 Under the construction theory, frustration may occur even though a term dealing with the event which has occurred cannot be implied.99 In Davis Contractors Ltd v Fareham Urban District Council,100 Lord Reid gave an example to show the artificiality of the implied term approach: A tiger has escaped from a travelling menagerie. The milkgirl fails to deliver the milk. Possibly the milkman may be exonerated from any breach of contract; but, even so, it would seem hardly reasonable to base that exoneration on the ground that ‘tiger days excepted’ must be held as if written into the milk contract.

[page 312] [20-30] Just solution. Frustration has been described101 as a ‘device, by which the rules as to absolute contracts are reconciled with a special exception which justice demands’. However, the solution of frustration cannot always be described as ‘just’.102 There are three other defects. The theory: (1) is based on the misconception103 that contractual duties are absolute; (2) does not explain when the concept operates; and (3) implies that courts enjoy a discretion, which is not correct. [20-31] Disappearance of foundation. Occasionally, it has been suggested104 that frustration applies whenever the foundation of the contract has disappeared. This does explain some cases of frustration.105 However, it does not explain them all. In addition, as a possible general theory, it is ‘too vague’106 to be adopted.

QUICK QUIZ

Short answer Explain: (1) the purpose of the doctrine of frustration; (2) the concept of impossibility of performance; (3) ‘war’ as a frustrating event; (4) ‘self-induced frustration’; and (5) whether the doctrine of frustration applies to contracts involving land. True or false? (1) Frustration may occur if an event deprives a promisor of substantially the whole benefit of the contract. (2) A contract may be frustrated by destruction of the subject matter of the contract. (3) ABC Ltd (in Australia) contracts with DEF Inc (in the United States). The contract is frustrated when Australia declares war on the United States. (4) Whereas the doctrine of frustration does not apply to a contract for the sale of land, it does apply to a 10-year lease of commercial premises. (5) The implied term theory is the best explanation for frustration. [page 313] Choose the best answer (1) Ned, in New South Wales, agrees to sell 100 tonnes of his crop of wheat, to be delivered in Victoria, to Vicki. The contract may be frustrated if: (a) Ned’s wheat crop fails without fault on his part; (b) Ned sells all his wheat to Queenie; (c) the Victorian government bans the export of wheat from Victoria; (d) there is a one-week rail strike; or

(2)

(3)

(4)

(5)

(e) the price of wheat increases by 60%. A contract between A and B requires A to use his unique transport vehicle (UTV) to collect B’s goods from Melbourne on 1 March and deliver them to B in Sydney before 10 March. The contract is frustrated if: (a) UTV breaks down on 28 February; (b) UTV breaks down on 1 March; (c) UTV breaks down on the way to Melbourne; (d) UTV breaks down halfway to Melbourne and it will take until 11 March to fix it; or (e) UTV breaks down after travelling 100 km and it is uncertain how long the repairs will take. Katie grants Jon a licence to use her city apartment to view the Sydney marathon and parade of athletes on 1 April. Jon pays her $1000 and Katie gives Jon the key. The contract is frustrated if: (a) Katie changes the locks on the apartment; (b) the marathon is cancelled; (c) the parade is cancelled; (d) both the marathon and parade are cancelled; or (e) it rains on the day of the marathon. P enters into a contract to purchase V’s land with the intention of knocking down the building on the land. The contract is frustrated if, before completion: (a) the local council designates the building as one of historical interest; (b) the building is destroyed by fire; (c) P loses his purchase money at the races; (d) the land is washed into the sea; or (e) V sells the land to X. In relation to the SAMPLE SERVICES CONTRACT, there is a one-week strike by Provider Ltd’s workforce: (a) Client Ltd may terminate the contract under cl 7.3(a); (b) Provider may terminate the contract under cl 7.3(a); (c) Client may terminate the contract under cl 7.4(b); (d) performance of the contract is suspended by cl 7.4(a); or (e) Provider may terminate the contract under cl 7.4(b).

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For the consequences of discharge see Chapter 21. [1956] AC 696 at 729. The sentence in Latin is a quote from Virgil’s Aeneid, book IV, l 339. (1982) 149 CLR 337; 41 ALR 367. See [20-09]. See [15-02]. See generally Chapter 10. See further [20-03], [20-12]. See Universal Cargo Carriers Corp v Citati [1957] 2 QB 401 (see [18-25]). See further [20-13]. See further [20-12]. (1647) Aleyn 26 at 27; 82 ER 897 at 897. See Cases and Materials, §33-14. Given that Prince Rupert was the nephew of Charles I, and commander of the Royalist cavalry’, it seems odd that he was described as ‘enemy to the King. See further [20-23]. See [15-11]. See also Joseph Constantine SS Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154 at 184. But see [20-21]–[20-23] (land contracts). See Donald Robertson, ‘Force Majeure Clauses’ (2009) 25 JCL 62. See eg Plaimar Ltd v Waters Trading Co Ltd (1945) 72 CLR 304; Hong Guan & Co Ltd v R Jumabhoy & Sons Ltd [1960] AC 684. See eg Tennants (Lancashire) Ltd v C S Wilson & Co Ltd [1917] AC 495. See further [20-25], [21-03]. See Thames Valley Power Ltd v Total Gas & Power Ltd [2006] 1 Lloyd’s Rep 441; [2005] EWHC 2208 (Comm). But procedural requirements may be promissory. See eg Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109. [1984] ICR 419. See [20-07]. See [20-08]. See [20-24]–[20-25], where terms dealing with frustration are also discussed. See [24-01]. Appellate courts are reluctant to interfere with the conclusion of a trial judge or arbitrator. See Kodros Shipping Corp of Monrovia v Empresa Cubana de Fletes (The Evia) (No 2) [1983] 1 AC 736. See Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; 41 ALR 367. (1982) 149 CLR 337; 41 ALR 367, Cases and Materials, §33-05C. See Jane Swanton, ‘Discharge of Contracts by Frustration’ (1983) 57 ALJ 201. See further [20-26]–[20-27]. See further [20-02]. Including the statement of principle quoted in [29-01]. For the position where both parties are at fault see Bremer Vulkan Schiffbau und Maschinenfabrik v South India Shipping Corp Ltd [1981] AC 909. Cf F C Shepherd & Co Ltd v Jerrom [1987] QB 301. See eg Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169 at 203; Denny Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] AC 265 at 274. But see [21-05] (accrued rights remain enforceable). [1944] AC 265. Contrast Islamic Republic of Iran Shipping Lines v Steamship Mutual Underwriting Association (Bermuda) Ltd [2011] 1 Lloyd’s Rep 195 at 217; [2010] EWHC 2661 (Comm) at [116].

37 38 39 40 41 42 43 44 45

46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76

See generally Chapter 21. See [30-25]–[30-36]. (1964) 81 WN (Pt 1) (NSW) 358 (see [20-24]). See Carmichael v Colonial Sugar Refining Co Ltd (1944) 44 SR (NSW) 233 at 235–6. Cf Finch v Sayers [1976] 2 NSWLR 540. But the contract may provide for a different result, such as that either party may terminate the contract. (1863) 3 B & S 826; 122 ER 309. See Cases and Materials, §33-14. (1863) 3 B & S 826 at 828–9; 122 ER 309 at 311. Cf Lennon and McCartney, ‘Being for the Benefit of Mr Kite’. (1863) 3 B & S 826 at 838; 122 ER 309 at 314. ACT: Sale of Goods Act 1954, s 12; NSW: Sale of Goods Act 1923, s 12; NT: Sale of Goods Act 1972, s 12; Qld: Sale of Goods Act 1896, s 10; SA: Sale of Goods Act 1895, s 7; Tas: Sale of Goods Act 1896, s 12; Vic: Goods Act 1958, s 12; WA: Sale of Goods Act 1895, s 7. See Cases and Materials, §33-14. See the example in [20-03]. See eg Comptoir d’Achat et de Vente du Boerenbond Belge SA v Luis de Ridder Limitada (The Julia) [1949] AC 293. See also [12-13]. (1863) 3 B & S 826; 122 ER 309 (see [21-12]). See Gelling v Crespin (1917) 23 CLR 443. See also [21-04] (partial discharge). See also [20-07]. (1874) LR 10 CP 125. See Cases and Materials, §33-14. A clause of the contract excepting ‘perils of the seas’ meant that there was no breach of contract. [1956] AC 696, Cases and Materials, §33-17C. (1982) 149 CLR 337; 41 ALR 367, Cases and Materials, §33-05C. References to ‘unreasonable’ delay must be understood in the same sense. See Kodros Shipping Corp of Monrovia v Empresa Cubana de Fletes (The Evia) (No 2) [1983] 1 AC 736. (1874) LR 10 CP 125 (see [20-14]). [1914] 3 KB 45, Cases and Materials, §33-25C. [1943] AC 32. (1943) 67 CLR 169. See also [20-09]. Cf Gamerco SA v ICM/Fair Warning (Agency) Ltd [1995] 1 WLR 1226 (see J W Carter and Gregory Tolhurst (1996) 10 JCL 264). [1918] AC 119 (see [20-25]). [1903] 2 KB 740. See Cases and Materials, §33-14. [1903] 2 KB 740 at 749. See eg Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169. [1983] 2 Lloyd’s Rep 171 at 187. [1903] 2 KB 740. [1903] 2 KB 683. (1943) 67 CLR 169. See [20-12]. And the transfer is registered at the land titles office. See Insurance Contracts Act 1984 (Cth), s 50 (sale of insured property); Conveyancing Act 1919 (NSW), s 66K (postponement of passing of risk to purchaser). See British Traders’ Insurance Co Ltd v Monson (1964) 111 CLR 86. See Meriton Apartments Pty Ltd v McLaurin & Tait (Developments) Pty Ltd (1976) 133 CLR 671; 10 ALR 296. See Wong Lai Ying v Chinachem Investment Co Ltd (1979) 13 Build LR 81. See Austin v Sheldon [1974] 2 NSWLR 661. (1926) 38 CLR 261, Cases and Materials, §33-42C. See eg Robertson v Wilson (1958) 75 WN (NSW) 503.

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[1981] AC 675. This would seem inevitable. See Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17; 57 ALR 609 (doctrine of repudiation applies to leases). See Ocean Tramp Tankers Corp v V/O Sovfracht (The Eugenia) [1964] 2 QB 226 at 239; Re NIAA Corp Ltd (1993) 33 NSWLR 344 at 362. (1964) 81 WN Pt 1 (NSW) 358, Cases and Materials, §33-57C. See also W J Tatem Ltd v Gamboa [1939] 1 KB 132 (interruption greater than anything contemplated). [1956] AC 696 at 731 per Lord Radcliffe. For the facts see [20-15]. See eg Claude Neon Ltd v Hardie [1970] Qd R 93. See generally [35-11]–[35-14]. See Ertel Bieber & Co v Rio Tinto Co Ltd [1918] AC 260. [1918] AC 119. See generally [17-02]. See also [20-05], [21-03] (force majeure clause). See Bank Line Ltd v Arthur Capel & Co [1919] AC 435. See generally Jane Swanton, ‘The Concept of Self-Induced Frustration’ (1990) 2 JCL 206. [1935] AC 524, Cases and Materials, §33-63C. See [20-08]. Cf Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169 at 186. See Joseph Constantine SS Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154. [1990] 1 Lloyd’s Rep 1. See Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; 41 ALR 367. See [20-07]. See eg Taylor v Caldwell (1863) 3 B & S 826 at 838; 122 ER 309 at 314 (see [20-12]). See generally on implied terms Chapter 8. See Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; 41 ALR 367. [1956] AC 696 at 720. Hirji Mulji v Cheong Yue SS Co Ltd [1926] AC 497 at 510 per the Privy Council. The frustrated contracts legislation redresses injustices in common law consequences. See [3025]–[30-36]. See [20-04]. See eg W J Tatem Ltd v Gamboa [1939] 1 KB 132 at 137. See eg [20-19]. See National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 at 703 per Lord Simon.

