Understanding contract law : a practical guide. 9780409344141, 0409344141
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Table of contents :
Full Title
Copyright
Preface
Table of Cases
Table of Statutes
Table of Contents
Chapter 1 Australian Legal System
Introduction
Australian legal system
Historical foundations of Australian law
The Constitution and Australia’s federal system
Sources of law
Classifications of law
Contract law
Nexus between law and business
Chapter 2 Contract Formation
Introduction
Bilateral and unilateral contracts
Offer
Acceptance
Consideration
Origins of the doctrine of consideration
Elements of consideration
Legal requirements
Consideration in practice
Intention to create legal relations
Certainty and completeness of terms
Chapter 3 Is a Contract Legally Binding?
Introduction
Capacity to contract
Illegality
Privity
Agency
Chapter 4 Contents of a Contract
Introduction
Express terms
Written agreements
Implied terms
Interpretation of terms
Variation of contract terms
Chapter 5 Is There Genuine Agreement?
Introduction
Mistake
Misrepresentation
Duress
Duress of the person
Duress of goods
Economic duress
Undue influence
Unconscionable conduct
Chapter 6 Statutory Regulation of Contracts
Introduction
Australian Consumer Law
Misleading or deceptive conduct under the ACL
Unconscionable conduct under the ACL
Unfair terms in consumer contracts
Other unfair business practices
Consumer guarantees
Other statutes
Reporting a breach of the ACL
Chapter 7 Termination of a Contract
Introduction
Termination by performance
Termination by agreement
Termination by operation of contractual term
Termination by operation of law
Termination by frustration
Termination for breach of contract
Termination by repudiation
Chapter 8 Remedies
Introduction
Common law remedies
Equitable remedies
Equitable damages under statute
Chapter 9 Alternative Dispute Resolution
Introduction
Self-help
Mediation
Conciliation
Arbitration
Mandatory ADR
Sources which may assist parties contemplating ADR
Index
Citation preview
Understanding Contract Law A Practical Guide
Dr Mark Giancaspro LLB (Hons), LP (Flinders), PhD (Adelaide) Lecturer, Adelaide Law School
Dr Colette Langos BA, LLB (Adelaide), GDLP (Law Society of South Australia), MComLaw (Deakin), PhD (UniSA) Lecturer, Adelaide Law School
LexisNexis Butterworths Australia
2016
LexisNexis AUSTRALIA LexisNexis Butterworths 475–495 Victoria Avenue, Chatswood NSW 2067 On the internet at: www.lexisnexis.com.au ARGENTINA LexisNexis Argentina, BUENOS AIRES AUSTRIA LexisNexis Verlag ARD Orac GmbH & Co KG, VIENNA BRAZIL LexisNexis Latin America, Sao PAULO CANADA LexisNexis Canada, Markham, ONTARIO CHILE LexisNexis Chile, SANTIAGO CHINA LexisNexis China, BEIJING, SHANGHAI CZECH REPUBLIC Nakladatelství Orac sro, PRAGUE FRANCE LexisNexis SA, PARIS GERMANY LexisNexis Germany, FRANKFURT HONG KONG LexisNexis Hong Kong, HONG KONG HUNGARY HVG-Orac, BUDAPEST INDIA LexisNexis, NEW DELHI ITALY Dott A Giuffrè Editore SpA, MILAN JAPAN LexisNexis Japan KK, TOKYO KOREA LexisNexis, SEOUL MALAYSIA LexisNexis Malaysia Sdn Bhd, PETALING JAYA, SELANGOR NEW ZEALAND LexisNexis, WELLINGTON POLAND Wydawnictwo Prawnicze LexisNexis, WARSAW SINGAPORE LexisNexis, SINGAPORE SOUTH AFRICA LexisNexis Butterworths, DURBAN SWITZERLAND Staempfli Verlag AG, BERNE TAIWAN LexisNexis, TAIWAN UNITED KINGDOM LexisNexis UK, LONDON, EDINBURGH USA LexisNexis Group, New York, NEW YORK LexisNexis, Miamisburg, OHIO National Library of Australia Cataloguing-in-Publication entry Author:
Giancaspro, Mark.
Title: Edition: ISBN: Notes: Subjects:
Other Authors/Contributors: Dewey Number:
Understanding contract law: a practical guide. 1st edition. 9780409344141 (pbk). 9780409344158 (ebk). Includes index. Contracts — Australia — Textbooks. Commercial law — Australia — Textbooks. Langos, Colette. 346.9407
© 2016 Reed International Books Australia Pty Limited trading as LexisNexis. 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. Typeset in Archer and Gotham. Printed in China. Visit LexisNexis Butterworths at www.lexisnexis.com.au
Preface There is no hiding from contract law; it regulates exchange in virtually all modern economies. As such, it pervades a great number of industries and affects many different aspects of our lives. It is little wonder, then, that the need to have an understanding of how this complex field of law operates in commercial practice is now commonplace. Contract law is not just for lawyers anymore and many business-related degree programs now incorporate a legal component to provide an informed foundation for practice. We have attempted through this book to compile a comprehensive guide on the law of contract which not only provides clear explanations of the relevant laws, cases and principles, but also includes practical examples of how these apply and function in the ‘real world’. All content (including case law and legislation) is current up to mid-2016 and incorporates some very recent developments in this field. We hope this book will assist readers from many disciplines including and outside of law to understand the workings of, and develop a deep appreciation for the importance of, contract law. We would like to thank the wonderful staff at LexisNexis Butterworths, particularly Pamela O’Neill for believing in our vision and helping us bring this book to life. We also thank Jarrad Napier for his efforts in ensuring our compliance with style protocols. Finally, we offer some personal messages of thanks. I devote this book to my family and friends. Without the support of you all, I would never have retained the confidence (or sanity) to complete this monumental task. To my relatives: my mother Joy, Darren, Rosalyn, Mya, Anton, Adam, Jodi, Elita, Talia and Alana, thank you especially. To my father Tony and sister Leah, both in God’s care, this one’s for you. To my ‘little brother’ Chris, thank you for your humour; it kept me going. Finally, I thank my incredible co-author, Colette. Your support was tremendous; we did it. Mark Giancaspro I would like to dedicate this book to my Papa. Lieber Papa, ich Danke Dir von ganzem Herzen für die lebenslange Inspiration die Du mir gegeben hast. This
is also for Mama — ich Danke Dir für Deine endlose Unterstützung, Liebe und Geborgenheit — and for my daughter Adena — you are my greatest joy and source of strength. Bernd, Antje, Adena, Andre, Joni and Louenna — I thank you for your unwavering encouragement, love and support throughout the textbook journey. Henrik — you are in my heart forever. To my co-author Mark — I thank you wholeheartedly for inviting me to write this work with you. You are a constant inspiration. Colette Langos September 2016
Table of Cases References are to paragraph numbers A A v Hayden (1984) 156 CLR 532; 56 ALR 82 …. 3.44, 3.50 AB v Western Australia (2011) 244 CLR 390; 281 ALR 694 …. 3.27 Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 42 FCR 470; 114 ALR 355 …. 6.55 Adams v Lindsell (1818) 106 ER 250 …. 2.45 Addis v Gramophone Co Ltd [1909] AC 488 …. 8.2 Adrenaline Pty Ltd v Bathurst Regional Council (2015) 322 ALR 180 …. 8.103 AGC (Advances) v McWirter (1977) 1 BPR 9454 …. 2.20 Agius v Sage [1999] VSC 100 …. 2.137 Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570; 251 ALR 322 …. 2.96, 4.143, 4.171, 4.175, 7.45 Agripay Pty Ltd v Byrne [2011] 2 Qd R 501; [2011] QCA 85 …. 5.108 Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 …. 2.55, 4.19 Akot Pty Ltd v Rathmines Investments Pty Ltd [1984] 1 Qd R 302 …. 4.20 Alderton v Prudential Assurance Co Ltd (1993) 41 FCR 435 …. 5.110 Alex Kay Pty Ltd v General Motors Acceptance Corporation & Hartford Fire Insurance Company [1953] VR 458 …. 4.89 Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 …. 8.6, 8.8 — v Rayson [1936] 1 KB 169; [1935] All ER Rep 185 …. 3.47 Alphacell Ltd v Woodward [1972] AC 824 …. 8.6 Alstom Ltd v Yokogawa Australia Pty Ltd (No 7) [2012] SASC 49 …. 4.153 Amann Aviation Pty Ltd v Commonwealth (1990) 22 FCR 527; 92 ALR 601 …. 7.89 AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170; 68 ALR 185 …. 8.33, 8.37, 8.40, 8.48
Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288; 1 ALR 385 …. 3.66 Anaconda Nickel Ltd v Edensor Nominees Pty Ltd (2004) 50 ACSR 679; [2004] VSCA 167 …. 4.46 — v Tarmoola Australia Pty Ltd (2000) 22 WAR 101; [2000] WASCA 27 …. 2.140, 2.164 Anderson v G H Michell and Sons Ltd (1941) 65 CLR 543 …. 3.56 Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 …. 8.40, 8.49 Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549; 70 ALR 641 …. 7.97, 7.100, 7.104 Anton Piller KG v Manufacturing Processes Ltd [1976] Ch 55 …. 8.86 ANZ Banking Group Ltd v Alirezai [2004] QCA 6 …. 5.110 Apotex Pty Ltd (formerly GenRx Pty Ltd) v Les Laboratoires Servier (No 2) (2008) 77 IPR 1 …. 6.28 Arcos Ltd v E A Ronaasen & Son [1933] AC 470 …. 7.11 Argy v Blunts & Lane Real Estate Pty Ltd (1990) 26 FCR 112; 94 ALR 719 …. 6.13 Associated Newspapers Ltd v Bancks (1951) 83 CLR 322 …. 7.92, 7.116, 7.123 Attorney-General v Blake [2001] AC 268 …. 8.111 Attorney-General of Botswana v Aussie Diamond Products Pty Ltd (No 3) [2010] WASC 141 …. 7.11 Attwood v Small (1838) 6 Cl & Fin 232; 7 ER 684 …. 5.58 Australia Estates Pty Ltd v Cairns City Council [2005] QCA 328 …. 5.22 Australia Meat Holdings Pty Ltd v Kazi [2004] 2 Qd R 458; [2004] QCA 147 …. 3.30 Australian and New Zealand Banking Group Ltd v Frost Holdings Pty Ltd [1989] VR 695 …. 2.140, 2.141 — v Liebmann [2010] NSWSC 545 …. 8.53 Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 …. 4.138 Australian Casualty Co Ltd v Federico (1986) 160 CLR 513; 66 ALR 99 …. 4.138 Australian Communications Network Pty Ltd v Australian Competition and Consumer Commission (2005) 146 FCR 413; 224 ALR 344 …. 6.133
Australian Competition and Consumer Commission v AGL South Australia Pty Ltd [2014] FCA 1369 …. 6.28 — v Allphones Retail Pty Ltd (No 2) (2009) 253 ALR 324 …. 6.83 — v Baxter Healthcare Pty Ltd (2007) 232 CLR 1; 237 ALR 512 …. 3.42 — v C G Berbatis Holdings Pty Ltd (2003) 214 CLR 51; 197 ALR 153 …. 6.74, 6.77 — v Coles Supermarkets Australia Pty Ltd (2014) 317 ALR 73; [2014] FCA 634 …. 6.58 — v Giraffe World Australia Pty Ltd (No 2) (1999) 95 FCR 302; 166 ALR 74 …. 6.138 — v Jewellery Group Pty Limited (2012) 293 ALR 335 …. 6.28 — v Lux Distributors [2013] FCAFC 90 …. 6.84, 6.85 — v Lyoness Australia Pty Ltd [2015] FCA 1129 …. 6.139 — v Reckitt Benckiser (Australia) Pty Ltd (No 4) [2015] FCA 1408 …. 6.52 — v Samton Holdings Pty Ltd (2001) 117 FCR 301 …. 6.75 — v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253; 178 ALR 304 …. 6.83 Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd (2014) 253 CLR 560 …. 8.107 Australian Securities and Investments Commission v Fortescue Metals Group Ltd (2011) 190 FCR 364; 274 ALR 731 …. 6.42 — v McCaskey (2000) 104 FCR 8; 183 ALR 159 …. 6.141 Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424 …. 2.5, 2.71, 2.72, 2.134, 8.102 Azzi v Volvo Car Australia Pty Ltd [2007] NSWSC 319 …. 2.55
B Baburin v Baburin [1990] 2 Qd R 101 …. 5.101 Bacon v Purcell (1916) 22 CLR 307 …. 4.172 Badat v DTZ Australia (WA) Pty Ltd [2008] WASCA 83 …. 7.45 Balfour v Balfour [1919] 2 KB 571 …. 2.119 Balmain New Ferry Co Ltd v Robertson (1906) 4 CLR 379 …. 4.60, 4.61 Baltic Shipping Co v Dillon (1993) 176 CLR 344; 111 ALR 289 …. 8.31, 8.94, 8.110 Banco de Portugal v Waterlow & Sons Ltd [1932] UKHL 1; [1932] AC 452 ….
8.18, 8.20 Bank Line Ltd v Arthur Capel and Co [1919] AC 435 …. 7.71 Bankstown City Council v Alamdo Holdings Pty Ltd (2005) 223 CLR 660; 221 ALR 1 …. 8.81 Banning v Wright [1972] 1 WLR 972 …. 4.171 Barbaro v Millington [2007] ACTCA 1 …. 5.110 Barry v Davies [2001] 1 All ER 944 …. 2.20 Barton v Armstrong [1973] 2 NSWLR 598; [1976] AC 104 …. 5.78, 5.82 Batemyn v Slatyer (1987) 71 ALR 553 …. 6.42 Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5) [2012] FCA 1200 …. 6.42 Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 …. 2.163 Beaton v McDivitt (1987) 13 NSWLR 162 …. 2.68 Bell v Lever Brothers Ltd [1932] AC 161 …. 5.10, 5.12, 5.13, 5.14, 5.18, 5.19, 5.20 Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1; 225 FLR 1 …. 7.110 Bellgrove v Eldridge (1954) 90 CLR 613 …. 7.2, 8.28 Beswick v Beswick [1968] AC 58 …. 8.68, 8.74 Bettini v Gye (1876) 1 QBD 183 …. 7.108 Bilke v Havelock (1813) 3 Camp 374; 170 ER 554 …. 2.80 Bisset v Wilkinson [1927] AC 177 …. 5.47 Blackman v Gant [2010] VSC 109 …. 6.42 Blomley v Ryan (1956) 99 CLR 362 …. 5.114 Body Bronze International Pty Ltd v Fehcorp Pty Ltd (2011) 34 VR 536; 282 ALR 571 …. 6.56 Bolton v Mahadeva [1972] 2 All ER 1322 …. 7.14, 7.15 Bolton Partners v Lambert (1899) 41 Ch D 295 …. 3.99 Bond v Larobi Pty Ltd (1992) 6 WAR 489 …. 3.56 Bond Corporation Pty Ltd v Thiess Contractors Pty Ltd (1987) 14 FCR 215; 71 ALR 615 …. 6.13 Booker Industries Pty Ltd v Wilson Parking (Qld) Ltd (1982) 149 CLR 600; 43 ALR 68 …. 2.147
Bot v Ristevski [1981] VR 120 …. 8.41 Boucaut Bay Co Ltd v Commonwealth (1927) 40 CLR 98 …. 8.33 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 …. 4.100, 4.102, 4.103, 4.111, 4.112, 4.114 Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 …. 2.7, 2.55 Breen v Williams (1996) 186 CLR 71 …. 4.108 Bridge Stockbrokers Ltd v Bridges (1985) 57 ALR 401 …. 6.17 Bridgewater v Leahy (1998) 194 CLR 457; 158 ALR 66 …. 6.76 Brikom Investments Ltd v Carr [1979] QB 467; 2 All ER 753 …. 4.173 Brinkibon Ltd v Stahag Stahl und Stahlwarenhandelsgesellschaft mbH [1983] 2 AC 34 …. 2.44, 2.49 British & Benningtons Ltd v North West Cachar Tea Co [1923] AC 48 …. 2.103, 4.156, 7.36 British Russian Gazette and Trade Outlook Ltd v Associated Newspapers Ltd [1933] 2 KB 616 …. 7.38 Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 432 …. 3.54, 3.67, 3.68 Brown v Jam Factory Pty Ltd (1981) 53 FLR 340 …. 6.6 Bruno Pisano v Georgia Dandris [2014] NSWSC 1070 …. 8.28 Buckley v Tutty (1971) 125 CLR 353 …. 3.61 Bunnings Group Ltd v Laminex Group Ltd (2006) 153 FCR 479; 230 ALR 269 …. 6.144 Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558 …. 4.133 Burke v State Bank of New South Wales (1995) 37 NSWLR 53 …. 5.110 Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592; 212 ALR 357 …. 6.22, 6.29 Butt v McDonald (1896) 7 QLJ 68 …. 7.20 Byers v Dorotea Pty Ltd (1986) 69 ALR 715 …. 6.53 Byrne v Australian Airlines Ltd (1995) 185 CLR 410; 131 ALR 422 …. 4.112, 4.113, 4.115, 4.119, 4.122, 4.126 Byrne & Co v Leon Van Tienhoven & Co (1880) LR CPD 344 …. 2.27
C C&P Syndicate Pty Ltd v Reddy [2013] NSWSC 643 …. 7.111 Callaghan v O’Sullivan [1925] VLR 664 …. 3.50, 3.73 Caltex Oil v Howard Smith Industries [1973] NSWLR 89 …. 7.71 Cameron v Hogan (1934) 51 CLR 358 …. 2.126 — v Qantas Airways Ltd (1995) 55 FCR 147 …. 6.83 Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; 257 ALR 610 …. 6.22, 6.25 Campomar Sociedad Limitada v Nike International Ltd (2000) 202 CLR 45; 169 ALR 677 …. 6.21, 6.26, 6.27 Car & Universal Finance Co Ltd v Caldwell [1965] 1 QB 525 …. 8.55 Caringbah Business and Sports Club Limited v Caringbah Investments Pty Ltd [2015] NSWSC 724 …. 8.58 Carlill v Carbolic Smoke Ball [1893] 1 QB 256 …. 2.11, 2.12, 2.14, 2.43 Carr v JA Berriman (1953) 89 CLR 327 …. 7.118 Cary Boyd v Agrison Pty Ltd (Civil) [2014] VMC 23 …. 6.154 Casey’s Patents, Re; Stewart v Casey [1892] 1 Ch 104 …. 2.106, 2.107 Causer v Browne [1952] VLR 1 …. 4.54 CCP Australian Airships Ltd v Primus Telecommunications Pty Ltd (2005) ATPR 42-042; [2004] VSCA 232 …. 6.37 Cellulose Acetate Silk Co Ltd v Widnes Foundry (1925) Ltd [1933] AC 20 …. 8.46 CGM Investments v Chelliah (2003) 196 ALR 548 …. 7.42 Challenge Bank Ltd v Pandya (1993) 60 SASR 330 …. 5.110 — v VL Cooper and Associates Pty Ltd [1996] VicRp 14; [1996] 1 VR 220 …. 8.18 Chapelton v Barry Urban District Council [1940] 1 All ER 356; 1 KB 532 …. 4.53 Chaplin v Hicks [1911] 2 KB 786 …. 8.27 Chapman v Taylor [2004] NSWCA 456 …. 7.77 Chappel v Hart (1998) 195 CLR 232; 156 ALR 517 …. 8.6 Chappell & Co Ltd v Nestlé Co Ltd [1960] AC 87 …. 2.75, 2.77 Chapple v Cooper (1844) 13 M & W 252; 153 ER 105 …. 3.4 Chwee Kin Keong v Digilandmall.com Pte Ltd [2005] SGCA 2; 1 SLR 502 ….
5.28 Clambake Pty Ltd v Tipperary Projects Pty Ltd (No 3) [2009] WASC 52 …. 5.27 Clark Equipment Australia Ltd v Covcat Pty Ltd (1987) 71 ALR 367 …. 6.59 Clarkson Williams Partners Pty Ltd v Vaughan [2016] ACTCA 1 …. 6.37 Clegg v Wilson (1932) 32 SR (NSW) 109 …. 3.74 Coastal Estates v Melevende [1965] VR 433 …. 8.56 Coates v Sarich [1964] WAR 2 …. 8.43 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 …. 4.10, 4.107, 7.66, 7.78 Cohen v Cohen (1929) 42 CLR 91 …. 2.120 Collier v P & M J Wright (Holdings) Ltd [2008] 1 WLR 643 …. 2.93 Collins v Godefroy (1831) 1 B & Ad 950; 109 ER 1040 …. 2.79 Comandate Marine Corporation v Pan Australia Shipping Pty Ltd (2006) 157 FCR 45; 238 ALR 457 …. 2.157 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; 46 ALR 402 …. 1.8, 5.72, 5.93, 5.112, 5.115, 5.117, 5.119, 5.120, 6.74, 6.76, 6.77 — v Younis [1979] 1 NSWLR 444 …. 8.102 Commissioner of Taxation v Murry (1998) 193 CLR 605; 155 ALR 67 …. 3.63 Commissioner of Taxation (Cth) v Sara Lee Household & Body Care (Aust) Pty Ltd (2000) 201 CLR 520; 172 ALR 346 …. 2.96, 2.103, 4.142, 4.143, 4.156, 7.34, 7.40 Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; 104 ALR 1 …. 8.3, 8.21, 8.27, 8.30 — v Crothall Hospital Services (Aust) Ltd (1981) 36 ALR 567 …. 4.152 — v Verwayen (1990) 170 CLR 394; 95 ALR 321 …. 4.169, 4.171, 6.76 Commonwealth Bank of Australia v Barker (2014) 253 CLR 169; 312 ALR 356 …. 4.122, 4.130 — v Carotino (Australia) Pty Ltd [2011] SASC 42 …. 4.168 — v Longo [2001] VSC 191 …. 5.110 Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594; 92 ALR 193 …. 6.9, 6.10, 6.13 Concut Pty Ltd v Worrell (2000) 176 ALR 693 …. 2.103, 4.156, 7.40 Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance
(Australia) Pty Ltd (1986) 160 CLR 226; 64 ALR 481 …. 4.127, 4.128 Cooper v Phibbs (1867) LR 2 HL 149 …. 5.10 Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1 …. 8.75 Costa Vraca Pty Ltd v Berrigan Weed & Pest Control Pty Ltd (1998) 155 ALR 714 …. 6.37 Couldery v Bartrum (1881) 19 Ch D 394 …. 2.77, 2.93 Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 …. 3.75, 3.77, 8.74 Council of the City of Sydney v West (1965) 114 CLR 481 …. 4.95 Couturier v Hastie (1852) 8 Ex 40 …. 5.4, 5.5 Cowan v O’Connor (1888) 20 QBD 640 …. 2.44 Coward v Motor Insurers’ Bureau [1963] 1 QB 259 …. 2.122, 2.124 Cox v Isles, Love and Co [1910] QSR 80 …. 3.99 Crago v Multiquip Pty Ltd (1998) ATPR 41-620 …. 6.144 Crawford v Mayne Nickless Ltd (1992) ASC 56-144 …. 6.158 Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438 …. 7.32 Crawley v Short (2009) 262 ALR 654 …. 8.75 Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40 …. 5.74, 5.76, 5.80, 5.89, 5.90 Cummings v Rundle (1993) 41 FCR 559; 113 ALR 285 …. 6.40 Cundy & Bevington v Lindsay (1878) 3 App Cas 459 …. 5.35, 5.36, 5.37 Currie v Misa (1875) LR 10 Ex 153 …. 2.68 Curtis v Chemical Cleaning & Dyeing Co [1951] 1 KB 805; [1951] 1 All ER 631 …. 4.43, 4.45 Cutter v Powell (1795) 6 TR 320; 101 ER 573 …. 7.5, 7.6, 7.16
D D J Hill & Co Pty Ltd v Walter H Wright Pty Ltd [1971] VR 749 …. 4.44, 4.53 D&R Constructions (Aust) Pty Ltd v Wesiak [2016] NSWCATAP 38 …. 7.122 Dainford v Smith (1985) 155 CLR 342; 58 ALR 285 …. 7.121 Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500; 68 ALR
385 …. 2.167, 4.88 David Contractors Ltd v Fareham Urban District Council [1956] AC 696 …. 7.66 David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 …. 8.96, 8.102, 8.103, 8.107 Davis v Pearce Parking Station Pty Ltd (1954) 91 CLR 642 …. 4.93 De Francesch Builders Pty Ltd v Riley [2000] WASC 301 …. 8.40 De Lasselle v Guildford [1901] 2 KB 215 …. 4.32 Demagogue v Ramensky (1992) 39 FCR 31; 110 ALR 608 …. 6.17, 6.30 Deputy Federal Commissioner of Taxation (NSW) v Chamberlain (1990) 26 FCR 221; 93 ALR 729 …. 5.32 Derry v Peek (1889) 14 App Cas 337 …. 5.60 Diagnostic X-Ray Services Pty Ltd v Jewel Food Stores Pty Ltd (2001) 4 VR 623 …. 8.75 Dibble v Aidan Nominees Pty Ltd [1986] ATPR 40-693 …. 4.36 Dickinson v Dodds (1876) 2 Ch D 463 …. 2.27 Diestal v Stevenson [1906] 2 KB 345 …. 8.46 Director General of Fair Trading v First National Bank plc [2002] 1 AC 481; [2001] UKHL 52 …. 6.101 Director of Consumer Affairs v AAPT Ltd (Civil Claims) [2006] VCAT 1493 …. 6.102 Director of Consumer Affairs Victoria v Scully (2013) 303 ALR 168 …. 6.83 — v Trainstation Health Clubs Pty Ltd (Civil Claims) [2008] VCAT 2092 …. 6.103, 6.108, 6.110 Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643 …. 3.54 Dockpride Pty Ltd v Subiaco Redevelopment Authority [2005] WASC 211 …. 2.26 Donis v Donis (2007) 19 VR 577; [2007] VSCA 89 …. 4.167 Donoghue v Stevenson [1932] AC 562 …. 5.63, 5.64 Dougan v Ley (1946) 71 CLR 142 …. 8.67, 8.69, 8.70, 8.72 Dr Gregory Moore v The National Mutual Life Association of Australasia Ltd [2011] NSWSC 416 …. 8.56 DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423; 19 ALR
223 …. 7.41, 7.92, 7.121, 7.122 Du Buisson Perrine v Chan [2016] WASCA 18 …. 8.45 Duffy Bros Fruit Market (Campbelltown) Pty Ltd v Gumland Property Holdings Pty Ltd [2007] NSWCA 7 …. 7.30 Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79 …. 8.37, 8.40 — v Selfridge and Co Ltd [1915] AC 847 …. 1.70, 2.71
E Eads v Williams (1854) 43 ER 671 …. 8.75 Eastern Health v MIA Victoria Pty Ltd (2009) 22 VR 502 …. 2.137 Eastwood v Kenyon (1840) 11 Ad & E 438; 113 ER 482 …. 2.66 eBay International AG v Creative Festival Entertainment Pty Ltd (2006) 170 FCR 450 …. 4.77, 4.79 Ecay v Godfrey (1947) 80 LI LR 286 …. 4.28, 4.29 Edgington v Fitzmaurice (1885) 29 Ch D 459 …. 5.46 Edwards v Skywards [1964] 1 WLR 349 …. 2.128 EK Nominees Pty Ltd v Woolworths Ltd [2006] NSWSC 1172 …. 6.34 Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; 306 ALR 25 …. 4.138 Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 …. 2.38, 2.42 Energy Venture Partners Ltd v Malabu Oil and Gas Ltd [2013] EWHC 2118 …. 4.153 England v Davidson (1840) 11 Ad & E 856; 113 ER 640 …. 2.81 Entores v Miles Far Eastern Corp [1955] QB 327 …. 2.49 Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50 …. 5.78 Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471; 211 ALR 101 …. 4.10 — v Haxton (2012) 246 CLR 498; 286 ALR 12 …. 3.72, 8.97, 8.109 — v Worts [2000] VSC 179 …. 5.110 Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95; 187
ALR 92 …. 1.70, 2.132 Errichetti Nominees Pty Ltd v Paterson Group Architects Pty Ltd [2007] WASC 77 …. 5.22 Esanda Finance Corp Ltd v Plessnig (1989) 166 CLR 131 …. 8.40 Esposito v Bowden (1857) 7 EB & BI 763 …. 7.76
F F & G Sykes (Wessex) Ltd v Fine Fare Ltd [1967] 1 Lloyd’s Rep 53 …. 2.142 Falcke v Gray (1859) 62 ER 250 …. 8.70 Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; 236 ALR 209 …. 1.60 Felthouse v Bindley (1862) 11 CB (NS) 869; 142 ER 1037 …. 2.40 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 …. 7.80 Fitzgerald v F J Leonhardt Pty Ltd (1997) 189 CLR 215; 143 ALR 569 …. 3.25, 3.28, 3.31, 3.34 — v Masters (1956) 95 CLR 420 …. 2.154, 4.138, 7.42, 8.75 Fitzpatrick v Garvey [2012] WADC 42 …. 8.32 Fitzwood Pty Ltd v Unique Goal Pty Ltd [2001] FCA 1628 …. 4.138 Flamingo Park Pty Ltd v Dolly Dolly Creation (1986) 65 ALR 500 …. 8.32 Foakes v Beer (1884) 9 App Cas 605 …. 2.91, 2.92 Foley v Classique Coaches Ltd [1934] All ER Rep 88; 2 KB 1 …. 2.142 Fong v Cilli (1968) 11 FLR 495 …. 2.33 Foran v Wright (1989) 168 CLR 385; 88 ALR 413 …. 7.87, 7.124 Ford v Perpetual Trustees Victoria (2009) 257 ALR 658 …. 8.108 Foster v Rahman t/as Smarty Web Solutions [2014] NSWCATCD 17 …. 6.157 Four Square Stores (Qld) Ltd v ABE Copiers Pty Ltd (1981) ATPR 40-232 …. 6.144 Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407 …. 4.13, 5.15, 8.62, 8.63 Frederick E Rose (London) Ltd v William H Pim Junior & Co Ltd [1953] 2 QB 450 …. 8.60 Freeman & Lockeyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB
480; [1964] 1 All ER 630 …. 3.102 Futuretronics Pty Ltd v Gadzhis [1992] 2 VR 217 …. 6.56
G G Percy Trentham Ltd v Archital Luxfer Ltd [1993] 1 Lloyd’s Rep 25 …. 2.142 Galaxidis v Galaxidis [2004] NSWCA 111 …. 4.169 Gange v Sullivan (1966) 116 CLR 418 …. 7.49, 7.54 Garcia v National Australia Bank Ltd (1998) 194 CLR 395; 155 ALR 614 …. 5.107, 6.76 GEC Marconi Systems Pty Ltd v BHP Information Technology (2003) 128 FCR 1; [2003] FCA 50 …. 2.96, 4.143 General Newspapers Pty Ltd v Telstra Corporation (1993) 45 FCR 164; 117 ALR 629 …. 6.35, 6.46 George v Roach (1942) 67 CLR 253 …. 2.148 George Hudson Holdings Ltd v Rudder (1973) 128 CLR 387 …. 2.39 George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] QB 284; 1 All ER 108 …. 6.88 Gerraty v McGavin (1914) 18 CLR 152 …. 3.38 Getup Ltd v Electoral Commissioner (2010) 189 FCR 165; 268 ALR 797 …. 4.79 Gibbons v Wright (1954) 91 CLR 423 …. 3.20 Gibson v Manchester City Council [1978] 1 WLR 520 …. 2.56 Gibson Motor Sport Merchandise Pty Ltd v Robert James Forbes [2005] FCA 749 …. 4.148 Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1954) 76 WN (NSW) 72 …. 2.38 Gillette Australia Pty Ltd v Energizer Australia Pty Ltd (2002) 193 ALR 629 …. 6.50 Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82; 55 ALR 25 …. 6.41 Golden Oceans (NSW) Pty Ltd v Evewall Pty Ltd [2009] NSWSC 674 …. 8.43 Goldsbrough Mort & Co Ltd v Quinn (1910) 10 CLR 674; 17 ALR 42 …. 2.31 Google Inc v Australian Competition and Consumer Commission (2013) 249 CLR 435; 294 ALR 404 …. 6.18
Goss v Nugent (1833) 110 ER 713 …. 4.9 Gould v Vaggelas (1985) 157 CLR 215; 62 ALR 527 …. 5.57 Grainger & Sons v Gough [1896] AC 325 …. 2.17 Gray v Motor Accident Commission (1998) 196 CLR 1; 158 ALR 485…. 8.2, 8.23 Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2003] QB 679 …. 5.16, 5.19, 5.20, 5.22 Green v AMP Life Ltd [2005] NSWSC 370 …. 8.60 — v Sommerville (1979) 141 CLR 594; 27 ALR 351 …. 8.75 Grieve v Enge [2006] QCA 213 …. 7.22 Griffiths & Beerens Pty Ltd v Duggan (2008) 66 ACSR 472; [2008] VSC 201 …. 3.61 Grocon Constructions (Qld) Pty Ltd v Juniper Developer (No 2) Pty Ltd [2015] QCA 291 …. 8.37, 8.40 Groser v Equity Trustees Ltd [2008] VSC 163 …. 7.58 Gwam Investments Pty Ltd v Outback Health Screenings Pty Ltd [2010] SASC 37 …. 4.107, 8.20
H Hadley v Baxendale (1854) 9 Exch 341 …. 8.9, 8.10, 8.12, 8.15, 8.31 Haigh v Brooks (1839) 10 Ad & E 309; 113 ER 119 …. 2.76 Hall v Busst (1960) 104 CLR 206 …. 2.137, 2.141 Hamer v Sidway 124 NY 538 (1891) …. 2.77 Hampton v BHP Billiton Minerals Pty Ltd (No 2) [2012] WASC 285 …. 6.77 Hanneybel v Uniflex (Australia) Pty Ltd [2002] WASCA 349 …. 7.126 Hanson v Royden (1867) LR 3 CP 47 …. 2.86 Hardy v Motor Insurers’ Bureau [1964] 2 QB 745 …. 3.44 Harris v Watson (1791) Peake 102; 170 ER 94 …. 2.89 Harry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31 …. 4.63 Hart v O’Connor [1985] AC 1000; [1985] 1 NZLR 159 …. 3.21 Hartigan v International Society for Krishna Consciousness Inc [2002] NSWSC 810 …. 5.99 Hartley v Ponsonby (1857) 7 El & Bl 872; 119 ER 1471 …. 2.86, 2.87, 2.97 Harvey v Facey [1893] AC 552 …. 2.10
— v Pratt [1965] 1 WLR 1025 …. 2.141 Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298 …. 5.84 Hawkes v Saunders (1782) 1 Cowp 289; 98 ER 1091 …. 2.66 Hawkins v Clayton (1988) 164 CLR 539; 78 ALR 69 …. 4.113 Hays Personnel Services (Australia) Pty Ltd v Motorline Pty Ltd [2008] QCA 375 …. 4.63 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 …. 5.63, 5.64 Heilbut Symons & Co v Buckleton [1913] AC 30 …. 4.34 Heimann v Commonwealth of Australia (1938) 38 SR (NSW) …. 4.104 Heimos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 235 …. 2.128 Helps v Clayton (1964) 17 CB (NS) 553; 144 ER 222 …. 3.8 Henderson v Pioneer Homes Pty Ltd (1980) ATPR 40-159 …. 6.57 Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 39 FCR 546; 79 ALR 83 …. 6.16, 6.34, 6.59 Henry v Krell [1902] 2 KB 740 …. 7.75 Henthorn v Fraser [1892] 2 Ch 27 …. 2.48 Henville v Walker (2001) 206 CLR 459; 182 ALR 37 …. 5.57 Herbert Clayton & Jack Waller Ltd v Oliver [1930] AC 209 …. 8.32 Heron v Port Huon Fruitgrowers’ Cooperative Association Ltd (1922) 30 CLR 315 …. 3.61 Highfield Property Investments Pty Ltd v Commercial &Residential Developments (SA) Pty Ltd [2012] SASC 165 …. 7.109 Highmist Pty Ltd v Tricare Ltd [2005] QCA 357 …. 7.2 Hirachand Punamchand v Temple [1911] 2 KB 330 …. 2.93 Hoenig v Isaacs [1952] 2 All ER 176 …. 7.5, 7.13, 7.15 Holland v Wiltshire (1954) 90 CLR 409 …. 7.45 Hollier v Rambler Motors (AMC) Ltd [1972] 2 QB 71 …. 4.64 Holmes v Jones (1907) 4 CLR 1692 …. 5.58 Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 …. 7.95, 7.102, 7.104, 7.107 Hookway v Racing Victoria Ltd (2005) 13 VR 444 …. 8.102 Hoover (Australia) Pty Ltd v Email Ltd (1991) 104 ALR 369 …. 6.51
Hope v RCA Photophone of Australia Pty Ltd (1937) 59 CLR 348 …. 4.11 Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41; 55 ALR 417 …. 4.24, 4.102 Hospitality Group Pty Ltd v Australian Rugby Union Ltd (2001) 110 FCR 157 …. 8.112 Hotmail Corp v Van$ Money Pie Inc 49 USPQ 2d 1020 (1998) …. 4.79 Household Fire and Carriage Accident Insurance Co v Grant (1879) LR 4 Ex D 216 …. 2.45, 2.47, 2.48 Howe v Teefy (1927) 27 SR (NSW) 301 …. 8.27 Hoyts v Spencer (1919) 27 CLR 133 …. 4.35 Huddart Parker v Moorehead (1909) 8 CLR 330; 15 ALR 241; [1909] HCA 36 …. 1.42 Huggins v Wiseman (1960) Carth 110; 90 ER 669 …. 3.8 Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151; 146 ALR 1 …. 2.25, 2.26 Hume v Munro (No 2) (1943) 67 CLR 461 …. 8.75 Hutchence v South Sea Bubble Company Pty Ltd (1986) 64 ALR 330 …. 6.61 HWG Holdings Pty Ltd v Fairlie Court Pty Ltd (2015) 302 FLR 230; [2015] VSC 519 …. 5.22 Hyde v Wrench (1840) 3 Beav 334 …. 2.29
I Ikin v The Danish Club ‘Dannebrog’ Inc [2001] VSCA 123 …. 4.111 Imperial Land Co of Marseilles, Re (1872) LR 7 Ch App 587 …. 2.44 Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110 …. 2.54, 2.55 Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433; [1988] 1 All ER 348 …. 4.57 Ipex Software Services Pty Ltd v Hosking [2000] VSCA 239 …. 2.105
J J C Williamson v Lukey & Mulholland (1931) 45 CLR 287 …. 8.75, 8.79 J J Savage & Sons Pty Ltd v Blakney [1973] VR 385 …. 4.34 Jamieson v Renwick (1891) 17 VLR 124 …. 2.77
Jarvis v Swans Tours Ltd [1973] 1 QB 233 …. 8.31 J-Corp Pty Ltd v Mladenis [2009] WASCA 157 …. 8.46 Je Maintiendrai Pty Ltd v Quaglia (1980) 26 SASR 101 …. 4.164, 4.166 Jillawara Grazing Co v John Shearer Ltd (1984) ATPR 40-441 …. 6.144 Johnson v Buttress (1936) 56 CLR 113 …. 5.94, 5.100 — v Perez (1988) 166 CLR 351; 82 ALR 587 …. 8.22, 8.27 Jones v Padavatton [1969] 1 WLR 328 …. 2.121 Joscelyne v Nissen [1970] 2 QB 86 …. 8.63
K Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313 …. 7.111 Kayserian Nominees (No 1) Pty Ltd v J R Garner Pty Ltd [2008] NSWSC 803 …. 7.21 Kelly v Solari (1841) 9 M & W 54; 152 ER 24 …. 8.96 Kevin (As Public Officer of Wat Buddhalavarn Inc) v Phantha-oudomm [2016] NSWSC 305 …. 8.31 Kioa v West (1985) 159 CLR 550; 62 ALR 321 …. 1.19 Kitching v Phillips (2011) 278 ALR 551 …. 4.110 Klocek v Gateway 2000 Inc 104 F Supp 2d 1332 (2000) …. 4.71 Kodros Shipping Corp of Monrovia v Empresa Cubana de Fletes [1983] 1 AC 736 …. 7.71 Koh v Pateman [2005] WASC 172 …. 4.156 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 241 ALR 88 …. 7.104, 7.105, 7.106, 7.107 Kostopoulos v GE Commercial Finance Australia Pty Ltd [2005] QCA 311 …. 7.44 Koufos v C Czarkinow Ltd [1969] 1 AC 350 …. 8.8 Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563; 130 ALR 1 …. 5.54 Kugler v Koskot Interplanetary Inc 293 A 2d 682 (1972) …. 6.133 Kuhadas v Gomez [2014] FCCA 1130 …. 4.104
L
L G Thorne & Co Pty Ltd v Thomas Borthwick & Sons (A/Asia) Ltd (1955) SR (NSW) 81 …. 4.12 L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 …. 7.89 L Shaddock & Associates Pty Ltd v Parramatta City Council (No 1) (1981) 150 CLR 225; 36 ALR 385 …. 5.65, 5.66 La Rosa v Nudrill Pty Ltd [2013] WASCA 18 …. 4.65 Lacey v Attorney-General (Qld) (2011) 242 CLR 573; 275 ALR 646 …. 3.27 Lam v Ausintel Investments Australia Pty Ltd (1989) 97 FLR 458 …. 6.32 Lampleigh v Brathwait (1615) Hob 105; 80 ER 235 …. 2.105 Lantry v Tomule Pty Ltd (2007) 12 BPR 23,727; [2007] NSWSC 81 …. 7.21 Larking v Great Western (Nepean) Gravel Ltd (1940) 64 CLR 221 …. 8.23 Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623; 85 ALR 183 …. 7.117, 7.119 Laybutt v Amoco (Australia) Pty Ltd (1974) 132 CLR 57; 4 ALR 482 …. 7.59 Laythoarp v Bryant (1836) 3 Scott 238 …. 2.69 Leaf v International Galleries [1950] 2 KB 86 …. 5.14 Legione v Hateley (1983) 152 CLR 406; 46 ALR 1 …. 6.76, 7.21 Leibler v Air New Zealand Ltd (No 2) [1999] 1 VR 1 …. 8.59 Leonard v Pepsico Inc 88 F Supp 2d 116 (1999) …. 2.13, 2.14 L’Estrange v Graucob [1934] 2 KB 394 …. 4.37, 4.42, 4.43, 4.44, 4.46, 4.47, 4.48 Lewis v Averay [1972] 1 QB 198 …. 5.39, 5.40 Lewis Construction (Engineering) Pty Ltd v Southern Electric Authority of Queensland (1976) 11 ALR 305; 50 ALJR 769 …. 4.138 Liebe v Molloy (1906) 4 CLR 347 …. 4.153 Lindner v Murdock’s Garage (1950) 83 CLR 628 …. 3.61, 3.65 Lindsay-Owen v Associated Dairies [2000] NSWSC 1095 …. 7.68, 7.76 Lintel Pines Pty Ltd v Nixon [1991] 1 VR 287 …. 7.30 Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548 …. 8.106 Liu v Adamson [2004] NSW ConvR 56-074 …. 5.110 Liverpool City Council v Irwin [1977] AC 239 …. 4.123, 4.124 Lobb v Vasey Housing Auxiliary (War Widows Guild) [1963] VR 239 …. 7.58 Lordsvale Finance Plc v Bank of Zambia [1996] QB 752 …. 8.38
Louth v Diprose (1992) 175 CLR 621; 110 ALR 1 …. 5.116, 5.119, 6.76 Loyola v Cryeng Pty Ltd (No 2) [2012] FCAFC 98 …. 8.32 Lucke v Cleary (2011) 111 SASR 134 …. 2.164 Lumbers v W Cook Builders Pty Ltd (in liq) (2008) 232 CLR 635; 247 ALR 412 …. 8.89 Lumley v Wagner (1852) 1 De G M & G 604; 42 ER 687 …. 8.75, 8.84 Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286; 39 SR (NSW) 66 …. 7.91, 7.92, 7.93, 8.3 Luong v Du [2013] VSC 723 …. 5.42
M Mabo v State of Queensland (No 2) (1992) 175 CLR 1 …. 1.30 Macdonald v Australian Wool Innovation Ltd [2005] FCA 105 …. 2.55, 2.137 Mackay v Dick (1881) 6 App Cas 251 …. 7.20, 7.49 MacRobertson Miller Airline Services v Commissioner of State Taxation (Western Australia) (1975) 133 CLR 125; 8 ALR 131 …. 2.54 Madden v Seafolly Pty Ltd [2014] FCAFC 30 …. 8.32 Magill v Magill (2006) 226 CLR 551; 231 ALR 277 …. 2.54 Mahmoud and Ispahani, Re [1921] 2 KB 138 …. 3.29 Majik Markets Pty Ltd v S & M Motor Repairs Pty Ltd (No l) (1987) 10 NSWLR 49 …. 7.111 Manchester Diocesan Council for Education v Commercial and General Investments Ltd [1969] 3 All ER 1593 …. 2.38 Manna v Manna [2008] ACTSC 10 …. 5.22 Manton v Parabolic Pty Ltd (1985) 2 NSWLR 361 …. 2.98 Manufacturers House Pty Ltd v Ashington No 147 Pty Ltd [2005] NSWSC 767 …. 8.43 Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336; 1 ALR 169 …. 8.58 Mareva Compania Naviera SA v International Bulkcarriers SA (The Mareva) [1980] 1 All ER 213 …. 8.86 Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524 …. 7.69 Marshall v Marshall [1999] 1 Qd R 173 …. 8.96
Masters v Cameron (1954) 91 CLR 353 …. 2.161, 2.162, 2.163, 2.164 Materials Fabrication Pty Ltd v Baulderstone Pty Ltd [2009] VSC 405 …. 3.55 McDermott v Black (1940) 63 CLR 161 …. 2.150, 7.39 McFarlane v Daniell (1938) SR (NSW) 337 …. 3.68 McIvor v Westpac Banking Corporation [2012] QSC 404 …. 5.110 McLaughlin v Darcy (1918) 18 SR (NSW) 585 …. 3.8 McRae v Commonwealth Disposals Commission (1950) 84 CLR 377 …. 5.6 McWilliam’s Wines Pty Ltd v McDonald’s System of Australia Pty Ltd (1980) 49 FLR 455; 33 ALR 394 …. 6.19 Medsara Pty Ltd v Sande [2005] NSWCA 40 …. 8.59 Meehan v Jones (1982) 149 CLR 571; 42 ALR 463 …. 7.52 Mehmet v Benson (1965) 113 CLR 295 …. 8.75 Mercantile Bank of Sydney v Taylor (1891) 12 LR (NSW) 252 …. 4.10 Mercantile Credit v Spinks [1968] QWN 32 …. 3.6 Merritt v Merritt [1970] 1 WLR 1211 …. 1.73, 2.117, 2.120 Mersey Steel and Iron Co Ltd v Naylor, Benzon & Co (1884) 9 App Cas 434 …. 7.123 Metal Fabrications Pty Ltd v Kelcey [1986] VR 507 …. 8.17 Metropolitan Transit Authority v Waverley Transit Pty Ltd [1991] 1 VR 181 …. 7.30 Miller v Karlinski (1945) 62 TLR 85 …. 3.53 Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357; 270 ALR 204 …. 6.33 Mills v Meeking (1990) 169 CLR 214; 91 ALR 16 …. 3.27 Mobil Oil Australia v Wellcome International (1998) 81 FCR 475; 153 ALR 198 …. 2.27 Molinara v Perre Bros Lock 4 Pty Ltd [2014] SASCFC 115 …. 8.26, 8.27 Moobi Pty Ltd v Les Gunn Properties Pty Ltd [2008] NSWSC 719 …. 5.32 Moorcock, The (1889) 14 PD 64 …. 4.104, 4.105 Moore & Co Ltd and Landauer & Co, Re [1949] 2 All ER 193; [1949] 2 KB 519 …. 7.2 Morgan v Palmer (1824) 2 B & C 729; 107 ER 554 …. 2.80 Morris v Baron and Company [1918] AC 1 …. 2.103, 4.156
— v Burdett (1808) 1 Camp 218; 170 ER 935 …. 2.80 Morris (dec’d), Re (1943) 43 SR (NSW) 352 …. 3.46 Mulcahy v Hoyne (1925) 36 CLR 41 …. 4.173 Multiplex Constructions Pty Ltd v Abgarus Pty Ltd (1992) 33 NSWLR 504 …. 8.38, 8.40 Murphy v Overton Investments Pty Ltd (2001) 112 FCR 182; 182 ALR 138 …. 4.168 Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723 …. 2.100
N N M Superannuation Pty Ltd v Baker (1992) 27 NSWLR 26; 7 ACSR 105 …. 2.49 Nagy v Masters Dairy Ltd (1996) 150 ALR 273 …. 6.31 Nash v Inman [1908] 2 KB 1 …. 3.6 National Australia Bank Ltd v Rice [2015] VSC 10 …. 7.106 National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 …. 7.71 Neal v Ayres (1940) 63 CLR 524 …. 3.49 Nelson v Nelson (1995) 184 CLR 538; 132 ALR 133 …. 3.33, 3.35 New South Wales Rifle Association Inc v Commonwealth of Australia (2012) 266 FLR 13 …. 7.31 Newbon v City Mutual Life Assurance Society Ltd (1935) 52 CLR 723 …. 7.126 Nissho Iwai Australia Ltd v Malaysian International Shipping Corp, Berhad (1989) Aust Torts Reports 80-254 …. 4.88 NLS Pty Ltd v Hughes (1966) 120 CLR 583 …. 8.42 Noone, Director of Consumer Affairs Victoria v Operation Smile (Australia) Inc (2012) 38 VR 569 …. 6.14 Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 …. 3.58, 3.61, 3.63 North v Marra Developments Ltd (1981) 148 CLR 42; 37 ALR 341 …. 3.47, 3.68 North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd [2016] VSC 1 …. 8.6 North Ocean Shipping Company Ltd v Hyundai Construction Co Ltd [1979] 1 QB 705 …. 5.89
Norton Australia Pty Ltd v Streets Ice Cream Pty Ltd (1968) 120 CLR 516 …. 8.6 Novamaze Pty Ltd v Cut Price Deli Pty Ltd (1995) 128 ALR 540 …. 3.55 Nunin Holdings Pty Ltd v Tullamarine Estates Pty Ltd [1994] 1 VR 74 …. 2.49
O Oaktech Pty Ltd v Legion Heights Pty Ltd (t/as A M Machinery) [2008] VSCA 145 …. 7.97 O’Brien v Smolonogov (1983) 53 ALR 107 …. 6.13 Ocean Tramp Tankers Corp v V-O Soufracht [1964] 2 CB 226 …. 7.71 Oceanic Sun Line Special Shipping Co Inc v Fay (1988) 165 CLR 197 …. 4.53 O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 …. 8.37 Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444; 9 ALR 309 …. 7.45 Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA (No 4) (2009) 255 ALR 632; [2009] FCA 522 …. 2.49, 2.50 Olley v Malborough Court [1949] 1 KB 532 …. 4.51 O’Meara v Dominican Fathers (2004) 153 ACTR 1 …. 8.7 Optus Networks Ltd v Telstra Corporation Ltd (No 3) [2009] FCA 728 …. 6.77 Oraka Pty Ltd v Leda Holdings Ltd (1997) ATPR 41-558 …. 6.59 Ormwave Pty Ltd v Smith [2007] NSWCA 210 …. 2.140 Oscar Chess v Williams [1957] 1 WLR 370 …. 4.31 Ovidio Carrideo Nominees Pty Ltd v The Dog Depot Pty Ltd [2006] VSCA 6 …. 8.105 Owen & Gutch v Homan (1853) 4 HL Cas 997; 10 ER 752 …. 5.117 Owston Nominees No 2 Pty Ltd v Clambake Pty Ltd (2011) 248 FLR 193; [2011] WASCA 76 …. 6.37 Oxfords Case, The Earl of (1615) Mich 13 Jac 1; 21 ER 485 …. 1.27, 1.63
P Pacific Brands Sports & Leisure Pty Ltd v Underworks Pty Ltd (2006) 149 FCR 395 …. 4.171, 7.43 Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199; 321 ALR 584; [2015] FCAFC 50 …. 6.84, 8.37, 8.40, 8.48 Paddison v Downer EDI Engineering Power Pty Ltd (2010) 11 DCLR (NSW)
48; [2010] NSWDC 131 …. 6.13 Page One Records Ltd v Britton [1968] 1 WLR 157 …. 8.83 Paisley v Aitchison t/as Dean Cars (Civil Claims) [2012] VCAT 1483 …. 6.153 Pan Foods Co Importers & Distributors Pty Ltd v Australia and New Zealand Banking Group Ltd (2000) 170 ALR 579 …. 7.30 Pao On v Lau Yiu Long [1980] AC 614 …. 2.83, 2.105, 5.75 Papas v Bianca Investments Pty Ltd (2002) 82 SASR 581; [2002] SASC 190 …. 5.40 Paradine v Jane (1647) 82 ER 897 …. 7.64, 7.65 Park v Brothers (2005) 222 ALR 421 …. 7.22 Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191; 42 ALR 1 …. 6.17, 6.18 Partridge v Crittenden [1968] 2 All ER 421 …. 2.17 Patersons Securities Ltd v Financial Ombudsman Service Ltd [2015] WASC 321 …. 8.10 Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (No 3) (1998) 195 CLR 1; 153 ALR 643 …. 8.75 Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221; 69 ALR 577 …. 7.14, 8.89, 8.99 Payne v Cave (1789) 3 Term Rep 148; 100 ER 502 …. 2.19, 2.20 Pearce v Brooks (1866) LR 1 Exch 213 …. 3.57 Penola Trading Co Pty Ltd v Sunny Springs Pty Ltd [2009] VSCA 161 …. 7.119 Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537; 41 ALR 441 …. 4.48, 7.21, 7.49, 7.54 Petelin v Cullen (1975) 132 CLR 355; 6 ALR 129 …. 5.41, 5.42 Peter Turnbull & Co Pty Ltd v Mundus Training Co Australasia Pty Ltd (1954) 90 CLR 235 …. 7.49 Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126; 181 ALR 337 …. 3.60 Pham v Doan (2005) 63 NSWLR 370 …. 3.29 Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401 …. 2.16 Phillips v Brooks [1919] 2 KB 243 …. 5.39 — v Ellinson Bros Pty Ltd (1941) 65 CLR 221 …. 4.155, 4.172, 7.16, 7.45
Phoenix Security Pty Ltd v Papas Transport Eng Pty Ltd [2000] SADC 61 …. 5.70 Planta v National Finance & Trustees Ltd (1964) 180 CLR 146 …. 8.72 Pico Holdings Inc v Wave Vistas Pty Ltd (2005) 214 ALR 392 …. 2.109 Pinnel’s Case (1601) 5 Co Rep 117a; 77 ER 237 …. 1.73, 2.91, 2.93, 2.94, 2.98 Pioneer Shipping v BTP Tioxide (The Nema) [1982] AC 397 …. 7.71 Pipeline Services WA Pty Ltd v ATCO Gas Australia Pty Ltd [2014] WASC 10 …. 9.21 Pirina v Pirina Holdings Pty Ltd [2015] NSWSC 1899 …. 8.107 Placer Development Ltd v Commonwealth (1969) 121 CLR 353 …. 2.108 Planche v Colburn (1831) 8 Bing 14; 131 ER 305 …. 7.25 Pola v Commonwealth Bank of Australia [1997] FCA 1476 …. 3.82, 3.97 — v — [1998] ANZ ConvR 402; (1998) Aus Torts Reports 81-460 …. 3.97 Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Aust) Pty Ltd (The New York Star) (1978) 139 CLR 231; 18 ALR 333 …. 3.101 Poseidon Ltd v Adelaide Petroleum NL (1991) 105 ALR 25 …. 6.34 Pretorius Pty Ltd v Muir & Neil Pty Ltd [1976] 1 NSWLR 213 …. 3.30 Price v Easton (1833) 4 B & Ad 433; 110 ER 518 …. 2.69, 2.109 Privatbraurei Erdinger Weissrau Werner Brombach GMBH v World Brands Australia Pty Ltd [2016] WASC 9 …. 4.65 ProCD Inc v Zeidenberg and Silken Mountain Web Services Inc 86 F 3d 1447 (1996) …. 4.71 Procter & Gamble Australia Pty Ltd v Energizer Pty Ltd [2011] FCA 1347 …. 6.68 Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17; 57 ALR 609 …. 7.120 Pryor v Given (1980) 30 ALR 189 …. 5.49 Pukallus v Cameron (1982) 180 CLR 447; 43 ALR 243 …. 5.15, 8.60, 8.63
R R v Attorney-General for England and Wales [2003] UKPC 22 …. 5.79 R v Clarke (1927) 40 CLR 227; [1928] ALR 97 …. 2.35, 2.36 Raffles v Wichelhaus (1864) 2 H & C 906; 159 ER 375 …. 5.26
RAIA Insurance Brokers Ltd v FAI General Insurance Co Ltd (1993) 41 FCR 164; 112 ALR 511 …. 6.43 Ramsgate Victoria Hotel Co v Montefiore (1866) LR 1 Ex 109 …. 2.30 Read v Neerey [1979] VR 47 …. 6.157 Reg Glass Pty Ltd v Rivers Locking Systems Pty Ltd (1968) 120 CLR 516 …. 8.5 Regazzoni v KC Sethia (1944) Ltd [1958] AC 301 …. 3.47 Regional Development Australia Murraylands and Riverland Inc v Smith [2015] SASCFC 160 …. 8.17 Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 …. 4.132, 7.31, 7.52 Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 77 …. 6.37 Richard v Moore Stephens Adelaide Pty Ltd [2015] SASCFC 147 …. 7.106 Riggall v Thompson [2010] QCA 144 …. 8.48 Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 …. 8.40 Riverplate Properties Ltd v Paul [1975] Ch 133 …. 5.27, 8.59 Roberts v Gray [1913] 1 KB 520 …. 3.12 Robinson v Harman (1848) 1 Exch 850 …. 7.84, 7.114, 8.2, 8.30, 8.112, 8.113 Roscorla v Thomas (1842) 3 QB 234; 114 ER 496 …. 2.104 Rose and Frank Co v J R Crompton & Bros Ltd [1923] 2 KB 261 …. 2.130 Roufos v Brewster (1971) 2 SASR 218 …. 2.128 Routledge v McKay [1954] 1 All ER 855 …. 4.27 Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516; 185 ALR 335 …. 8.95 Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45 …. 2.147, 4.130 Royal Exchange Assurance v Hope [1928] 1 Ch 179 …. 2.103, 4.156 RTS Flexible Systems Ltd v Molkerei Alois Müller Gmbh [2010] UKSC 14; [2010] 1 WLR 753 …. 2.55 Rudder v Microsoft Corp (1999) 2 CPR (4th) 474 …. 4.79 Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344 …. 8.2
S
Sabre Corporation Pty Ltd Laboratories Pharm-A-Care Pty Ltd (1995) 31 IPR 445 …. 6.47 Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149 …. 2.160 Saleh v Romanous (2010) 79 NSWLR 453 …. 4.16, 4.47 Sargent v ASL Developments Ltd (1974) 131 CLR 634; 4 ALR 257 …. 7.111, 7.112 SAS Realty Developments Pty Ltd v Kerr [2013] NSWCA 56 …. 4.143 Scald Pty Ltd v Turner Developments Pty Ltd [2014] ACTSC 72 …. 8.60, 8.64 Scarborough v Sturzaker (1905) 1 Tas LR 117 …. 3.6 Scott v Avery (1856) 5 HL Cas 811; 10 ER 1121 …. 3.56 Scruttons Ltd v Midland Silicones Ltd [1962] AC 446 …. 3.101 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596; 26 ALR 567 …. 7.20 Seivewright v Brennan (2005) 12 BPR 22,979; [2005] NSWSC 216 …. 2.19 Sekisui Rib Loc Australia Pty Ltd v Rocla Pty Ltd (2012) 291 ALR 140 …. 4.104 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332; 120 ALR 16 …. 8.27 Semelhago v Paramadevan [1996] 2 SCR 425 …. 8.73 Sentinel Countrywide Retail Ltd v PC Emerald (Qld) Pty Ltd [2015] QSC 348 …. 8.75 Seven Cable Television Pty Ltd v Telstra Corp Ltd [2000] FCA 350 …. 4.156 Shadwell v Shadwell (1860) 9 CB (NS) 159; 142 ER 62 …. 2.82 Shell UK Ltd v Lostock Garage Ltd [1976] 1 WLR 1187 …. 4.108, 4.109 Shevill v Builders Licensing Board (1982) 149 CLR 620; 42 ALR 305 …. 7.21, 7.88, 7.97, 7.115 Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206 …. 4.106 Shogun Finance Ltd v Hudson [2003] UKHL 62 …. 5.37 Silent Vector Pty Ltd v Squarcini [2008] WASC 246 …. 8.46 Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322 …. 4.119 Simpkins v Pays [1955] 3 All ER 10; 1 WLR 975 …. 2.125 Slade’s Case (1602) 4 Co Rep 91a; 76 ER 1072 …. 1.77 Slee v Warke (1949) 86 CLR 271 …. 8.75 Slipper v Berry Buddle Wilkins Lawyers [2015] NSWSC 810 …. 4.143 Smith v Hughes (1871) LR 6 QB 597 …. 5.48