[page 314]

Chapter 21

Consequences and Scope of Discharge [21-01] Both parties discharged. The first point to note about discharge for breach or repudiation, or by frustration, is that both parties are discharged. Accordingly, even when a contract is terminated for breach, the promisor is discharged from further performance. Discharge relates to the duty to perform (or to be ready and willing to perform)1 unperformed obligations.2 Because the parties are discharged, neither party can require the other to perform. So far as discharge is concerned, the difference3 between breach (or repudiation) and frustration is that discharge by frustration is automatic.4 There is no requirement for a promisee to ‘elect’ to terminate. Since the discussion below deals with principles under the general law, it does not deal with consequences provided for by statute. For example, the ACL expressly regulates the consequences of termination of a contract for the failure of a supplier to comply with a consumer guarantee.5 And in some jurisdictions the consequences of discharge by frustration are regulated by the frustrated contracts legislation.6

Discharge, Rescission and Suspension [21-02] Discharge and rescission. Discharge for breach or repudiation occurs when the promisee elects to terminate the contract. It is not retrospective.7 Similarly, discharge by frustration takes effect when the frustrating event occurs.8 Discharge halts performance, but does not usually require prior performance to be unravelled. Rescission for a vitiating factor, such as mistake or misrepresentation, [page 315] is different.9 If a contract is rescinded, the parties must be restored to their pre-

contractual positions. Expressed in terms of the contract continuum:10 t1--------t2--------t3----tt---tr--------t4 ■ discharge — if a contract is terminated at some point (tt) after performance began (t3)11 the parties do not complete performance (that is, reach t4). Their rights crystallise at tt (the time of discharge); and ■ rescission — if a contract is rescinded at some point (tr) between t3 and t4,12 the contract must be treated as if it never existed. Therefore, the parties are taken back to their positions immediately before t2 (the date of agreement). [21-03] Contract not merely suspended. Discharge ends the contract. Therefore, the parties’ performance duties are not merely suspended.13 This is true whether discharge is for breach or repudiation, or by frustration.14 However, an event which occurs without fault, but does not frustrate the contract, may suspend performance. For example, an entertainer may be excused by illness from fulfilling one of several agreed engagements.15 Of course, the parties may agree that performance is suspended if a particular event occurs. Force majeure clauses frequently do that.16 [21-04] Partial discharge. In a sense, discharge of a contract is necessarily partial: it applies only to the unperformed obligations of the parties.17 However, the real question is whether part of a contract can be discharged.18 Generally, the answer is ‘no’. If a contract is terminated for breach or repudiation, or by frustration, all unperformed obligations are discharged.19 There are exceptions. But some are more apparent than real. ■ Express provision — a termination clause may provide for partial discharge.20 ■ Severable contract — part of a severable contract may be discharged.21 For example, assume a sale of goods contract requires delivery and payment by instalments. The buyer may be entitled to reject an instalment which does not conform to the contract even though it cannot terminate the whole contract. [page 316]

■ Partial failure of source — if the subject matter of the contract is to be obtained from an identified source, the contract may be frustrated to the extent that the source fails. For example, in Goldsbrough Mort & Co Ltd v Carter22 the seller agreed to deliver sheep from a specific source. He was discharged to the extent that the sheep perished before delivery. ■ Contract within a contract — what appears to be a single contract may have another contract embedded within it. Discharge of one does not necessarily affect the other.23 For example, an arbitration clause operates as a ‘contract within a contract’. Therefore, if a contract for the sale of goods is discharged, an arbitration clause in the contract will usually remain binding. Only under an express provision can a promisee be entitled to select a particular part of the contract for termination.

Accrued Rights and Restitution [21-05] Accrued rights not divested. Parties to contracts become entitled to certain rights and benefits at particular times, and in accordance with what is done under a contract. Entitlements therefore ‘accrue’ by reason of performance or breach of the contract. Once a right has accrued unconditionally, it remains enforceable even though the parties are later discharged. Expressed in technical terms, an accrued right is not divested (removed) by discharge for breach or repudiation or by frustration.24 There are two types of accrued right: (1) damages, that is, rights to recover compensation for breach; and (2) sums due, that is, rights to receive payment of liquidated sums as contract debts. These are briefly explained below.25 [21-06] Damages. A right to damages accrues unconditionally as soon as a breach of contract occurs. Therefore, exercise of a right to terminate for breach or repudiation does not prevent the promisee recovering compensation. The same is true if discharge is by frustration.26 In each case, how termination impacts on damages assessment is important.27 Of course, in cases of discharge for breach or repudiation the promisor is

necessarily liable in damages.28 However, an accrued right to damages may be [page 317] enforced by either party.29 In cases of frustration, damages can be claimed for any prior breach.30 [21-07] Sums due. Accrued rights in relation to liquidated sums due under the contract are more complex than damages claims. That is because, although a sum of money may accrue due for payment before discharge, the right to recover it as a contract debt may depend on further performance of the contract. Therefore, unlike a damages entitlement, the unconditional nature of the accrued right must be proved.31 Various factors must be taken into account when deciding whether the right to receive a payment is unconditional.32 But it does not matter that the payee of the money is the party whose breach or repudiation led to termination.33 [21-08] Restitutionary claim. Relevantly, restitution is a claim to be paid a sum of money equal to the value of a benefit conferred in performance of a contract prior to its discharge. It must be proved that the defendant was unjustly enriched at the plaintiff’s expense.34 The benefit may be money paid, or a non-monetary benefit conferred, prior to discharge. These claims are discussed in detail later.35 The one significant difference between discharge for breach or repudiation and discharge by frustration is that legislation dealing with the consequences of frustration may need to be taken into account.36

Terms Enforceable after Discharge [21-09] Discharge for breach. In general, once a contract is discharged for breach (or repudiation), promissory terms cannot be enforced except to support accrued rights.37 Ultimately, enforceability depends on the intention of the parties, and is therefore an issue of construction. Although everything depends on what the contract says, three general points can be made: (1) substantive promissory terms — promissory terms which create

substantive performance obligations, such as to pay the contract price, are not enforceable after discharge unless the contract expressly says so, or an accrued right exists;38 [page 318] (2) procedural promissory terms — procedural terms such as arbitration clauses, choice of law provisions and notice provisions are enforceable even if promissory in nature;39 and (3) regulatory terms — non-promissory terms such as exclusion clauses that regulate rights and liabilities are usually intended to operate even if the contract is discharged.40 It does not matter that the contract was discharged for breach or repudiation by the party who seeks to enforce the clause.41 That is obvious for exclusion clauses. But it is also true for provisions such as arbitration clauses. Indeed, whether the promisee was entitled to terminate the contract for the promisor’s breach may be the very issue in dispute. The arbitrator has jurisdiction to determine who is correct. [21-10] Discharge by frustration. Whether a term is enforceable after discharge by frustration depends on the construction of the contract. The statements made in the previous paragraph also apply to discharge by frustration.42 For example, an arbitration clause is enforceable even though the contract is alleged to be discharged by frustration.

QUICK QUIZ Short answer (1) Explain the usual consequences of discharge under general law principles. (2) What is the difference between discharge and rescission? (3) Explain the statement: ‘Accrued rights remain enforceable following discharge for breach or repudiation’.

True or false? (1) If a contract is terminated for breach by a promisor, only the promisee is discharged. (2) Accrued rights remain enforceable if a contract is discharged by frustration. (3) If a contract is alleged to be discharged by frustration, an arbitration clause in the contract is enforceable. Choose the best answer (1) A contracts to pay $100 to B on 1 March. B terminates the contract on 10 March: (a) A does not have to pay B anything; (b) A must pay B $100; (c) A must pay $100 if B enjoyed an unconditional accrued right to be paid; (d) A must pay B $50; or (e) A must pay B so much of $100 as is reasonable in the circumstances. [page 319] (2) On 1 March A breaches a contract with B. On 10 March, A validly terminates the contract for breach by B: (a) A is entitled to damages but B is not; (b) B is entitled to damages but A is not; (c) each of A and B is entitled to damages; (d) neither A nor B is entitled to damages; or (e) A is entitled to damages if it brings proceedings before B. (3) C contracts to supply 100 tonnes of wheat to D in five 20-tonne instalments. D agrees to pay $1000 for each delivery. C delivers 20 tonnes, but later repudiates the contract: (a) if D terminates the contract, C has no right to be paid for the goods delivered; (b) D cannot terminate the contract because it has been partly performed;

(c) the contract is discharged by frustration; (d) C is not liable to pay damages if B terminates the contract; or (e) C is entitled to be paid $1000 whether or not D terminates the contract.

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For the concept see [18-03]. See McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457; Johnson v Agnew [1980] AC 367 at 392. See generally Carter’s Breach of Contract, §12-19. See [20-09]. See ACL, ss 263, 269. See [30-25]–[30-36]. See eg Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd [2003] 1 AC 469 at 494. See Hirsch v Zinc Corp Ltd (1917) 24 CLR 34 at 64. Cf [20-16] (frustration by delay). See also [16-02]. See [1-10]. In cases of anticipatory breach, point tt may precede t3. Rescission may precede A condition precedent may operate to suspend performance of a contract. See [4-21], [14-05]. See Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221 at 232. See Robinson v Davison (1871) LR 6 Ex 269; Finch v Sayers [1976] 2 NSWLR 540. See [20-05], [20-25]. See SAMPLE SERVICES CONTRACT, cl 7.4(a). See Carter’s Breach of Contract, §§12-02, 12-04. See J W Carter, ‘Partial Termination of Contracts’ (2008) 24 JCL 1. See eg Hirsch v Zinc Corp Ltd (1917) 24 CLR 34; McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 477. See eg Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109 (prohibition of export clause applicable to each shipment of goods). See [18-17]. However, this is not always applicable to discharge by frustration. See Ertel Bieber & Co v Rio Tinto Co Ltd [1918] AC 260 at 270. (1914) 19 CLR 429. See Carter’s Breach of Contract, §3-22. See McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476–7; Johnson v Agnew [1980] AC 367 at 396. For the details see Chapter 31. See also [21-01]. See [31-03]–[31-05], [31-08]. Note in particular [31-04] (‘loss of bargain’ damages). See [31-01]. See [21-06]. See [31-10]. See [31-09]–[31-14]. See [31-09]. See [30-03]. See Chapter 30.

36 37 38 39 40 41 42

See [30-25]–[30-36]. See [21-06]–[21-07]. This is subject to statute, rules of public policy and specific restrictions under the general law. See eg [27-51]–[27-56] (rules in relation to penalties). See Heyman v Darwins Ltd [1942] AC 356. See [11-10]. But cf General Billposting Co Ltd v Atkinson [1909] AC 118 (restraint of trade clause). See State Rail Authority of New South Wales v Codelfa Construction Pty Ltd (1982) 150 CLR 29; 42 ALR 289.

[page 321]

Part H

Has the Contract Been Rescinded?

[page 322]

Chapter 22

Bases for Rescission [22-01] Introduction. This part of the book is mainly concerned with situations in which a party is entitled to elect to rescind a contract on the basis of a ‘vitiating factor’. Vitiating factors concern conduct during the negotiation of a contract.1 ‘Rescission’ describes exercise of the right to rescind; for example, for misleading conduct. The ‘right to rescind’ concept includes the right of a party to apply to a court for an order setting aside the contract under general law principles.2 Following rescission, or an order setting it aside, the contract is treated as if it never existed.3 It follows that rescission is also a process. Because the contract is taken to have never existed, the parties must be restored to their pre-contractual positions. Adjustments may need to be made if things were done in reliance on the contract. But damages for breach of contract cannot be claimed.4 All this is very different from discharge, which merely brings performance of the contract to an end.5 The parties do not need to be restored to their pre-contractual positions and damages may be claimed for any prior breach. Even if there is no right to rescind under the general law, relief under statute may be available for conduct which amounts to, or is analogous to, a vitiating factor. In that context it may not be necessary to restore the parties to their former positions. Since the concern of later chapters is to discuss situations in which a contract may be rescinded at the election of a party or by court order, this chapter is mainly about identifying the situations referred to above. There are two further situations in which rescission may occur: (1) by agreement between the parties; or (2) on exercise of a right expressly conferred by the contract or by statute. These situations are discussed later in this chapter.6 [page 323]

Vitiating Factors [22-02] Categories. Under the general law, rights to rescind arise from precontractual conduct that influenced the decision to contract. The conduct must qualify as a vitiating factor (or ‘invalidating cause’). These are legally defined circumstances which undermine (‘vitiate’) contractual assent without making the contract void.7 The legally recognised categories are:8 (1) misleading conduct (misrepresentation); (2) mistake; (3) improper pressure (duress or undue influence); and (4) unconscionable conduct. [22-03] Scope. A vitiating factor may operate under the general law or statute. The principal perspective is whether one party may elect to rescind the contract. However, other remedies may be available, particularly under statute.9 Sometimes, a vitiating factor is also a legal wrong. Compensation may then be available even though there is no breach of contract. Damages may be awarded: ■ in tort — for negligence or fraud; or ■ under statute — for misleading conduct or unconscionable conduct. The situations in which damages may be claimed are identified in this part of the book. However, assessment of damages is discussed later.10 [22-04] Third parties. A third party may enter the picture in three situations.11 First, the conduct of a third party may be a vitiating factor. For example, A’s decision to contract with B may be induced by the duress of C.12 Second, a third party may have notice of the impropriety which the vitiating factor entails, and therefore be affected by it.13 Assume A’s misleading conduct induces B to sell goods to A, who then sells the goods to C. If C knows of A’s misleading conduct, B’s right to rescind the contract with A continues to be available even though its exercise will impact on C’s ownership of the goods. But even if C has no knowledge, valid rescission by B prior to A’s transaction with C will prevent C becoming the owner.14 The third situation arises in relation to contracts of guarantee. Assume G (the guarantor) agrees to guarantee payment by A (the debtor), under a contract with B

[page 324] (the creditor). The ability of B to enforce the guarantee against G may be affected by A’s pre-contractual conduct.15

Rescission by Agreement [22-05] General. Rescission by agreement occurs when a second contract rescinds an earlier contract between the same parties. In other words, the parties may expressly agree that the contract is to be treated as if it never existed. Rescission by agreement may be express or implied. Like any other contract, the agreement must be supported by consideration. This is usually found in the parties giving up, or compromising, the rights they enjoyed under the original contract.16 The agreement may be: (1) simple rescission; or (2) rescission and replacement of the old contract with a new bargain relating to the same (or a different) subject matter.17 There is a difference between an agreement to rescind the whole contract and an agreement to rescind part of the contract. A partial rescission is a variation (amendment) of the contract.18 Whether there is merely a variation depends on the intention of the parties and the legal effect of what they have done.19 A variation must also be supported by consideration. Sometimes, this is difficult to establish.20 [22-06] Express agreement. The parties are free to agree expressly to rescind any contract at any time prior to discharge by performance. There are no magic words. The parties may therefore use words such as ‘rescind’, ‘cancel’, ‘terminate’ or ‘annul’. Whether the intention is merely to discharge the former contract,21 rather than to treat the contract as if it never existed, is a question of construction22 (and effect). [22-07] Implied agreement. Because rescission of a contract is a matter of intention,23 an agreement to rescind may be implied or inferred from what the parties have done or said. There are three main categories. First, the parties may enter into a second agreement which expressly deals with obligations under their prior contract, but does not say whether they intend to rescind the earlier contract. If the amendments are very extensive, the proper conclusion may be that the original contract has been rescinded and replaced.

[page 325] Second, even though the parties may not refer expressly to their first contract, they may enter into a second contract which is to some extent inconsistent with the first. There is a rescission if the new contract is so inconsistent with the prior contract that it is impossible to give effect to them both.24 Third, even though the parties do not purport to enter into a second contract, their conduct may be explicable only on the basis that the original contract has been abandoned, that is, rescinded.25 Abandonment may alternatively be based on estoppel, in which case the requirement of consideration does not apply.26 [22-08] Variation. Rather than rescinding the whole contract, the parties may agree to rescind it in part. The earlier contract is varied.27 As in the case of rescission, this may be express or implied.28 In order to be a variation rather than a rescission, some part of the earlier contract must remain.

In Concut Pty Ltd v Worrell29 an employee named Wells claimed damages for wrongful dismissal. Concut employed Wells as its Queensland Branch Manager under an oral contract. Unknown to Concut, but in serious breach of contract, Concut’s staff and property were used by Wells to build his own home. In 1986, the parties entered into a written agreement (1986 contract). This was to last for five years. Its stated object was ‘to record the terms and conditions’ of Wells’s employment. Wells was later dismissed by Concut without notice. This occurred in 1988. He claimed that this was a wrongful termination of the 1986 contract, which (he argued) rescinded and replaced the oral contract. However, Concut sought to justify its conduct by pointing to the breach of the oral contract. Its contention was that the 1986 contract merely varied the oral contract. Perhaps surprisingly, the High Court held the 1986 contract only ‘supplemented’30 the oral contract. The latter was therefore merely varied. Since Concut could rely on the breach of the original contract, it had not wrongfully dismissed Wells. [22-09] Consequences of rescission. The consequences of rescission by

agreement depend on the intention of the parties. That is true whether the rescission is express [page 326] or implied, and whether it is a partial or complete rescission. If there is a written contract, the question is one of construction. The usual objective is simply to rescind the existing contract — wholly or in part. However, if a dispute arose under the prior contract the purpose is to resolve (compromise) the dispute. The terms of such an arrangement are more complex.31

Right to Rescind [22-10] Election. A person who enjoys a right to rescind a contract because of a vitiating factor is not obliged to exercise the right. There is an alternative, namely, to elect to keep the contract in existence. It follows that a party who rescinds a contract must prove two things: (1) that the right arose; and (2) valid exercise of the right, that is, an election to rescind. [22-11] Contractual rights to rescind. A right to rescind a contract may be conferred by an express term of the contract. In practice, this is most unusual. Whether the contract confers a right to rescind is a question of construction. If a contract between A and B states that B may ‘rescind’ it in certain circumstances, it should not be assumed that ‘rescind’ means ‘treat the contract as if it never existed’. Usually, the parties will have used the word to mean ‘terminate’, so that they intend the contract to be discharged. The whole contract must be construed, in light of its context.32 [22-12] Common law rights to rescind. Two bases for rescission were recognised by the common law:33 (1) misleading conduct; or (2) improper pressure amounting to duress. The category of misleading conduct includes all cases of misrepresentation inducing a contract.34 A misrepresentation is a false statement of a fact by one

person which induces the other to enter into the contract. For example, if Lister induces Rimmer to purchase his motor car by saying that it was manufactured in 2008, when in fact it was manufactured in 2006, Rimmer may rescind the contract for misrepresentation. A right to rescind arises even if the misrepresentation is purely innocent, that is, Lister believed his statement to be true. To be entitled to compensation under the common law, the misrepresentation must be shown to have been:35 [page 327] ■ fraudulent; or ■ made in breach of a duty of care. ‘Duress’ is a category of improper pressure.36 For example, if Lister induces Rimmer to purchase his motor car by saying that unless he does so Lister will lock him in a cupboard, Rimmer is entitled to rescind the contract. Such cases are rare. More commonly, duress is of an economic kind, involving a threat to a person’s economic well-being. There is no right to damages under the general law.37 [22-13] Rights derived from equity. Some rights to rescind are derived from equitable principles. The right may arise for:38 ■ mistake — one party takes unconscionable advantage of a misunderstanding by the other; ■ undue influence — one party abuses a position of influence or dominance over the other; and ■ unconscionable conduct — one party takes advantage of a special disability which affected the other. Of course, the legal requirements for each category are more complex than in the summary. Moreover, the fact that ‘unconscionable conduct’ can be seen as a unifying feature does not mean that a contract can be rescinded just because there is conduct which might be considered ‘unfair’. [22-14] Consequences. ‘Rescission’ requires the parties to be restored to their pre-contractual positions.39 If nothing has been done under a contract, an election to rescind will achieve that. The same is true if all that happened was

that the rescinding party paid money under the contract. However, in that situation the money paid is recoverable in an action for restitution.40 By contrast, if the contract has been partially performed by both parties, exercise of the right to rescind does not restore the parties to their precontractual positions. The court’s aid must be sought. There is then a process of adjustment termed ‘restitutio in integrum’. The impact is that an election to rescind is effective only if the court can make adjustments that substantially restore the parties to their former positions.41 [page 328]

Under Statute [22-15] General. Statute interacts with vitiating factors under the general law in three ways: (1) by creating statutory prohibitions on particular classes of conduct analogous to vitiating factors; (2) by conferring jurisdiction to grant relief against unjust or unfair contracts or contractual terms; and (3) by conferring jurisdiction to make an order analogous to rescission — whether or not there is a right to rescind under the general law. ‘Interaction’ does not include replacement of rights under the general law. Therefore, the impact of statute is to confer additional or different rights. The jurisdiction to grant relief against unjust or unfair contracts is an illustration.42 The chief concerns are the statutory prohibitions on misleading or deceptive conduct43 and unconscionable conduct44 under the ACL.45 Those prohibitions also provide the context for discussion of orders analogous to rescission, and remedies not available under the general law.46 [22-16] Statutory rights to rescind. Statutory rights to rescind are not common. If a statute does confer a right to ‘rescind’, the word may be used to mean ‘terminate’. It does not necessarily mean ‘rescind’ in the sense of treating the contract as if it never existed. The issue is one of statutory interpretation. However, under the ACL a court has a discretionary jurisdiction to declare a contract void if one party engaged in prohibited contract. In such a case, the only ‘right’ of the party affected by the conduct is to apply to the court.47

QUICK QUIZ Short answer (1) Explain the concept of ‘rescission’. (2) List the bases for rescission under the general law. (3) Explain the difference between variation and rescission by agreement. [page 329] True or false? (1) Rescission is available for misleading conduct if it induces a contract. (2) It is not open to the parties to agree to rescind part of their contract. (3) If a contract is rescinded, it is treated as if it never existed. Choose the best answer (1) Angus agrees to sell 1 Smith St to Betty. The contract is rescinded if, before completion: (a) Angus agrees to sell 1 Smith St to Sue; (b) Angus and Betty agree to increase the price by $100; (c) Angus and Betty agree to cancel the contract; (d) Betty agrees to sell 1 Smith St to Sue; or (e) Betty fails to pay the price. (2) A contract for the sale of land may be rescinded for misleading conduct: (a) if the vendor made a false statement to the purchaser in relation to a factual matter affecting the value of the land; (b) if the purchaser’s own inquiries led the purchaser to believe that the land was worth more than the price, when in fact it was worth less; (c) unless the misleading conduct was an innocent

misrepresentation; (d) if the land was worth less than the contract price; or (e) none of the above. (3) If Albert sold his yacht to June because she made threats amounting to duress: (a) a sale by June to Bill may prevent Albert rescinding the contract with June; (b) the contract can be rescinded for duress; (c) a sale by June to Bill may result in Bill becoming owner of the yacht; (d) Albert cannot claim damages under the general law; or (e) all of the above.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

20 21 22 23 24

See [22-02]. For restrictions on exercise of the right see Chapter 33. See [22-13]. The technical expression is ‘rescission ab initio’. See [16-02]. An agreement for rescission may have the same effect. See [22-06]. See also [16-02]. For analysis in terms of the contract continuum see [21-02]. See [22-05]–[22-09], [22-11], [22-16]. Sometimes, a vitiating factor may prevent formation of the contract. See [24-07], [24-15], [24-19]– [24-20]. See further [22-10]–[22-16]. See [22-15]–[22-16]. See Chapter 28. See eg N Y Chin, ‘Undue Influence and Third Parties’ (1992) 5 JCL 108. See [25-07], [25-10]. See eg Bank of New South Wales v Rogers (1941) 65 CLR 42. See [33-33]. See eg Burke v State Bank of New South Wales (1994) 37 NSWLR 53 at 78 and further [25-23]–[25-24] (Yerkey principle). See [3-26]. On when writing is required see [35-23]. On when writing is required see [35-24]. See Dan v Barclays Australia Ltd (1983) 46 ALR 437 at 448; Federal Commissioner of Taxation v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520; 172 ALR 346; [2000] HCA 35. See further [22-08]. See [3-18]–[3-25]. See [16-03]. See generally on construction Chapter 10. See eg Dan v Barclays Australia Ltd (1983) 46 ALR 437 at 448. See British and Beningtons Ltd v North Western Cachar Tea Co Ltd [1923] AC 48 at 62; Tallerman & Co

25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47

Pty Ltd v Nathan’s Merchandise (Victoria) Pty Ltd (1957) 98 CLR 93 at 112–13. See Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal [1983] 1 AC 854 at 915; Lombok Pty Ltd v Supetina Pty Ltd (1987) 71 ALR 333 at 345. Cf DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423; 19 ALR 223. See [22-05]. See Lockie v Walter Reid & Co Ltd [1916] St R Qd 10. (2000) 176 ALR 693; [2000] HCA 64. See J W Carter and Andrew Stewart, ‘The Effect of Formalising an Employment Contract: The High Court Misses An Opportunity’ (2001) 17 JCL 181. See (2000) 176 ALR 693 at 699; [2000] HCA 64 at [21] per Gleeson CJ, Gaudron and Gummow JJ. See [3-18]. See [17-02]. Note also the concept of non est factum. See [24-19]–[24-20]. See generally Chapter 23. See Chapter 28, where damages for contravention of the ACL are also discussed. See generally Chapter 25. But the right may arise under statute. See [25-01]. See generally Chapters 24–26. See [22-01]. See generally on restitution Chapter 31. See [33-26]. See [26-14]–[26-22]. See generally Chapter 23. See generally Chapter 26. See also [25-01] (duress under statute). See generally [23-29]–[23-30], Chapter 28. See [23-30]. Cf [23-21].

[page 330]

Chapter 23

Misleading Conduct [23-01] Concept. The concept of misleading conduct refers to a precontractual misrepresentation and misleading (or deceptive) conduct prohibited by statute. As explained in more detail below,1 a misrepresentation is a false statement of a material fact made to induce a person to contract and which has that effect. The statutory concept is at times broader. It is directed at misleading conduct in general, so that it merely includes conduct which induces entry into a contract. The general law of contract emphasises the right of the party misled to rescind a contract induced by misleading conduct.2 However, statutory remedies are more extensive.

Features of the General Law [23-02] Approach. Under the general law, the rights of a party misled are determined by characterising the misleading conduct. In cases of fraudulent misrepresentation3 (‘deceit’) inducing a contract, the person misled enjoys two rights: (1) to rescind the contract; and (2) to claim damages. All other misrepresentations are characterised as ‘innocent’. Usually, there is only a right to rescind the contract. Originally, this depended on proof of a ‘complete difference in substance’4 between the actual subject matter of the contract and the subject matter as represented. This requirement of a ‘total failure of consideration’5 made the right to rescind of limited utility. Today, however, it is sufficient that the innocent misrepresentation is ‘material’. The right to recover damages has also evolved. Originally, damages could not be awarded for a purely innocent misrepresentation. However, damages are now available if an innocent misrepresentation is made in breach of a duty of care.6 As in cases of deceit, damages are awarded for a tort, not for breach of contract.

[page 331] [23-03] Shortcomings of the general law. Notwithstanding the significant developments noted above, the general law on misleading conduct has several shortcomings: ■ damages — there is no general right to compensation for loss caused by reliance on misleading conduct; ■ specific requirements — the concept of misrepresentation is hedged around by specific elements;7 and ■ lack of flexibility — several technical rules apply to exercise of a right to rescind.8 For misleading conduct in trade or commerce, the ACL removes several of these shortcomings.9

Misrepresentation Introduction [23-04] Concept. Principles regulating misrepresentation concern misleading statements made during the negotiation of a contract. A statement is misleading if it conforms to the definition of misrepresentation, namely: A false statement of a material fact which is intended to induce entry into a contract and which has that effect.