— v Land & House Property Corp (1884) 28 Ch D 7 …. 5.51 — v Smith [2004] NSWSC 663 …. 5.32 — v William Charlick Ltd (1924) 34 CLR 38 …. 8.101 Smyth v Jessep [1956] VLR 230 …. 8.45 Smythe v Thomas (2007) 71 NSWLR 537 …. 2.21 Softman Products Company v Adobe Systems Inc 171 F Supp 2d 1075 (2001) …. 4.71 Solle v Butcher [1949] 2 All ER 1107 …. 5.16, 5.17, 5.18, 5.19, 5.20 Sopov v Kane Constructions Pty Ltd (No 2) (2009) 24 VR 510 …. 7.23, 8.110 South Australian Cold Stores Ltd v Electricity Trust of South Australia (1965) 98 CLR 65 …. 3.73 South Australian Railways Commissioner v Egan (1973) 130 CLR 506 …. 3.54, 3.56 Specht v Netscape Communications Corporation 306 F 3d 17 (2d Cir 2002) …. 4.83 Spencer v Harding (1870) LR 5 CP 561 …. 2.17 Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 …. 8.98 SST Consulting Services Pty Ltd v Rieson (2006) 225 CLR 516; 228 ALR 417 …. 3.67 St John Shipping Corporation v Joseph Rank Ltd [1957] 1 QB 267 …. 3.31 Standard Chartered Bank Australia Ltd v Bank of China (1991) 23 NSWLR 164 …. 4.168 State Bank of New South Wales v Chia (2000) 50 NSWLR 587 …. 5.108 — v Layoun [2001] NSWSC 198 …. 5.110 State of Tasmania v Leighton Contractors Pty Ltd [2005] TASSC 133 …. 8.40 State Rail Authority of New South Wales v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170 …. 4.12, 4.46 Steele v Tardiani (1946) 72 CLR 386 …. 7.8, 7.19 Stern v McArthur (1988) 165 CLR 489; 81 ALR 463 …. 6.76, 7.21 Stevenson Jacques & Co v McLean (1880) 5 QBD 346 …. 2.29 Stilk v Myrick (1809) 2 Camp 317; 170 ER 1168 …. 2.85, 2.86, 2.87, 2.90 Stuart Alexander & Co (Interstate) Pty Ltd v Blenders Pty Ltd (1981) 37 ALR 161; 53 FLR 307 …. 6.46
Sultman v Bond [1956] St R Qd 180 …. 3.4 Summers v Cocks (1927) 40 CLR 321 …. 8.75 Sumpter v Hedges [1898] 1 QB 673 …. 7.18 Sundell & Sons Pty Ltd v Emm Yannoulatos (Overseas) Pty Ltd (1955) 56 SR (NSW) 323 …. 4.147 Svanosio v McNamara (1956) 96 CLR 186 …. 5.9
T Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; 253 ALR 1 …. 7.84, 8.28 Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 …. 6.22, 6.23, 6.24, 6.25, 6.70 Tallerman & Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd (1957) 98 CLR 93 …. 2.103, 4.156, 7.35 Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315; 201 ALR 359 …. 7.21 Taylor v Caldwell (1863) 3 B & S 826 …. 7.74 — v Johnson (1983) 151 CLR 422; 45 ALR 265 …. 5.18, 5.29, 5.30, 5.32, 6.76 Teen Ranch Pty Ltd v Brown (1995) 87 IR 308 …. 2.126 Thomas v Thomas (1842) 2 QB 851; 114 ER 330 …. 2.69, 2.76 Thomas Brown & Sons Ltd v Fazal Deen (1962) 108 CLR 391 …. 3.67, 3.68 Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353 …. 4.89, 4.96 Thompson v Palmer (1933) 49 CLR 507 …. 4.161 — v White (2006) 13 BPR 24, 537; [2006] NSWCA 350 …. 2.140 Thorby v Goldberg (1964) 112 CLR 597 …. 2.140 Thornley v Tilley (1925) 36 CLR 1 …. 4.128 Thornton v Shoe Lane Parking [1971] 2 QB 163 …. 4.53 Tinn v Hoffman (1873) 29 LT 271 …. 2.37 TLK Transport Pty Ltd v Thornthwaite Pty Ltd [2014] NSWCATCD 147 …. 6.158 Tobacco Institute of Australia Ltd v Australian Federation of Consumer Organisations Inc (1992) 38 FCR 1; 111 ALR 61 …. 6.14, 6.41 Todd v Nichol [1957] SASR 72 …. 2.121
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; 211 ALR 342 …. 3.101, 4.37, 4.38, 4.43, 4.44, 4.58, 4.136 Tonkin v Cooma-Monaro Shire Council (2006) 145 LGERA 48; [2006] NSWCA 50 …. 3.33, 3.41, 3.42 Tooth v Laws (1888) 9 LR (NSW) 154; 4 WN (NSW) 181 …. 3.102 Trade Practices Commission v Quality Publications Pty Ltd (1990) ATPR 40991 …. 6.132 Tramways Advertising Pty Ltd v Luna Park Ltd (1938) 61 CLR 286; NSW 38 SR (NSW) 632 …. 7.91, 7.92, 7.93 Trans Petroleum (Australia) Pty Ltd v White Gum Petroleum Pty Ltd [2012] WASCA 165 …. 4.135 Trevey v Grubb (1982) 44 ALR 20 …. 2.125, 2.127 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; 80 ALR 574 …. 3.75, 3.79, 3.86, 3.88, 8.74 Triplex Safety Glass Co Ltd v Scorah [1938] Ch 211 …. 3.64 Trollope & Colls Ltd v Atomic Power Constructions Ltd [1963] 1 WLR 333 …. 2.140
U United Dominions Corporation (Jamaica) Ltd v Shoucair [1969] 1 AC 340 …. 2.103, 4.156 United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd [1968] 1 WLR 74 …. 2.3 United Group Rail Services Ltd v Rail Corporation NSW (2009) 74 NSWLR 618 …. 2.156 Universe Tankships Inc of Monrovia v International Transport Workers’ Federation [1983] 1 AC 366 …. 5.73, 5.79, 5.80 University of Western Australia v Gray (2009) 179 FCR 346; 259 ALR 224 …. 4.119 Upfill v Wright [1911] 1 KB 506 …. 3.57 Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429 …. 2.151
V
Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444 …. 4.137 Vestry of St Leonard’s, Shoreditch v Hughes (1864) 17 CB (NS) 137; 144 ER 55 …. 2.137 Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 …. 8.12, 8.13 Visurgis, The [1999] 1 Lloyd’s Rep 218 …. 2.166 Vodafone Pacific Ltd v Mobile Innovations [2004] NSWCA 15 …. 4.135 Vouzas v Bleake House Pty Ltd [2013] VSC 534 …. 8.12 Vroon BV v Foster’s Brewing Group Ltd [1994] 2 VR 32 …. 2.140
W W & J Investments Ltd v Bunting [1984] 1 NSWLR 331 …. 8.48 W Scott Fell & Co Ltd v Lloyd (1906) 4 CLR 572 …. 5.48 Waldorf Australia Pty Ltd v Elias Construction Group Pty Ltd [2010] NSWSC 164 …. 8.64 Walton v Illawarra [2011] NSWSC 1188 …. 8.15 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513 …. 4.163, 6.76 Wang v Yamamoto [2015] NSWSC 942 …. 8.31 Warlow v Harrison (1859) 120 ER 925 …. 2.20 Watkins & Son v Carrig 91 NH 459 (1941) …. 2.88, 4.173 Watson v Healy Lands Ltd [1965] NZLR 511 …. 4.174 Westlake v Adams (1858) 5 CB (NS) 248; 141 ER 99 …. 2.76 Westpac Banking Corporation v Cockerill (1998) 152 ALR 267 …. 5.80 White v John Warwick & Co [1953] 2 All ER 1021 …. 4.93 White & Carter (Councils) Ltd v McGregor [1962] AC 413; [1961] 3 All ER 1178 …. 8.53 Whitlock v Brew (1968) 118 CLR 445 …. 2.152 Wigan v Edwards (1973) 1 ALR 497 …. 2.84, 2.101 Wilkinson v Osborne (1915) 21 CLR 89 …. 3.44, 3.51 Williams v Bayley (1866) LR 1 HL 200 …. 5.95 — v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1 …. 2.99, 4.146 Wilson v Northampton and Banbury Junction Railway Co (1874) 9 Ch App
279 …. 8.67 With v O’Flanagan [1936] 1 Ch 575 …. 5.55 Wolfe v Permanent Custodians Ltd [2012] VSC 275 …. 2.75 Wolseley Investments Pty Ltd v Gillespie [2007] NSWCA 358 …. 8.65 Wong Lai Ying v Chinachem Investment Co Ltd (1979) 13 BLR 86 …. 7.68 Woolworths Ltd v Kelly (1991) 22 NSWLR 189 …. 2.76 Workers Trust and Merchant Bank Ltd v Dojap Investment Ltd [1993] AC 573 …. 8.43
X XCB Pty Ltd v Creative Brands Pty Ltd [2005] VSC 424 …. 5.32
Y Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410; 21 ALR 585 …. 3.26, 3.27, 3.31, 3.33, 3.35, 3.36 Yarra Capital Group Pty Ltd v Sklash Pty Ltd [2006] VSCA 109 …. 8.40 Yerkey v Jones (1939) 63 CLR 649 …. 5.105, 5.106, 5.107 York Air Conditioning and Refrigeration (Australasia) Pty Ltd v Commonwealth (1949) 80 CLR 11 …. 2.137, 2.143, 2.153 York Glass Co Ltd v Jubb [1925] All ER Rep 285 …. 3.21 Yorke v Lucas (1985) 158 CLR 661; 61 ALR 307 …. 6.18
Table of Statutes References are to paragraph numbers Commonwealth Acts Interpretation Act 1901 s 2C …. 6.7 s 15AA …. 3.27 Age Discrimination Act 2004 …. 9.14 Australia Act 1986 …. 1.33 Australian Consumer Law …. 1.85, 3.69, 4.36, 4.118, 5.11, 5.44, 6.2, 6.3, 6.4, 6.7, 6.8, 6.9, 6.15, 6.71, 6.83, 6.84, 6.86, 6.87, 6.89, 6.91, 6.92, 6.93, 6.95, 6.97, 6.99, 6.102, 6.119, 6.142, 6.143, 6.144, 6.149, 6.165, 6.170, 7.99, 8.57 Pt 2-3 …. 6.87 Pt 3-2 …. 6.142 Pt 5-4 …. 6.159 s 2 …. 6.91, 6.148 s 2(1) …. 6.79, 6.130 s 2(2) …. 6.36 s 2(2)(a) …. 6.54 s 3(1) …. 6.143, 6.144 s 3(2) …. 6.144 s 3(3) …. 6.145 s 4 …. 6.38 s 4(1) …. 6.40 s 4(2) …. 6.39 s 4(3) …. 6.40 s 16 …. 3.69, 3.70 s 18 …. 5.44, 6.7, 6.8, 6.9, 6.10, 6.11, 6.12, 6.13, 6.15, 6.16, 6.17, 6.18, 6.19, 6.20, 6.21, 6.24, 6.30, 6.33, 6.34, 6.37, 6.39, 6.41, 6.43, 6.46, 6.50, 6.51, 6.52, 6.53,
6.55, 6.56, 6.57, 6.59, 6.60, 6.61, 6.63, 6.64, 6.65, 6.67, 6.68, 6.69, 6.70, 6.71, 6.119, 6.167 s 18(1) …. 6.5 s 20 …. 5.123, 6.73, 6.74, 6.75, 6.77, 6.79, 6.80 ss 20–22 …. 6.71 s 20(1) …. 1.8, 6.72 s 20(2) …. 6.73 s 21 …. 5.123, 6.73, 6.79, 6.80, 6.82, 6.83, 6.85 s 21(1) …. 6.78, 6.80 s 21(3) …. 6.80 s 21(4)(a) …. 6.80 s 21(4)(b) …. 6.81 s 21(4)(c) …. 6.81 s 22 …. 5.123, 6.82, 6.85 s 22(1) …. 6.82 s 22(1)(a) …. 6.82 s 22(1)(c) …. 6.82 s 22(1)(d) …. 6.82 s 22(1)(e) …. 6.82 s 22(1)(g) …. 6.82 s 22(1)(i) …. 6.82 s 22(1)(j) …. 6.82 s 22(1)(l) …. 6.82 s 22(2) …. 6.82 s 23 …. 4.148, 6.95, 6.97, 8.57 s 23(1) …. 6.90, 6.91 s 23(1)(b) …. 6.93 s 23(2) …. 6.90 s 23(3) …. 6.91 s 23(4)(b) …. 6.98 s 24 …. 6.96 s 24(1) …. 6.100, 6.117
s 24(1)(a) …. 6.101, 6.102, 6.107, 6.110 s 24(1)(b) …. 6.107, 6.108, 6.110 s 24(2) …. 6.111 s 24(3) …. 6.112 s 24(4) …. 6.107 s 25(1) …. 6.116 s 25(1)(d) …. 4.148 s 26(1) …. 6.95 s 27(1) …. 6.93 s 27(2) …. 6.94 s 28 …. 6.95 s 29 …. 5.44, 6.120 s 29(1)(a) …. 6.120 s 29(1)(b) …. 6.120 s 29(1)(e) …. 6.120 s 29(1)(g) …. 6.120 s 29(1)(i) …. 6.120 s 29(1)(j) …. 6.120 s 29(1)(k) …. 6.120 s 29(1)(l) …. 6.120 s 30 …. 5.44, 6.121 s 30(1)(a) …. 6.121 s 30(1)(c) …. 6.121 s 30(1)(d) …. 6.121 s 30(1)(e) …. 6.121 s 30(1)(f) …. 6.121 s 31 …. 6.122 s 32 …. 6.123 s 33 …. 6.124 s 34 …. 6.124 s 35 …. 6.125 s 35(1)(a) …. 6.126
s 35(1)(b) …. 6.126 s 36 …. 6.128 s 36(1) …. 6.128 s 36(2) …. 6.128 s 36(4) …. 6.128 s 39 …. 6.129 s 40 …. 6.131 s 41 …. 6.131 s 42 …. 6.131 s 43 …. 6.132 s 44 …. 6.134 s 45 …. 6.134 s 46 …. 6.134 s 47 …. 6.135 s 48 …. 6.136 s 48(2) …. 6.136 s 48(3) …. 6.136 s 49 …. 6.137, 6.138 s 50 …. 6.140, 6.141 s 51 …. 6.147 ss 51–62 …. 4.118 s 52 …. 6.147 s 53 …. 6.147 s 54 …. 4.118, 5.11, 6.147, 6.153, 7.99 ss 54–59 …. 6.148 s 54(2) …. 4.118, 6.150 s 54(3) …. 6.151 s 54(4) …. 6.152 s 54(6) …. 6.152 s 54(7) …. 6.152 s 55 …. 5.11, 6.147, 6.154, 6.155, 7.99 s 55(3) …. 6.155
s 56 …. 5.11, 6.147, 7.99 s 57 …. 6.147 s 58 …. 6.147 ss 58–59 …. 6.159 s 59 …. 6.147 s 60 …. 6.156 s 61 …. 6.156 s 61(4) …. 6.146 s 62 …. 6.156, 6.158 s 63(a) …. 6.146 s 63(b) …. 6.146 s 64 …. 4.118, 6.165, 8.57 s 64A …. 4.118, 6.165 s 131A …. 6.71, 6.146 s 164 …. 6.134 s 167 …. 6.139 s 168 …. 6.141 s 224 …. 6.86, 6.134, 6.139, 6.141 s 232 …. 6.63, 6.69, 6.86, 6.118 s 236 …. 6.63, 6.86 s 237 …. 6.86, 6.118 s 239 …. 6.118 s 243 …. 6.63, 6.86, 6.118 s 246 …. 6.86 s 247 …. 6.86 s 248 …. 6.86 s 250 …. 6.118 s 259 …. 6.161, 6.163 s 259(1) …. 6.159 s 259(2)(a) …. 6.164 s 259(2)(b) …. 6.164 s 259(3)(a) …. 6.161
s 259(3)(b) …. 6.161 s 259(4) …. 6.161, 6.164 s 260(a) …. 6.160 s 260(b) …. 6.160 s 260(c) …. 6.160 s 260(d) …. 6.160 s 260(e) …. 6.160 s 261 …. 6.164 s 262 …. 6.163 s 263 …. 6.163 s 267(2)(a) …. 6.164 s 267(3) …. 6.162 s 268 …. 6.161 Australian Securities and Investments Commission Act 2001 …. 6.87, 6.91, 6.146 Pt 2 Div 2 Subdiv BA …. 6.87 ss 12CA–12CC …. 6.71 s 12DL(2) …. 6.129 Banking Act 1959 …. 3.36 s 8 …. 3.36, 3.37 Bankruptcy Act 1966 s 58 …. 7.57 s 133 …. 7.57 Commonwealth of Australia Constitution Act 1900 …. 1.32, 1.34, 1.35, 1.36, 1.40, 1.41, 1.47 Ch I …. 1.38 Ch II …. 1.40 Ch III …. 1.41 s 1 …. 1.37 s 51 …. 1.44, 1.45 s 51(xii) …. 1.44 s 51(xviii) …. 1.44
s 51(xx) …. 1.44 s 51(xxi) …. 1.44 s 51(xxvii) …. 1.44 s 51(xxix) …. 1.44 s 52(ii) …. 1.46 s 61 …. 1.40 s 62 …. 1.40 s 64 …. 1.40 s 68 …. 1.40 s 71 …. 1.41 s 73 …. 1.41 s 75 …. 1.41, 1.57 s 76 …. 1.41, 1.57 s 90 …. 1.46 s 109 …. 1.45 s 122 …. 1.43, 1.46 s 128 …. 1.35 Competition and Consumer Act 2010 …. 6.2, 6.3, 6.9, 6.83 Pt XI Div 2 Subdiv A …. 6.2 s 2 …. 6.2 s 4 …. 6.7 s 6 …. 6.8 s 130 …. 6.2 s 131(1) …. 6.7 Sch 2 …. 1.8, 4.36, 5.11, 6.2 Sch 2 s 54 …. 5.56 Corporations Act 2001 s 181 …. 3.65 s 181(1)(a) …. 2.80 s 182 …. 3.65 s 183 …. 3.65 Disability Discrimination Act 1992 …. 9.14
Electronic Transactions Act 1999 …. 2.51 s 10 …. 4.80 s 14A …. 2.51 s 14A(1)(a) …. 2.51 s 14A(1)(b) …. 2.51 s 15B …. 2.17 Food Standards Australia New Zealand Act 1991 …. 5.56 Human Rights Commission Act 1986 …. 9.14 Income Tax Assessment Act 1997 s 995-1 …. 6.79 Insurance Contracts Act 1984 …. 3.80, 6.166 s 13 …. 5.54 s 13(1) …. 1.8 s 48 …. 3.80 International Arbitration Act 1974 …. 9.29 s 2D …. 9.29 Marriage Act 1961 …. 1.43 Migration Act 1958 …. 3.30 s 235(3) …. 3.30 Ministers of State Act 1952 s 4 …. 1.40 National Consumer Credit Protection Act 2009 …. 6.166 Native Title Act 1993 …. 1.30 Racial Discrimination Act 1975 …. 9.14 Sale of Goods Act 1954 …. 6.166 Sex Discrimination Act 1984 …. 9.14 Trade Practices Act 1974 …. 6.2 s 51AA …. 6.74, 6.77 ss 51AA–51AC …. 6.71 s 52 …. 6.10, 6.11, 6.16, 6.17, 6.20, 6.24, 6.30, 6.33, 6.51 s 60 …. 6.141 s 64(2A) …. 6.132
Trade Practices Amendment (Australian Consumer Law) Act (No 2) …. 6.7
Australian Capital Territory Age of Majority Act 1974 …. 3.2 Civil Law (Property) Act 2006 s 204(1) …. 4.155 Civil Law (Wrongs) Act 2002 …. 5.70 s 102 …. 8.7 s 174(2) …. 5.70 s 174(3) …. 5.70 Commercial Arbitration Act 1986 …. 9.18 Criminal Code 2002 s 356 …. 3.94 Electronic Transactions Act 2001 …. 2.51 s 9 …. 4.80 s 14B …. 2.17 Fair Trading (Australian Consumer Law) Act 1992 s 7 …. 6.2 Legislation Act 2001 s 28 …. 1.52 s 30 …. 1.52 s 73(1) …. 1.52 s 139 …. 3.27 Marriage Equality (Same Sex) Act 2013 …. 1.43 Mercantile Law Act 1962 s 15(2) …. 3.17 Residential Tenancies Act 1997 s 71(1)(c) …. 1.8 s 71E(1)(d) …. 1.8 Sale of Goods Act 1954 …. 4.116 s 7 …. 3.5, 3.9, 3.19 s 11 …. 5.5
s 60 …. 2.19, 2.21 Sale of Goods (Vienna Convention) Act 1987 …. 2.50 Supreme Court Act 1933 s 33 …. 1.63 s 34 …. 8.114
New South Wales Anti-Discrimination Act 1977 s 91A …. 9.15 Commercial Arbitration Act 2010 …. 9.18 Companies Code …. 8.109 Contracts Review Act 1980 …. 8.57 s 7(1)(b) …. 8.57 Conveyancing Act 1919 s 54A(1) …. 4.155 Crimes Act 1900 s 249B …. 3.94 Electronic Transactions Act 2000 …. 2.51 s 9 …. 4.80 s 14B …. 2.17 Fair Trading Act 1987 s 32 …. 6.2 Frustrated Contracts Act 1978 …. 6.166, 7.81 Frustrated Contracts Act 1988 Pt 3 …. 7.81 s 6(1) …. 7.83 s 6(2) …. 7.83 Interpretation Act 1987 s 23(1) …. 1.52 s 33 …. 3.27 Law Reform (Law and Equity) Act 1972 s 5 …. 1.63
Law Reform (Miscellaneous Provisions) Act 1965 s 9 …. 8.7 Local Government Act 1993 …. 3.41, 8.103 s 55 …. 3.41 s 55(1) …. 3.41 s 435 …. 3.41 Minors (Property and Contracts) Act 1970 …. 3.2, 3.14, 6.166 Pt 3 …. 3.14 Pharmacy Act 1964 …. 3.29 s 25(1) …. 3.29 Residential Tenancies Act 2010 s 50 …. 1.8 Sale of Goods Act 1923 …. 4.116, 6.166 s 7 …. 3.5, 3.9, 3.19 s 11 …. 5.5 s 20 …. 2.19, 2.21 Sale of Goods (Vienna Convention) Act 1986 …. 2.50 Securities Industry Act 1970 s 70 …. 3.47 Supreme Court Act 1970 ss 57–63 …. 1.63 s 68 …. 8.114 Therapeutic Goods and Cosmetics Act 1972 …. 3.30 s 13 …. 3.30
Northern Territory Age of Majority Act …. 3.2 Anti-Discrimination Act s 78 …. 9.15 Commercial Arbitration Act 2011 …. 9.18 Consumer Affairs and Fair Trading Act 1990 s 27 …. 6.2
Criminal Code Act s 236 …. 3.94 Electronic Transactions (Northern Territory) Act 2000 …. 2.51 s 9 …. 4.80 s 14B …. 2.17 Interpretation Act 1978 s 6(1) …. 1.52 s 62A …. 3.27 Law of Property Act 2000 s 62 …. 4.155 Law Reform (Miscellaneous Provisions) Act 1956 s 16 …. 8.7 Residential Tenancies Act 1999 s 65 …. 1.8 Rights of the Terminally Ill Act 1995 …. 1.43 Sale of Goods Act 1972 …. 4.116, 6.166 s 7 …. 3.5, 3.19 s 11 …. 5.5 s 60 …. 2.19, 2.21 Sale of Goods (Vienna Convention) Act 1987 …. 2.50 Statute of Frauds Amendment Act 1828 …. 3.17 Supreme Court Act 1975 s 14(1)(b) …. 8.114 ss 62–63 …. 8.114 Supreme Court Act 1979 s 68 …. 1.63
Queensland Acts Interpretation Act 1954 s 14A …. 3.27 s 15A …. 1.52 Anti-Discrimination Act 1991
s 158 …. 9.15 Civil Proceedings Act 2011 s 8 …. 8.114 Commercial Arbitration Act 2013 …. 9.18 Criminal Code Act 1899 s 442B …. 3.94 Electronic Transactions (Queensland) Act 2001 …. 2.51 s 14 …. 4.80 s 26B …. 2.17 Fair Trading Act 1989 s 16 …. 6.2 Law Reform Act 1995 …. 3.2 s 10 …. 8.7 Property Law Act 1974 s 59 …. 4.155 Residential Tenancies and Rooming Accommodation Act 2008 s 183 …. 1.8 s 249 …. 1.8 Sale of Goods Act 1896 …. 4.116, 5.5, 6.166 s 5 …. 3.5, 3.9, 3.19 s 59 …. 2.19, 2.21 Sale of Goods (Vienna Convention) Act 1986 …. 2.50 Supreme Court Act 1995 s 249 …. 1.63
South Australia Acts Interpretation Act 1915 s 7(1) …. 1.52 s 22 …. 3.27 Age of Majority (Reduction) Act 1971 …. 3.2 Commercial Arbitration Act 2011 …. 9.18, 9.20 s 7(2) …. 9.21
s 7(3) …. 9.21 s 7(5) …. 9.21 s 10(1) …. 9.22 s 10(2) …. 9.22 s 17(1)–(2) …. 9.26 s 17(3) …. 9.26 s 17H …. 9.26 s 18 …. 9.23 s 19(1) …. 9.23 s 19(3) …. 9.23 s 24(1) …. 9.23 s 24A(1) …. 9.24 s 24B …. 9.24 s 27D(1) …. 9.25 s 27D(2) …. 9.25 s 27E …. 9.23 s 29(1) …. 9.27 s 31 …. 9.27 s 32(1) …. 9.27 s 32(2) …. 9.27 s 34 …. 9.27 s 34A(4) …. 9.27 s 35 …. 9.27 Criminal Law Consolidation Act 1935 s 148 …. 3.94 s 149 …. 3.94 Electronic Transactions Act 2000 …. 2.51 s 9 …. 4.80 s 14B …. 2.17 Equal Opportunity Act 1984 …. 9.15 s 95 …. 9.15 Fair Trading Act 1987
s 14 …. 6.2 Frustrated Contracts Act 1988 …. 6.166, 7.81, 7.82 s 4(2) …. 7.83 s 6(2)(b) …. 8.54 s 7 …. 7.82 s 7(1) …. 7.81 s 7(2) …. 7.81 s 7(4) …. 7.81 Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 s 7 …. 8.7 Minors Contracts (Miscellaneous Provisions) Act 1979 s 4 …. 3.17 s 5(1) …. 3.16 s 5(2) …. 3.16 s 6 …. 3.15 s 7 …. 3.10 Misrepresentations Act 1974 …. 5.70 s 7(1) …. 5.70 s 7(2) …. 5.70 s 7(3) …. 5.70 Law of Property Act 1936 s 26(1) …. 4.155 Prices Act 1948-51 …. 3.73 Residential Tenancies Act 1995 s 65 …. 1.8 Return to Work Act 2014 …. 1.55 s 202(1) …. 1.54 s 202(2) …. 1.55 Sale of Goods Act 1895 …. 4.116, 6.166 s 2 …. 3.5, 3.9, 3.19 s 6 …. 5.5
s 13 …. 4.116, 5.11, 7.99 s 14(a) …. 5.11, 7.99 s 57 …. 2.19, 2.21 Sale of Goods (Vienna Convention) Act 1986 …. 2.50 Supreme Court Act 1935 s 28 …. 1.63 s 30 …. 8.114 s 39 …. 3.54 Supreme Court Civil Rules 2006 s 220(1) …. 9.31 s 221(1) …. 9.31 Worker’s Liens Act 1893 s 41 …. 5.86
Tasmania Acts Interpretation Act 1931 s 8A …. 3.27 s 9(3) …. 1.52 Age of Majority Act 1973 …. 3.2 Anti-Discrimination Act 1998 s 75 …. 9.15 Australian Consumer Law (Tasmania) Act 2010 s 6 …. 6.2 Conveyancing and Law of Property Act 1884 s 36(1) …. 4.155 Criminal Code Act 1924 Sch 1 s 266 …. 3.94 Electronic Transactions Act 2000 …. 2.51 s 7 …. 4.80 s 12B …. 2.17 Residential Tenancy Act 1997 s 55 …. 1.8
Sale of Goods Act 1896 …. 4.116, 6.166 s 7 …. 3.5, 3.9, 3.19 Sale of Goods (Vienna Convention) Act 1986 …. 2.50 Supreme Court Civil Procedure Act 1932 ss 10–11 …. 1.63 s 11(13) …. 8.114 Wrongs Act 1954 s 4 …. 8.7
Victoria Age of Majority Act 1977 …. 3.2 Australian Consumer Law and Fair Trading Act 2012 …. 7.81 s 8 …. 6.2 s 35(3) …. 7.83 s 36 …. 7.81 s 37 …. 7.81 s 38 …. 7.81 Commercial Arbitration Act 2011 …. 9.18 Crimes Act 1958 s 176 …. 3.94 Factories and Shops Act 1912 …. 3.39 Fair Trading Act 1999 …. 6.102, 6.103 Pt 2B …. 6.87 Frustrated Contracts Act 1959 …. 6.166 Electronic Transactions (Victoria) Act 2000 …. 2.51 s 9 …. 4.80 s 14B …. 2.17 Equal Opportunity Act 2010 s 111 …. 9.15 Goods Act 1958 …. 4.116 s 64 …. 2.19, 2.21 Instruments Act 1958
s 126(1) …. 4.155 Interpretation of Legislation Act 1984 s 10A(3) …. 11.52 s 10A(4) …. 11.52 s 35(a) …. 3.27 Property Law Act 1958 s 53(1)(a) …. 4.155 Residential Tenancies Act 1997 s 67 …. 1.8 Retail Tenancies Reform Act 1998 …. 8.105 Sale of Goods Act 1958 …. 6.166 s 7 …. 3.5, 3.9, 3.19 s 11 …. 5.5 Sale of Goods (Vienna Convention) Act 1987 …. 2.50 Supreme Court Act 1986 s 29 …. 1.63 s 38 …. 8.114 s 50(a) …. 3.18 s 50(b) …. 3.18 Wrongs Act 1958 s 26 …. 8.7
Western Australia Age of Majority Act 1972 …. 3.2 Commercial Arbitration Act 2012 …. 9.18 Criminal Code Act 1913 Ch LV …. 3.94 Electronic Transactions Act 2003 …. 2.51 s 10 …. 4.80 s 18 …. 2.17 Equal Opportunity Act 1984 s 91 …. 9.15
Fair Trading Act 2010 s 19 …. 6.2 Interpretation Act 1984 s 18 …. 3.27 s 20(2) …. 1.52 Law Reform (Contributory Negligence and Tortfeasors’ Contribution) Act 1947 s 3A …. 8.7 Residential Tenancies Act 1987 s 44 …. 1.8 s 59E …. 1.8 Sale of Goods Act 1895 …. 4.116, 5.5, 6.166 s 2 …. 3.5, 3.9, 3.19 s 57 …. 2.19, 2.21 Sale of Goods (Vienna Convention) Act 1986 …. 2.50 Statute of Frauds Amendment Act 1828 …. 3.17 Supreme Court Act 1935 ss 24–25 …. 1.63 s 25(10) …. 8.114
Imperial Colonial Laws Validity Act 1865 …. 1.31
International United Nations Convention on Contracts for the International Sale of Goods (Vienna Convention) Art 24 …. 2.50
New Zealand Sale of Goods (United Nations Convention) Act 1994 Sch 3 Art 15(1) …. 2.50 Sch 3 Art 18(2) …. 2.50
United Kingdom Housing Act 1961 …. 4.123 Judicature Act 1873 …. 1.27, 1.63 Judicature Act 1875 …. 1.27 Unfair Terms in Consumer Contracts Regulations 1999 …. 6.87
Contents Preface Table of Cases Table of Statutes
Chapter 1
Australian Legal System Introduction Australian legal system Historical foundations of Australian law The Constitution and Australia’s federal system Sources of law Classifications of law Contract law Nexus between law and business
Chapter 2
Contract Formation Introduction Bilateral and unilateral contracts Offer Acceptance Consideration Origins of the doctrine of consideration Elements of consideration Legal requirements Consideration in practice Intention to create legal relations Certainty and completeness of terms
Chapter 3
Is a Contract Legally Binding? Introduction
Capacity to contract Illegality Privity Agency
Chapter 4
Contents of a Contract Introduction Express terms Written agreements Implied terms Interpretation of terms Variation of contract terms
Chapter 5
Is There Genuine Agreement? Introduction Mistake Misrepresentation Duress Duress of the person Duress of goods Economic duress Undue influence Unconscionable conduct
Chapter 6
Statutory Regulation of Contracts Introduction Australian Consumer Law Misleading or deceptive conduct under the ACL Unconscionable conduct under the ACL Unfair terms in consumer contracts Other unfair business practices Consumer guarantees Other statutes
Reporting a breach of the ACL
Chapter 7
Termination of a Contract Introduction Termination by performance Termination by agreement Termination by operation of contractual term Termination by operation of law Termination by frustration Termination for breach of contract Termination by repudiation
Chapter 8
Remedies Introduction Common law remedies Equitable remedies Equitable damages under statute
Chapter 9
Alternative Dispute Resolution Introduction Self-help Mediation Conciliation Arbitration Mandatory ADR Sources which may assist parties contemplating ADR
Index
[page 1]
CHAPTER 1
Australian Legal System
Key Ideas By the end of this chapter you should be able to identify: ▶
history and features of the Australian legal system
▶
various sources and classifications of law
▶
relationship between law and business
[page 2]
Introduction [1.1]
The principal aim of this book is to provide a clear and concise exposition of the Australian law of contract, with a concurrent emphasis upon its practical application across various industries and contexts. It seeks not only to state what the law is, but to give the reader a clearer indication of how this law applies in the commercial world. There is obvious force in the suggestion that a consideration of both of these things provides a more holistic view of the law of contract; otherwise, how might we truly appreciate what the law is, how to apply it, and the likely outcomes of this application? As Harris and Croese note, ‘[r]ules without commercial context are of little use to business people and those studying for a career in business’.1 This is certainly true when one considers the popular view that there exists a dissonance between the law as a body of principle and how it actually operates in practice.2
[1.2]
It is arguable that this dissonance is perpetuated through the manner in which contract law is taught. There is plenty of scholarly research both in Australia and abroad which supports this position.3 This book aims to strike an appropriate balance by outlining the law in clear and comprehensible terms while also providing practical examples (from the case law and otherwise) demonstrating the ways in which such principles manifest in various situations. As is discussed later in the chapter, contract law has an importance and relevance to business which cannot be understated.
[1.3]
British science-fiction writer Charles Stross once provided a memorable definition of ‘contract law’. ‘Contract law’, Stross said, ‘is essentially a defensive scorched-earth battleground where the constant question is, “if my business partner was possessed by a brain-eating monster from beyond space-time tomorrow, what is the worst thing they could do to me?”’ Though a little eccentric, this quote
fundamentally identifies the underlying role of the law of contract: to regulate agreements between parties and allocate attendant risks through the imposition of [page 3] rights and obligations. There is reference to a commercial agreement with another party, to the behaviour of both parties, to risk, to consequence and, impliedly, to remedies. Commercial activity is characterised by such agreements and the majority of activities and relationships in society are in some way influenced by contract principles. For example, contracts affect the sale and purchase of land, goods and services; regulate employment and other professional relationships; and influence trade and exchange (financial and otherwise). Contract law is thus of enormous importance in the Australian legal landscape. [1.4]
The legal framework through which Australian contract law operates derives from England and has a long and complicated history reaching back many centuries. Today, most of the rules of contract are relatively settled, though the gradual diversification and specialisation of industries has seen specific rules be fashioned for particular settings and circumstances. This has led some to question whether there is actually a ‘law of contract’ in the sense of a body of universal principle applicable to all contracts, or merely a ‘law of contracts’ in terms of particularised principles applicable to specific contracts in a given context or relationship. Atiyah lends support to the latter view and downplays the overarching relevance of the general principles of contract law: 4 The classical model of contract … continues to exist though with much less content or application than would justify treating the model as the paradigm even of voluntarily incurred obligations. The principles of contract law sometimes govern new or marginal or residuary situations, but it is hard to see in what sense they can continue to be called general principles. They remain general only by default, only because they are being superseded by detailed ad hoc rules lacking any principle, or by new principles of narrow scope and application.
[1.5]
In Atiyah’s view, the rules governing contracts have become specialised to the point that only ‘whatever is left’ can be accurately described as ‘contract law’ in the sense of a universal body of principle. Real estate contracts, for example, have features and clauses unique to that industry, such as covenants, addenda (that is, schedules of property plans, etc) and conditions imposed by statute or regulation. The general principles of contract law still apply, but their influence may be less significant owing to the complex legal framework which governs transactions involving real property. McKendrick labels this process of specialisation as ‘fragmentation’ and echoes Atiyah’s views with a different example: 5 A contract of employment is, in many respects, radically different from a contract to purchase a chocolate bar. The considerations
[page 4] applicable to a contract between commercial parties of equal bargaining power may be very different from those applicable to a contract between a consumer and a multinational supplier. [1.6]
Perhaps the most radical view, as expressed by Gilmore in his famous tome, The Death of Contract (1974), is that contract law is being gradually absorbed by other doctrines, such as tort law,6 and that this phenomenon may well ‘provide the doctrinal justification for the fusing of contract and tort in a unified theory of civil obligation’.7
[1.7]
It cannot be denied that the law of contract has undergone significant change in recent times as particular industries have grown in number and complexity and their needs have required adaptation of the general rules of contract. However, contract law is far from irrelevant or, as Gilmore claimed, dead. It is very much alive and well and rightfully commands a book such as this unto itself. Without it, the world as we know it would cease to function effectively.
[1.8]
The general principles of contract law retain an important significance which must not be downplayed. For a start, the specific rules which govern the formation, content, performance and
termination of contracts in particular industries and contexts are founded upon the basic framework of contract law presented in this book. Specialised contracts rely upon this foundation and merely build upon (rather than supplant) it so as to cater for unique circumstances. The general rules of contract law permeate all contractual agreements. Moreover, the broader rules of contract law often translate into industry- or context-specific rules. For example, the common law principle of good faith in contractual performance has been codified in the context of insurance contracts and requires the parties to act towards one another with ‘the utmost good faith’.8 The doctrine of unconscionability, which has its roots in the common law and equity,9 is now reflected in the prohibition against unconscionable conduct in trade or commerce contained in s 20(1) of the Australian Consumer Law.10 A tenant’s common law right to ‘peace and quiet enjoyment’ of their rented premises is enshrined in the residential tenancy Acts of all Australian jurisdictions.11 [page 5] [1.9]
It might be said, therefore, that rather than diluting the importance of the general principles of contract law, its fragmentation within industry actually emphasises its lasting significance. Whether it be in sales, property, business, architecture, banking and finance, information technology or some other field, the fundamental principles of contract law detailed in this book provide the basis for understanding how contracts are made, how they are to be interpreted, how they operate and how they subsequently come to an end.
Australian legal system What is law? [1.10]
‘What is law?’ is one of the most enduring questions of all time. Indeed, as Hart has noted, ‘few questions concerning human society
have been asked with such persistence and answered by serious thinkers in so many diverse, strange, and even paradoxical ways’.12 The answer very much depends upon who is being asked, as the concept of ‘law’ incorporates various doctrinal, moral, philosophical, political and functional considerations, each of which will likely deliver a very different answer. The Macquarie Dictionary defines law as ‘the principles and regulations emanating from a government and applicable to a people, whether in the form of legislation or of custom and policies recognised and enforced by judicial decision’.13 From here, we can begin to understand the fundamental role or purpose of the law: to regulate human behaviour. [1.11]
The law is that set of rules which determine what conduct is and is not permissible. It gives rise to enforceable rights and obligations, establishes institutions, imposes penalties, facilitates dispute resolution and provides remedies for the infringement of legal rights. The two primary sources of law are: 1.
the legislature — that is, the parliament at Commonwealth and state/territory levels (and including local governments, such as city councils); and
2.
the judiciary — that is, the courts.
[1.12]
The parliament is the supreme lawmaker, which creates law through the passage of ‘Acts’ or ‘statutes’. The courts can also create laws by way of judicial decisions; this is known as ‘case law’. These sources of law are considered later in this chapter.
[1.13]
Laws must be distinguished from non-legal rules or social norms, which are not legally enforceable and do not in themselves give rise to legal sanctions if breached. These rules are often founded upon conscience, custom or general expectation. Examples of such rules include remaining quiet in a library, introducing someone standing with you while you are talking to a third party, [page 6]
saying ‘please’ when asking for something, offering your seat to an elderly or injured person on the bus, going to the back of a queue and not ‘pushing in’, and offering a drink to visitors in your home. If you violate these rules you are vulnerable to social condemnation for having contravened common expectations and practices, but you have not broken the ‘law’. [1.14]
Law is typically divided into discrete fields. For example, criminal law determines when individuals may be held liable to punishment for committing an offence. Family law regulates familial relationships and related matters, such as marriage and children. Tort law embodies all those causes of action which protect one’s interest in his or her bodily security, tangible property, financial resources or reputation (such as negligence, trespass and defamation). And then there is contract law, with which this book is concerned. As we will see, the law of contract is integral to our legal framework and social order in the manner by which it regulates economic relations and activity.
Rule of law and natural justice [1.15]
The rule of law is a fundamental principle in Australian law. At the most basic level, it stipulates that every person and organisation is equal under the law and subject to the same laws. This extends to the government as, under this principle, no one is above the law. It is therefore diametrically opposed to arbitrary government, which favours differential treatment devoid of choice or formal restraint. The Prime Minister of Australia is as subservient to the law as you are. The phrase ‘rule of law’ is often attributed to the British jurist, Albert Venn Dicey, who, when writing Introduction to the Study of the Law of the Constitution (1885),14 described the universal nature of the law and emphasised that one’s position in society would make no difference to its application. The rule is dynamic in that the content of the law constantly changes but its reach and impartial manner do not. The rule is also reinforced by our constitutional structure and the unique interrelationship it imposes upon the arms of government through the doctrine of the separation of powers. This structure is discussed at
[1.33]–[1.47], below. [1.16]
The rule of law manifests itself in a number of accepted principles. For example, the law must be made known to all citizens and be fairly enforced. Wealth or rank is irrelevant; all persons possess the same legal rights and obligations and will be treated equally. By extension, no one person or group may be discriminated against except for rational reasons (for example, special provisions for the physically or mentally disabled). Another fundamental rule is that all persons are entitled to access justice by way of a fair hearing before an impartial judicial body. Judges are not free to arbitrarily generate law but, rather, are bound under the doctrine of precedent (discussed at [1.22], below) to consistently decide like [page 7] cases in a like manner, with reference to established common law principles. Any person who believes they have not received justice is entitled to appeal any ruling to a higher court.
[1.17]
The ideals of equality and fairness, which are central to the rule of law, are also integral to a related principle known as ‘natural justice’. This principle specifically concerns fairness in judicial procedure. Among other things, it mandates an individual’s right to be given a fair hearing and to present their case before an impartial and unbiased adjudicator who has no personal interest in the matter. If the decisionmaker has a personal interest in the matter before them they must recuse themselves or otherwise declare their bias or interest. They must take all relevant circumstances and evidence into account and deliver a decision which is both fair and socially acceptable, and provide their reasons for the decision.
[1.18]
Natural justice also requires that the proceedings be fair and follow procedural rules, and that the ultimate decision be based upon logically probative evidence. The procedural rules ensure that both sides are permitted to ask questions of each other and that the
evidence admitted is of sufficient quality and value. It therefore goes without saying that an individual must be given ample notice of an impending hearing and provided with the opportunity to prepare their case, and to seek representation where possible. [1.19]
The rules of natural justice not only apply to hearings before a court but also to quasi-judicial bodies, such as tribunals. For this reason, the principle of natural justice is often described in terms of a general duty to act fairly and afford procedural fairness.15 This duty binds whichever decision-making body an individual is being heard before — whether it be a sporting, employment or administrative appeals tribunal, a review board or a court of law.
Historical foundations of Australian law Origins of the common law [1.20]
In order to truly appreciate the historical foundations and development of Australian law (including contract law), it is essential to go several centuries back in time to the High Middle Ages. The common law system in Australia derives from the English model that developed in the wake of the Norman invasion of England in 1066. Prior to this date, the legal system in England was based primarily on rules and customs specific to each fiefdom (province), due [page 8] largely to centuries of Scandinavian, Germanic and other invasions following the withdrawal of the Romans in the 5th century AD. When the Duke of Normandy, William the Conqueror, and his army invaded and occupied England, it signalled the birth of a new social and legal order. William was an intelligent administrator who drew upon his civil war experiences in Normandy to implement a scheme of systemisation and firm enforcement. As the new king, William gradually superimposed a new system of social and economic
organisation known as feudalism, a system of land ownership based on rank and designed to facilitate effective control and order over the country. The existing Anglo-Saxon laws and legal institutions were largely untouched following the invasion though William’s influence soon increased. Indeed, initially at least, the local courts were relied upon to resolve disputes raised by citizens and punish criminals. [1.21]
William (and his successors) appreciated the importance of a centralised and unified legal system to the efficient administration of the nation and, subsequently, the consolidation of England’s power. The Norman kings undertook to tour the kingdom and hear complaints or ‘petitions’ from the populace as well as criminal cases so as to administer justice in an impartial manner untainted by local prejudices. In time, designated ‘judges’ were dispatched on ‘circuits’, offering the people wider access to the king’s justice.
[1.22]
Given their lack of local knowledge, and so as to maintain consistency, fairness and predictability in decision-making, the king (or his delegate) opted to decide like cases in a like manner; a principle encapsulated in the Latin term stare decisis (‘let the decision stand’). This principle ossified into the doctrine of precedent and inspired the practice of recording the decisions of the courts on rolls of parchment, which were ultimately compiled into the first series of law reports. The practice of recording court decisions still exists today. In time, dedicated court reporters were vested with the task of selecting those cases of greatest importance to report. The principles emanating from the courts came to be known as the common law by virtue of the fact that it applied to all persons across the land, effectively extinguishing the customary laws that had existed previously.
[1.23]
The curia regis (‘king’s court’), comprising the king’s advisory board (members of which occasionally travelled and heard petitions from aggrieved members of the public), eventually divided into specialised courts: the Court of Exchequer, which dealt with disputes involving revenue; the Court of Common Pleas, which heard petitions from commoners; and the King’s Bench, which administered disputes involving or affecting the interests of the Crown. The jurisdiction of the King’s Bench extended to criminal matters and prosecutions and,
eventually, broadened even further to enable the court to become a general forum which heard matters not heard by the other courts. The development of the common law and the English legal tradition, upon which the legal systems of Australia and the former colonies of the United Kingdom are based, owes much to the success of these institutions. [page 9] [1.24]
Another important tradition to emerge from this system was the use of ‘writs’ to add formality and orderly procedure to the process of dispute resolution. These writs, or court orders, were special forms which could be purchased, filled out by a petitioner and filed to commence a legal action. These writs are in essence the predecessors to the ‘standard forms’ in use today. Thus, much of how the Australian law works in practice in contemporary times was inspired by formalities and institutions formed in England centuries ago.
[1.25]
It is somewhat ironic that the common law’s objective to provide evenhanded justice to all through the implementation of formal procedures and firm adherence to the doctrine of precedent ultimately caused it to become a receptacle of injustice. By around the 13th century, the system’s preoccupation with form, rigid approach to applying judicial precedents and inability to provide remedies outside of damages (such as specific performance orders) saw it become markedly inflexible. Cooke et al call the common law ‘a victim of its own success’ in light of its transformation from a system characterised by simple procedure and pragmatic nature to one involving complex procedures and having a fixation on form.16 So frustrated were the citizens of England that many petitioned the king directly to attain justice which the common law did not always afford.
[1.26]
As the number of such requests grew exponentially, the practice of delegating these matters to the Chancellor developed and became more common. The Chancellor not only kept the royal seal for official documents but headed the king’s secretariat, the Chancery (which was
responsible for issuing the royal writs). In 1349, Edward III issued a decree that the Chancellor could provide authoritative determinations in equitable matters (on the king’s behalf) without the king’s permission. In 1474, a separate judicial body known as the Court of Chancery was developed to exclusively administer cases in equity. This was a significant development, for now the Chancellor could decide such cases in his own name and not that of the monarch. [1.27]
Most medieval Chancellors were members of the clergy though many had graduated from studies in civil and canon (church) law and even practised in law before joining the church. This religious influence translated into their decisionmaking processes and, thus, many Christian ideologies and precepts, particularly conscience and morality, came to underpin the judgments of the Chancellors.17 ‘With such a combination of political, clerical and sometimes legal experience’, Evans notes, ‘the medieval Chancellors were well placed to determine claims [page 10] brought on legal or moral grounds.’18 This body of decisions developed alongside the common law and came to be known as ‘equity’. Eventually, however, the British parliament passed the Judicature Acts of 1873 and 1875, which fused the previously separate common law and equity courts such that a court could exercise both common law and equitable jurisdiction. A number of equitable principles still exist and represent integral features of the Australian law of contract. These principles are explored in later chapters.
Development of the Australian legal system [1.28]
The first laws in Australia were those of the Indigenous Australians, who arrived as long as 50,000 years ago. This unique body of laws was based primarily on customs, traditions and practices unique to indigenous culture and remains an important feature of our complex
legal framework in contemporary times. The manner in which English law reached our shores, however, dates back to the significant problem of overcrowded jails in England during the early 18th century. Previously, the Imperial Parliament was in the practice of commuting the death sentences of prisoners on the proviso they agreed to be transported to one of the colonies. At first, the American colonies were favoured but the American Revolution from 1765 forced the Imperial Parliament to consider alternative destinations. On 6 December 1786, orders in council were made designating New South Wales (which English explorer Captain James Cook had previously mapped and named) as a penal colony. In May the following year, a fleet of 11 ships, known as the First Fleet, departed Britain for Australia, arriving at Botany Bay from 18 January 1788. On 26 January 1788, Captain (and eventual Governor) Arthur Phillip unfurled the British flag and claimed the land in the name of King George III.19 [1.29]
The laws of England came to apply in Australia by virtue of an important principle of international law in force at this time: territory could be acquired by a country either by cession, conquest or settlement. In the first two cases, the pre-existing laws of the territory remained in force. In the case of settlement, however, the laws of the settling country immediately came into effect. This concept is explained best in a famous excerpt from William Blackstone’s highly influential treatise, Commentaries on the Laws of England:20 [I]t hath been held that if an uninhabited country be discovered and planted by English subjects, all the English laws then in being, which are the birthright of every subject, are immediately there in force.
[page 11] [1.30]
This principle was qualified by the rule that English law applied only so far as was applicable to the new situation and the conditions of the settled territory. In applying the laws of England in this manner, the British colonists endorsed the doctrine of terra nullius (‘land belonging to no one’). This doctrine justified the implementation of laws upon settlement where no recognisable legal system or political
or economic structures existed among the native population. This law was ultimately overturned in the landmark High Court of Australia decision in Mabo v State of Queensland (No 2) (1992) 175 CLR 1, which recognised the coexistence of Crown title over the land of the nation and native title. Native title is a right or interest in land or waters, as defined within the traditional laws and customs of Indigenous Australians. Today, there is specific legislation allowing for Indigenous Australians to make a native title claim over a particular piece of land in Australia. The Native Title Act 1993 (Cth) empowers the Federal Court with the responsibility to process such claims and make subsequent determinations. [1.31]
In the 50 or so years following the arrival of the First Fleet and the British settlement, a series of Acts were passed by the Imperial Parliament with the aim of identifying the new colonies and establishing a legal order in each within the English tradition. New colonies (which we now recognise as the states) were created and began to exercise more and more independence and sovereignty. The Imperial Parliament passed the Colonial Laws Validity Act 1865 (Imp), which confirmed the supremacy of English law in the colonies but provided that colonial laws would not be invalidated unless inconsistent with (or ‘repugnant’ to) English laws extending to the colonies. In time, English influence waned as the colonies established their own governments, industries, economies, court structures and the like. Owing to this growing establishment, the colonies were (initially, at least) highly competitive and somewhat hostile to one another.
[1.32]
Growing fears as to French and German expansion in some parts of the Pacific, coupled with undesirable trade and movement tariffs and incongruities between the colonies with respect to law, currency, trade, foreign policy and the like, prompted consideration of a potential federation. Uniting in this manner would also provide for more efficient administration of such important matters as defence, immigration and finance. A series of conventions were held among representatives from each of the colonies and a draft constitution was produced. At first, nothing came of these conventions but the
movement did not lose momentum and eventually it was agreed to endorse a national model akin to England’s Westminster system, featuring a bicameral federal legislature operating within the framework of a parliamentary democracy. Several referenda were held before, finally, the colonies of Queensland, Victoria, Tasmania, South Australia and New South Wales approved of the draft constitution and sought endorsement from the Imperial Parliament. Some minor amendments were made before the Commonwealth of Australia Constitution Act 1900 (Cth) was passed, coming into force on 1 January 1901. [page 12]
The Constitution and Australia’s federal system Constitutional monarchy [1.33]
Australia is a constitutional monarchy. This means our sovereign head of state is a monarch, specifically that of England (currently Queen Elizabeth II). The Queen is represented in Australia by the GovernorGeneral. Despite significant developments in the years following Federation, Australia, as a nation, retains ties with England. Today, in practical terms, those ties are primarily symbolic (with some exceptions). Up until 1931, for example, the British Parliament could pass legislation applicable to Australia. In that year, the British Parliament passed the Statute of Westminster, which made request and consent of the relevant Australian parliament a necessary condition for the passage of applicable legislation through Britain. One might say that the Australian connection with England was all but severed through the passage of the Australia Act 1986 (Cth), which fully removed the British Parliament’s ability to legislate for Australia, and abolished domestic appeals to the Privy Council from Australian courts, among other things. This marked a significant development in Australia’s steady march towards independence.
The Constitution [1.34]
The Australian Constitution is the single most important political and legal document in our national history. It performs several critical functions which characterise how our legal system operates. For example, it provides the source and authority for the exercise of public power while also stipulating the applicable limitations to that power. It also governs the relationship between the federal (Commonwealth) and state governments, and identifies the unique demarcation of power subsisting between them. By virtue of its structure, it also crucially regulates the arms of government and their relationship with one another and wider society.
[1.35]
The High Court of Australia is charged with responsibility for interpreting the Constitution, and its findings therefore go some way towards shaping our understanding of the content and effect of the document. A series of constitutional ‘conventions’ or unwritten practices are also important in determining how the Constitution operates. For example, the office of prime minister is not even mentioned in the document though political practice dictates that the prime minister is nominated by the majority party (or dominant party in a coalition) to represent the government. The Constitution can only be altered via the procedure specified in s 128; however, the interpretations of the High Court are equally critical in determining the Constitution’s true scope and content. [page 13]
Separation of powers [1.36]
The Constitution consists of eight chapters and 128 sections. By virtue of its arrangement, it identifies three independent but interrelated ‘arms’ of government: 1.
the legislature;
2.
the executive; and
3.
the judiciary.
The legislature [1.37]
The legislature is the lawmaking arm, which we recognise as the parliament. Section 1 of the Constitution stipulates that the legislative power of the Commonwealth vests in a federal parliament consisting of ‘the Queen, a Senate, and a House of Representatives’. This section imposes a bicameral structure; that is, a parliament with two houses: an upper house representing the states (Senate); and a lower house representing the people (House of Representatives).
[1.38]
The names of the houses differ at state and territory level. These are traditionally coloured red and green respectively and serve as an iconic visual distinction between the two houses.21 All Australian parliaments, with the exception of Queensland22 and the territories, are bicameral. Chapter I of the Constitution further provides for the election and duties of members, and matters of general administration. The state and territory parliaments operate in similar fashion to the Commonwealth Parliament, with government forming in the lower house (represented by a premier). Each state and territory parliament has a governor, which is a non-political office responsible for overseeing the constitutional operations of the relevant state or territory.
[1.39]
Two fundamental principles underpin the role of the legislature: representative government and responsible government. The former represents the democratic nature of the lower house: its members are elected by the people through elections. All lower houses at federal and state level are democratically elected. The latter is a classic feature of the Westminster model of government and dictates that the executive is drawn from and accountable to the legislature and, indirectly, to the people of Australia. By extension, the executive (that is, the government) must retain the confidence of the House of
Representatives and, of course, the citizenry. If the government loses support and fails to attain a majority in the lower house, it [page 14] cedes power.23 The government is thus bound to exercise its power in accordance with the will of the people and is held accountable during its tenure through such methods as parliamentary questions, free press, investigative committees, and debates on legislation.
The executive [1.40]
The second arm of government, the executive, is the subject of Ch II of the Constitution. Essentially, the executive describes the government and extends to specific officers and institutions of the Commonwealth. The Constitution vests the executive power of the Commonwealth in the Queen and stipulates that this power is exercisable by the Governor-General,24 who is also the commander-inchief of the Commonwealth’s naval and military forces.25 The Governor-General appoints ministers of state (including the prime minister) on the government’s recommendation,26 who subsequently advise the Governor-General on matters of government.27 Together with the prime minister, the more important members of government form the Cabinet, the members of which are each responsible for a portfolio covering specific areas such as finance, tourism, immigration, health and education. The Cabinet cannot consist of more than 30 members28 and is the principal decision-making group within the executive. The executive also performs its functions through government departments, with senior ministers often heading these departments. These departments represent, and sometimes exercise the powers of, the executive.
The judiciary
[1.41]
The third arm of government, the judiciary, incorporates the various courts which operate within Australia to resolve legal disputes. Chapter III of the Constitution establishes the federal court structure,29 including the High Court of Australia, which is the highest court in the land. The High Court exercises both original30 and appellate31 jurisdiction, meaning it can hear certain cases in the first instance (such as those involving interpretation of the Constitution or interstate disputes) and also entertain appeals from courts lower in the judicial hierarchy. Numerous courts operate in a tiered structure of superiority at the state level. [page 15]
[1.42]
A notable feature of the judiciary is that it is totally independent of the other two arms of government (that is, the legislature and the executive). This means it is totally free from political interference or influence and can administer justice impartially in accordance with the rule of law and the principles of natural justice.32 The exercise of judicial power is vital ‘to decide controversies between [a sovereign authority’s] subjects, or between itself and its subjects, whether the rights relate to life, liberty or property’.33
Federalism and the division of powers [1.43]
Given that it is a federal state, Australia’s constitutional power is shared between two levels of government: the federal (Commonwealth) government based in Canberra, and the six state governments. All of these governments are autonomous, unlike the governments of the Northern Territory and the Australian Capital Territory, which are, to a large extent, under the control of the federal government. Section 122 of the Constitution vests plenary power over the territories in the Commonwealth, meaning it can create or abolish their laws and even abolish them as territories! For the most part, however, the territory governments are permitted to operate freely and are rarely interfered with.34
[1.44]
The legislative powers of the Federal Parliament, known as ‘heads of power’, are outlined in s 51 of the Constitution. The Commonwealth has the power to make laws ‘for the peace, order and good government’ with respect to a variety of things under this section, including: trade and commerce, and interstate trade: s 51(1); currency, coinage and legal tender: s 51(xii); copyrights, patents, designs and trademarks: s 51(vxiii); foreign corporations and domestic trading or financial corporations: s 51(xx); marriage: s 51(xxi); immigration and emigration: s 51(xxvii); and external affairs: s 51(xxix). [page 16]
[1.45]
Many of the powers outlined in s 51 are held concurrently; that is, the states also have limited authority to legislate on the same matters, with any inconsistencies being cured through the application of s 109.35 The High Court is vested with the responsibility of determining when the legislature has acted outside the scope of its power. Legislation or other actions deemed to be outside this scope are held to be ultra vires (‘beyond the power’).
[1.46]
Other powers are exclusive to the Commonwealth, such as the power to impose customs and excise duties (s 90) and making laws with respect to public service departments (s 52(ii)) and the territories (s 122).
[1.47]
Those powers not stipulated in the Constitution as belonging to the Commonwealth remain with the states and are known as residual powers.
Sources of law [1.48]
There are two primary sources of law in Australia: statute and case law.
Statute [1.49]
Statute, also referred to as legislation, relates to law passed by parliament. Once made, a law remains in force until it is repealed. The process of adding, changing or repealing laws involves several steps.
[1.50]
As a starting point, an Act will be introduced by a member of parliament in the form of a ‘Bill’ drafted by parliamentary counsel. Usually, the bill is introduced by a member of the lower house; at the Commonwealth level this is the House of Representatives, and at the state/territory level this is the House of Assembly or Legislative Assembly. The purpose of the Bill may be to create new law, to repeal old law or to codify existing laws (the process of collating various laws addressing a similar subject matter to create one unified Act). A Bill will then undergo three ‘readings’.
[1.51]
The first reading introduces the bill to the parliament. The draft legislation is accompanied by an explanatory memorandum, which explains the object of the bill and outlines the provisions. The second reading occurs shortly after the first and provides the minister introducing the Bill with an opportunity to speak to parliamentary members about the rationale of the Bill and explain the importance of particular sections of the proposed legislation. The Bill is then debated and voted on by members of the house. If the majority agree to the Bill in principle, it progresses to the next stage where each provision is scrutinised. Amendments are then suggested and debated. The third reading stage is a formality and signifies the passing of the Bill by the house. [page 17]
[1.52]
From here, the Bill is referred to the upper house36 and undergoes the same process involving the three reading stages. When passed by both houses, the Bill receives royal assent by the Governor-General (Commonwealth) or state governor (states) and is publicised in the Commonwealth or state/territory Government Gazette. At this point in time the Bill evolves into an Act and becomes part of Australian law. It comes into force on the date specified in the Act. Where it is not specified, the Act commences 28 days after assent in New South Wales and Western Australia; 14 days after assent in Tasmania; on the day following publication in the Government Gazette in the Australian Capital Territory; and on the date of assent in Queensland, the Northern Territory and South Australia.37 In Victoria, unless otherwise provided in the relevant Act, it commences on the day it is to be proclaimed or on the first anniversary of the Act’s passage, whichever is the earlier.38 Figure 1.1 shows the passage of legislation through the two houses.