The person who made a statement which is a misrepresentation is termed the ‘representor’; and the person to whom a representation is made is termed the ‘representee’. [23-05] Classification. The classification of misleading statements referred to earlier10 relies mainly on the state or mind of the representor: ■ fraudulent misrepresentation — the representor knew it was false;11 ■ innocent misrepresentation — the representor acted honestly; and ■ negligent misrepresentation — an innocent misrepresentation was made in breach of a duty of care.12 Fraudulent and negligent misrepresentation illustrate broader concepts. For

the former it is common law deceit. For the latter, the concept is the negligent provision of information or advice. This leads to three common features: [page 332] (1) each is a tort for which there is a right to damages under the general law; (2) it is not a pre-condition to the recovery of damages that a disadvantageous contract was entered into; and (3) where loss takes the form of entry into a disadvantageous contract, the contract may be with a third party. It follows that unless a person is seeking to rescind a contract with the person who was fraudulent or negligent, it is not essential for the conduct — fraud or negligence — to conform to the definition of ‘misrepresentation’ given above. [23-06] Rights and remedies. If a misrepresentation by A induces B to contract with A, B is entitled to rescind the contract.13 Damages are available in tort if the misrepresentation causes loss and was fraudulent or negligent. Valid exercise of a right to rescind requires the parties to be restored to their pre-contractual positions.14 Court orders may be necessary.

Hypothetical Verity induces Bill to purchase her business by representing that its annual revenue exceeds $4 million. In fact, the annual revenue is no more than $3 million. Bill does not discover the true position until the end of the first year, when his accountant identifies errors in the old accounts of the business. During that time he has paid Verity the price, spent money promoting the business, replaced some of the business assets, obtained revenue from clients, and so on. Bill is entitled to rescind the contract15 and recover whatever amount he paid as the price. However, this is just one aspect of the give and take necessary to restore Verity and Bill, substantially, to their pre-contractual positions. This process of adjustment is termed restitutio in integrum.16

Elements of Misrepresentation [23-07] Five elements. To prove misrepresentation, five elements must be

established. The conduct in question must: (1) be a representation; (2) which is false; (3) relate to a factual matter; (4) be relied upon by the representee; and (5) in cases of innocent misrepresentation, be material. [page 333] [23-08] The representation. Almost invariably, a representation is found in an express positive statement by the representor to the representee. Alternatively, such a statement may be implied from conduct. The general rule is that silence is not a representation. However, there are three qualifications. (1) A duty to disclose may arise from the nature of the contract into which the parties propose to enter. The principal example is a contract of insurance. A person proposing to enter into a contract of insurance owes a duty to disclose all facts which would influence a prudent insurer in deciding whether to contract.17 (2) Even if literally true, a statement is a misrepresentation if it gives a false impression because it is a half-truth. For example, in Krakowski v Eurolynx Properties Ltd18 negotiations for the sale of an investment property were conducted on the basis that it was leased and in each year would return 10% of the sale price. The purchasers were induced to purchase the property on that basis. However, a separate arrangement between the lessee and the lessor materially reduced the rent. It was held that the 10% statement implied a representation that no such separate arrangement existed. Failure to disclose it was therefore a misrepresentation. (3) If circumstances change between the making of a representation and entry into the contract, so that the representation becomes false, the representor must disclose the change to the representee. An illustration is given below.19

[23-09] Falsity. A representation is false if it does not accord with the true facts. Whether a representation is true or false is an issue of fact which does not depend on intention or the representor’s knowledge. Except in cases of fraud, the question is how a reasonable person in the position of the representee would have understood the statement.20 Usually, a statement is a misrepresentation because it was false when made. However, a representation continues to operate until entry into the contract.21 Therefore, account must also be taken of any change in circumstances.

Hypothetical Sissy negotiates to sell her car to Bruce and tells him that: (1) the brakes are in good working order; and (2) the vehicle is not classified as a sports car. [page 334] Prior to Bruce’s entry into the contract, the car’s brakes fail when Sissy is driving to university. In addition, unknown to Sissy, new registration rules classify her car as a sports car. Bruce then agrees to purchase the vehicle. The subsequent facts falsify the two statements made to Bruce. Both are therefore misrepresentations: (1) fraudulent misrepresentation — Sissy’s statement that the brakes are in good working order has become false to her knowledge;22 and (2) innocent misrepresentation — the classification change means that her statement that the vehicle is not classified as a sports car has become false.23 Therefore, Bruce is entitled to rescind. He can also claim damages for fraud. [23-10] Statements of fact. The misrepresentation concept is limited to statements which can be either true or false, that is, statements of fact. Statements relating to other matters do not, of themselves, count as representations. These include statements about:

■ ■ ■ ■

the future — for example, that a particular event may or will occur; intention — a statement that a person intends to do something; opinion — expressing a personal view about some matter; and the law — a statement about the law may also be the expression of an opinion. These are all logical deductions from the requirement that a representation must be true or false. However, courts have shown considerable ingenuity in manipulating and qualifying the content of each category.

Illustration In Balfour v Hollandia Ravensthorpe NL,24 a statement was made by a vendor to the prospective purchasers of a property. This concerned the amount that a building society would lend the purchasers. Superficially, the statement was one of opinion, or related to a future matter. However, it was held to embody (imply) false factual representations. These related to the terms of the lending policy of the society and the vendor’s understanding of the policy. More generally, a representation of fact can usually be implied from a statement of intention or opinion, such as that the representor actually had the intention. In such a case, the misrepresentation relates to the representor’s state of mind. In a famous statement, in Edgington v Fitzmaurice25 Bowen LJ said: There must be a misstatement of an existing fact: but the state of a man’s mind is as much a fact as the state of his digestion. It is true that it is very difficult to prove

[page 335] what the state of a man’s mind at a particular time is, but if it can be ascertained it is as much a fact as anything else. A misrepresentation as to the state of a man’s mind is, therefore, a misstatement of fact.

The exclusion of statements about the law from the representation concept is also quite narrow. For example, a fraudulent statement of law is a misrepresentation, and a statement about private rights may be a representation of fact.26 [23-11] Reliance. In the nature of things, representations are made in order to induce the representee to rely on what was said. For the present context, reliance

is entry into a contract with the representor. It is logical to assume a causal connection between the two. Therefore, if two things are established: (1) a material false statement of fact; and (2) entry into the contract, it can be presumed that (2) is at least partly the result of reliance on (1).27 Although the representor must have intended the representee to rely on the statement, since the facts will usually enable reliance to be presumed, the representor is required to present evidence raising some doubt about reliance.28 Reliance is absent when the facts show the representee knew the true position before contracting. For example, in Holmes v Jones29 a false statement was made during negotiations as to the number of cattle on a station. However, the purchasers inspected the property before its purchase and discovered the true number of animals. Accordingly, they could not establish reliance on the false statement. [23-12] Materiality. Most descriptions of the elements of misrepresentation include ‘materiality’.30 This requirement is easily satisfied.

Summary of relevant points There are three points. First, it is sufficient for a misrepresentation to be an inducement to the representee. There is no requirement that it be the sole (or even the main) inducement to contract. Second, materiality does not equate with the old requirement31 of a complete difference. Instead, the impact is to exclude statements about trivial matters.32 Third, once inducement has been established, there is no separate requirement of materiality in cases of fraud. [page 336]

Fraudulent Misrepresentation [23-13] Proof of fraud. Since it is a serious matter, the common law has always taken a narrow view of what constitutes fraud. An allegation of fraud must be ‘clearly and distinctly’33 pleaded and proved.

The distinctive feature is the state of the representor’s mind. It is sufficient to prove: ■ actual knowledge — the representor knew the representation was false; or ■ reckless indifference — the representor made the representation recklessly, without believing that it was true and not caring whether it was false. [23-14] State of representor’s mind. The requirement of knowledge or reckless indifference to the truth means that mere carelessness on the part of a representor is not fraud. That was decided over 100 years ago in Derry v Peek.34 The prospectus of a tramway company represented that it had the right to use steam power. That was untrue: at best the company enjoyed a contingent right under statute. Relying on the prospectus, Peek bought shares in the company. Because it did not obtain consent to use steam power, the company was wound up. Having lost his money, Peek alleged that the people responsible for the false prospectus — the directors of the company — were liable to pay damages for fraud. The House of Lords ruled out fraud because the directors honestly believed that the prospectus was true. They had been negligent, but not fraudulent. In cases of misrepresentation, the issue is whether the representation conveyed a false impression. If an innocent misrepresentation is alleged it is sufficient to ask how a reasonable person in the position of the representee would have construed the representation. But in cases of fraud the focus is on the state of the representor’s mind. Therefore, the statement must be construed according to how the representor believed it would be understood. For example, in John McGrath Motors (Canberra) Pty Ltd v Applebee35 the court held that evidence of how the sellers of a business understood an advertisement for which they were responsible was crucial if they were to be held liable for fraud.

Negligent Misrepresentation [23-15] Elements of negligence. The tort of ‘negligence’ is committed if a person who owes a duty of care to another breaches that duty and causes the other damage (or loss) which is not too remote. Proof of negligence is therefore incomplete without proof of loss or damage. Liability for negligent misrepresentation derives from the decision in Hedley Byrne & Co Ltd v Heller & Partners Ltd.36 That case recognised that the elements [page 337]

of negligence may be present where information or advice is given carelessly. The defendant is then liable to pay damages. This is termed the ‘Hedley Byrne principle’. [23-16] Negligent information or advice. Expressed by reference to the giving of information or advice, the elements of liability are: ■ duty of care — owed by the giver of the information or advice to the recipient; ■ breach of duty — a failure to exercise reasonable care when providing the information or advice; and ■ loss — caused by reliance on the information or advice and which is not too remote. The defendant is then liable to pay damages for ‘negligent misstatement’. In a negligent misstatement claim, loss arises from the plaintiff’s detrimental reliance on information or advice. That includes entry into a disadvantageous contract. The contract may be with the defendant. For example, in Esso Petroleum Co Ltd v Mardon37 the lessee of a petrol service station from Esso relied on Esso’s estimate of how much petrol would be sold — the ‘throughput’ of the station. The court held that a duty of care arose because Esso was in a position to make a reliable estimate, and could reasonably be expected to do so. Esso was liable to pay damages because the estimate was made negligently. However, the contract need not be with the person who made the statement. Indeed, in many cases the contract will be with a third party who is not involved in the defendant’s negligence. Two points follow from this. First, if only damages are sought, whether the defendant’s statement conforms to the requirements of ‘misrepresentation’ is irrelevant. Second, the elements of misrepresentation must be established if the plaintiff seeks to rescind a contract entered into with the defendant. Therefore, the information or advice must include a false statement of fact. [23-17] Duty of care. The crucial question is usually whether the defendant owed a duty of care to the plaintiff. In cases of negligent misstatement, the loss is of a financial (economic) nature, rather than physical damage to a person or property. This makes it more difficult to establish a duty of care. In effect, the Hedley Byrne principle is an exception to a general rule that there is no duty of care to prevent economic loss.38 A duty of care will be found if the maker of the statement occupied a position of special care or skill, or professed to

have that special skill or care. Although the principle extends beyond those categories, framing a test is difficult. [page 338]

In L Shaddock & Associates Pty Ltd v Parramatta City Council,39 Shaddock asked an employee of the council whether a property was affected by any council road-widening proposal. The employee advised that it was not affected. In reliance on the statement, Shaddock purchased the property from a third party. He suffered loss because the property was affected. Although the council had no statutory duty to supply the information, the High Court held that the council owed Shaddock a duty of care when providing the information. In finding the duty of care, the court said the Hedley Byrne principle is not limited to those who have or profess special skill or expertise.40 It applied a test to the following effect:41 A duty of care arises whenever A seeks information or advice on a serious matter from B in a situation in which B realises (or ought to realise) that A is trusting B to give the best of B’s information or advice, as a basis for some action by A.

However it must be reasonable in the circumstances for A to act on the information or advice. It follows from Shaddock that there must be an inquiry into several matters: ■ occasion — generally, the occasion must be a serious one. A duty of care is unlikely if information or advice is provided in an informal setting; ■ realisation — the person who makes the statement realises, or at least ought to realise, that the information or advice will be relied on; and ■ reliance on the information or advice is crucial. It must be reasonable and give rise to a reasonably foreseeable loss.