Delegated statute [1.53]
Parliament is able to confer upon the executive branch of government the authority to enact subordinate legislation, which is also referred to as delegated statute, secondary legislation or delegated legislation. This assignment of power supports parliamentary efficiency, effectively reducing pressure on parliamentary time. Delegated statute may take the form of regulations, statutory rules or by-laws.
[1.54]
An Act may confer authority upon the Governor-General (who acts on the advice of ministers), a state governor (who acts on the advice of the Executive Council) or another authority, such as a government department or local council. Regulations are the most common form of subordinate legislation, providing a detailed framework which specifies how the law will be carried out and enforced. Parliament commonly names the authority responsible for creating subordinate legislation towards the end of an Act. For example, s 202(1) of the Return to Work Act 2014 (SA) provides: The Governor may make such regulations as are contemplated by this Act, or as are
necessary or expedient for the purposes of this Act. [1.55]
This provision means that the Governor of South Australia, acting on the advice of the Executive Council, has delegated authority to create regulations which support the administration of the Return to Work Act 2014.39 The Return to Work Regulations [page 18] were enacted in 2015 and provide details on matters encompassed in the Act, such as return-to-work plans, employer insurance registration and the dispute-resolution mechanism (which replaces the former workers compensation scheme).
Figure 1.1: Passage of legislation through both houses
[page 19]
Case law [1.56]
The term ‘case law’ refers to law made by judges or, more specifically, law embodied in the legal principles developed by judges on a case by case basis. Case law is synonymous with the term ‘common law’ when referring to principles of law emerging from decisions by judges. Common law as a source of law is therefore distinct from statute. In order to prevent arbitrary decision-making, courts adhere to the principle stare decisis, also known as the doctrine of precedent, the historical development of which is discussed at [1.22], above. Essentially, lower courts are bound by the legal reasoning provided by higher courts of the same hierarchy when considering the same legal issue with similar facts. Decisions made in the superior courts are published systematically in law reports, fostering consistency in the development of case law. The legal reasoning which forms the rationale of a decision is referred to as the ratio decidendi. This is to be distinguished from other parts of a judgment which do not specifically relate to the legal rationale of a decision. Comments made by a judge ‘in passing’ are referred to as obiter dicta.
[1.57]
There are two distinct court hierarchies in Australia: federal and state. Each hierarchy is ordered in a particular way to enable a matter to be appealed from lower to intermediate to the superior courts. The High Court of Australia is the highest court of appeal from both federal and state court systems. The courts within the federal court hierarchy include the Federal Circuit Court,40 Federal Court, Family Court and the High Court. Matters heard within this court system relate to federal law, such as administrative, bankruptcy, family, migration, intellectual property, taxation, native title and competition law. As discussed at [1.41], above, as well as being the highest appellate court in the hierarchy, the High Court also has original jurisdiction to hear a range of matters prescribed under ss 75 and 76 of the Constitution, including constitutional matters and disputes arising under any treaty. The federal court system is depicted in Figure 1.2.
[1.58]
Each state has a similar ordering of courts which include lower,
intermediate and superior courts. The lowest court in each state hierarchy is the Magistrates Court or Local Court. This court is conferred with summary jurisdiction to hear minor criminal matters (non-indictable summary offences), small claims (each state differs in regards to the maximum monetary amount recoverable) and less serious civil cases (there is some variation between the states as to the maximum monetary amount an applicant can claim). The District Courts or County Court (as in the case of Victoria) represent intermediate courts and, as such, they have original jurisdiction to hear more serious criminal matters than those which [page 20]
Figure 1.2: Federal Court hierarchy
originate in a local court (indictable offences except treason or murder) and civil matters where the monetary amount claimed exceeds the jurisdiction of the local court. They also have appellate jurisdiction to hear matters on appeal from a local court.41 A state’s superior court is the Supreme Court which has original jurisdiction to hear very serious criminal matters and civil matters where the monetary amount exceeds the amount claimable at the intermediate court level. The Supreme Court has appellate jurisdiction to hear cases appealed from local or intermediate courts. Matters heard in the
Supreme Court by a single judge can also be appealed. Such matters are heard by a Full Court (or Full Bench) which consists of three judges. [1.59]
Courts are bound only by the legal reasoning propounded by superior courts of the same court hierarchy. For example, the District Court of South Australia is bound only by South Australian Supreme Court decisions. Supreme Court decisions on the same issue and similar facts from other jurisdictions only have persuasive value, even where there is a lack of South Australian precedent on the issue. Stated differently, a Victorian Supreme Court decision on a like case may influence how the South Australian District Court formulates its legal reasoning, but it will not bind courts comprising the South Australian hierarchy. In this example, the District Court decision may be appealed to the Supreme Court of South Australia. The decision delivered by the superior court would then act as binding precedent. Previous decisions of the same court are also merely persuasive.
[1.60]
Similarly, the decision of one intermediate appellate court in Australia is merely persuasive upon the decision of another such court. For example, the Tasmanian Supreme Court is not bound by the decisions of the Western Australia Supreme [page 21] Court, though these decisions may influence the former’s reasoning processes.42 This provides some flexibility in the development of the common law. A court’s decision to diverge from the legal reasoning delivered by the same court on the same point of law may be considered necessary by virtue of specific facts which distinguish the case at hand from previous like cases or be based on changing community values or on the rationale that the previous decision was decided wrongly.
[1.61]
The High Court is the apex court of appeal in a state court system. Special leave is required to have a matter heard by the High Court.
Only a small percentage of cases are granted special leave. Successful applications normally relate to matters where the current law is unclear, uncertain or outdated (for example, where social codes or expectations have changed). A High Court decision provides all state courts with binding precent. The state court system is depicted in Figure 1.3.
Figure 1.3: State Court hierarchy
Other meanings of the term ‘common law’ [1.62]
This book generally refers to the term ‘common law’ as a source of law: case law as distinct from statute. There are, however, other meanings associated with this term. [page 22]
[1.63]
Common law may also be used to describe a division of law. In this sense, common law lies in contradistinction to ‘equity’, the historical development of which was discussed earlier at [1.25]–[1.27], above. Maxims underpinning the principles of equity include: ‘He who comes into equity must come with clean hands’ and ‘Equity sees that as done what ought to be done.’ With the notions of even-handedness and fairness forming the basis of equity, this division of judge-made law remedied unjust behaviour (for example, unconscionable conduct), recognised new relationships (for example, trusts) and, more generally, often provided a workable outcome for a plaintiff who was left without a remedy as a result of the rigidities of the common law. Equity has had a significant impact on the development of contract law, most profoundly by providing for a range of contractual remedies which discourage unfair and unconscionable behaviour in the business context. This, in turn, supports certainty in business and discourages the exploitation of contractual relationships. Australian jurisdictions have followed the English approach; Australian courts apply both common law and equitable principles in the same proceeding. In instances where there is a conflict of the rules, equity prevails.43
[1.64]
The term ‘common law’ may also be used to describe a system of law. In this context, the common law refers to the legal system of England (case law and statute) also adopted by those countries colonised by the British, such as Australia, India, Canada and New Zealand. Common law as a system of law is distinguishable from the civil legal system of Europe, which is based on Roman law and is therefore largely codified.
Classifications of law Public/private [1.65]
One way of classifying law is to draw a distinction between public and private law. The former encompasses areas of law which reflect a relationship between the state and its citizens. These areas include
administrative, criminal, competition, tax, environmental and industrial law. On the other hand, private law includes areas of law concerned with disputes between individuals or between individuals and organisations. Contract law falls within the scope of private law, as does property, family and tort law, to name just a few. [page 23]
Civil/criminal law [1.66]
Another way of thinking about classifying law is to differentiate between civil and criminal proceedings.
[1.67]
Civil proceedings are actions instigated by an individual or organisation referred to as a plaintiff. A claim is based upon enforcement of a legal right. The party against whom the claim is brought is referred to as a defendant. The standard of proof required in a civil action is based on substantiating a claim on the balance of probabilities. This threshold is different in relation to criminal proceedings. The orders made in a civil court depend upon the nature of the particular claim. Where, for example, a plaintiff has sustained loss or injury, compensation may be ordered. Ultimately, civil proceedings provide a plaintiff with the opportunity to seek legal redress.
[1.68]
Criminal cases are instigated by the state, either by the police (where an accused is charged with a summary offence) or by state/federal prosecutors (where an accused is charged with an indictable offence). An accused is referred to as a defendant. In criminal matters, the standard of proof involves a higher threshold than in civil cases; the prosecution must prove their case beyond reasonable doubt. A defendant is innocent until found guilty. Where an accused is proven guilty, he or she will be sentenced. Criminal punishment can take various forms (including imprisonment, a suspended sentence, a good behaviour bond, a community service order or a monetary fine) and is dependent on various factors, such as the nature and severity of the
crime, the accused’s age and prior criminal history. Criminal proceedings provide the state with a legal process for convicting and sentencing an individual in relation to conduct deemed to be criminal.
Contract law [1.69]
With a basic understanding of the central features of the Australian legal system, it becomes necessary to consider the law of contract and its place within this system. We first attempt to define the term ‘contract’ before briefly exploring the historical development of this field of law. This discussion then informs the next part of the chapter, which explores the relationship between contract law and business.
Defining ‘contract’ [1.70]
Defining the term ‘contract’ is not an easy task. There is no consensus in Western jurisprudence as to what a ‘contract’ actually is. The word itself derives from the Latin words con (from the earlier com, meaning ‘together’) and trahere (from trahō, meaning ‘pull’ or ‘draw’).44 Hence con-trahere, later Anglicised as ‘contract’, metaphorically describes the physical process of pulling or drawing together [page 24] information. The difficulty in establishing a satisfactory definition fundamentally stems from the very nature of a contract; the concept not only refers to the bargain manifested between the parties, but to the physical expression or evidence of this bargain (the document). Sometimes, no document is involved at all and the contract is entirely verbal. In other cases, it may be both verbal and written. In essence, then, the contract in whatever form might be most accurately described as an agreement or set of promises made between parties which carry the force of the law.45
[1.71]
So, when will the law enforce such an agreement? Ultimately the answer depends upon three things: 1.
who is making the exchange;
2.
what they are exchanging; and
3.
what they intended to accomplish through the exchange.
[1.72]
When two or more legally capable parties have exchanged (or promised to exchange) something of sufficient legal value in clear and comprehensible terms, and objectively demonstrated an intention for the law to enforce the rights and obligations conferred through this agreement, the arrangement will metamorphose into a contract.
[1.73]
It is therefore important to distinguish between contracts and gifts or social arrangements, neither of which possess all of these features and which are therefore not contracts. As we discuss in Chapter 2, a gift is purely gratuitous in that consideration only moves from one party; nothing is returned by the recipient (except perhaps gratitude!) As such, it lacks the characteristic of a bargained-for exchange, which is essential to the element of consideration and therefore is not contractual.46 Similarly, a casual bet between friends or an agreement to meet for dinner is a social arrangement in which none of the parties involved will (typically) expect legal consequences to attach to their actions.47 Sometimes, it can be difficult to determine when an ostensibly domestic or social arrangement has become contractual, particularly given the law of contract’s emphasis upon [page 25] objectivity in assessing the outward intentions of the parties.48 Nonetheless, ‘contract’ is a special descriptor for an arrangement comprising specific common law elements which have been established over centuries.
[1.74]
We turn now to briefly considering the history of contract law.
Brief history of development [1.75]
Contract law as we know it today emerged out of medieval England in response to a need for a more coherent method of resolving disputes over breached agreements. By the 13th century, the writ of covenant had developed as an action utilised by plaintiffs who sought performance of a breached promise made under seal (typically with respect to rights concerning land). This writ was used to recover unquantified sums of money or seek specific performance orders. Application was made to local sheriffs or through the various courts which had been established by this stage. Where a party sought a specific sum of money, the corresponding writ of debt was used (or the subsidiary writ of detinue in the case of tangible goods or their value). The creditor seeking to recover a debt would have to prove that the agreement adhered to the doctrine of quid pro quo;49 in other words, that the debtor had received a material benefit for which the creditor had not yet received due payment. The writ of debt was particularly beneficial as it was also available to recover sums of money promised under informal arrangements; that is, agreements not under seal.
[1.76]
Throughout the 14th and 15th centuries, the action of assumpsit came into prominence as the principal mechanism for remedying contractual and tortious wrongs. The reason for this lies in the shortfalls of its predecessors: the writ of covenant was unavailable if the relevant agreement was not in deed form whereas the writ of debt could only be utilised where a specific sum or money was sought. Assumpsit provided greater relief, though it too was somewhat inflexible given that it did not apply to situations of nonfeasance, that is, where a party merely failed to do something they were legally obliged to do. Rather, the writ was restricted to malfeasance, that is, where a party had done something imperfectly. As Ferson explains, this gave rise to a significant injustice in that the early courts:50 … could not amerce one who merely omitted to perform his simple agreement; there was no form of action to afford such relief. It was necessary, in order to recover on a simple agreement, that the facts of the case be warped into a shape that would fit an available form of action.
[page 26] [1.77]
This injustice was finally cured in Pickering v Thoroughgood51 and the action in assumpsit was rendered applicable to cases of nonfeasance. Seventy years later, it was recognised52 as a single form of action available to remedy the breach of any informal agreements and evolved into a general action for ‘breach of promise’. This action developed considerably throughout the 17th and 18th centuries as commercial law grew and ‘the essentially one-sided or unilateral concept of an actionable promise was supplanted by the more complex conception of an actionable contract, a bilateral transaction’.53
[1.78]
The growth of popular political and economic ideologies, particularly individualism, economic liberalism and laissez-faire,54 accelerated during the 19th century and coincided with a notable scholarly interest in systemisation. Drawing on Romanist traditions, many prominent academics and legal philosophers of the time, such as Sir Frederick Pollock and Sir William Anson, sought to assimilate the disorderly body of contract principles which had emerged from the English courts and create a coherent framework of rules through which legal issues could be confidently resolved.55 It is to these scholars, Atiyah notes, ‘that we owe much of the power of the concepts of the law of contract; the belief in the objective reality of these concepts — offer, acceptance, consideration, and so forth — if it was not created, was certainly significantly assisted by these writers’.56 Today, the basic theories and elements of contract law are relatively settled. We consider the essential elements of contract law in Chapter 2.
Nexus between law and business [1.79]
In evaluating the overarching importance of contract law to our legal system, it is important to recognise the intrinsic connection between law and business. A legal framework places constraints and obligations on business operations and regulates commercial
transactions in order to maintain a stable economic environment. The law thus has a fundamental role in minimising uncertainty [page 27] in the commercial context. Contract law has specific relevance to business because this area of law regulates the exchange and performance of promises. The performance of legally binding agreements represents the cornerstone of business.
Risk [1.80]
‘Risk’ is a concept which is difficult to define. Interpretations are dependent on context. A practical definition utilised by the Australian Government is ‘the effect of uncertainty on objectives’.57
[1.81]
In line with this characterisation of risk, commercial risk relates to the effect of uncertainty on business objectives. Commercial risks may be external or internal. External risks are macro-level risks and relate to factors outside the direct control of a business. Such risks include changes to the legal framework (laws) governing business, the occurrence of a natural disaster or environmental factors such as climate change. Each of these may affect business adversely if contingency measures, such as risk management strategies, are not in place. Internal risks are micro-level risks and relate to those risks a business has the ability to influence. Risks which fall into this category include those associated with workplace safety, resourcing, financial health of the business, staffing and legal issues.
[1.82]
Having a basic understanding of laws which govern business activity enables business professionals to identify legal issues and respond in a manner which avoids the internal risk or, at least, minimises the risk posed. Having some knowledge of how law regulates significant aspects of business also empowers a professional to be able to recognise when to seek expert legal advice. This is why the study of
law becomes very relevant for individuals in business-related disciplines, including commerce, economics, accounting, engineering and construction. The ‘best’ responses to issues which have a legal dimension are based on informed decisions — decisions which have the least-adverse effect on the business. [1.83]
As contracts form the foundation of commercial transactions, this area of law becomes a natural focal point when studying business-related law. Contract law as a body of law minimises external risks to business by providing a legal framework for the formation, interpretation and enforcement of contracts. Businesses are afforded certainty by virtue of consistent application of legal principles.58 [page 28] Understanding fundamental contract law themes can also assist a business professional manage internal risks by enabling the professional to identify potential issues which may arise in a contractual relationship. For example: Where an agreement between parties lacks one of the essential elements of contract formation, the person relying on the agreement may not be able to enforce the promise. A business professional who understands which components of an agreement make it legally enforceable, manages risk by exchanging a promise which can be enforced legally if it is not honoured. Businesses rely on the performance of contracts; poor or non-performance often results in delay, which amounts to financial loss for a business. The construction of a contract signifies how parties have agreed to allocate the risk. Terms of a contract represent obligations which are legally enforceable. Parties who are aware of how contracts are interpreted in the eyes of the law, will ensure the terms of the contract are incorporated or varied in a manner which minimises risk. A business professional able to identify factors which vitiate a
contract minimises the risk of incurring loss. For example, a professional who is able to recognise that a contract formed on the basis of a mistake regarding the subject matter of the contract, will be able to make an informed decision to take steps to declare the contract void in order to minimise delay and associated costs. Being able to identify issues relating to termination of a contract also minimises risk for business. For example, a business professional who is able to identify when a term of the contract has been breached and is able to recognise the type of term breached, will be able to make an informed choice to either terminate the contract and/or pursue damages for loss sustained. A basic understanding of the law in this area facilitates informed business decision-making.
Ethics [1.84]
Observing business ethics can play a fundamental role in internal risk management and is a useful theme individuals should be familiar with before entering the workplace. Business ethics can generally be understood as moral standards which have application in a commercial context. Inherent in business ethics lie notions of fairness and honesty. Businesses who act unfairly (for example, engage in unfair business practices in order to capture a greater share of the market), and therefore act unethically, are less likely to be trusted by other businesses and consumers. A lack of trust diminishes business opportunities. Parties may be less willing to enter into contractual relationships with businesses that have a reputation as being dishonest; this could have negative financial implications. Consumers may also be less willing to purchase goods or services from businesses who act unethically and this too could have a negative impact on the business, as it loses a share of the market. Decisions made by business [page 29]
professionals should therefore be informed by ethics in order to minimise risk of loss of reputation, loss of consumer confidence and loss of confidence among staff (including management) within the organisation itself. [1.85]
Many laws encompass moral standards. Consider, for example, the legal principles surrounding breach of contract. The common law offers an aggrieved party the opportunity to be compensated for loss sustained as a result of another party’s failure to perform the contract as agreed. Justness is inherent in the legal outcome. The development of equity as a body of law supplements the common law in areas where common law principles do not offer a fair result. For instance, equity may intervene where the element of consideration is missing in contract formation. At common law, the contract would be unenforceable. However, in certain circumstances, the doctrine of promissory estoppel may provide equitable relief (see [4.158]); relief that provides an aggrieved party with a workable, just outcome. Legislation, too, often encompasses the notion of fairness. The Australian Consumer Law provides us with a useful example of how statute provides remedies for dishonest and unfair conduct between businesses and between business and consumers: see Chapter 6.
[1.86]
Possessing ethical sensitivity when making business decisions minimises the risk of violating laws. Not all laws, however, share a nexus with ethics. Some laws, such as procedural laws, may have no inherent connection to morality at all — they simply exist to facilitate business efficacy. Business ethics ought to guide decision-making even when laws do not impose moral standards. Decisions which are based on building trust (by acting honestly and fairly) encourage sustainable business relationships between parties.
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J Harris and C Croese, Contract Law in Context, Wolters Kluwer CCH, Sydney, 2015, p vii. C Mitchell, Contract Law and Contract Practice: Bridging the Gap Between Legal Reasoning and Commercial Expectation, Hart Publishing, Oxford, UK, 2013, p 2. There is a large body of empirical literature on this point. See, for example: S Macaulay, ‘Non-Contractual Relations in Business: A Preliminary Study’ (1963) 28(1) American Sociological Review 55; J J White, ‘Contract Law in Modern Commercial Transactions, An Artefact of Twentieth Century Business Life?’ (1982) 22 Washburn Law Journal 1; T M Palay, ‘Comparative Institutional Economics: The
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4 5 6 7 8 9 10
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18 19 20
Governance of Rail Freight Contracting’ (1984) 13 Journal of Legal Studies 265; L Bernstein, ‘Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry’ (1992) 21(1) Journal of Legal Studies 115. See, for example: M Weir, ‘The Dissonance Between Law School Academics and Practitioners — the Why, the How, the Where to Now’ (1993) 9 Queensland University of Technology Law Journal 143; K Hall, M Townes O’Brien and S Tang, ‘Developing a Professional Identity in Law School: A View from Australia’ (2010) 4 Phoenix Law Review 19; A M Johnson Jr, ‘Think Like a Lawyer, Work Like a Machine: The Dissonance Between Law School and Law Practice’ (1991) 64(5) Southern California Law Review 1231; H T Edwards, ‘The Growing Disjunction Between Legal Education and the Legal Profession’ (1992) 91(1) Michigan Law Review 34. P S Atiyah, ‘Contracts, Promises and the Law of Obligations’ in P S Atiyah (ed), Essays on Contract, Clarendon Press, Oxford, UK, 1986, p 19. E McKendrick, Contract Law, 11th ed, Palgrave Macmillan, UK, 2015, p 2. G Gilmore, The Death of Contract, Ohio State University Press, Columbus, OH, 1974, p 87. G Gilmore, The Death of Contract, Ohio State University Press, Columbus, OH, 1974, p 90. Insurance Contracts Act 1984 (Cth) s 13(1). See: Commercial Bank of Australia v Amadio (1983) 151 CLR 447; 46 ALR 402. Contained in Sch 2 of the Competition and Consumer Act 2010 (Cth). Section 20(1) defines the phrase ‘unconscionable’ in this context ‘within the meaning of the unwritten law from time to time’. See, further, Chapter 6. Residential Tenancies Act 1997 (ACT) ss 71(1)(c) and 71E(1)(d); Residential Tenancies Act 2010 (NSW) s 50; Residential Tenancies Act 1999 (NT) s 65; Residential Tenancies and Rooming Accommodation Act 2008 (Qld) ss 183 and 249; Residential Tenancies Act 1995 (SA) s 65; Residential Tenancy Act 1997 (Tas) s 55; Residential Tenancies Act 1997 (Vic) s 67; Residential Tenancies Act 1987 (WA) ss 44 and 59E. H L A Hart, The Concept of Law, 2nd ed, Clarendon Press, Oxford, UK, 1994, p 1. Macquarie Dictionary, 5th ed, Macquarie Dictionary Publishers, Sydney, 2009, p 947. A V Dicey, Introduction to the Study of the Law of the Constitution, 3rd ed, London and Macmillan, London, 1889. ‘[I]t has been recognized that in the context of administrative decision-making it is more appropriate to speak of a duty to act fairly or to accord procedural fairness. This is because the expression “natural justice” has been associated, perhaps too closely associated, with procedures followed by courts of law’: Kioa v West (1985) 159 CLR 550 at 583; 62 ALR 321 at 346 (Mason J). C Cooke, R Creyke, R Geddes, D Hamer and T Taylor, Laying Down the Law, 9th ed, LexisNexis Butterworths, Australia, 2015, p 23. In a famous case of 1615, Lord Ellesmere LC described the role of the Court of Chancery and equity generally as facilitating justice by way of mollifying the extremity of the law through ‘correcting man’s conscience’. His Lordship acknowledged that both the common law and equity were concerned with doing right and attaining justice, but recognised the marked differences in their effects and operations: The Earl of Oxford’s Case in Chancery (1615) Mich 13 Jac 1 at 6–7, 10; 21 ER 485 at 486–7. M Evans, Equity and Trusts, 3rd ed, LexisNexis Butterworths, Australia, 2012, p 4. We now know this day as Australia Day. Sir William Blackstone, Commentaries on the Laws of England, 1765, reproduced in full by Garland Publishing, New York, 1978, vol 1, 108.
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Interestingly, the colours of the houses are said to represent the Australian landscape, with greens and reds colouring many Australian native plant species (for example, eucalypts and wattle trees). Queensland abolished its upper house in 1922. It is therefore a unicameral (one house) parliament. This principle has no application at upper house level. Constitution, s 61. Above, s 68. Above, n 24, s 64. Above, n 24, s 62. Ministers of State Act 1952 (Cth) s 4. Constitution, s 71. Above, ss 75 and 76. Above, n 29, s 73. ‘The reason why judicial independence is of such public importance is that a free society exists so long as it is governed by the rule of law — the rule which binds governors and the governed, administered impartially and treating equally all those who seek its remedies or against whom its remedies are sought. However vaguely it may be perceived, however unarticulated may be the thought, there is an aspiration in the hearts of all men and women for the rule of law’: Gerard Brennan, ‘Judicial Independence’ (Speech delivered at Annual Symposium of the Australian Judicial Conference, Canberra, 2 November 1996) 2, cited in R Ananian-Welsh and G Williams, ‘Judicial Independence from the Executive: A First-Principles Review of the Australian Cases’ (2014) 40(3) Monash University Law Review 593 at 595. Huddart Parker v Moorehead (1909) 8 CLR 330 at 357; 15 ALR 241; [1909] HCA 36 (Griffiths CJ). A notable exception occurred in 1997 when the Commonwealth overturned the Rights of the Terminally Ill Act 1995 (NT), which legalised voluntary euthanasia. More recently, the Marriage Equality (Same Sex) Act 2013 (ACT), which permitted same-sex couples to wed contrary to the prohibition in the Marriage Act 1961 (Cth), was overturned. This section states: ‘When a law of a State is inconsistent with a law of the Commonwealth, the latter shall prevail, and the former shall, to the extent of the inconsistency, be invalid.’ This is known as the Senate at the Commonwealth level and the Legislative Council in New South Wales, South Australia, Tasmania, Victoria and Western Australia. As mentioned earlier, the parliaments of Queensland and the territories are unicameral and consist solely of a lower house known as the Legislative Assembly. Legislation Act 2001 (ACT) ss 28, 30, 73(1); Interpretation Act 1987 (NSW) s 23(1); Interpretation Act 1978 (NT) s 6(1); Acts Interpretation Act 1954 (Qld) s 15A; Acts Interpretation Act 1915 (SA) s 7(1); Acts Interpretation Act 1931 (Tas) s (3); Interpretation Act 1984 (WA) s 20(2). Interpretation of Legislation Act 1984 (Vic) s 10A(3), (4). Section 202(2) of the Return to Work Act 2014 (SA) includes examples of the types of regulations the Minister may consider. The Federal Circuit Court was formerly known as the Federal Magistrates Court (the name change eventuated in April 2013). It is the largest federal court, exercising concurrent jurisdiction with the Federal Court and the Family Court. It offers a less formal alternative to litigation in the superior courts. The Northern Territory and the Australian Capital Territory do not have intermediate courts in their hierarchy. Appeals are heard in the Supreme Court in these jurisdictions.
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47 48 49 50 51 52 53 54
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In Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at 151–2; 236 ALR 209 at 252–3, however, the High Court passed comment on the persuasive value of a decision of an intermediate court of appeal vis-à-vis other such courts. In the High Court’s opinion, given that there is a single common law of Australia, intermediate appellate courts should not depart from other such courts’ rulings on the common law unless convinced they are plainly wrong. This principle was famously expressed in The Earl of Oxford’s Case in Chancery (1615) Mich. 13 Jac. 1; 21 ER 485. It was later enshrined in the English Judicature Act of 1873 and remains in force today. It has also been codified through legislation in all Australian jurisdictions: Supreme Court Act 1933 (ACT) s 33; Supreme Court Act 1970 (NSW) ss 57–63; Law Reform (Law and Equity) Act 1972 (NSW) s 5; Supreme Court Act 1979 (NT) s 68; Supreme Court Act 1995 (Qld) s 249; Supreme Court Act 1935 (SA) s 28; Supreme Court Civil Procedure Act 1932 (Tas) ss 10–11; Supreme Court Act 1986 (Vic) s 29; Supreme Court Act 1935 (WA) ss 24–25. Oxford Latin Dictionary, Clarendon Press, Oxford, UK, 1982, pp 358, 383. See, for example: Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd [1915] AC 847 at 855; Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 at 105; 187 ALR 92; B Coote, ‘The Essence of Contract: Part 1’ (1988) 1 Journal of Contract Law 91 at 94–7. The Restatement (Second) of Contracts 1981 (US), §1 defines a contract as ‘a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty’. An exception to this rule is a promise of a gift recorded in a ‘deed’, which is a special form of document historically referred to as a ‘document under seal’ (so called because the ‘sealing’ of the document was traditionally achieved by dripping molten wax onto the paper and then imprinting a specific insignia into it; nowadays, it is normally just stamped). If such an arrangement, although lacking consideration, is recorded in a deed, it is contractually enforceable: Pinnel’s Case (1601) 5 Co Rep 117a, 117b; 77 ER 237 at 238. See further Chapter 2. The doctrine of promissory estoppel, among others, may serve to render a seemingly unenforceable promise contractual. See further Chapter 2. See: Merritt v Merritt [1970] 1 WLR 1211 (discussed in Chapter 2). ‘One thing in exchange for another.’ M Ferson, The Rational Basis of Contracts and Related Problems in Legal Analysis, Foundation Press, Brooklyn, NY, 1949, p 124. (1532) Spelman’s Reports, vol 1, 4 (reproduced in J H Baker, The Reports of Sir John Spelman, Selden Society, London, UK, 1979). Slade’s Case (1602) 4 Co Rep 91a; 76 ER 1072. N Seddon, R Bigwood and M Ellinghaus, Cheshire and Fifoot: Law of Contract, 10th ed, LexisNexis Butterworths, Australia, 2012, p 1267. Williston describes laissez faire as ‘a passionate exhortation to allow the free development of the individual, and to permit production and trade to follow their natural channels unimpeded. It was a cry for freedom’: S Williston, ‘Freedom of Contract’ (1921) 6(4) Cornell Law Quarterly 365 at 366. P S Atiyah, The Rise and Fall of Freedom of Contract, Oxford University Press, Oxford, UK, 1979, p 682. Much inspiration was drawn from Joseph Powell’s influential work, An Essay upon the Law of Contracts and Agreements of 1790, which sought to identify the rules upon which the decisions of the courts were based, and was widely credited as having achieved this objective. P S Atiyah, The Rise and Fall of Freedom of Contract, Oxford University Press, 1979, p 683. Standards Australia, AS/NZS ISO 31000:2009 Risk Management — Principles and Guidelines at 2.1. This definition is modelled on one provided by the International Organization for
58
Standardization (ISO), an independent organisation responsible for developing voluntary international standards: ISO Guide 73:2009 Risk Management — Vocabulary at 1.1. When laws change, a business should have risk management strategies in place to ensure the business is able to operate within the bounds of new or amended laws. Being involved in industry associations may be one way a business can keep informed about changes to the law in order to minimise risk of non-compliance (an internal risk).
[page 31]
CHAPTER 2
Contract Formation
Key Ideas By the end of this chapter you should be able to identify: ▶
classification of contracts
▶
elements of a contract – offer and acceptance (agreement) – consideration – intention to create legal relations – certainty and completeness of terms
[page 32]
Introduction [2.1]
Discussions surrounding contract formation necessarily require reference to four essential components of a contract, namely: offer and acceptance (sometimes simply referred to as agreement), consideration, intention to create legal relations, and certainty and completeness of terms. Prima facie, where any one of these integral components cannot be established, parties will not have struck a legally binding bargain. This chapter considers each aspect of contract formation in turn, referring to applicable precedent on key points of law. Furthermore, we consider what these components may ‘look like’ in practice by providing a range of examples relevant to commercial dealings.
Bilateral and unilateral contracts [2.2]
As a prelude to this chapter, it is useful to note that contracts can be classified as being either bilateral or unilateral. The required performance of each party’s contractual obligations is dependent upon whether parties have exchanged promises (in which case the obligations arise upon reaching agreement) or whether only one party has made a promise enforceable upon the performance of a specified act (in which case the only obligations which arise upon agreement are those promised by the promisor). The party making a promise is known as the promisor while the party receiving the promise is known as the promisee. In bilateral contracts, each party is simultaneously a promisor and promisee whereas with unilateral contracts only the party stipulating the specified act of acceptance is the promisor. The party who performs the act is then the promisee for the purposes of contractual formation.
[2.3]
A bilateral contract is formed by an exchange of promises, where an offer is made and accepted. The contractual obligations of both parties remain to be performed at the time the contract is formed; obligations are executory. As Diplock LJ once stated:
Under [bilateral] contracts … each party undertakes to the other party to do or to refrain from doing something, and in the event of his failure to perform his undertaking, the law provides the other party with a remedy.1
[page 33] [2.4]
Bilateral contracts are the most common types of contracts. For example:
A offers to sell B his car for $10,000 and B accepts the offer. Here, A makes B an offer in which he promises to transfer ownership of the car to B in exchange for B’s promise to pay him $10,000. In accepting this offer, B promises to pay A $10,000 in exchange for ownership of the car. At the time the contract is formed (agreement is reached), both parties have to carry out their respective contractual obligations made under the contract.
[2.5]
A unilateral contract involves one party making a promise (offer). This promise is enforceable only once another party has accepted the offer by performing a specified act.2 The promisor (that is, the party making the promise) is then legally obliged to perform his or her side of the bargain; the promisor’s obligation is executory. For example: A places a notice at the local community centre notice board offering anyone who finds his lost pet a reward of $100 upon return of the pet. Here, A is the only party making a promise. He promises to pay anyone who returns his pet $100. The only party who has a contractual obligation to perform the contract is A if B accepts the contract by returning the pet to A. Note, Party B is under no legal obligation to find and return the pet to A.
Party B, who (after seeing the notice) finds the pet accepts A’s offer by carrying out the required act — returning the pet to A. Performance of the act legally entitles B to the $100 reward; A is obligated to pay B the sum upon return of the pet.
[2.6]
With unilateral contracts, ‘the consideration on the part of the offeree is completely executed by the doing of the very thing which constitutes acceptance of the offer’.3 [page 34]
Offer What is an offer? [2.7]
An offer is characterised by the making of a promise to be legally bound provided that specific terms are accepted. Stated another way, a person who makes an offer (offeror) must indicate a willingness to be bound by the terms of a promise he or she makes to another (offeree), and the latter must be provided with the opportunity to elect between acceptance and rejection.4 Communication of the offer can occur in various ways. It may be conveyed in writing, verbally, by conduct, or even by virtue of a combination of these means. The medium by which an offer can be communicated is not limited and can be made to one or more persons, that is, to the other party, to numerous other parties, or even to the community as a whole, that is, by way of an advertisement.
[2.8]
Most of the time, an offeror will articulate his or her intention clearly and there is no dispute about whether or not a binding offer was made. For example: A (the offeror) communicates to B (the offeree):
I offer to sell you my car for $10,000 (indicates A’s clear (a) readiness to transfer ownership of the car to B provided B pays $10,000). (b) I offer to buy your house for $50,000 (indicates A’s willingness to take ownership of the house provided B agrees to accept $50,000 as the purchase price). (c) A places items taken from the supermarket shelves at the cashier desk for payment (indicates a willingness to pay the stipulated price for the items displayed on the shelves).
[2.9]
However, sometimes the offeror’s state of mind is not as readily apparent. As it is difficult to determine willingness (intention to be bound) subjectively, the courts make an objective assessment as to what the offeror intended and apply an objective test premised on whether a reasonable person placed in the position of the offeree would consider the offeror to have made a binding offer. An offer is to be distinguished from other communications such as a statement which constitutes a supply of information, exaggerated advertisement (puff), or an invitation to treat.
Supply of information [2.10]
A supply of information, such as the specifications of an item or the price at which the owner would be willing to sell the item, is not a contractual offer. Harvey v [page 35] Facey [1893] AC 552 is an old English case which continues to have relevance today when considering subtle differences between the making of an offer and the mere supply of factual information.
Harvey v Facey [1893] AC 552 Brief facts: The defendant, Harvey, wanted to buy from Facey, the plaintiff, a property known as Bumper Hall Pen. A series of communications transpired between Harvey and Facey. Harvey sent a telegram to Facey stating: ‘Will you sell us Bumper Hall Pen? Telegraph lowest cash price’ to which Facey responded ‘Lowest price for Bumper Hall Pen, £900’. Harvey responded and agreed to buy the property for £900 before requesting the transfer documents to be sent to him. Facey refused to proceed with the sale of the property, claiming he had not made an offer. Issue: Was the response from Facey to Harvey an ‘offer’ to sell Bumper Hall Pen for £900, or was the statement merely a supply of factual information (as requested by Harvey)? Conclusion: The court held that this communication reflected a supply of factual information requested rather than the making of an offer. Objectively, Facey’s actual intention did not matter. The court needed only to consider whether a reasonable person in Harvey’s position would regard the communication as a promise to be legally bound. Here, the statement communicated the minimum price at which Facey was willing to sell; it was not reasonable for someone in Harvey’s position to consider Facey’s response to be an offer.
Advertisement [2.11]
The case of Carlill v Carbolic Smoke Ball [1893] 1 QB 256 (see [2.12] below) is another illustration of the judiciary’s objective approach to determining whether a party intended to be legally bound by a promise made. This case involved a unilateral contract. The offer was communicated by way of an advertisement to the public as a whole. It can be applied as case authority that an advertisement containing a promise can be legally binding rather than a puff.
[2.12]
Puff is a term commonly used in relation to advertising. Advertisements take on legal significance where they are statements of fact — which constitute a binding promise. However, where statements are simply exaggerated claims about advertised products that most people would treat as meaningless, those statements are regarded as mere puffs or puffery.5 Ultimately, the objective test [page 36] is applied to determine a party’s intention: the legal question is whether a party intended to be legally bound as viewed by a reasonable person in the position of the promisee.
Carlill v Carbolic Smoke Ball [1893] 1 QB 256 Brief facts: The defendant manufactured a product called ‘The Carbolic Smoke Ball’, claiming that this preparation would prevent a user from contracting the flu when taken in the manner directed. In order to promote this product, the company advertised in several newspapers that they would pay a £100 reward 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’. The defendant deposited £1000 with the Alliance Bank as a sign of their sincerity in the matter. The plaintiff, Mrs Carlill, purchased a smoke ball and used the product as directed. The plaintiff contracted influenza and claimed the £100. Issue: Did Carbolic Smoke Ball make a contractual offer? Conclusion: The English Court of Appeal held that that the plaintiff was entitled to the £100, as per the advertisement. The advertisement constituted an offer which the plaintiff accepted by purchasing the smoke ball and taking it in the manner
directed. As such, the promisor (the defendant) was under a contractual obligation to pay the £100. In considering whether or not an offer had been made, the court noted that an offer could indeed be made to the public as a whole and that, in this instance, the advertisement comprised of a firm promise: a reasonable person in the plaintiff’s position would consider that the manufacturers of the smoke ball intended to be bound by their promise to pay a person who used the smoke ball in accordance with the directions provided. The court commented that the act of depositing £1000 in the Alliance Bank provided strong support the defendants intended to be legally bound; that the advertisement was not exaggerated advertising (puff or puffery). Specifically, ‘the deposit is called in aid by the advertiser as proof of his sincerity in the matter that is, sincerity in the promise to pay this £100 in the event which has been specified’: at 262 per Lindley LJ.
[2.13]
An interesting comparative case is Leonard v Pepsico, Inc 88 F Supp 2d 116 (SDNY 1999). Although a United States case, it is instructive because it demonstrates how an advertisement does not always constitute a binding offer. Often, statements made about an advertised product amount to puffery and are not legally enforceable. [page 37]
Leonard v Pepsico, Inc 88 F Supp 2d 116 (SDNY 1999) Brief facts: The defendants, Pepsico, ran a marketing campaign driven by advertisements promoting the Pepsi drink and offering consumers opportunities to claim prizes: ‘Drink Pepsi — Get Stuff’. A range of merchandise (t-shirts, sunglasses, jackets, caps etc) could be redeemed by customers upon collecting the specified number of ‘Pepsi Points’. Customers could collect the
required points by either buying Pepsi products or by buying the Pepsi Points for 10 cents each. The defendant’s television commercial conveyed how many points were needed to collect a variety of items of Pepsi merchandise. The advertisement ended with a statement that the prize for a customer who collected 7,000,000 Pepsi Points was a Harrier military fighter jet. In reliance of this statement, Leonard acquired 7,000,000 Pepsi Points and claimed the jet which the defendants (unsurprisingly) did not deliver. Issue: Was the advertisement which related to supply of a Harrier Jet in exchange for 7,000,000 Pepsi points an offer (an enforceable promise) or was the statement simply a humorous assertion amounting to a puff (an unenforceable exaggerated statement)? Conclusion: The New York District Court held that Leonard was not entitled to the Harrier Jet. The court accepted the defendant’s argument that the inclusion of a Harrier Jet as one of the ‘prizes’ was clearly intended to inject humour into the advertisement; it was mere puffery. As the court explained (at 128): The implication of the commercial is that Pepsi Stuff merchandise will inject drama and moment into hitherto unexceptional lives. The commercial in this case thus makes the exaggerated claims similar to those of many television advertisements: that by consuming the featured clothing, car, beer, or potato chips, one will become attractive, stylish, desirable, and admired by all. A reasonable viewer would understand such advertisements as mere puffery, not as statements of fact.
Reinforcing this finding was the fact the youth featured in the advertisement was very young and clearly not a pilot, and the Harrier Jet was a militarygrade aircraft designed for combat and obviously not intended for civilian use getting to and from school as depicted in the advertisement: at 128–9.
[2.14]
The New York District Court referred to Carlill v Carbolic Smoke Ball and noted that the defendant there emphasised the earnestness of
their offer by depositing [page 38] the £1000 into the bank. Objectively, this suggested an intention to make a serious offer as opposed to an exaggerated claim for marketing purposes. The defendant in Leonard v Pepsico, Inc, however, did not demonstrate such an intention and no reasonable person in the plaintiff’s position would have considered that they did.
Invitation to treat [2.15]
It is also important to note that some communications are invitations to treat rather than binding offers. An invitation to treat is an indication of a party’s willingness to negotiate entering into a contract. Examples include: display of goods in shops, catalogues and classified advertisements, auctions and tenders.
Display of goods in shops [2.16]
Displaying items in shops invites the customer to enter into a contract with the shop for the sale of the item.6 Practically, most items in shops have a specified price associated with the good and often there is little room to negotiate the terms of the contract (that is, the price) with the sales assistant or cashier, particularly in self-serve shops such as supermarkets.7 A customer makes an offer once the good is presented at the sales desk. The contract is made when the sales person accepts the offer made by the customer to purchase the item and the customer facilitates payment.
Catalogues and classified advertisements [2.17]
Catalogues listing items for sale at specific prices and classified
advertisements printed in newspapers, for example, are also invitations to treat rather than enforceable offers.8 This principle also extends to advertisements posted on the Internet. For example: [page 39]
(a) The local department store catalogue lists a printer priced at $200 This does not constitute an offer. Rather, the communication acts as an invitation for a potential customer to come into the store and make an offer to purchase the printer at the said price (or negotiated price) at the sales desk; it is an invitation for customers reading the catalogue to make the store an offer at the sales desk. (b) A places an advertisement in the classified section of the local newspaper which reads: ‘For Sale — 2015 Lexus RC350 Luxury (used): Offer to sell — $65,000’ This, too, is not an offer, notwithstanding that A has used the word ‘offer’ in the advertisement.9 In the eyes of the law, it is a proposal inviting readers to make an offer for the purchase of the car which A can, in turn, choose to reject or accept. (c) B places an advertisement on a local, free online classified advertisement website indicating that her computer is for sale for $100 This also is an invitation to treat as opposed to a firm offer. Persons who are interested in purchasing the computer are invited to make B an offer which B can either reject or accept.
[2.18]
Remember, a fundamental distinction between an offer and invitation to treat is the promisor’s intention. In all of the above examples, the seller lacks the requisite intention to be legally bound (viewed objectively). As such, it is the buyer who must make the offer. This makes perfect commercial sense. If these communications were understood as being offers, the sellers would be bound legally in relation to every acceptance communicated, as acceptance consummates the enforceable deal. A potentially infinite number of buyers could accept, binding the seller instantly. This would create an uncertain commercial environment for both buyers and sellers. Buyers would potentially be left wondering if the seller would carry out their obligations formed upon acceptance (sellers may not have sufficient stock to carry out legal obligations incurred) and sellers would be required to accommodate the associated legal risk (a seller unable to carry out his or her obligations under a contract will be liable to the buyer). [page 40]
Auctions [2.19]
An auction facilitates the sale of property through a process of bidding. Prima facie, the highest bidder will be the successful purchaser of the property. Where property for auction has a reserve price, a call for bids represents an invitation to treat; an invitation for bidders to make an offer to buy. The auctioneer, acting as an agent for the vendor, can accept or reject the highest offer. A vendor is permitted to withdraw their property from sale until such time that an offer has been accepted. Likewise, a bidder is able to withdraw an offer before the offer is accepted. A contract between buyer and seller will be formed ‘when the hammer falls’.10
[2.20]
Where auction of property has no reserve price, there is some uncertainty as to whether the auctioneer is under an obligation to sell the property to the highest bidder. Stated differently, does the fact that the auction is without reserve impose a duty upon the auctioneer to
sell the property to the highest bidder? Cases decided indicate this to be a grey area of law. The argument that an auctioneer makes an offer to sell the property to the highest bidder where an auction is conducted without a reserve was accepted in the English case of Warlow v Harrison (1859) 120 ER 925.11 It follows that a person who is bidding in reliance of the offer accepts the offer by making the bid. Failure to sell the property to the successful bidder, who may not necessarily be the highest bidder, means that the auctioneer becomes personally liable to the vendor. At the time of writing, there is no Australian High Court ruling on this issue. The New South Wales Supreme Court case of AGC (Advances) v McWirter (1977) 1 BPR 9454 followed Payne v Cave: an auctioneer is under no obligation to accept the highest bid; an auction remains an invitation to treat regardless of whether the auction is with or without a reserve price.12 To minimise legal risk, auctioneers generally clearly stipulate the rules governing an auction before proceeding. [2.21]
Given the plethora of websites facilitating consumer to consumer bidding on goods and services, online auctions also warrant brief mention. eBay and Amazon are two of the largest and most popular online ‘auction’ platforms.13 Does a successful online bid create a binding legally enforceable agreement between [page 41] buyer and seller? A case which provides us with guidance on this point is Smythe v Thomas (2007) 71 NSWLR 537.
Smythe v Thomas (2007) 71 NSWLR 537 Brief facts: The plaintiff, Peter Smythe, and the defendant, Vincent Thomas, were registered users of eBay. The defendant had listed his Wirraway Australian Warbird aircraft with a minimum price of $150,000 for a period of 10 days. The plaintiff bid for the plane in accordance with eBay rules at the minimum
price and, at the end of the time period, both the defendant and the plaintiff were notified by eBay that the plaintiff was successful. The defendant argued that the listing was merely an invitation to treat and that he was therefore able to reject the buyer’s bid. Issue: Was the defendant under a legal obligation to accept the plaintiff’s bid? Conclusion: Rein AJ highlighted the critical importance of eBay’s rules in determining whether the listing was an invitation to treat or a firm offer. By accepting eBay’s terms and conditions, registered bidders permitted eBay to close the auction at the stipulated time (sellers are free to withdraw their item from the bidding process up until the close of the auction, as is the case in traditional/offline auction environments where a vendor is free to withdraw from the auction until an offer is accepted/the hammer falls). eBay’s rules clearly stipulated that the intention of the bidding process is to create a binding agreement between the buyer and the seller, as distinct from an invitation to treat. The seller was under an obligation to accept the bid at ‘auction close’.
[2.22]
This case acts as a pertinent reminder that users of online auction platforms should be mindful of the rules and/or terms and conditions stipulated by the website facilitating the sale of items by auction.
Tenders [2.23]
A call for tenders is often made by large companies or government authorities in relation to large scale endeavours such as construction projects. The public advertisement calling for tenders is, generally speaking, an invitation to treat; it represents the caller’s willingness to negotiate with a tenderer interested in the project. To minimise uncertainty and legal risk, it is good commercial practice for parties calling for tenders to communicate clearly that they reserve the right
to accept or reject all tenders, even tenders which do not comply with any terms represented in the advertisement (for example, the submission deadline). A tender or ‘bid’ constitutes an offer made in response to the advertisement. As such, a contract comes into existence upon acceptance of a bid, binding the parties. [page 42] [2.24]
Where a party calling for tenders advertises specific criteria against which tenders will be assessed, it becomes imperative for callers to highlight evaluation procedures. Ensuring transparency and consistency in the tender process minimises legal risk. For example, this reduces the risk of breaching a separate legal agreement which may arise between the caller and the tenderers in regard to the evaluation process and making of the award.
[2.25]
A landmark case which highlights the importance of fairly assessing bids and awarding the contract accordingly is Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151; 146 ALR 1. Finn J found that in certain circumstances the request for tenders may give rise to a legally binding agreement governing the evaluation of bids and the making of the award (where tenders will be assessed against specific criteria). This, in effect, ‘protects the integrity of the bidding system’.14 The case emphasised that where the body calling for tenders is a public body, there will be an implied term requiring it to ‘deal fairly with the tenderers in the performance of its tender process contracts with them’.15
[2.26]
The more recent Western Australian Supreme Court decision in Dockpride Pty Ltd v Subiaco Redevelopment Authority [2005] WASC 211 applied the principles propounded in Hughes. The authority (the defendant) was obliged to act fairly towards Dockpride (the plaintiff) so as not to breach the tender process contract. The authority was under a duty to evaluate tenders fairly in a consistent and transparent manner. In this case, the authority was not in breach of this contract governing the bidding process.
Revoking an offer [2.27]
Just as offers can be made, they can also be withdrawn. The general rule is that an offer can be cancelled at any point prior to acceptance provided revocation is communicated.16 It matters not how the withdrawal is communicated; revocation will be effective whether by words, written text or conduct as long as the offeree becomes aware of this prior to acceptance.17 As unilateral contracts require a party to carry out an act in return for a promise, it can be difficult to revoke an offer effectively: the offeree may have already commenced performance of the contract (and therefore partially completed the requisite act). Whether or not revocation is legally valid will depend upon the merits of each case. A number of factors will be taken into account such as, the parties’ intentions, whether the offeree benefits or suffers detriment from performance, and the offeror’s appreciation of the risk.18 [page 43]
Rejecting an offer [2.28]
Rejection of an offer terminates the offer; it cannot be ‘revived’ and subsequently accepted. An offer can be rejected expressly or by implication via conduct which indicates the offeree’s contrary intention. For example, A offers to loan B his tractor for $500 per day. Although B does not expressly reject A’s offer, he loans a tractor for $200 a day from A’s brother (C) instead. Clearly, B’s actions imply that he rejects A’s offer.
[2.29]
It is also important to note that a counteroffer terminates the offer on foot and becomes the new offer which the other party can chose to accept or reject.19 There is a fine line between making a counteroffer (rejecting the original offer) and merely requesting further particulars or information (clarifying the terms of the original offer). The latter does not destroy an offer but merely seeks to elucidate further details
about it.20 For example:
A says to B: ‘I offer to sell you my car for $10,000’. (a) B replies: ‘I cannot afford that, but I am willing to pay you $8000 for the car.’ B has made a counteroffer which has the effect of cancelling A’s original offer to sell the car for $10,000. The only offer on foot is B’s $8000 offer. (b) This time B replies: ‘Would you be willing to come down to $9000 and would that include the trailer?’ B’s response is not a counteroffer but a request for information and an enquiry as to whether A is flexible on price. As such, A’s original offer is still ‘on the table’ for B to accept (a request for information need not be phrased as a question). (c) This time B replies: ‘Am I able to pay part cash and part bank cheque?’ This also is not a rejection of A’s offer. B is merely asking for clarification in regards to a term of the offer.
Offer can cease Offers not accepted within a reasonable time [2.30]
An offer will lapse if it is not accepted within the specified time frame. If no time period is known, then it will lapse in reasonable time. What is reasonable will depend upon the circumstances. In the case of Ramsgate Victoria Hotel Co v Montefiore (1866) LR 1 Ex 109, an offer to purchase shares was made but not accepted. After five months, the offeror claimed that the offer had lapsed. The court agreed, noting [page 44]
that it was reasonable for the offer to lapse after five months and correspondingly unreasonable for the offeree not to accept or reject the offer within the five month period. In relation to the sale of goods, an offer to purchase perishable goods will be open for a lesser period than would be the case for non-perishable goods. This is a sensible approach which reflects the limited lifespan of perishables.
Options [2.31]
Where a party has made a promise to hold an offer open for a specific time so as to prevent it lapsing, it will have no legal effect unless the offeree has purchased an option; that is, given consideration of sufficient legal value in return for the promise.21 This is a common occurrence in relation to the purchase of shares and real estate. Where an option has been ‘paid for’, an offeror will be bound to keep the offer open for the time period that the parties have agreed to. In relation to real estate, this can benefit both the buyer and the seller. The seller benefits by gaining a sum of money immediately with the prospect of a future sale, and the buyer ‘buys’ him or herself more time to sort out finances, inspect the land, consider zoning laws etc. The buyer will normally not be bound to purchase the real estate, but if he or she decides to follow through with the purchase the sale must be carried out in accordance with the terms and conditions stipulated in the options contract.
[2.32]
The Australian Securities Exchange highlights the numerous benefits of option contracts for shares.22 One of the clear advantages of purchasing an option relates to the fact that it enables the buyer to assess if he or she wants to proceed with the purchase or sale of shares (until such time that the option expires); it buys the option purchaser time to decide.
Death [2.33]
Generally speaking, an offer will lapse with the death of one of the parties. This is necessarily the case where the potential contract is of a
personal nature. Where the offeree is unaware of the offeror’s death, it is possible that post-death acceptance can bind the offeror’s estate. The caveat is obviously that the contract must not require the personal involvement of the offeror. Conversely, an offer cannot be accepted where an offeree has notice of the offeror’s death: Fong v Cilli (1968) 11 FLR 495.
Acceptance [2.34]
Acceptance converts an offer into a binding agreement. It occurs where the offeree unequivocally assents to the offer and represents a ‘meeting of the minds’ (consensus ad idem) between the parties. There are several legal rules which determine valid acceptance and, as such, define how a contract comes into being. [page 45]
Offeree must act in reliance of the offer [2.35]
The requirement for parties to have reached consensus upon acceptance of an offer necessarily means that the accepting party must accept upon reliance of an offer; the offeree must know about the offer in order to validly accept it.23 For example: A offers a $100 reward for the return of a lost pet. The person claiming the reward must have known about the offer in order to enforce the unilateral contract. If B finds the pet (knowing it belongs to A) but has no knowledge of the reward on offer, A is not legally obliged to pay B the $100. A contract will only exist where the act required for acceptance is performed on the faith of the offer. The following case aptly demonstrates this principle in action.
R v Clarke (1927) 40 CLR 227; [1928] ALR 97 Brief facts: The Western Australian Police offered a public
reward of £1000 for anyone that could provide information leading to the arrest and conviction of the person(s) who murdered two police officers. The petitioner (Evan Clarke), who was himself charged with murder in connection with the case, issued a statement to police which led to the arrest and conviction of two men for the homicides. Clarke was exonerated and released before attempting to claim the reward. In evidence, however, he revealed that he made his statement to police not in reliance upon or in return for the reward, but exclusively in order to clear himself of the murder charge against him. The award was only contemplated after this time and, accordingly, the Western Australia Police refused to pay him the £1000. Clarke commenced legal proceedings to claim the reward. Issue: Did Clarke’s provision of information amount to an acceptance of the Western Australian Police’s offer of reward? Conclusion: The High Court held that Clarke was not entitled to the reward, as a unilateral contract can only be formed where the act required for acceptance is performed on the faith of the offer. Even though Clarke performed the specified act (provided the information), he did not do so as to claim the reward but rather to clear his own name. Per Isaacs ACJ (at CLR 232): Clarke never accepted or intended to accept the offer in the proclamation, and, unless the mere giving of the information without such intention amounted in law to an acceptance of the offer or to performance of the condition, there was neither ‘acceptance’ nor ‘performance’, and therefore there was no contract.
[page 46] [2.36]
Ironically, had the respondent not made known that he had not acted in reliance on the offer it might have been presumed that he had,24 but with clear evidence that there had been no agreement, no contract was formed.
Acceptance must be communicated [2.37]
Generally speaking, acceptance must be communicated to the offeror.25 Where the offeree decides to accept the offer but does not convey this to the offeror, no contract will come into being. For example, A offers to sell B five of his horses. Knowing of A’s prizewinning horses, B thinks he is lucky to have received the offer and makes up his mind to accept the offer. A, not hearing from B after a month, offers the horses to C. B learns of this and is very upset. He states he was delighted with the offer and demands the horses. Merely ‘mentally’ accepting an offer will not suffice. B needed to have communicated his acceptance to A by undertaking a positive action indicating his intention (for example, a verbal reply).
[2.38]
Acceptance must be communicated in the mode or manner prescribed by the offeror.26 Where an offeror does not state a specific mode of acceptance (that is, the means by which acceptance is to be communicated), it does not matter how acceptance is communicated to the offeror as long as it conveyed within the time period specified or otherwise within a ‘reasonable time’.27 Generally speaking, an offeree’s response ought to be given by the same means used by the offeror. For example, A telephones B offering to sell B her portable basketball system (offset base, angled pole, backboard and hoop) for $250 and indicates that she needs to know if B will buy it within the hour. It would be ‘best practice’ for B to telephone A indicating her acceptance of the offer. It is plausible that B could provide valid acceptance by driving to A’s house and accepting ‘in person’. However, this may not be as expedient as B runs the risk of A selling the equipment to another party in the interim.
[2.39]
Where the method of communication is clearly stipulated, the offeree must comply with the requirements. In practice, commercial offers rarely stipulate an exclusive method/means of acceptance. More commonly, a method of acceptance which is preferable is nominated. The New South Wales Supreme Court of Appeal decision of George Hudson Holdings Ltd v Rudder (1973) 128 CLR 387 suggests that statements stipulating a method of acceptance, even when expressed
using unambiguous language, will be interpreted quite broadly. In that case the offer stated (in cl 7) that acceptance must occur by post. One offeree, Philip Rudder, [page 47] posted his acceptance while another offeree, Frederick French, delivered his to the offeror personally. Both acceptances were received within the required time frame. Menzies J commented that: Notwithstanding the use of the words ‘… must be delivered … by forwarding …’, I do not, in the context, read cl 7 as meaning either that acceptance will be complete upon posting or that there can be no acceptance without posting. Accordingly in my opinion, the fact that Rudder’s acceptance was by posting, whereas French’s acceptance was by delivery warrants no distinction being drawn between the two matters.28
Silence as acceptance [2.40]
Prima facie, silence does not constitute acceptance. The old English case of Felthouse v Bindley (1862) 11 CB (NS) 869; 142 ER 1037 is a case which illustrates this point well.
Felthouse v Bindley (1862) 11 CB (NS) 869; 142 ER 1037 Brief facts: The plaintiff, Paul Felthouse, wrote a letter to his nephew John offering to buy a horse. The letter stipulated that Felthouse would consider the horse his unless he heard anything to the contrary. John never contacted his uncle, though he intended to accept the offer and instructed his auctioneer, the defendant, to take the horse off the market as it was no longer for sale. The auctioneer mistakenly sold the horse and Felthouse sued for conversion (tortious misuse of property). Issue: Can silence constitute valid acceptance of an offer?
Conclusion: The court held that the nephew’s silence did not amount to acceptance of the plaintiff’s offer. The defendant had to take positive action to communicate acceptance of the offer to the plaintiff for a contract to come into being. The effect of this legal rule is that it prevents a party from imposing a contractual obligation on another without both parties reaching consensus.
[2.41]
This 19th century principle has generally withstood the test of time. However, the legal rule has been qualified to an extent to give business efficacy to agreements, which when viewed as a whole, indicate mutual agreement. Where there has been no express acceptance of an offer, it may be possible to infer that an offeree has demonstrated acceptance through conduct. If the conduct of the offeree objectively indicates an intention to accept the offer, an agreement will be implied. [page 48]
[2.42]
In the case of Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 at 534, McHugh JA noted, ‘under the common law theory of contract, the silent acceptance of an offer is generally insufficient to create any contract … The objective theory of contract requires an external manifestation of assent to an offer‘. However, his Honour went on to comment that an offeree’s silence may amount to acceptance when silence is considered holistically in conjunction with the surrounding circumstances, including his or her conduct. His Honour stated (at 535) that the ‘ultimate issue is whether a reasonable bystander would regard the conduct of the offeree, including his silence, as signalling to the offeror that his offer has been accepted’.