Innocent Misrepresentation [23-18] Reliance on material representation. An innocent misrepresentation is established if a false statement of a material fact42 is relied on by the

representee. Reliance is present if the misrepresentation causes entry into a contract with the representor. If an investigation of the facts by the representee shows the representation to have been false, reliance cannot be established.43 But reliance may be present even if the representee was given an opportunity to verify the facts. [page 339]

Illustration In Redgrave v Hurd,44 during negotiations for the sale of his house and practice, Redgrave (a solicitor) represented that the practice brought in around £400 a year. That was clearly a material matter. He produced certain documents to support the representation. But Hurd could see from these that the practice was worth only £200 a year. On inquiring about evidence of the balance of the revenue, Redgrave produced more bits of paper. Hurd did not look closely at these. Had he done so he would have been unimpressed. They showed negligible business. In truth, the practice was worth nothing, as Hurd soon discovered when he took it over. The question for the court was whether Hurd could rely on misrepresentation as a defence to Redgrave’s claim for specific performance. Redgrave argued that Hurd had relied on his own inquiries. The court disagreed. Hurd’s opportunity to verify the truth of the representation did not prevent proof of reliance on the misrepresentation, even though Hurd had to some extent investigated the factual position. [23-19] Sale of goods. There is still some uncertainty about whether a sale of goods contract can be rescinded for innocent misrepresentation which is merely ‘material’. The problem is that the sufficiency of a material misrepresentation is derived from principles formerly applied in equity.45 In some jurisdictions, legislation has clarified that the right is available.46 In other jurisdictions, the matter depends on a provision in the sale of goods legislation that ‘saves’ (preserves) ‘common law’ rules, including for ‘misrepresentation’.47 The better view is that ‘common law’ means ‘nonstatutory’, and therefore includes principles derived from equity.48 Accordingly,

the elements of innocent misrepresentation inducing a sale of goods contract are the same as for any other contract.49 However, the contrary view has been applied in Victoria.50

Misleading Conduct under Statute Misrepresentation Legislation [23-20] Introduction. In the Australian Capital Territory and South Australia the misrepresentation legislation reforms certain aspects of the general law of misrepresentation. [page 340] This comprises the Misrepresentation Act 1972 (SA) and ch 13 of the Civil Law (Wrongs) Act 2002 (ACT). [23-21] Operation. The misrepresentation legislation has the following features:51 ■ application — it applies to an innocent misrepresentation made in the course of a trade or business;52 ■ damages — it provides for the recovery of damages, either as of right or subject to the discretion of the court;53 ■ removal of bars to rescission — it removes several rules of the general law which restrict the ability to rescind a contract for innocent misrepresentation;54 and ■ exclusion clauses — it regulates clauses excluding (or restricting) liability for misrepresentation.55

Prohibited Conduct [23-22] Introduction. Various statutes prohibit misleading or deceptive conduct in trade or commerce. The chief example is s 18 of the ACL.56 Unlike the misrepresentation legislation, the ACL is not concerned to reform the general law. Rather, the approach of the ACL is to prohibit certain classes of

misleading conduct, and to provide remedies for contravention of the prohibitions.57 The prohibitions have had considerable impact. Although the general law principles explained above are not redundant, they have been marginalised. [23-23] Misleading or deceptive conduct. Section 18 of the ACL provides:58 (1) A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. (2) Nothing in Part 3-1 (which is about unfair practices) limits by implication subsection (1).

The impact is to create a ‘norm of conduct’59 for those who engage in conduct in trade or commerce. It is a very difficult norm to adhere to. Since ‘deceptive’ adds nothing to ‘misleading’, it is sufficient to relate the discussion below to ‘misleading conduct’. [page 341] [23-24] Other prohibited conduct. Although s 18 is the key provision, other prohibitions in the ACL, also restricted to conduct in trade or commerce, are potentially relevant to the negotiation of contracts.60 Examples include: ■ false or misleading conduct in connection with the promotion, supply or use of goods or services — including a false representation concerning the existence, exclusion or effect of any right or remedy (including a consumer guarantee) (s 29); ■ employment — conduct liable to mislead a person seeking employment (s 31); ■ offering free items — offering gifts or prizes in connection with the promotion of goods or services with the intention of not providing them (s 32); and ■ business and investment opportunities — statements about certain business activities that are false or misleading in a material particular (s 37). As with s 18, remedies are available for contravention of these provisions, including damages.61 In addition, but by contrast with s 18, a pecuniary penalty may be imposed for contravention.62 Indeed, the same conduct may be an offence punishable by a substantial fine.63

[23-25] Elements. The three elements of s 18 of the ACL are: (1) conduct — which includes spoken and written statements; (2) in trade or commerce — there is a trading or business context; and (3) misleading — a person to whom the conduct was directed was misled (or likely to be misled). Once remedies are taken into account, there is a fourth element: (4) loss — reliance on the misleading conduct caused the applicant for relief to suffer loss (or damage).64 Assume Alpha is negotiating a sale of its business to Beta, and that Alpha tells Beta that all the machinery is in good working order. Beta is entitled to damages for misleading conduct if it enters into the contract in reliance on the statement and suffers loss because one item of machinery is not in good working order. [23-26] Scope. The courts have given s 18 of the ACL a very broad scope of operation. For example, the provision: ■ is of general application — s 18 operates for the benefit of corporations as well as consumers; [page 342] ■ applies to contract negotiations — s 18 applies if a transaction is negotiated in trade or commerce;65 ■ attracts an objective test — a statement is misleading if it would mislead a reasonable person in the position of the person to whom it was made;66 ■ imposes strict liability — there is no requirement of negligence, an intention to mislead or knowledge that the conduct was misleading;67 and ■ operates as an independent regime — the prohibitions and remedies under the ACL are not restricted by the general law of contract.68 Since liability is strict, in the Alpha–Beta example it is irrelevant whether Alpha knew that the item of machinery was not in good working order, or was careless in making the statement. In addition, the courts have applied the ACL on the basis that if a contractual provision purports to exclude (or limit) liability for loss caused by misleading conduct it is usually invalid.69 Accordingly, if a clause of the contract between

Alpha and Beta states that Alpha is not liable for misleading conduct during negotiations, the clause has no effect. [23-27] Proving contravention. Certain principles have been developed to decide whether contravention of s 18 of the ACL has been established in the negotiation of a contract.

Summary of principles ■ Question of fact — whether the conduct in question was misleading is a factual issue.70 ■ Positive conduct — most examples of misleading conduct take the form of a false statement of fact (express or implied).71 ■ Silence — generally, silence is not misleading conduct.72 ■ Burden of proof — the burden is on the applicant for relief to prove misleading conduct, reliance and loss.73 [page 343] ■ Reliance may be assumed — if entry into a contract followed misleading conduct, reliance on the conduct can usually be assumed.74 These principles are quite similar to those applied to misleading conduct under the general law. Therefore, just about every example given above of misleading conduct under the general law also illustrates conduct actionable as a contravention of s 18 of the ACL. For example, if a seller makes a profit prediction in relation to a business, making the prediction is not in itself misleading. However, just as there is misleading conduct under the general law if there were no reasonable grounds for making the prediction, so also will s 18 have been contravened.75 However, contravention of s 18 can be established in situations where there would be no misrepresentation under the general law. It is probably easier to prove that silence is misleading conduct.76 Ultimately, the real significance of s 18 relates to remedies. If a person contravenes s 18 by making an innocent misrepresentation, liability for any loss caused is the same as for a fraudulent misrepresentation under the general law.

[23-28] Future matter. Section 4 of the ACL77 is an evidentiary provision, designed to reduce the burden on a person who alleges that a representation in relation to a future matter contravened a provision of the ACL. It does not create an additional prohibition.78 Under s 4(1), if a person makes a representation with respect to any future matter, the representation is taken to be misleading if there were no reasonable grounds for making it. That is the same as under the general law.79 However, under s 4(2) the representor is taken not to have had reasonable grounds, unless contrary evidence is adduced. Under the general law, the representee is not required to adduce any evidence to that effect. Even so, s 4 of the ACL does not have the effect that a person who made a representation as to a future matter must prove reasonable grounds for making it.80

Hypothetical Able Ltd owns a shopping centre. Ben is contemplating leasing a shop in the centre. Able says $100,000 will be spent in the following year to promote the centre, and Ben relies on the statement by leasing the shop. Able’s statement is a representation as to a future matter which is misleading unless there were reasonable grounds for making it. Able may be held to have contravened s 18 if it does not adduce evidence of reasonable grounds for making the representation to Ben. [page 344] Even if Able does adduce contrary evidence, it may still be held not to have had reasonable grounds.81

Remedies [23-29] Regime. A person who establishes contravention of s 18 of the ACL may seek a statutory remedy. The principal remedies are: ■ damages — a statutory right to damages for loss (or damage) caused by misleading conduct (s 236);82 ■ other orders — a court has a discretion to make various other orders to compensate, prevent or reduce loss (ss 237, 242, 243);83 and ■ injunction — an order may be made to restrain misleading conduct (s

232). The same regime applies to conduct in contravention of other prohibitions stated in the ACL. That includes unconscionable conduct.84 [23-30] Other orders. If misleading conduct also amounts to a misrepresentation under the general law, the representee may rescind the contract, and recover money paid under the contract. No such right is conferred by the ACL for contravention of s 18. However, whether or not a right to rescind the contract is enjoyed under the general law, if s 18 has been contravened an application may be made for more extensive relief under s 237 of the ACL.85 The court has a discretion to make various orders, including as described in s 243. If misleading conduct induced entry into a contract, a court may, for example: ■ declare the contract void, wholly or in part; ■ vary the contract; ■ refuse to enforce any or all of the provisions of the contract; ■ require a refund of money, or the return of property; ■ require compensation to be paid; ■ require the repair of goods, or the supply of parts; ■ require services to be supplied; and ■ make orders in relation to instruments relating to land. Such orders may be made even if the s 236 right to damages is not invoked. [page 345] The scope of the power to declare a contract void is uncertain. However, the better view is that a contract which was valid at its inception cannot be declared void other than through the operation of the legislation or a change in circumstances.86 Because the orders are discretionary, the representee has no legal right to relief. This discretionary element is a limitation from the perspective of the person misled. However, this must be balanced against the greater flexibility that the court enjoys — as compared with the general law.87 Important points about the discretionary jurisdiction include:

■ purpose — the purpose of any order must be to compensate, prevent or reduce the loss (or damage) caused by the conduct;88 ■ general law restrictions not applicable — although analogies are often drawn, a court is not bound to apply restrictions on remedies for misrepresentation which operate under the general law;89 and ■ proportionality — a court will strive to ensure that the remedial response is proportionate to the conduct which has occurred.90

QUICK QUIZ Short answer (1) What does the concept of ‘misrepresentation’ embrace under the general law? (2) State the elements of fraudulent misrepresentation. (3) State the elements of negligent misrepresentation. (4) What is the impact of statute on the general law of misleading conduct? (5) What is the role of reliance where a remedy is sought for misleading conduct? True or false? (1) A statement of opinion is not usually a representation under the general law. (2) Under the general law, only a fraudulent misrepresentation confers a right of rescission. (3) A contract may be rescinded for an innocent misrepresentation. (4) Contravention of s 18 of the ACL is a criminal offence. (5) Damages may be claimed in respect of loss caused by contravention of s 18 of the ACL. [page 346] Choose the best answer

(1) A Ltd says to B, ‘I promise that if you buy this car you will have no trouble with it.’ Under the general law, the statement: (a) is the breach of a duty of care; (b) is of itself a representation; (c) is not of itself a representation; (d) is a misrepresentation if the car breaks down; or (e) none of the above. (2) C advises D that E Ltd is a good investment. (There is no contract between C and D.) D invests in E. Subsequently, E is wound up and D loses all the money invested. C must compensate D: (a) if the statement is made in breach of a duty of care; (b) if C has not invested any money in E; (c) if E was a bad investment; (d) if all E’s assets were located overseas; or (e) only if C knew that E would be wound up. (3) F Ltd contracts to sell its business to G Ltd. During negotiations, F said the bad debts of the business amounted to $50,000. In fact, the bad debts totalled $60,000. G is entitled to damages: (a) under the general law, if the statement was misleading; (b) under the ACL, if the statement was relied on by G; (c) even if G knew the statement was false; (d) under the general law, whether or not G relied on the statement; or (e) under the ACL, whether or not G relied on the statement. (4) H Ltd enters into a commercial lease with I Ltd. During negotiations, H represented that it would invest $100,000 in remediating the land if the lease was agreed. The statement by H: (a) may be misleading conduct under the ACL unless H Ltd adduces evidence to the contrary; (b) is of itself misleading under the general law; (c) is one of fact; (d) is not material; or (e) is not made in trade or commerce for the purposes of the ACL. (5) Sandra, a solicitor, tells Toby that his business contracts are not regulated by legislation prohibiting the use of exclusion clauses in contracts. In fact they are regulated and he suffers loss when Xavier

successfully sues Toby for damages. Toby can claim damages: (a) if the statement was made by Sandra at a drinks party; (b) unless Toby is also a solicitor; (c) even if Toby had entered into the contract with Xavier prior to Sandra’s statement; (d) if Sandra made her statement in trade or commerce; or (e) none of the above.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33

See [23-07]. See [22-02]. For the concept of fraud see [23-05], [23-13]. Kennedy v Panama New Zealand and Australian Royal Mail Co Ltd (1867) LR 2 QB 580 at 587 per Blackburn J (for the court). For this concept see [30-08]. See [23-16]. See [23-07]. See [23-30]. See [23-22]–[23-30]. See [23-02]. See [23-13]. See [23-17]. See [23-01]. See [21-02], [22-14]. But see [33-34]. He is entitled to damages under ACL. See [23-29]. For restrictions on exercise of the right see Chapter 33. The duty is regulated by the Insurance Contracts Act 1984 (Cth). (1995) 183 CLR 563; 130 ALR 1. See also [23-27] (position under statute). For cases of fraud see [23-14]. See Cramaso LLP v Ogilvie-Grant [2014] AC 1093 at 1102; [2014] UKSC 9 at [16]. See eg Jones v Dumbrell [1981] VR 199. See eg Pedashenko v Blacktown City Council (1996) 39 NSWLR 189 at 199–201. (1978) 18 SASR 240. (1885) 29 Ch D 459 at 483. See Cases and Materials, §18-11. See eg Mackenzie v Royal Bank of Canada [1934] AC 468. See Smith v Chadwick (1882) 9 App Cas 187 at 196; Gould v Vaggelas (1984) 157 CLR 215 at 219, 238, 250, 262; 56 ALR 31. Cf Sidhu v Van Dyke (2014) 251 CLR 505 at 524; 308 ALR 232; [2014] HCA 19 at [63], [65]. (1907) 4 CLR 1692, Cases and Materials, §18-13C. See eg Smith v Land and House Property Corp (1885) 28 Ch D 7; Cutts v Buckley (1933) 49 CLR 189. See [23-02]. A court is likely to find that a non-material representation was not intended to induce reliance. Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (in liq) (2003) 214 CLR 514 at 534; 197 ALR 364; [2003] HCA 25 at [38] per McHugh, Kirby and Callinan JJ.