Unilateral contracts [2.43]
Unilateral contracts are an exception to the general rule that
acceptance must be communicated to the offeror. In such contracts, the doing of an act constitutes valid acceptance and, as such, the requirement of communication is effectively dispensed with. For example, in Carlill v Carbolic Smoke Ball, the manufacturers of the smoke ball did not know when Mrs Carlill bought and used the product as directed (accepted the offer); they did not know the time the contract came into being.
Postal acceptance rule [2.44]
The postal rule is also an exception to the general rule that acceptance must be communicated. As the name suggests, it is a legal rule which essentially applies to communications via post, chiefly letters.29 The rule, formulated in the 19th century,30 was developed to overcome ‘the extraordinary and mischievous consequences which would follow if it were held that an offer might be revoked at any time until the letter accepting it had actually been received’.31 Thus, it was a rule ‘based on considerations of practical convenience, arising from the delay that is inevitable in delivering a letter’.32
[2.45]
Essentially, where acceptance is expected to be sent by post, it is effective as soon as it is posted (as opposed to being actually received by the offeror).33 In accordance with this rule it does not matter if the letter indicating acceptance is delayed or even lost.34 A contract between offeror and offeree comes into being when the correctly addressed letter is handed to the post office. [page 49]
[2.46]
Since delivery of the acceptance communication lies outside the control of the offeree, an element of risk is associated with this rule. Let us consider this point by way of an illustrative hypothetical scenario:
Hypothetical
A and B have had discussions about the sale of A’s boat. A states that she will let B know when she is ready to sell it: ‘I will send you an offer in the mail in the next couple of days. If you are happy with the offer, let me know by return letter. You must accept by 5 October or else I will sell it to C.’ On 1 October, B receives A’s letter offering B the boat for $20,000. She accepts by way of a letter (as discussed) and addresses the envelope correctly, handing it to the post office on 3 October. Unfortunately, the letter was lost by the post office and as a result A did not receive B’s acceptance letter. When B rings on 10 October to organise delivery of the boat, A states that she has already sold it to C since she never heard back from B. A states: ‘You had to let me know by 5 October.’ Issue: Is A liable to B here? Conclusion: Yes. Application of the postal rule denotes that B accepted on 3 October when she handed the letter to the post office (she even had the Australia Post receipt to prove it). It does not matter that the post office lost the letter — the contract between A and B was formed on the 3 October. A will be liable to B for breach of contract.
[2.47]
The postal rule applies where parties have reasonably contemplated acceptance by post. This can occur expressly. For example, where the offer states unequivocally that acceptance by post is the only valid mode of acceptance; where the offer states that acceptance by post is a mode of acceptance; or where parties agree to this method of acceptance during their negotiations. Application of the rule can also be implied. For instance, where the offeror makes the offer by post and says nothing specifically about how acceptance should occur; or where this is accepted industry practice. In Household Fire and Carriage Accident Insurance Co v Grant (1879) LR Ex D 216, Baggallay LJ succinctly comments that acceptance of an offer by post will be limited to: … cases in which by reason of general usage, or the relations between the parties to
any particular transactions, or the terms in which the offer is made, the acceptance of the offer by a letter through the post is expressly or impliedly authorised.35 [2.48]
The rule can be excluded expressly.36 For example, the contract may stipulate: ‘Acceptance is deemed upon receipt.’ It is important to recall that revocation [page 50] of an offer can only occur before the offeree accepts the offer. Thus, where the postal rule applies, the offeror must ensure that the offeree receives notice of the withdrawal of the offer before the offeree posts acceptance.37 In practice, given ease of communication through modern technologies, few commercial transactions are conducted exclusively via the post.
Electronic communications [2.49]
Prima facie, instantaneous (for example telephone, telex, facsimile) or ‘virtually instantaneous’38 forms of communication are not subject to the postal acceptance rule. This position was propounded in Entores v Miles Far Eastern Corp [1955] QB 32739 and Brinkibon Ltd v Stahag Stahl und Stahlwarenhandelsgesellschaft mbH [1983] 2 AC 34 and has been accepted in Australia.40 Hedigan J of the Supreme Court of Victoria in Nunin Holdings Pty Ltd v Tullamarine Estates Pty Ltd notably comments: Recent authority has been concerned with the more modern methods of virtually instantaneous communication, preferring to confine the postal acceptance rule strictly enough to its original sphere and, subject always to the parties’ intentions, applying the primary principle that acceptance must be actually communicated to be effective.41
[2.50]
While emails transmitted via the Internet may not be strictly a form of instantaneous communication,42 Australian courts have recognised emails as being analogous to telexes. As such, acceptance is communicated upon receipt of the email, rather than at the moment of
dispatch as with the postal acceptance rule.43 This position would appear to be consistent with the Vienna Sales Convention44 which Australia has adopted in all jurisdictions.45 Article 24 of the Vienna Convention stipulates: [page 51] For the purposes of the Part of the Convention, an offer, declaration of acceptance or any other indication of intention ‘reaches’ the address when it is made orally to him or delivered by any other means to him personally, to his place of business or mailing address or, if he does not have a place of business or mailing address to his habitual residence. [2.51]
When considered in light of digital communications, acceptance occurs upon receipt of the communication. But when does receipt via email actually occur? The Electronic Transactions Act 1999 (Cth) provides us with some guidance here.46 Section 14A provides that, unless the parties agree otherwise, where an electronic address has been designated by the addressee, receipt is deemed to occur when the electronic communication enters the information system47 (when the message enters the addressee’s electronic mailbox or ‘inbox’). Where no electronic address is designated, receipt occurs when the recipient is subjectively aware of its existence48 (when the email comes to the attention of the addressee). If the addressee is expecting the email, this may be when the email appears in the Inbox. Where the email is not expected, this may be when the recipient actually opens and reads the email. It will depend on the circumstances of the case.
[2.52]
Let us consider a hypothetical scenario:
Hypothetical One afternoon, A emailed B with an offer to sell B her gym equipment for $5000. A clearly states: ‘Let me know if you accept via email.’ B replies almost immediately: ‘I will take it for $4500.’ At 9:00 am the next day, A responds to B’s email: ‘Yes, I can agree on a price of $4500.’ At about the same time, B sent an email to
A: ‘Actually, I will take the equipment for $5000 as I really need it soon and I cannot be bothered haggling over the price.’ According to the electronic records, A’s email Inbox received B’s most recent email (purporting to accept the $5000 offer) at 9:45 am. B’s email Inbox records having received A’s email (accepting the price of $4500) at 9:40 am and she looked at it at 9:50 am. [page 52] Issue: Has the gym equipment been sold and if so at what price? Conclusion: The gym equipment has been sold at $4500 at 9:40 am. It is important to note that A expressly stated that acceptance should be made via email. A will be expecting communications from B via email and vice versa. Note that B’s reply — ‘I will take it for $4500’ — is a counter-offer which cancels A’s original offer. It will now be up to A to either accept or reject B’s offer of $4500. A sends an acceptance email at 9:00 am the next day and it enters B’s Inbox at 9:40 am. As B is expecting an electronic communication, 9:40 am is the time of receipt (not 9:50 am when she looks at the email). This is the time when the gym equipment is sold.
[2.53]
Note that B’s communication sent at around 9:00 am is a new offer which would effectively cancel the offer to buy the equipment for $4500. However, as acceptance was received at 9:40 am, this new offer becomes irrelevant (which is lucky for B, as B is bound to pay the lower price of $4500!).
Practical difficulties with the ‘offer and acceptance’ analysis [2.54]
Most of the time, parties will be clear as to whether or not they have mutually manifested assent to be bound. Where the fact that an
agreement has been reached is disputed, the rules relating to offer and acceptance are useful ‘tools’ in determining whether parties have ‘struck a bargain’. Sometimes, however, it can be difficult to identify a specific offer, corresponding acceptance and the moment when these legal criteria of a contract have been fulfilled, especially in an ongoing relationship.49 As Stephen J comments in MacRobertson Miller Airline Services v Commissioner of State Taxation (Western Australia) (1975) 133 CLR 125; 8 ALR 131: This doctrine, of the formation of contracts by offer and acceptance, encounters difficulties when sought to be applied, outside the realms of commerce and conveyancing, to the everyday contractual situations which are a feature of life in modern urban communities.50 [2.55]
Weinberg J in Macdonald v Australian Wool Innovation Ltd [2005] FCA 105 at [182] similarly noted that ‘many commercial dealings do not lend themselves to [the] orthodox analysis’ of offer and acceptance. It may, thus, be necessary to look beyond the rigidities of an offer/acceptance analysis (where neither are readily apparent) and look to the ‘acts and conduct of parties as well as, or in absences of, [page 53] their words’ to infer objectively whether parties legally ‘struck a bargain’.51 There are several cases which provide authority that courts will look at communications and conduct of the parties as a whole when determining whether parties have reached agreement on the substance of the contract.52 Heydon JA in Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 at 179 stated that the relevant questions to ask are: In all the circumstances can an agreement be inferred? Has mutual assent been manifested? What would a reasonable person in the position of the plaintiff and a reasonable person in the position of the defendant think as to whether there was a concluded bargain?
[2.56]
This objective view reflects a more ‘global approach’53 to contract formation which courts may apply where application of traditional offer/acceptance rules do not offer assistance in determining whether
parties have formed an agreement in light of all the circumstances.
Consideration [2.57]
Once you have established that an offer has been made and validly accepted, it becomes necessary to consider the second element of contractual formation: consideration. The doctrine of consideration requires that something be given in return for a promise in order for that promise to be legally binding. It plays the critically important role of distinguishing merely gratuitous promises from legally enforceable promises.54 This objective is accomplished by seeking out the presence of a bargain between the parties in which the promisor (person making the promise) receives a benefit, or the promisee (person seeking to enforce the promise) incurs a detriment. If an agreement lacks consideration on both sides it is known as a nudum pactum or naked contract; so called because it lacks substance.
[2.58]
Earlier in the chapter the distinction between bilateral and unilateral contracts was discussed: see [2.2]–[2.6]. It is important to appreciate this distinction when comprehending the nature of the consideration in a contractual agreement. Whereas a bilateral contract arises when parties exchange promises and create executory obligations (that is, obligations to be performed in the future), a unilateral contract is created when one party makes a promise and creates an executory obligation for themselves which is ‘accepted’ when another party performs the specified act. [page 54]
[2.59]
Now let us consider how to identify the consideration in both bilateral and unilateral contracts. If A makes a promise to B, A’s promise is not contractually enforceable unless B has promised something to A in return.55 If A, for example, promises to mow B’s front lawn, and B promises to pay A $50 for this service, consideration subsists in A’s promise of a service in return for B’s promise of money. This is an
exchange of promises where neither party has actually performed their part of the deal yet. As discussed earlier, this is known as a bilateral contract which has given rise to executory obligations. [2.60]
If B immediately pays A to mow B’s lawn, but A is yet to mow the lawn, then a promise (to mow the lawn) has been exchanged for an object (money). This is still a bilateral contract involving an exchange of promises, except that now B has gone ahead and paid A. In this situation, A’s obligation to mow the lawn remains executory because it has not yet been performed, whereas B’s obligation to pay the money is executed, that is, it has been fulfilled.
[2.61]
Finally, assume now that B offers a payment of $50 to whoever comes and mows his or her lawn. A comes along and mows B’s lawn and claims the $50 payment. This is a unilateral contract because B has made a promise (giving rise to an executory obligation to pay anyone that mows his lawn as directed) and A has acted on that promise and performed the specified act. B’s consideration, that is, the obligation to pay the money remains executory, whereas A’s consideration, that is, to mow the lawn is executed.
[2.62]
To summarise: An executory promise is one you are yet to act upon. An executed promise is one you have acted upon. A bilateral contract can consist of an exchange of executory promises, or both executory and executed promises. A unilateral contract consists of an executory promise awaiting fulfilment by the performance of a specified act (there is no exchange of promises, just one promise from one party, and performance of an act by the other).
[2.63]
The scenarios described above are typical and frequently arise in the commercial world. More often than not, they cause little difficulty; it will almost always be clear what the parties are exchanging in terms of consideration and the bargain will normally be fulfilled without trouble. Issues arise more commonly where a party claims that
another party’s promise is (un)enforceable and that they have or have not formed a contract, or where a party to an existing contract promises additional consideration to the other party who ostensibly provides nothing in [page 55] return. In such cases the courts must determine (a) whether legally sufficient consideration has actually been promised or exchanged; and (b) whether this exchange formed part of a bargain between the parties. [2.64]
Fundamentally, therefore, the term ‘consideration’ describes both the subject matter of an exchange and the process of the exchange itself. In other words, the consideration in a contract subsists in whatever has changed hands between the parties (usually money, goods or services) as well as the act or promise of exchange. Let us briefly consider the origins of the doctrine of consideration before defining it in terms of its central elements.
Origins of the doctrine of consideration [2.65]
The doctrine of consideration emerged out of the covenants of debt and assumpsit, which were discussed in Chapter 1. Historically, the question of whether a promise was legally enforceable or not depended upon the motivating considerations or factors prompting a party to make a promise.56 In other words, to determine if a promise was binding at law, you needed to know why it was made in the first place. By the end of the 16th century it was essential for parties to identify the ‘motive’ or ‘reason’ underpinning the promise being sued upon in their pleadings.57 During the 16th and 17th centuries, however, English judges started to favour the premise of ‘bargain’ as founding the element of consideration in contracts. ‘The large commercial interests of the new age sought a general sanction not for charitable gifts but for business enterprise.’58 The courts therefore stressed the
requirement of some material inducement for the promisor’s undertaking. [2.66]
In the second half of the 18th century, the ‘moral’ basis for enforcing a contractual promise then started to find footing, thanks mainly to the efforts of advocate Lord Mansfield. On this view, if a party made a promise to another party, this in itself gave rise to an enforceable moral obligation to perform.59 This basis for enforcement was unequivocally rejected in Eastwood v Kenyon,60 Lord Denman noting that it would annihilate the necessity for consideration altogether if merely making a promise created a legal obligation to keep it. This signalled the revival of the ‘bargain’ theory of consideration; the requirement of some material [page 56] inducement for the promisor’s undertaking was regarded as the most effective test that a promise was made seriously and with the intent that it should create a legal liability.61
Elements of consideration [2.67]
Given that consideration encompasses both what is exchanged and the process of that exchange, it is traditionally defined in two ways: (1) benefit and detriment; and (2) bargain.
Benefit/detriment [2.68]
In Currie v Misa (1875) LR 10 Ex 153 at 162, Lush J defined consideration in the following manner: A valuable consideration, in the sense of the law, may consist in some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility, given, suffered, or undertaken by the other.62
[2.69]
While this definition is broad, not everything will suffice.
Consideration must have some measure of legal value. As Patteson J explained in Thomas v Thomas (1842) 2 QB 851, it must consist of: … something which is of some value in the eye of the law, moving from the plaintiff: it may be some benefit to the plaintiff, or some detriment to the defendant; but at all events it must be moving from the plaintiff.63
The concepts of value and movement of consideration form the basis of separate (but related) legal rules and are discussed later in the chapter at [2.75] and [2.109] respectively. [page 57] [2.70]
Recall for a moment the lawn mowing agreement between A and B from earlier in the chapter: see [2.59]. A promised to mow B’s front lawn in return for a payment of $50 from B. The parties are simultaneously promisor and promisee. A receives a benefit ($50) and incurs a detriment (obligation to mow B’s lawn); at the same time, B receives a benefit (has his or her lawn mowed) and incurs a detriment (obligation to pay A $50).
Bargain [2.71]
Together with the requirement that consideration consist of either a benefit to the promisor or a detriment to the promisee is the requirement that the benefit or detriment be given in return for the promise in question: that is, that it was bargained for. Lord Dunedin explained this aspect of consideration in Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd [1915] AC 847 at 855 like so: ‘An act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.’64 To rephrase, when one party makes a promise to another party, that promise is the ‘payment’ in return for the other party’s reciprocal promise. In Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424 at 456–7, the High Court emphasised this requirement of ‘bargain’:
In cases of this class it is necessary, in order that a contract may be established, that it should be made to appear that the statement or announcement which is relied on as a promise was really offered as consideration for the doing of the act, and that the act was really done in consideration of a potential promise inherent in the statement or announcement. Between the statement or announcement, which is put forward as an offer capable of acceptance by the doing of an act, and the act which is put forward as the executed consideration for the alleged promise, there must subsist, so to speak, the relation of a quid pro quo. [2.72]
It is therefore critical to consider the circumstances in which the relevant promises were made, including the manner and timing of the exchange, to determine if what has manifested is a bargain. Conditional gifts, for example, resemble bargains but lack the requirement of mutuality. The High Court in Australian Woollen Mills gave the example of A (in Sydney) promising B (in Melbourne) to pay B the sum of £1000 when B arrives in Sydney.65 There is no contract subsisting between the parties because there is no intrinsic connection between A’s promise and B’s act; [page 58] A is merely stating their intention to pay B a sum of money as a conditional gift.66 However, if A had asked B to attend Sydney and B had expressed hesitation due to travel costs, B’s act of flying to Sydney may be regarded as consideration for A’s promise of £1000. In this case, the necessary connection or relation might be inferred.
[2.73]
If we reflect upon the lawn mowing agreement between A and B from earlier in the chapter (see [2.59]), we once again see that there is clearly a manifested bargain between the parties. B’s promise to pay $50 to A was clearly made in return for A’s promise to mow B’s front lawn. There is nothing on the evidence to suggest this was anything other than a classic bargained-for agreement.
[2.74]
Now that consideration has been defined, we must consider the additional legal rules or requirements which concern the doctrine.
Legal requirements Sufficiency [2.75]
Consideration must be legally sufficient in order to be valid, but it need not be adequate. That is, it must have some measure of legal value but does not have to be a ‘fair’ price. You can buy a castle for $1 if the vendor is happy to sell it to you for that amount. The price is clearly disproportionate when measured in terms of adequacy, but when speaking in terms of legal sufficiency, this is perfectly valid consideration. This rule of sufficiency has come to be known in contract law as the ‘peppercorn principle’ by virtue of the fact that ‘it is legally sufficient to agree, for example, to sell a valuable object or to let commercial premises in exchange for a nominal consideration, such as a peppercorn’.67 The phrase itself is said to derive from Lord Somervell’s judgment in Chappell & Co Ltd v Nestlé Co Ltd [1960] AC 87 at 114, where his Honour stated: ‘A peppercorn does not cease to be good consideration if it is established that the promisee does not like pepper and will throw away the corn.’
[2.76]
The important point to take in here is that the law will not enter into an inquiry as to the adequacy of consideration.68 The comparative value of fairness of the promises exchanged between the parties is of no concern to the law; parties are presumed to be capable of acting in their own interests and concluding their [page 59] own bargains on terms they see fit.69 The rationale behind this position was explained by Kirby P in Woolworths Ltd v Kelly (1991) 22 NSWLR 189 at 193–4. First, parties will often place different values upon the contracts they make and be motivated by disparate idiosyncratic, sentimental, ethical, economic or other reasons. Second, judges (as lawyers) have limited expertise and are not always wellversed in the many economic factors relevant to understanding the
wisdom of a given bargain. Third, requiring judges to evaluate the adequacy of consideration would open floodgates and be prone to inconsistent decision-making and therefore harvest uncertainty. Fourth, other doctrines such as those in equity may serve to challenge the adequacy of a bargain. Finally, contract law reflects the principle of freedom of contract; the right of parties to forge their own agreements ‘untroubled by the paternalistic superintendence of the courts as to the adequacy of their bargains is the approach which the common law has adopted’.70 [2.77]
One American academic has likened consideration to Tabasco sauce in that ‘a little of it goes a long way’.71 This is very accurate when one reflects upon the relatively low threshold of legal validity. In Couldery v Bartrum (1881) 19 Ch D 394 at 400, Jessell MR remarked that a promise by one party may be supported by the other party’s reciprocal provision of ‘canary-birds’, ‘tomtits’ or insignificant ‘rubbish of that kind’. Historically there are countless examples of seemingly trivial things being deemed legally sufficient forms of consideration, such as empty chocolate wrappers,72 a promise not to live in a certain area and not to visit or annoy a particular person,73 and a promise not to smoke, drink, swear or play cards or billiards for money until the age of 21.74 In sum, all that is required is that the parties’ promises be supported by sufficient consideration in the sense of something having some legal value (even if nominal) in order to create a contract.
Existing legal duty rule [2.78]
The existing legal duty rule stipulates that the promise to perform, or the actual performance of, an existing legal duty does not suffice as consideration to support [page 60] a contract. In basic terms, you cannot receive more in return for the same. The rule can manifest itself in three types of situation: (1) public
duties; (2) existing duties promised to third parties; and (3) existing duties promised to the same party. By examining some common commercial scenarios, you will begin to see how commonly the rule actually operates in practice. Each of the three categories discussed will now be considered in order.
Public duties [2.79]
A public duty is one which is legally imposed upon a party. If a party is lawfully required to perform a certain duty, the promised performance of that duty cannot constitute consideration to support a contract. So the provision of public services, such as law enforcement and firefighting, cannot be good consideration.
Collins v Godefroy (1831) 1 B & Ad 950; 109 ER 1040 Brief facts: The plaintiff, a lawyer, was subpoenaed to give evidence in the defendant’s trial. The plaintiff demanded from the defendant his regular attendance fee of six guineas, which the defendant initially promised, but later refused, to pay. Issue: Did the plaintiff’s attendance in court amount to valid consideration in return for his testimony in the defendant’s trial and the defendant’s promise to pay the appearance fee? Conclusion: The defendant’s promise to pay was not supported by consideration from the plaintiff. A person who receives a subpoena to give evidence in court is under an existing legal obligation to do so. Lord Tenterden CJ said (at B & Ad 956–7; ER 1042): If it be a duty imposed by law upon a party regularly subpoenaed, to attend from time to time to give his evidence, then a promise to give him any remuneration for loss of time incurred in such attendance is a promise without consideration.
[2.80]
In the context of public duties, the existing legal duty rule is clearly justified on grounds of policy. It is critical that the law of contract ‘does not encourage public officials and those involved in the administration of justice to be influenced by promises of extra rewards for discharging their responsibilities’.75 Imagine a situation where a shareholder in a company which is financially struggling [page 61] offers to pay one of the directors a sum of money to find the most viable buyer for the company and keep it solvent. The director accepts the money and agrees. This scenario is complicated by the fact that the director already has a statutory obligation (or a public duty) to act in good faith and in the best interests of the company.76 This obligation extends to finding an appropriate buyer for the company so as to avoid insolvency. Whereas the shareholder has provided valid consideration (money), the director has promised to do only what they already had an existing legal duty to do: act in the best interests of the company on behalf of the shareholders and find a suitable buyer. This agreement would therefore likely be unenforceable (not to mention highly unethical!)
[2.81]
However, if a person exceeds their public duty, this is a different situation and consideration may be found. The courts will consider the degree to which an individual bound by such a duty has purportedly gone above and beyond what they were already obligated to do.
England v Davidson (1840) 11 Ad & E 856; 113 ER 640 Brief facts: The defendant offered a £50 reward to anyone who could provide information which led to the conviction of unidentified offenders who broke into his house. The plaintiff, a police officer in the region, gave such information. The
defendant refused to tender the reward, arguing that the plaintiff had merely performed his legal duty to combat crime in the district. The police officer sued to recover the reward. Issue: Was the police officer merely performing his public duty to combat crime, or had he exceeded this duty rendering him contractually entitled to the reward? Conclusion: Lord Denman CJ held that providing the information to the defendant was a voluntary service offered by the plaintiff and that it went beyond his general duties as a police officer. Accordingly, his act amounted to good consideration in return for the defendant’s promised reward of £50 and he was entitled to the money.
Duties imposed by contract with a third party [2.82]
If A owes an existing legal duty to B, but subsequently promises to perform this same duty for C (a third party), this will amount to legally sufficient consideration. In other words, you can owe the same legal duty to two or more different parties. [page 62]
Shadwell v Shadwell (1860) 9 CB (NS) 159; 142 ER 62 Brief facts: The plaintiff was engaged to be married to Miss Ellen Nicholl. At this time, this constituted a binding contract. The plaintiff’s uncle, the defendant, then promised in writing to pay him the sum of £150 per year until such time as his annual income exceeded 600 guineas. The obvious intent of the defendant’s promise was that it would be paid so long as the plaintiff and Miss Nichol were married. The plaintiff married
Miss Nichol and the defendant commenced making the promised payments. The defendant subsequently fell into arrears before passing away. The plaintiff sued his uncle’s estate to recover the outstanding money owed. The defendant’s personal representatives administering his estate argued that the plaintiff had provided no consideration for his uncle’s promise, as the plaintiff was already contractually obligated to marry Miss Nichol prior to the defendant’s promise being made. In other words, the plaintiff was merely promising to perform an existing legal duty. Issue: Was the plaintiff’s promise to marry Miss Nichol valid consideration in return for the defendant’s promise to pay him £150 per year, given that he was already obligated to marry Miss Nichol when the defendant’s promise was made? Conclusion: A majority of the court found in favour of the plaintiff and held that his promise to perform his existing legal duty to marry Miss Nichol to a third party (his uncle) amounted to sufficient consideration in return for his uncle’s promise of payment. Erle CJ, for the majority, noted that the defendant suffered a detriment in the nature of his materially altered position, and also obtained a benefit in that he was able to see a near relative marry (at CB (NS) 174; ER 68).
[2.83]
This principle was applied and approved in Pao On v Lau Yiu Long [1980] AC 614. The Privy Council stated (at 632) that there was no doubt that ‘a promise to perform, or the performance of, a pre-existing contractual obligation to a third party can be valid consideration’ because ‘the promisee obtains the benefit of a direct obligation’.
Duties imposed by contract between promisor and promisee [2.84]
This is the third and most common scenario in which the existing legal duty rule can have effect: the modification of existing contracts
between plaintiff and defendant. The rule has caused the most controversy in this context. The general rule, as explained in Wigan v Edwards (1973) 1 ALR 497 at 512, is that: … a promise to perform an existing duty is no consideration, at least when the promise is made by a party to a pre-existing contract, when
[page 63] it is made to the promisee under that contract, and it is to do no more than the promisor is bound to do under that contract. [2.85]
In other words, merely promising to do what you were already required to do under a contract cannot amount to sufficient consideration in return for a promise of something more from the other party to the contract.
Stilk v Myrick (1809) 2 Camp 317; 170 ER 1168 Brief facts: The plaintiff, a sailor, was engaged as a crew member aboard a ship travelling from London to the Baltic and back. During the voyage, two other sailors deserted. The captain attempted to obtain replacements during a stopover in Sweden but was unsuccessful. To guarantee the ship’s return to England, the captain promised the nine remaining crew-members that he would divide the deserters’ wagers equally among them if they agreed to remain with the ship and guide it home. They agreed to his terms. When the ship arrived back in England, the captain refused to pay the extra sum promised to the crew. The plaintiff, one of the crewmen, sued to recover the money. Issue: Were the sailors who remained with the ship entitled to the additional wages promised to them by the ship captain, or had the sailors merely promised to perform their existing contractual obligation to sail the ship back to London? Conclusion: Lord Ellenborough held that the captain’s promise
of extra payment was not supported by consideration from the sailors as they had merely promised to perform their existing legal obligation to ‘do all that they could under all the emergencies of the voyage … till the voyage should be completed’. The sailors that remained were ‘bound by the terms of their original contract to exert themselves to the utmost to bring the ship in safety to her destined port’: at (1809) 2 Camp 317 at 319–20; 170 ER 1168 at 1169.
[2.86]
It is certainly debatable that the sailors in this case went beyond their existing contractual obligation to sail the ship safely back to port, even in the urgent circumstances. The absence of the two deserting crewmen means it is likely each of the remaining sailors would have had to perform greater numbers of duties, possibly for longer periods of time.77 This is precisely the logic employed by the court in the very similar case of Hartley v Ponsonby (1857) 7 El & Bl 872; [page 64] 119 ER 1471.78 There a ship docked at Port Philip, Australia en route to India. While in Port Philip, 17 of the 36 crew members were imprisoned for refusing to work. Of the 19 remaining crew only four or five were able and experienced seamen. Proceeding with the voyage was therefore highly dangerous. The captain promised each of the sailors an additional sum above their wages to secure their services. The crew agreed and set sail, safely navigating the ship to India. On arrival the captain refused to pay the additional money promised. The plaintiff, one of the crew members, sued to recover the funds and was successful.
[2.87]
Unlike the sailors in Stilk v Myrick, the court held, the plaintiff and his colleagues had exceeded their existing legal duty by agreeing to man the ship and continue with the journey in circumstances where they were not obliged to do so. Coleridge J, in the majority, explained: [O]wing to the excessive labour which would be imposed, it was not reasonable to
require the mariners to go to sea. If they were not bound to go, they were free to make a new contract: and the master was justified in hiring them on the best terms he could make. It may be that the plaintiff took advantage of his position to make a hard bargain; but there was no duress.79 [2.88]
The existing legal duty rule can lead to great uncertainty in contractual renegotiation as it renders unenforceable any variations to a contract which only affect the obligations of one of the parties. Such one-sided modifications are common, for example, where a contractor is engaged by a homeowner to do some building work on a residential property and encounters structural problems or other difficulties requiring more labour to remedy and thus an increase in the price of the job.80 The issue is that any subsequent promise from the homeowner to pay the contractor more money is ostensibly unenforceable because they are giving more in return for the same; this violates the existing legal duty rule in a situation where it makes commercial sense (in the absence of duress or other vitiating factors) to simply allow the parties to amend their agreement without having to bother with the cumbersome technicalities of the consideration doctrine.
[2.89]
The existing legal duty rule emerged in the Napoleonic war era (circa 1790–1820) and was designed to operate as a safeguard against contractual extortion at a time when English law did not have a developed doctrine of economic duress.81 [page 65] Maritime trade was critical to the British economy and the law was wary of tempting unscrupulous seamen to hold their captains to ransom.82 If the requirement of consideration to support a contract was not reinforced through the existing legal duty rule, ruthless sailors would, as Lord Kenyon noted in Harris v Watson (1791) Peake 102 at 103; 170 ER 94 at 94, ‘in many cases suffer a ship to sink, unless the captain would pay any extravagant demand they might think proper to make’. More broadly, parties to any kind of contract for the sale of goods or services would be tempted to extort their
counterparts and undermine both the purpose of the agreement and the integrity of the law. [2.90]
Of course times have changed dramatically from when Stilk v Myrick was decided. The diversification of industries, development of increasingly complex methods of doing business, and our exponentially growing reliance upon technology has seen contracts increase in intricacy and lifespan and their vulnerability to changes in economic, social or other conditions has consequently been amplified.83 Moreover, in contemporary times there exists a variety of more sophisticated and established legal doctrines — such as economic duress — which can adequately guard against extortion in contractual renegotiations.84 Nonetheless, at present, the existing legal duty rule remains a steadfast feature of our legal framework and so commercial parties should be wary of making one-sided variations that may ultimately be unenforceable and lead to uncertainty or potential legal disputes. One of the exceptions to the existing legal duty rule (discussed later in the chapter) should be employed to avoid any potential issues.