34 35 36 37 38 39 40 41 42 43 44 45 46 47

48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71

(1889) 14 App Cas 337. (1964) 110 CLR 656. See also Edgington v Fitzmaurice (1885) 29 Ch D 459. [1964] AC 465. [1976] QB 801. The leading case in that context is Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515; 205 ALR 522; [2004] HCA 16. (1981) 150 CLR 225; 36 ALR 385, Cases and Materials, §18-45C. See also Henderson v Merrett Syndicates Ltd [1995] 2 AC 145. See (1981) 150 CLR 225 at 232–3; 36 ALR 385. Endorsing Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556 at 572–3 (reversed (1970) 122 CLR 628). See [23-02]. See Holmes v Jones (1907) 4 CLR 1692 (see [23-11]). (1881) 20 Ch D 1, Cases and Materials, §18-20C. Common law courts insisted on a ‘complete difference in substance’. See [23-02]. See Sale of Goods Act 1954 (ACT), s 62(1a); Sale of Goods Act 1923 (NSW), s 4(2a). See NT: Sale of Goods Act 1972, s 4(2); Qld: Sale of Goods Act 1896, s 61(2); SA: Sale of Goods Act 1895, s 59(2); Tas: Sale of Goods Act 1896, s 5(2); Vic: Goods Act 1958, s 4(2); WA: Sale of Goods Act 1895, s 59(2). See Leaf v International Galleries [1950] 2 KB 86; Graham v Freer (1980) 35 SASR 424. Cf Leason Pty Ltd v Princes Farm Pty Ltd [1983] 2 NSWLR 381. See eg Watt v Westhoven [1933] VLR 458. But see Australian Consumer Law and Fair Trading Act 2012 (Vic), ss 24, 25. See the summary in Cases and Materials, §18-55. See ACT: Civil Law (Wrongs) Act 2002, s 177; SA: Misrepresentation Act 1972, s 4(1). See [23-29]–[23-30], [28-14], [28-15]. See [33-34], [33-35]. See [28-22]. See [23-23]. This replaces s 52 of the Trade Practices Act 1974 (Cth). However, the cases on that provision are applicable to s 18. See generally David Harland, ‘The Statutory Prohibition on Misleading or Deceptive Conduct in Australia and Its Impact on the Law of Contract’ (1995) 111 LQR 100. Cases and Materials, §19-06S. See also Australian Securities and Investments Commission Act 2001 (Cth), s 12da (financial services). Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at 520; 158 ALR 333 per Gummow J. See ACL, ss 29–37. See eg [23-08]. The ACCC may bring other enforcement proceedings. See eg ACL, Pt 5-2, Div 5. See ACL, ss 151–159. On assessment of damages see Chapter 28. See eg Bevanere Pty Ltd v Lubidineuse (1985) 7 FCR 325; 59 ALR 335; Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281; 131 ALR 363. Contrast [23-14]. See eg Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd (1992) 38 FCR 471 at 483; 110 ALR 535; S & I Publishing Pty Ltd v Australian Surf Life Saver Pty Ltd (1998) 168 ALR 396 at 402–3. See eg Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 at 371; 257 ALR 610; [2009] HCA 25 at [102]. See [11-07], [28-22], [34-23]. See eg S & I Publishing Pty Ltd v Australian Surf Life Saver Pty Ltd (1998) 168 ALR 396 at 403. See eg Commonwealth Bank of Australia v Smith (1991) 102 ALR 453 at 475.

72

73 74 75 76 77 78 79 80 81 82 83 84 85 86 87

88 89 90

See Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357 at 371; 270 ALR 204; [2010] HCA 31 at [22]. Cf Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546; 79 ALR 83 (half-truth). See eg Ricochet Pty Ltd v Equity Trustees Executors and Agency Co Ltd (1993) 41 FCR 229 at 234; 113 ALR 30; Shears v Chisholm [1994] 2 VR 535 at 648, 649. See eg Tenji v Henneberry & Associates Pty Ltd (2000) 172 ALR 679 at 702. See Cut Price Deli Pty Ltd v Jacques (1994) 126 ALR 413 at 414–15. See Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 40–2; 110 ALR 608. See Cases and Materials, §19-12. Section 4 may be narrower than the provision it replaces (Trade Practices Act 1974 (Cth), s 51a). See [23-10]. See ACL, s 4(3)(b). See ACL, s 4(3)(a). Indeed, s 4(4) assumes that the representation may be misleading even if Able had reasonable gounds for making it. See further [28-16]–[28-19]. See [23-30]. See generally [26-09]–[26-13]. See also ACL, s 242. See Webb Distributors (Aust) Pty Ltd v State of Victoria (1993) 179 CLR 15 at 37; 117 ALR 321. But cf Tenji v Henneberry & Associates Pty Ltd (2000) 172 ALR 679. On the relationship between the two powers to award compensation see Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494; 158 ALR 333; I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109; 192 ALR 1; [2002] HCA 41. See further [28-16]–[28-19]. See ACL, s 237(2). See further [33-22]. See Akron Securities Ltd v Iliffe (1997) 41 NSWLR 353 at 368; 143 ALR 457.

[page 347]

Chapter 24

Mistake [24-01] Relevance. The most important point to make about mistake is that the fact that one party or both parties made a mistake of some sort in relation to their contract usually has no impact on their obligations or rights. That includes a mistake about the terms of a contract or the quality of its subject matter. For example, assume Vince agrees to sell land to Pat. If Pat mistakenly believes that the house on the land was built in 1899, when in fact it was built in 1910, her mistake is irrelevant. She must complete (perform) the contract. To decide whether the mistake concept is relevant, it may be necessary to consider: ■ whether both parties were mistaken; ■ how the mistake arose; ■ whether the mistake is associated with unconscionable conduct; ■ the remedy being sought; and ■ the seriousness of the mistake. [24-02] Impact. If the mistake concept is relevant, its impact varies. There are three main possibilities. First, it may render the contract void.1 However, that is rare. Second, the contract may be voidable. There is then a right to rescind the contract. This is the usual impact.2 Third, mistake may be relevant to the discretion of the court in relation to relief by way of specific performance or injunction.3 Mistake then has a purely defensive operation. It is also necessary to deal briefly with two other aspects of mistake governed by distinct principles:4 (1) the concept of non est factum, under which a document is devoid of legal effect; and (2) rectification of a document.

[page 348]

Classification Issues [24-03] Mistake and misrepresentation. Like misrepresentation, mistake is usually concerned with matters of fact. As discussed in the previous chapter, a contract entry into which is induced by misleading conduct can be rescinded. For example, assume Vince agrees to sell land to Pat who mistakenly believes that the house on the land was built in 1899 — because that was what Vince told her. If in fact it was built in 1910, Pat is entitled to rescind. But the basis is misleading conduct,5 not mistake per se. The fact that induced mistake is analysed in terms of misleading conduct (misrepresentation) helps to explain why mistake is a relatively unimportant concept. ‘Mistake’ therefore tends to deal with situations where mistake is spontaneous, rather than induced. However, assume that Alice enters into a contract with Tweedledum because he told Alice that he was Tweedledee. Although this is an obvious case of fraud, Alice may be entitled to say that her mistake is so serious that there is no contract.6 [24-04] Mistake and frustration. As a vitiating factor,7 the concept is restricted to pre-contractual mistake. Mistaken assumptions about events which occur after entry into a contract are mispredictions. This is the province of the law of frustration.8

Hypothetical Property Purchase Ltd agrees to buy Veronica’s land. Its purpose is to build a block of units. Since the existing building has to be demolished, a crucial consideration for Property is whether the building is affected by heritage restrictions. If, unknown to Property, heritage restrictions were in force at the time of entry into the contract, the issue is one of mistake. By contrast, if the heritage restrictions are introduced after entry into the contract, the issue is one of frustration.9 Whether the same principles are at work in both situations is debatable.10 [24-05] Classification of mistake. From a technical perspective, the best way

to classify mistake is according to its impact.11 However, it is analytically more helpful to start with a circumstantial perspective. On that basis, a mistake may be: [page 349] ■ common — both parties make the same mistake;12 ■ mutual — each party makes a different mistake; or ■ unilateral — only one party is mistaken. Whether the particular mistake made has any legal impact is a separate issue.

Hypothetical To illustrate the distinctions, recall the sale of land contract between Vince and Pat referred to earlier.13 The house on the land was built in 1910. Pat mistakenly believes that it was built in 1899. Consider three different situations. (1) Vince shares Pat’s belief. Since both parties believe the house was built in 1899, the facts illustrate common mistake. (2) Vince believes that the house was built in 1905. Both parties are wrong, but their mistakes differ. Therefore, the facts illustrate mutual mistake. (3) Vince knows that it was built in 1910. The facts illustrate unilateral mistake by Pat. What are Pat’s rights if she learns of her mistake before she has paid the price? Can she say there is no contract, or that if there is a contract she can rescind it? Or is her mistake simply irrelevant? The answers depend on whether her factual mistake has some legal effect, and what that effect is.

Common Mistake [24-06] Description and analysis. In a case of common mistake, both parties labour under the same misapprehension.14 The general rule is that common

mistake has no legal impact. In the example above (situation (1)), the mistake made by Pat and Vince has no legal significance. However, the general rule does not always apply.15 In exceptional cases, the contract may be void or voidable. [24-07] Mistake rendering contract void. A contract for the sale of specific goods is void if, unknown to the parties, the goods perished prior to entry into the contract.16 For example, assume Spike agrees to sell his motor car ABC123 to Buffy for $15,000, and Buffy accepts that offer. There is no contract if, unknown to both, the vehicle had already been destroyed by fire. [page 350] So far as contracts in general are concerned, in Bell v Lever Bros Ltd17 the House of Lords said a ‘contract’ is void if the same ‘fundamental mistake’ is made by both parties. However, the actual decision, and the illustrations in Lord Atkin’s speech, show ‘fundamental mistake’ to be an extremely narrow concept. For example, assume Peter pays Sarah $1 million to buy her painting, and both believe that it is by an old master. If it is actually a copy worth $100,000, the contract is not void. By contrast, assume Robin agrees to sell Locksley Castle to Marian. Both believe that Robin is the owner. In fact, it is owned by Marian. Their common mistake may render the contract void.18

In McRae v Commonwealth Disposals Commission,19 the Commission advertised an oil tanker for sale. The advertisement said: Tenders are invited for the purchase of an oil tanker lying on Jourmaund Reef, which is approximately 100 miles North of Samarai. The vessel is said to contain oil. Offers to purchase the vessel and its contents should be submitted to the Commonwealth Disposals Commission …

McRae’s offer to buy the tanker for £285 was accepted by the Commission. In fact, no such tanker existed. Although the sale contract related to specific goods, the sale of goods provision summarised above did not apply. The tanker had not perished — it never existed.20 Turning to the general law, the court agreed with Lord Atkin in Lever Bros that a contract may be void for common mistake. However, it considered the

issue to be one of construction21 or implication. By construing the contract, a court may come to the conclusion that the parties agreed to be bound only if a particular state of affairs existed at the time when the contract was agreed. There was no express term in the nature of a condition precedent to formation,22 saying that the agreement was ‘subject to’ the tanker existing. Nor could any term to that effect be implied. Therefore, the contract was not void. That led to the question whether the Commission had impliedly promised that the tanker existed. The decision was that the Commission had done so. It was therefore liable to pay McRae damages for breach of contract.23 Because the court agreed with Lord Atkin in Lever Bros, the decision in McRae leaves open the possibility that a contract may be void under a ‘doctrine’ of fundamental common mistake even though there is no express or implied term [page 351] to that effect in the parties’ agreement. There are, however, no illustrations of the operation of such a doctrine in the Australian cases.24 [24-08] Mistake rendering contract voidable. A decision that a contract is voidable for common mistake is more likely than a conclusion that the contract is void. But it is unusual. The conclusion can be reached if there is a complete difference in substance between the actual position and the position as understood by the parties.25 In other cases, there must be both a fundamental common mistake and unconscionable conduct by the party who seeks to enforce the contract.

Leading case In Svanosio v McNamara,26 a vendor sold a hotel to the purchaser, including the land on which it stood. After title to the land had been conveyed, the purchaser discovered that the vendor did not own all the land on which the hotel stood. Since the vendor shared the purchaser’s mistake, it was a common mistake. The purchaser argued the contract was void. The mistake alleged was that the hotel stood wholly on the land sold. If the purchaser had known

that a considerable part of the hotel was on land not owned by the vendor, Dixon CJ and Fullagar J said27 that he would not have entered into the contract. But that did not mean the contract was void. However, they agreed with a statement in Solle v Butcher.28 In that case, Denning LJ assumed a situation in which the parties enter into a contract labouring under a common mistake either as to the facts or their rights. He said29 that the contract can be rescinded if: (1) the mistake is ‘fundamental’; and (2) the party seeking to rescind was not at fault. In Svanosio, title to the land had been conveyed. In that situation, because there was neither a substantial failure of consideration nor ‘fraud’ by the vendor, Dixon CJ and Fullagar J said30 the purchaser had no rights against the vendor arising from mistake. The principle stated in Solle also received a measure of approval by the High Court in Taylor v Johnson,31 a case on unilateral mistake. The principle was rationalised in terms of unconscionable conduct. In other words, if the requirements suggested by Lord Denning are satisfied, the contract may be rescinded if it would [page 352] be unconscionable for the party seeking to enforce the contract to do so. It was also said32 that the reference to ‘fraud’ by Dixon CJ and Fullagar J in Svanosio should be understood to include unconscionable conduct. However, the statement in Solle does raise problems, including what is meant by a ‘fundamental’ mistake. How does this differ from ‘fundamental’ mistakes which, according to cases such as Bell v Lever Bros Ltd,33 make a contract void? The difficulty of reconciling Lord Denning’s statement in Solle with Lever Bros so troubled the English Court of Appeal in Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd34 that it declined to follow the case. Accordingly, under English law a contract cannot be rescinded for common mistake.

Mutual Mistake

[24-09] Description. In order to have any impact, mutual mistake must be of a significant nature. For example, the mistakes made by Pat and Vince as to the year in which the house was built are (as a matter of law) too insignificant to have any impact.35 By contrast, assume that Ajax Ltd owns two silos of wheat (S1 and S2). If Ajax and Beta Ltd contract for the sale of the contents of one silo, a position may arise where: ■ Ajax believes that Beta is buying the contents of S1; but ■ Beta believes that Ajax is selling the contents of S2. At a factual level there is ‘mutual’ mistake in relation to the subject matter of the contract. Since Ajax and Beta are at cross purposes, it is difficult to see how there can be a contract. However, we must also take account of the objective theory of contract law.36 The question is whether either party can rely on its own mistake.37 [24-10] No contract. If no written contract is signed describing the contract’s subject matter, offer and acceptance analysis is employed. In the above example, if Ajax Ltd made the offer, there is no contract if acceptance by Beta Ltd does not correspond to the offer.38 That may well be the case. But the explanation is the operation of normal rules of offer and acceptance, not a concept of mistake. Therefore, if the terms of Ajax’s offer led Beta reasonably to believe that the contents of S2 were the subject matter of the offer there is a binding contract. The fact that Ajax subjectively intended to sell the contents of S1 is immaterial. [page 353]

Old case Raffles v Wichelhouse39 is often cited as illustrating mutual mistake. An agreement for the sale of cotton described the goods as being due to arrive on the ship Peerless from Bombay. Two ships by that name were due to leave Bombay at about this time, one in October, the other in December. The seller tendered (and the buyer rejected) cotton from the December vessel. Because the existence of two Peerless ships only became apparent when

the contract was applied to the facts, there was latent ambiguity as to the contract’s subject matter. Accordingly, the objective theory was displaced and extrinsic evidence was admissible.40 It was assumed that the evidence would confirm that the parties bargained in relation to different goods. Accordingly, there was no contract because the ambiguity was insoluble.41 [24-11] Rescission for mutual mistake? Mutual mistake seems to operate in an all or nothing way. If there is a fundamental ambiguity which cannot be resolved, or the parties are at cross purposes, no contract exists. Otherwise, the contract is enforceable. It is therefore difficult to see how a right to rescind can arise for mutual mistake. Assume that a written contract contains an important term which means ‘X’. One party to the contract believes that it means ‘Y’, the other ‘Z’. Meanings Y and Z differ significantly from X. Since the exclusionary rule prevents either party from giving evidence of their understanding,42 the contract is enforced according to meaning X. Neither party can claim a right to rescind on the basis of its own misunderstanding.

Unilateral Mistake General [24-12] Description. People very often make mistakes about what their contracts mean, or how they operate as a matter of law. Since there is no reason to assume that the other will make the same mistake, or make a different mistake about the same aspect of the contract, ‘unilateral’ mistakes are frequent. As with other mistake categories, the general rule is that mistake by one party in relation to some aspect of the contract has no legal impact. For example, the unilateral mistake made by Pat in relation to the year on which the house was built43 has no legal impact. As always, there are exceptional situations. [24-13] Analysis. If unilateral mistake has an impact on the rights of the parties, that is because one party knew of the other’s mistake. Usually, it must also be shown [page 354]

that the first party was responsible for, or at least contributed to, the second party’s mistake. The most obvious case is a fraudulent misrepresentation. However, as has been explained, mistake induced by misleading conduct is analysed in terms of misrepresentation, not mistake.44 Moreover, when mistake is induced by fraud it is difficult to see the need for an independent concept of unilateral mistake.45 Analysis of unilateral mistake is more significant if there is no misrepresentation. A right to rescind may arise if unilateral mistake is associated with unconscionable conduct not coming within the Amadio principle.46 The law also assumes that in three cases a contract may be void: (1) unilateral mistake of identity; (2) unilateral mistake as to terms; and (3) under the doctrine of non est factum.47

Mistaken Identity [24-14] Introduction. If A makes an offer to B (only), and C purports to accept the offer, the obvious conclusion is that there is no contract between A and C.48 Even if C pretends to be B, there is no need to consider mistake. But what is the position if A makes an offer to C who is pretending to be B? Because of C’s pretence, the contract is clearly voidable for C’s fraud. But does A’s mistake about C’s identity — the belief that C was B — make the contract void?49 The issue assumes some importance if the contract relates to goods. Assume that Claude, pretending to be Bill, buys Alan’s yacht. Before his fraud is discovered, Claude purports to sell the yacht to Debbie. So far as ownership of the yacht is concerned, the real contest is between Alan and Debbie. Having defrauded Alan, Claude (alias Bill) will be on his way to South America. The legal problem is who, as between two innocent people (Alan and Debbie), should suffer the loss caused by Claude. If the contract between Alan and Claude was merely liable to be rescinded (for fraud), Alan bears the loss. But if the ‘contract’ between Alan and Claude was void (for mistake), Debbie bears the loss. In the cases, the person in Claude’s position is affectionately termed ‘the rogue’. [24-15] Parties at a distance. The mistaken identity cases place some stress on whether the parties negotiate face to face, or contract ‘at a distance’.

[page 355]

Leading case In Cundy v Lindsay,50 Blenkarn (the rogue) carried on business from 37 Wood St. His name was similar to that of a reputable business — ‘Blenkiron & Co’ — which carried on business from 123 Wood St. Exploiting this similarity, the rogue ordered goods from Lindsay & Co, who duly dispatched them to Blenkiron & Co at 37 Wood St, that is, to the rogue’s address. His deception having been successful, the rogue proceeded to sell the goods to Cundy — the innocent third party. Of course, no payment was made by the rogue to Lindsays. When they discovered the true facts, Lindsays knew there was no point suing Blenkarn for the price, and no point at all in suing Blenkiron & Co, who knew nothing of the transaction. So Lindsays sued Cundy in tort, alleging that they still owned the goods, and were therefore entitled to be paid their value. Cundy relied on his contract with the rogue to say he was the owner. Therefore, in order to succeed, Lindsays had to show that their ‘contract’ with Blenkarn was void for mistake. They were successful. The House of Lords held that where parties negotiate at a distance, no contract results from an agreement with a rogue who is pretending to be someone else. Superficially, Cundy v Lindsay seems a sensible decision. However, there are difficulties. First, it is not clear why Lindsays were not treated as having contracted with whoever was doing business at 37 Wood St.51 Second, Lindsays’s unilateral mistake was caused by the rogue’s fraud. Why is fraud of that nature analysed in terms of mistake? If a person tells some other lie, such as that they own goods which they are purporting to sell, the contract is not void. It seems odd that Lindsays could not sue the rogue in contract. Third, there is no analysis of why Cundy lost out in circumstances where, it might be said, Lindsays showed a lack of care in their dealing with the rogue. Cundy v Lindsay remains good law. It was recently applied in Shogun Finance Ltd v Hudson.52 In that case, execution of a written contract was held to attract the same principles as where parties contract at a distance. The rogue pretended to be ‘Patel’, and signed the contract in that name. Of course, Patel knew nothing of the transaction. It was held that because the rogue pretended to be a person

who existed, there was no contract with anyone. Therefore, the innocent third party to whom the rogue had disposed of the goods lost out. [24-16] Parties face to face. The law is perhaps clearer where a person contracts face to face with a rogue who pretends to be someone else. Although the cases assume that a contract can be void for unilateral mistake in this situation as well, the balance of authority favours analysis simply in terms of misrepresentation. [page 356] Therefore, the contract is voidable, that is liable to be rescinded, rather than void.53 This approach serves to protect innocent third parties. It also eliminates the need to draw fine distinctions, for example, between mistake as to identity and mistake as to an attribute of a person (such as creditworthiness).

In Lewis v Averay,54 Lord Denning MR attempted to restate the law. He suggested:55 I do not … accept the theory that a mistake as to identity renders a contract void. I think the true principle is … this: When two parties have come to a contract — or rather what appears, on the face of it, to be a contract — the fact that one party is mistaken as to the identity of the other does not mean that there is no contract, or that the contract is a nullity and void from the beginning. It only means that the contract is voidable, that is, liable to be set aside at the instance of the mistaken person, so long as he does so before third parties have in good faith acquired rights under it.

Lewis was the owner of an Austin Mini Cooper ‘S’ motor car. He sold it to a rogue who said he was Richard Greene, a well-known television actor.56 The rogue paid for the car with a cheque which was subsequently dishonoured. This was a clear case of fraud. Lewis said that he would not have entered into the contract but for his mistake as to the rogue’s identity. The court did not doubt that he had been told a believable story, supported by evidence.57 It was nevertheless held that the contract between Lewis and the rogue was not void for unilateral mistake. Averay would not have become the owner if Lewis had rescinded the contract with the rogue before the latter contracted with Averay.58 Rescission ceased to be available once Averay had

purchased the vehicle in good faith.59 Averay, not Lewis, was the owner of the car. Lord Denning’s statement of principle in Lewis looks to be inconsistent with Cundy v Lindsay.60 It has been criticised on that basis.61 However, Lewis is consistent with the Australian cases, which confine the situations in which a contract is void for mistake. [page 357]

Unilateral Mistake as to Terms [24-17] Introduction. The first question where there is a unilateral mistake as to terms is whether the mistake prevents a contract coming into existence. Under the objective theory,62 the usual position is that such a mistake has no impact. However, sometimes the objective theory is displaced. If so, the contract may be void.

Difficult case! The plaintiff (the seller) in Smith v Hughes63 claimed that the defendant (the buyer) had breached a contract to purchase oats by refusing to accept delivery. According to the buyer, the oats were not in accordance with the terms of the contract. When the contract was negotiated, the seller showed a sample of the oats to the buyer. Later, the buyer wrote offering to buy the oats at 34 shillings per quarter. The seller accepted the offer. But when he tendered delivery of the goods to the buyer they were rejected on the basis that they were ‘new oats’: the buyer believed the contract required delivery of ‘old oats’. The price in the buyer’s offer was high if the contract was for new oats. But at the time oats were scarce. Because the court was not satisfied with the directions given by the trial judge to the jury,64 a new trial was ordered. The importance of the case lies in the judges’ statements of principle. These rely on the need to distinguish two different contracts either of which may have arisen on the facts. For each it is assumed that the buyer does not expressly offer to buy old oats.

Contract 1: The seller agrees to sell new oats, but the buyer mistakenly believes that the seller is selling old oats. Here, the judges said, the buyer is bound, even if the seller knows of the buyer’s (unilateral) mistake. What Cockburn CJ picturesquely described65 as the ‘passive acquiescence of the seller in the self-deception of the buyer’ has no legal effect. Contract 2: The seller’s intention is to sell new oats. However: ■ the buyer reasonably, but mistakenly, believes that the seller has promised to sell old oats; and ■ the seller knows of the buyer’s mistake. The judges thought this contract would be void for unilateral mistake as to terms. In Smith v Hughes the negotiations were oral. In Contract 2 the fact that the seller knows of the buyer’s mistake displaces the objective theory. Because the mistake relates to an important matter — whether the seller promised to deliver old oats [page 358] — there is a fundamental mistake as to the terms of the contract. However, because most modern commercial contracts are in writing, the objective theory is hardly ever displaced. Moreover, the document will almost always include descriptions of the nature and quality of what is being sold. It follows that the prospect of a written contract being void for unilateral mistake as to terms is fairly remote. [24-18] Rescission based on unconscionable conduct. A mistake which is not induced by misleading conduct by the other party will normally have no legal significance. However, if a unilateral mistake as to terms is associated with unconscionable conduct66 by the other party, there may be a right to rescind the contract even if it is in writing.

In Taylor v Johnson,67 Mrs Johnson and Mr Taylor entered into a contract for

the sale of 10 acres of land. The written contract stated the price of the land as $15,000. In fact, Johnson believed the price was $15,000 per acre, so that the total contract price was $150,000. This was considerably more than the market value of the land (about $50,000). However, there was a distinct possibility that, after rezoning, the market value would increase to $195,000. When Johnson discovered her mistake she refused to perform the sale contract. Taylor then sought an order for specific performance of the contract. However, a majority of the High Court not only declined to order specific performance, but also confirmed Johnson’s refusal to perform the contract as an election to rescind the contract for mistake. Even though it related to a very important term of the contract, Johnson’s mistake did not make the contract void. Nor could Johnson rely on her own mistake as giving rise to a right to rescind: something more had to be proved. The ‘something more’ was that Taylor had acted unconscionably. He was aware that Johnson was labouring under a serious mistake and the majority was satisfied68 that he: [D]eliberately set out to ensure that Mrs Johnson did not become aware that she was being induced … to enter into the contract by some material mistake or misapprehension as to its terms or subject matter.

Mason ACJ, Murphy and Deane JJ stated the applicable legal principle as being:69 [A] party who has entered into a written contract under a serious mistake about its contents in relation to a fundamental term will be entitled in equity to an order rescinding the contract if the other party is aware that the circumstances exist which indicate that the first party is entering the contract under some serious mistake or misapprehension about either the content or subject matter of that

[page 359] term and deliberately sets out to insure that the first party does not become aware of the existence of his mistake or misapprehension.

Because Taylor knew that Johnson was mistaken, and made sure that she did not discover the true position, Johnson was entitled to rescind. The court left open for future consideration whether the analysis of unilateral mistake in Smith v Hughes70 was correct.71

Non est Factum [24-19] Principle. The parties are bound by a signed document whether or not they have read it.72 Even if one party relied on the other to explain its terms, and received an inaccurate explanation, the first party cannot say the document is void. There may, of course, be a right to rescind for misrepresentation, but that is quite different from saying that the document has no legal effect. However, if the ancient principle of ‘non est factum’73 operates, the document is void. The principle developed at a time when few people could read and write, when the main objective was to protect illiterate people. However, that is less important under the modern law, which focuses on the use of unscrupulous means to obtain a signature. Two classes of people are protected: (1) those unable to read due to blindness or illiteracy; and (2) other people who are permanently or temporarily (through no fault of their own) unable to understand the purport of documents they sign. Although originally limited to deeds, non est factum is now potentially applicable to any signed document. But it is a narrow principle. People who suffer from a relevant disability must still establish a fundamental difference between what they believed they were signing and what is actually signed. In addition, third parties who rely on the signature are given protection. Application of the principle must take that into account. [24-20] Application. If no third party will be affected by a decision that the document is void, the requirements of the non est factum principle are: ■ protected class — the mistaken party suffered from a relevant disability; ■ exploitation — the other party knew of and exploited the disability; and ■ fundamental difference — between the effect of document actually signed and the effect the signer believed the document would have. [page 360] It follows that proof of a difference between actual and supposed legal effect is sufficient only if it is fundamental. For example, in Petelin v Cullen74 an option was granted to Cullen by Petelin to purchase his land. Cullen wanted to extend the period of option. He asked Petelin to sign a document which did just that.

But he told Petelin that the document was a receipt. Petelin knew no better because he spoke little English and could read none. He therefore signed the document. Applying the non est factum principle, the document was held to be void because an extension of the option period was fundamentally different from a receipt. Once third party rights have intervened, an additional legal requirement for non est factum must be applied. The person relying on the principle must have exercised reasonable care when signing the document.

Leading case In Saunders v Anglia Building Society,75 Mrs Gallie, who was 78 years old, wanted to make a gift of her (leasehold) property to her nephew, Parkin. The purpose was to enable Parkin and his friend Lee to borrow money. She therefore understood he would mortgage the property to a lender. Gallie signed a document which she believed would transfer the property to Parkin by way of gift. In fact, Lee had persuaded Parkin to get his aunt to sign a deed transferring the property to Lee. Gallie’s spectacles were broken when the two called on her and presented the document for signature. Since she could not read without them, Gallie signed the document without reading it. Lee then mortgaged the property for £2000 to Anglia. Of course, it relied on Gallie’s signature on the deed in favour of Lee. When Anglia sought to enforce the mortgage against Lee, the facts came to light. Gallie pleaded that the deed in Lee’s favour was void on the basis of non est factum. Anglia would have no mortgage if the plea succeeded: its only remedy would be to sue Lee on his promise to repay the amount of the mortgage. Gallie’s disability brought her within the scope of the non est factum principle. However, the legal effect of the document she signed was not fundamentally different from what Gallie thought she was signing. Although she thought the gift was in favour of Parkin, the deceit practised on her by Parkin and Lee made little difference because she knew that they intended to borrow money on the security of the property. The court also explained the additional legal requirement which operates if an innocent third party has obtained rights in the subject matter of the document. A decision that the document is void under the non est factum principle prejudices anyone who has relied on the

document. As explained above, if Gallie had been successful Anglia would not have had the benefit of the mortgage. Therefore, the non est factum principle does not apply if the [page 361] person who signed the document was careless. However, ‘carelessness’ does not refer to tortious liability for negligence. The idea is simply that people who sign documents which mislead third parties cannot take advantage of their own carelessness to deny that the document ever existed. The analysis in Saunders was adopted by the High Court in Petelin v Cullen.

Rectification [24-21] Concept. Where mistake has the result that a document (which need not be a contract) does not say what the parties actually intended it to say, the remedy of rectification may be available. Assuming that the evidence76 establishes a sufficient mistake, the court can ‘re-form’77 the document to make it conform with what the parties intended. There are two situations: (1) common mistake; or (2) unilateral mistake. Convincing proof of the mistake is required.78 Because rectification is a remedy derived from equity, it is subject to the discretion of the court. [24-22] Common mistake. The usual situation is common mistake.

Hypothetical A draft agreement between Red and Blue for the provision of services states that Blue must pay electricity charges incurred in providing the services. The contract document actually executed by the parties says that Red must pay. Red contends that the document should be rectified to conform with the draft agreement.79 The applicable principles operate in this way.80

■ Actual intention. Red’s argument is that the draft stated the parties’ actual intention. It may therefore be used to establish a difference between what the parties intended to sign and what they actually signed. It does not matter that the draft was not enforceable as a contract, for example, because it was incomplete. ■ Continuing common intention. Of course, parties often change their minds about the terms of an agreement during negotiations. Therefore, Red must also establish a continuing common intention. It must prove that the intention expressed in the draft continued to be held by both parties down [page 362] to the time of execution of the document. An external manifestation of the continuing common intention is not required.81 ■ Issue must usually relate to content. Although not adhered to as closely today as in the past, usually the matter at issue must relate to the content of the document, rather than its legal effect. The dispute between Red and Blue relates to content. Therefore, Red is likely to succeed if a continuing common intention is established. [24-23] Unilateral mistake. The convincing proof requirement is more difficult in cases of unilateral mistake. For rectification to be available, the party seeking rectification must show:82 (1) a difference between the terms of the document and what that party understood the document to say; (2) knowledge of the mistake by the other party; and (3) unconscionable conduct by the other party when the document was signed.

Hypothetical White (a builder) offers to do construction work at Black’s factory. The offer includes a price variation clause. Black prepares the contract document for signature, but omits the price

variation clause. White signs the document believing that it includes the clause. If Black knew of White’s mistake, and took steps to ensure that White did not discover that the clause had been omitted, Black’s conduct is unconscionable. Therefore, White is entitled to have the document rectified, so that it includes the price variation clause.

QUICK QUIZ Short answer (1) Explain ‘common mistake’. (2) Explain ‘mutual mistake’. (3) Explain ‘unilateral mistake’. (4) What remedies are available for common mistake? (5) What remedies are available for unilateral mistake? True or false? (1) If S agrees to sell specific goods to B, and the goods had perished before entry into the agreement, the contract is void. [page 363] (2) A contract may be void if unilateral mistake is proved. (3) Non est factum is limited to contracts expressed as deeds. (4) Rectification is available only in cases of unilateral mistake. Choose the best answer (1) In McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 (see [24-07]), it was held that: (a) the contract was void; (b) the contract was void but the Commission was liable for fraud; (c) McRae was entitled to damages for breach of contract;

(d) McRae breached the contract; or (e) McRae was entitled to specific performance. (2) Albert, pretending to be Victoria, enters into a contract with Beatrice: (a) the contract is void if Beatrice pays the agreed price to Victoria; (b) Beatrice has no remedy against Albert unless the contract is void. (c) Beatrice has no remedy against Albert if she was negligent; (d) Albert is not liable for fraud; or (e) Beatrice can rescind the contract. (3) A and B enter into a contract which requires A to pay B $200. A mistakenly believes that only $100 must be paid: (a) A need only pay $100; (b) if B represented that A was obliged to pay $100, the contract is void; (c) the contract is void; (d) A may rescind the contract; or (e) A must pay $200. (4) Joan is blind. She signs a contract document without having it read to her. In order to prove that the document is void under the non est factum principle, Joan must establish: (a) mutual mistake in relation to the effect of the document; (b) common mistake in relation to the effect of the document; (c) that rectification is not an appropriate remedy; (d) a fundamental difference between what she signed and what the other party told Joan she was signing; or (e) that the other party to the contract is also blind.

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See [24-07]. See [24-08], [24-18]. See [29-14], [29-16]. See [24-19]–[24-20], [24-21]–[24-23]. See generally Chapter 23. See [24-14]–[24-16]. See [22-02].

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See generally Chapter 20. See Amalgamated Investment & Property Co Ltd v John Walker & Sons Ltd [1976] 3 All ER 509. See Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 360; 41 ALR 367; Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2003] QB 679 at 704–5; [2002] EWCA Civ 1407 at [82]. See [24-02]. Some of the cases use the word ‘mutual’ in this context. See also [24-01], [24-03]. See eg Andrew Tettenborn, ‘Agreements, Common Mistake and the Purpose of Contract’ (2011) 27 JCL 91. See also [24-21]–[24-22] (common mistake as basis for rectification). See ACT: Sale of Goods Act 1954, s 11; NSW: Sale of Goods Act 1923, s 11; NT: Sale of Goods Act 1972, s 10; Qld: Sale of Goods Act 1896, s 9; SA: Sale of Goods Act 1895, s 6; Tas: Sale of Goods Act 1896, s 11; Vic: Goods Act 1958, s 11; WA: Sale of Goods Act 1895, s 6. [1932] AC 161. Cf Cooper v Phibbs (1867) LR 2 HL 149. (1951) 84 CLR 377, Cases and Materials, §20-06C. The court clearly thought that the provision was based on a misconception. See generally on construction Chapter 10. See [4-03]. See also [14-05], [14-16]. See [27-16]. Contrast Associated Japanese Bank (International) Ltd v Credit du Nord SA [1989] 1 WLR 255 (see J W Carter (1991) 3 JCL 237). See Kennedy v Panama New Zealand and Australian Royal Mail Co Ltd (1867) LR 2 QB 580 at 587. (1956) 96 CLR 186. (1956) 96 CLR 186 at 195. [1950] 1 KB 671, Cases and Materials, §20-11C. [1950] 1 KB 671 at 693. (1956) 96 CLR 186 at 198. (1983) 151 CLR 422; 45 ALR 265 (see [24-17]). (1983) 151 CLR 422 at 431; 45 ALR 265. [1932] AC 161. [2003] QB 679. Situation (2) in [24-05]. See [1-39], [10-01]. See [24-11]. See also [29-14], [29-16] (discretion to refuse specific performance). See [2-25]. (1864) 2 H & C 906; 159 ER 375. See [10-28]. Cf Sharp v Thomson (1915) 20 CLR 137 at 142. See [10-09]. Situation (3) in [24-05]. See [24-03]. See also [29-14], [29-16] (discretion to refuse specific performance). See [26-05]. Alternatively, unilateral mistake may be a basis for rectification. See [24-23]. See [24-19]–[24-20]. See [2-23]. See D W McLauchlan, ‘Mistake of Identity and Contract Formation’ (2005) 21 JCL 1. (1878) 3 App Cas 459, Cases and Materials, §20-42C. Cf King’s Norton Metal Co Ltd v Edridge Merrett & Co Ltd (1897) 14 TLR 98.

52 53 54 55 56

57

58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80

81 82

[2004] 1 AC 919. See eg Phillips v Brooks Ltd [1919] 2 KB 243. Contrast eg Ingram v Little [1961] 1 QB 31. [1972] 1 QB 198, Cases and Materials, §20-49C. [1972] 1 QB 198 at 207. Having served his time as a would-be matinee idol in Hollywood, Richard Greene ultimately built his fame and fortune as star of a classic British television series of the 1950s — The Adventures of Robin Hood. How convincing that evidence was may be doubted. According to Lord Denning MR ([1972] 1 QB 198 at 204) the rogue produced a ‘special pass of admission to Pinewood Studios, which had an official stamp on it. It bore the name of Richard A Green’. See Car and Universal Finance Co Ltd v Caldwell [1965] 1 QB 525. See [33-33]. (1878) 3 App Cas 459 (see [24-15]). Including in Shogun Finance Ltd v Hudson [2004] 1 AC 919 (see [24-15]). See [1-39], [10-01]. (1871) LR 6 QB 597, Cases and Materials, §1-41C. Jury trials no longer occur in contract cases. (1871) LR 6 QB 597 at 603. See [24-13] (analysis does not depend on the Amadio principle). (1983) 151 CLR 422; 45 ALR 265, Cases and Materials, §20-32C. (1983) 151 CLR 422 at 433; 45 ALR 265 per Mason ACJ, Murphy and Deane JJ. (1983) 151 CLR 422 at 432; 45 ALR 265. (1871) LR 6 QB 597 (see [24-17]), Cases and Materials, §1-41C. See Carter, Construction, §2-22. See [9-04]. Literally, ‘it is not my deed’. (1975) 132 CLR 355; 6 ALR 129, Cases and Materials, §21-19C. Contrast O’Brien v Australia and New Zealand Bank Ltd (1971) 5 SASR 347. [1971] AC 1004. See also [10-20]. See Bacchus Marsh Concentrated Milk Co Ltd v Joseph Nathan & C