Part-payment of debt rule [2.91]
We have seen that the existing legal duty rule requires that a party give something in return for a promise of something more from the other party: you cannot get more for the same. Gratuitous promises lacking consideration are unenforceable. This same premise operates where parties attempt to discharge debts. The basic rule is that a debtor’s promise to pay part of a debt will not amount to good consideration for the creditor’s reciprocal promise to discharge the debt. This rule is widely known as the rule in Pinnel’s Case (1601) 5 Co Rep 117a; 77 ER 237 and was applied and approved in the following case. [page 66]
Foakes v Beer (1884) 9 App Cas 605 Brief facts: The respondent, Julia Beer, obtained a judgment against the appellant, John Foakes, for a debt of £2090 19s. Foakes could not pay the sum upfront and asked Beer if he could pay the debt in instalments. Beer agreed to withhold any further legal action if Foakes paid £500 upfront and the balance in instalments. Foakes agreed and commenced making payments until the debt was cleared. Beer then claimed the interest that had accrued on the judgment debt. Foakes argued that no interest was payable on the agreement, while Beer argued that he had provided no consideration and that the agreement was therefore unenforceable. Foakes sued to enforce the agreement and avoid paying interest to Beer. Issue: Did Foakes provide consideration in return for Beer’s promise to accept the judgment debt in interest-free instalments? Conclusion: Beer succeeded, meaning Foakes was required to pay interest on the debt he previously owed to her. The House of Lords held that Foakes had not provided consideration in return for Beer’s promise not to take any further legal action. Foakes had an existing legal duty to repay the judgment debt in full, including any accrued interest. Beer’s promise was therefore gratuitous and not supported by consideration on Foakes’ part.
[2.92]
The logic of the part-payment of debt rule is that the offer of a lesser sum can never satisfy the greater sum due, such that the law should refuse to enforce such an arrangement. The rule is related to the existing legal duty rule in that it demonstrates that a debtor in such situations will always have an existing obligation to repay their debt to the creditor in full; a reciprocal promise from the creditor to accept less in full satisfaction of the debt cannot be enforceable as they are conferring a benefit on the debtor without receiving anything more in return. As Lord Fitzgerald explained in Foakes v Beer (1884) 9 App Cas
605 at 629: [T]he payment of a part of a debt … due and payable cannot alone be the foundation of a parol satisfaction and discharge of the residue, as it brings no advantage to the creditor, and there is no consideration moving from the debtor, who has done no more than partially to perform his obligation. [2.93]
However, the common law has developed exceptions to the partpayment of debt rule. It will not, for example, apply where: the debtor tenders something other than money or the part-payment is made and accepted before the due date or at a different place to that originally agreed;85 [page 67] the promise of part-payment is made by a third party;86 multiple creditors unanimously agree to forego a portion of each of their debts;87 the debtor offers something in addition to their promise to pay their debt in part;88 the debtor can raise an equitable estoppel;89 or the agreement to accept the part-payment is set out in a deed.90
[2.94]
Peel explains the relationship between the existing legal duty rule and part-payment of debt rule by distinguishing a promise to accept partpayment in full satisfaction of a debt from actual acceptance of the part-payment:91 A promise by the debtor to pay part of the debt provides no consideration for the accord, as it is merely a promise to perform part of an existing duty owed to the creditor. And the actual part payment is no satisfaction under the rule in Pinnel’s Case that ‘Payment of a lesser sum on the day in satisfaction of a greater sum cannot be any satisfaction for the whole’.
[2.95]
The movement of money and resources is a commonplace feature of an established economy and so there are endless conceivable situations in which contractual parties will be indebted to one another.
The existing legal duty rule and part-payment of debt rule are thus significantly important to commerce.
Exceptions to the existing legal duty rule [2.96]
Earlier in the chapter the existing legal duty rule was defined in terms of a requirement for a party who has been promised something extra to offer something of sufficient legal value in return. Recalling that consideration must be in the nature of a bargained-for exchange when forming a contract, so too must it be so when modifying a contract. In other words, the same rules for modifying a contract apply to situations of renegotiation.92 This is important when you consider the nature of commercial activity: parties will very often be forced to vary their agreements owing to changing circumstances or mistaken assumptions as to the nature of the work to be undertaken, or to correct an error in drafting. They might even wish to do so as a matter of gratuity. [page 68] Consequently, the existing legal duty rule arises very frequently in business and the exceptions to the rule are therefore of critical importance to ensure contractual modifications are legally enforceable. These exceptions will now be considered.
Fresh consideration [2.97]
If an agreement to do something you are already contractually bound to do lacks consideration, it stands to reason that an agreement to do something more does not. If a party simply provides fresh consideration in return for a promise of something extra from the other party, the existing legal duty rule will have no application. Recalling from earlier in the chapter that consideration can be nominal, something as seemingly insignificant as a peppercorn may suffice. Alternatively, if it can be shown that the beneficiary‘s93 duty
was exceeded (and that they went beyond what they were originally required to do), this would also suffice. As we saw in Hartley v Ponsonby (1857) 7 El & Bl 872; 119 ER 1471 (see [2.86]–[2.87]), the sailors that remained on the ship were deemed to have gone beyond the conditions of their employment contracts because the undermanned crew resulted in excessive labour being imposed upon them.
Deed [2.98]
Contracts can be categorised as either simple or formal. Simple contracts can be made orally and/or in writing and require consideration. A formal contract, on the other hand, is one contained in a special written document known as a deed. A deed was historically referred to as a ‘document under seal’ because the ‘sealing’ of the document was traditionally achieved by dripping molten wax onto the paper and then imprinting a specific insignia into it. Nowadays it is normally just stamped and the relevant common law requirements pertaining to the use of deeds have been largely modified through statute. In Pinnel’s Case it was stated: ‘[I]f a man acknowledges himself to be satisfied by deed, it is a good bar, without anything received.’94 Therefore, agreements recorded in a deed do not require consideration. In Manton v Parabolic Pty Ltd (1985) 2 NSWLR 361 at 369, Young J explained how the use of a deed has traditionally been reserved for the most significant of transactions and (with reference to the historical authorities) described it as ‘the most solemn act that a person can perform with respect to a particular piece of property or other right’. Therefore, if parties to a contract record an agreement to modify that contract in a deed, they signal that they are aware of the significance of the transaction and are dispensing with the requirement of consideration. [page 69]
Practical benefit
[2.99]
Where one party to a contract (the promisor) promises additional consideration to the other party (the promisee) in return for what they were already due to receive from the promisee, consideration may be found in the ‘practical benefit’ the promisor derives from the modification. In other words, if the beneficiary of a unilateral (onesided) variation performs or promises to perform their existing legal obligation to the promisor, and this reiterated promise confers a ‘practical benefit’ on the promisor, consideration may be found in the beneficiary’s promise or performance.
Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1 Brief facts: The defendants, Roffey Bros (building contractors), were engaged by a housing association to refurbish a block of flats in London. Four months later in January 1986, the defendants hired the plaintiff, Lester Williams (a carpenter) to carry out the carpentry work in the flats for the sum of £20,000. Around two months into the job, Williams ran into financial difficulty and notified Roffey Bros that he was unable to complete the work. Roffey Bros agreed to pay Williams an additional £10,300 to ensure timely completion and avoid triggering the penalty clause in their head contract with the housing association. After completing eight more flats, a dispute arose as to payment and Williams ceased work before suing to recover the additional money promised. Roffey Bros argued that Williams did not provide any consideration for their promise to pay more money as he was merely completing the work he was originally contracted to do. Issue: Did Williams provide consideration for Roffey Bros’ promise to pay the additional money? Conclusion: The Court of Appeal held that Williams had provided consideration and that Roffey Bros’ promise of additional money was therefore enforceable. The consideration
was said to subsist in the practical benefits conferred upon Roffey Bros by having the work completed on time. These benefits included not having to obtain other subcontractors to finish the job, replacement of the haphazard payment scheme with a clearer and more efficient version, and avoiding the penalty clause in the head contract with the housing association. Glidewell LJ outlined (at 15–16) the relevant test as follows: (i) if A has entered into a contract with B to do work for, or to supply goods or services to, B in return for payment by B; and (ii) at some stage before A has completely performed his obligations under the contract B has reason to doubt whether A will, or will be able to, complete his side of the bargain; and
[page 70] (iii) B thereupon promises A an additional payment in return for A’s promise to perform his contractual obligations on time; and (iv) as a result of giving his promise, B obtains in practice a benefit, or obviates a disbenefit; and (v) B’s promise is not given as a result of economic duress or fraud on the part of A; then (vi) the benefit to B is capable of being consideration for B’s promise, so that the promise will be legally binding.
[2.100] The practical benefit principle was applied and approved in Australia
in the case of Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723. Santow J accepted Glidewell LJ’s formulation of the principle but made three variations: 1.
The promisee’s performance and the consequential benefits obtained (or disbenefits averted) by the promisor must be ‘capable of being viewed’ by the promisor as worth more than any likely remedy against the promisee.
2.
Element (iii) of Glidewell LJ’s test should be amended to reflect that a promisor’s promise can also be in the form of a concession (that is, reducing the promisee’s obligation).
3.
Element (v) of Glidewell LJ’s test should be expanded to include
unfair pressure, undue influence or unconscionable conduct.
Compromise of disputed claim and forebearance to sue [2.101]
Consideration may be found in a beneficiary’s promise to perform their existing legal obligation for the promisor where the promise is made so as to resolve a contractual dispute. This compromise is coupled with an implied undertaking that the promisor will forbear from commencing legal proceedings.
Wigan v Edwards (1973) 1 ALR 497 Brief facts: The respondents, Mr and Mrs Edwards, purchased a house built and owned by the appellant, Wigan. Prior to settlement, Mr and Mrs Edwards provided Wigan with a list of defects that required rectification and insisted that he deal with these before the transaction was finalised. Wigan promised in writing to remedy the listed defects, after which Mr and Mrs Edwards went through with the purchase and moved in. Wigan did not fix all of the listed defects after the sale of the property was completed. The Edwards sued for breach of contract. Wigan argued that the Edwards provided no consideration in return for his promise to rectify all of the defects because they were already obligated to proceed with the purchase of the property. The Edwards succeeded at first instance prompting Wigan to appeal the decision. [page 71] Issue: Did Mr and Mrs Edwards provide any consideration for Wigan’s promise to rectify the defects in the property? Conclusion: The High Court found in favour of the respondents. The court held that a promise which is made as part of a bona fide (honest) compromise of a dispute can constitute an
exception to the existing legal duty rule. Consideration in these cases subsists in the aggrieved party (that is, the Edwards) agreeing to resolve the dispute and forbear from suing the other party. Per Mason J (at 512): An important qualification to the general principle [that is, the existing legal duty rule] is that 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 pre-existing contract or that he has a cause of action under that contract.
Further (at 513) the aggrieved party need not actually have a valid legal right; they need only demonstrate that they honestly believed that they had such a right (that is, that it was well founded): [A] threat to bring an action or enter a defence is not an essential element of a bona fide compromise; it is enough if there is a claim (of the kind already discussed) that the contracting party is not bound to perform the contract.
Termination and replacement [2.102] Where parties have terminated their original contract and replaced it
with a new contract, the existing legal duty rule will not apply. This is because the original contract has ended and a ‘new’ contract has been created. It matters not if the obligations of one of the parties have remained the exact same in the new contract as they were in the old one, as the reiterated promise to perform these obligations is now regarded as a ‘fresh’ or ‘new’ promise. The existing legal duty rule is only concerned with prior obligations and so it will have no effect upon a brand new contract. As Twyford explains: The consideration for the contract of rescission is satisfied by the parties giving up their rights to take action for the other’s failure to perform. The consideration requirement for the new contract is satisfied by the exchanged promises to complete the outstanding obligations, albeit on amended terms.95
[page 72]
[2.103] In
most cases, in the interests of convenience, the parties will expressly agree to draw up a new agreement to reflect the amended terms. In other cases, where a purported variation has been made to the original contract, the existing legal duty rule may render the modification(s) unenforceable. The question will then arise if the original contract has actually been rescinded and replaced altogether, or merely varied. This can have great legal significance for the parties and so the courts consider the manifest intentions of parties to answer this question.96 Often this will ‘turn upon the place, or the time, or the form, of the [renegotiated] contract’.97
Concut Pty Ltd v Worrell (2000) 176 ALR 693 Brief facts: In 1980, an employee, Geoffrey Wells, commenced employment with the appellant company (Concut) under an oral agreement. In 1986, the parties executed a formal written employment contract which was said to ‘record the terms and conditions of [his] employment’. In 1988, Wells was terminated without notice. Concut justified its decision on the basis that Wells had breached his employment conditions through alleged misconduct that occurred prior to the formal employment contract being signed in 1986. This termination would only have been lawful, therefore, if the written contract merely varied (and not terminated and replaced) the original oral contract. Otherwise, it was an unlawful termination because the behaviour did not occur after 1986 while the employee was employed under the written contract. Issue: Did the parties objectively intend to vary the original oral contract by recording it in writing (rendering the termination lawful), or to rescind and replace the oral contract with a new written one (rendering the termination unlawful)? Conclusion: The High Court found in favour of Concut. The evidence demonstrated that the parties merely intended the written agreement to supplement, not replace, the original oral contract of employment. Among other factors, the court
considered the fact that the formal written contract preserved Wells’ accrued leave entitlements, used the same language as before in his role description, and preserved Concut’s rights in concluding that variation (and not complete replacement) was intended.
[page 73]
Past consideration [2.104] Since bargain theory dictates that consideration be given in return for
a promise, it is a logical consequence that consideration will not be found in something done or given prior to the making of the promise. In other words, there must be contemporaneity in the exchange of promises or acts between the parties; they must form part of the one transaction.
Roscorla v Thomas (1842) 3 QB 234; 114 ER 496 Brief facts: The plaintiff, Roscorla, purchased a horse from the defendant, Thomas, for the sum of £30. After the sale was completed Thomas, at Roscorla’s request, promised that the horse was ‘sound and free from vice’. Roscorla later sued Thomas for breach of contract, arguing that the horse was in fact ‘very vicious, restive, ungovernable and ferocious’ in nature, contrary to his promise. Issue: Did Roscorla give consideration in return for Thomas’ promise (which would have made it an enforceable term of the contract)? Conclusion: Lord Denman CJ held that the express promise as to the good nature of the horse was unenforceable as it was made
after the sale (it did not form part of the bargain). Roscorla’s payment for the horse had already occurred, and Thomas’ promise was made after this point, meaning it was past consideration and did not support the promise. [2.105] An
exception to the past consideration rule is where a party is requested to perform a particular service, which they do, and the party which made the request subsequently promises to pay for the service. This would ordinarily be an example of ‘past consideration’; however, the difference lies in the implication of a common understanding between the parties that the service will be paid for. Such an implication will arise where it is obvious that the service was rendered in anticipation that payment will be forthcoming. As Lord Scarman stated in Pao On v Lau Yiu Long [1980] AC 614 at 629: An act done before the giving of a promise to make a payment or confer some other benefit can sometimes be consideration for the promise. The act must have been done at the promisor’s request: the parties must have understood that the act was to be remunerated either by a payment or the conferment of some other benefit: and payment, or the conferment of a benefit, must have been legally enforceable had it been promised in advance.
[page 74]
Lampleigh v Brathwait (1615) Hob 105; 80 ER 235 Brief facts: The defendant, Thomas Brathwait, committed a murder and asked the plaintiff, Anthony Lampleigh, to obtain a pardon from the King for his crime. Lampleigh travelled throughout England at his own expense to petition the King. Brathwait subsequently promised Lampleigh £100 for his efforts but failed to pay. Lampleigh sued to recover the money promised to him. Issue: Was Lampleigh’s consideration (in return for Brathwait’s
promise of money) ‘past’ and therefore not valid? Conclusion: The court found in favour of Lampleigh. Though his consideration (the services he rendered) was given prior to Brathwait’s subsequent promise to pay for his services, those services were performed at the previous request of Brathwait and therefore the request and promise of payment were to be viewed as part of the same transaction.
Ipex Software Services Pty Ltd v Hosking [2000] VSCA 239 Brief facts: The respondent, Mark Hosking, transferred his computer software business to a corporate group of which the appellant company was a member. Hosking was a co-owner of the software business acquired by the corporate group. Hosking’s understanding was that he would receive a five per cent shareholding in the appellant’s restructured group in return for this transfer; however, this agreement was made after the transfer had occurred. The appellant later refused to grant the five per cent shareholding to Hosking on the basis that his consideration (business title transfer) was past. Issue: Did Hosking’s transfer of his software business amount to valid consideration for Ipex’s subsequent promise to give him a five per cent shareholding in the restructured corporate group? Was Hosking’s transfer past consideration, or did the exception of promises to pay for past services apply? Conclusion: The Victorian Court of Appeal found in favour of Hosking. His transfer of the software business was valid consideration for the appellant’s subsequent promise to give him a five per cent shareholding in the restructured corporate group. The obvious implication in the circumstances was that Hosking would be compensated by Ipex for transferring ownership of his software business to them. Per Callaway JA (at [22]–[23]):
The evidence establishes … that the respondent permitted the computer software services business to be acquired by Ipex …
[page 75] and that he actively assisted in the transfer of the business, in the belief that, in return, he would receive shares or units in the restructured group. … The transfer was not … intended to be gratuitous, nor was it an example solely of detrimental reliance. It was more like the performance of a service on the basis that it would be paid for, followed by a promise which fixed the amount of the payment.
[2.106] It can be difficult to conceptualise the distinction between the rule
against past consideration and the exception for promises to pay for past services. In the former case, there is no valid consideration as it has not formed part of the bargain between the parties. In the latter case, there is valid consideration which has merely been executed by one party (the party seeking payment) and which is therefore deemed to have been given in return for the later promise of payment. In Re Casey’s Patents; Stewart v Casey [1892] 1 Ch 104 at 115–6, Bowen LJ spoke of the presumption which operates when a party promises to pay for past services: [T]he fact of a past service raises an implication that at the time it was rendered it was to be paid for, and, if it was a service which was to be paid for, when you get in the subsequent document a promise to pay, that promise may be treated either as an admission which evidences or as a positive bargain which fixes the amount of that reasonable remuneration on the faith of which the service was originally rendered. [2.107] In
commercial transactions the courts will endeavour to apply the exception of promises to pay for past services rather than conclude that the consideration was past.98 Seddon, Bigwood and Ellinghaus have described the ‘great practical importance’ of this exception because of the way people commonly conduct business: It is a common practice, for example, to ring someone up and ask them to provide a service or deliver goods. Nothing is said about payment. A subsequent undertaking to pay is referable back to the original telephone conversation and fills in a gap in that conversation, namely, the fact that nothing was expressly said about price. It
cannot then be said that, because a vital element is missing, the bargain is incomplete.99
[page 76]
Illusory consideration [2.108] The
term ‘illusory consideration’ can be used to describe several different situations in contract law. It broadly describes any circumstance in which consideration is said to exist but where it does not; for example, because it is merely a promise to perform an existing legal duty, or it lacks certainty, or it facilitates an illegal act. One of the most common situations in which consideration is said to be illusory involves discretionary promises. Where a party makes a promise to do something when in fact they retain discretion whether or not to perform, this will amount to illusory consideration and will be insufficient to support a contract.
Placer Development Ltd v Commonwealth (1969) 121 CLR 353 Brief facts: An agreement was made between the Commonwealth Government and the plaintiff company, Placer, for Placer to provide wood and timber products to the territory of Papua New Guinea. Clause 14 of the agreement stated that the Commonwealth would pay a subsidy ‘of an amount or at a rate determined by the Commonwealth from time to time’ if the plaintiff paid unremitted customs duties on any of the products it imported. The Commonwealth did not pay any subsidies to Placer, nor make any determinations as to the appropriate amount to pay. Placer sued for financial compensation. Issue: Was the Commonwealth’s consideration (promise to calculate and pay subsidies where applicable) illusory?
Conclusion: The High Court held in favour of the defendant. Clause 14 imposed no obligation upon the Commonwealth to actually perform its promised obligation to calculate and pay the subsidy to the plaintiff. It retained an unfettered discretion in this regard. Consequently, the consideration was illusory and the agreement was therefore unenforceable. Per Kitto J (at 356): The general principle … is that wherever words which by themselves constitutes a promise are accompanied by words showing that the promisor is to have a discretion or option as to whether he will carry out that which purports to be his promise, the result is that there is no contract on which an action can be brought at all.
Movement from the promisee [2.109] It is settled law that consideration must move from the promisee.100 In
simple terms, this means that the consideration stipulated by one party (the [page 77] promisor) must be provided by the other party (the promisee). For example, if A promises to deliver goods to B providing that B pays C the sum of $50, this payment is good consideration in return for A’s promise as it has moved from B. B’s money went to C, not A, but this does not matter: the consideration does not have to move to the promisor.101 The rule of movement from the promisee ensures that there is proof of the plaintiff participating in the bargain upon which they now seek to initiate a cause of action. In the example given, it is irrelevant that the $50 from B did not pass to A as consideration must consist of either a benefit to the promisor or a detriment to the promisee. There is no obvious benefit to A here, but there is an obvious detriment to B (liability to pay C).
Consideration in practice [2.110]
In the commercial world, the consideration in a given contractual agreement is usually identified without difficulty. Normally it will be in the nature of money, goods or services. Some contracts will specifically include a ‘consideration’ clause to expressly identify the subject matter of the exchange. Take this example from a contract for the sale of a second-hand motor vehicle:
Consideration The total purchase price to be paid by the Buyer to the Seller for the Vehicle is three thousand dollars ($3000.00) AUD (‘Purchase Price’) consisting of the following components: (1) Deposit of five hundred dollars ($500.00) AUD to be paid to the Seller on or before execution of this agreement; and (2) Balance of two thousand five hundred dollars ($2500.00) AUD to be paid to the Seller either before or on the Delivery Date. Payment of the Deposit and the Balance are to be made by the Buyer in cash, certified cheque, electronic bank transfer or via any other means agreed to by the Seller.
[2.111]
Here you can see that a standalone clause has been included to eliminate doubt as to what the parties are exchanging: a car for money.
[2.112]
You will recall, however, that consideration does not necessarily have to be in the nature of a benefit; it can also be a detriment. A party might give up a right in exchange for the other party’s promise of something. A ‘restraint of trade’ clause is a good example. In basic terms, these clauses protect employers in specialised industries who lose staff from being exploited. Often they will prevent [page 78]
an employee from working for a rival business in the same or a closely similar industry, or within a certain geographical area, for a specified period of time. In return for being employed and receiving a salary from the employer (benefit from the promisor), the employee agrees in return not to work for a competitor or in a particular area for a specific duration (detriment to the promisee). An example of such a restraint of clause is as follows: In consideration of the Company agreeing to employ the Worker under the conditions specified in this agreement, the Worker agrees that s/he will not work for a competitor of the Company in the same or a substantially similar industry for a period of one year after the Worker’s employment ends.
[2.113]
Some contracts do not use standalone consideration clauses but merely make clear within the text of the agreement what is being exchanged between the parties. Often this is because the drafters seek to avoid antiquated terminology such as ‘consideration’, or merely because it is plainly obvious by virtue of how the contract is drafted what the parties are exchanging. Take this example from a residential sale contract:
The Property The whole of the land in Certificate of Title, Volume 1234 Folio 567 being improved land located at Street: 89 Smith Street Suburb: Summerville State: SA Postcode: 5000.
Purchase Price The sum of: Amount Payable for the Property: $450,000.00 GST (if applicable): N/A Total Purchase Price: $450,000.00
[2.114]
Here it is obvious that the vendor and the purchaser are exchanging a property at 89 Smith Street in Summerville for $450,000 cash respectively. There was simply no need to include a separate clause for consideration in this case. In other cases, the relevant clause outlining the consideration in the agreement will merely refer the reader to an appendix or similar attachment. Many employment contracts (in which the consideration is obviously the employer’s remuneration in return for the employee’s service) do this by stating something like the following: [page 79]
Remuneration The Employer and the Worker agree that the remuneration indicated in Schedule A is in full compensation for all hours and circumstances in which the Worker performs work for the Employer. … SCHEDULE A — REMUNERATION Worker name
Sarah Reynolds
Worker ID number Position title and classification Effective from Weekly hours Remuneration per annum ($)
B7764 Accounts Manager — Level 5 1 January 2017 38.50 Base salary 65,000.00 Employer superannuation contribution 7500.00 Leave loading 1000.00 Total remuneration 73,000.00
[2.115]
There is no particular reason for this except that it offers the advantage of being able to reserve the more substantial and tedious details of the remuneration in an attachment rather than the text of the contract itself. This makes the contract easier to read by reducing the body text to the bare essentials underpinning the agreement. [page 80]
Intention to create legal relations [2.116]
The fact that parties have reached agreement does not necessarily mean that a contract has been formed. An additional prerequisite of valid contract formation is intention to create legal relations; the parties to an agreement must intend the agreement to be legally enforceable.
[2.117]
Most of the time, the parties’ intention to be legally bound by a contract will be clear. However, where this intention is not readily apparent, the courts apply an objective test to discover whether a reasonable person would regard the agreement to be binding: would a reasonable person conclude that the parties intended to be legally bound? This position is propounded by Lord Denning in Merritt v Merritt [1970] 1 WLR 1211 at 1213: [T]he court does not try to discover the intention by looking into the minds of parties. It looks at the situation in which they were placed and asks itself: ‘Would reasonable people regard the agreement as intended to be binding?’
[2.118]
Over time, the common law developed ‘presumptions’ to assist courts in making their objective assessment. The presumptions are rebuttable on the facts of each particular case.
Domestic, family and social agreements Domestic agreements
[2.119]
In the absence of evidence to the contrary, where an agreement is of a social or domestic nature, parties are presumed not to have intended to enter into legal relations. A case commonly referred to on this point is the old English case of Balfour v Balfour [1919] 2 KB 571.
Balfour v Balfour [1919] 2 KB 571 Brief facts: The parties were a married couple of 15 years who lived in Ceylon (now Sri Lanka). During a holiday to England, Mrs Balfour fell ill and was advised by her doctor to remain in England until fit enough to return home to Ceylon. Mr Balfour promised to pay Mrs Balfour £30 each month until she was well enough to return. The parties eventually separated before filing for divorce, without Mr Balfour seeking to make any further payments. Mrs Balfour commenced legal proceedings against her ex-husband to enforce his promise to pay her maintenance. [page 81] Issue: Did the husband intend on being legally bound by his promise to pay his wife a monthly allowance? Conclusion: The agreement was of a domestic nature, such that there was no objective intention to create legal relations on the part of the parties. This was not a contract, but a mere domestic arrangement. The courts will not, prima facie, interfere in such arrangements. Per Atkin LJ (at 579): [Domestic agreements] are not sued upon, not because the parties are reluctant to enforce their legal rights when the agreement is broken, but because the parties, in the inception of the arrangement, never intended that they should be sued upon.
[2.120] This position has been adopted in Australia.102 Note, the presumption
can be rebutted. For example, where an agreement between a husband
and wife is made during or following the breakdown of a marriage, courts may be more inclined to deem the agreement as being legally enforceable. This was shown to be the case in Merritt v Merritt. The rationale underlying this position is that the honour and goodwill which would normally inform agreements made between spouses can be assumed to cease upon breakdown of the marital relationship.
Family agreements [2.121]
In relation to more general family agreements, courts generally presume that parties do not intend to be legally bound. In the case of Jones v Padavatton [1969] 1 WLR 328 the court held that a mother’s promise to pay her daughter $200 per month to enable her to go to England to read for the bar was not a legally enforceable agreement. However, the South Australian Supreme Court case of Todd v Nichol [1957] SASR 72 provides us with a contrary outcome.
Todd v Nichol [1957] SASR 72 Brief facts: The defendant, Mrs Nichol, resided in South Australia. She invited her sister-in-law and niece (the plaintiffs) to move to South Australia from Scotland, agreeing that they could share the home without paying rent. She also amended her will to the effect that the plaintiffs would be entitled to live in the house until they passed away. Mrs Todd quit her job and sold her belongings before relocating to South Australia with her daughter. [page 82] The living arrangements did not work out as planned and the relationship between the parties broke down. The plaintiffs claimed they had a contractual right to live in the defendant’s house rent free as promised, and sought to enforce this
arrangement. The defendant argued that the agreement was purely between family members and that it should therefore be presumed to be founded upon notions of trust and lacked legal force. Issue: Was this agreement intended to be legally binding? Conclusion: The court held that parties intended to be legally bound by their agreement, which gave rise to an enforceable contract. The court considered the ‘greatness’ of the upheaval involved in relocating and considered the surrounding circumstances: the plaintiffs’ act of selling all furniture and belongings, Mrs Todd’s resignation from her job, and the fact the arrangement never provided for the plaintiffs’ return to Scotland. If this were not an enforceable contract, the plaintiffs would have been at the whim of the defendant. The presumption against legal intention was rebutted based on the unique facts of the case.
Social agreements [2.122] Similarly, social agreements will not, prima facie, be legally binding.
Social agreements may include arrangements between friends or colleagues. The courts are highly reluctant to interfere with such agreements given that they are typically insignificant and because the consequences of their breach are not generally serious. In Coward v Motor Insurers’ Bureau [1963] 1 QB 259, for example, the plaintiff’s husband James Coward was killed while riding a motorcycle with his colleague to work. The driver, James Cole, was also killed. The plaintiff sued Mr Cole’s estate as well as the Motor Insurers’ Bureau (defendant) to obtain damages. She alleged that her late husband and Mr Cole had entered into a contract ‘for hire or reward’, which would have required Mr Cole to insure Mr Coward under road traffic legislation. Mr Cole transported Mr Coward to and from their place of employment every week for around 18 months prior to the accident,
and Mr Coward had paid Mr Cole a weekly sum for his trouble. [2.123] The court held that the parties did not, on an objective review of the
available evidence, intend to create legal relations with one another: this was not a contract for hire or reward, but a mere social agreement. As such, Mr Cole was not required to insure Mr Coward and the plaintiff could not recover damages from the defendant. Upjohn LJ explained (at 271) as follows: The practice whereby workmen go to their place of business in the motor-car or on the motor-cycle of a fellow-workman upon the terms of making a contribution to the costs of transport is well known and
[page 83] widespread. In the absence of evidence that the parties intended to be bound contractually, we should be reluctant to conclude that the daily carriage by one of another to work upon payment of some weekly (or it may be daily) sum involved them in a legal contractual relationship. The hazards of everyday life, such as temporary indisposition, the incidence of holidays, the possibility of a change of shift or different hours of overtime, or incompatibility arising, make it most unlikely that either contemplated that the one was legally bound to carry and the other to be carried to work. [2.124] Consider another scenario:
A and B enter into an agreement which requires B to pick up and deliver company meeting notes to A every Friday in the month of June (as A has other meetings to attend). B forgets to deliver the notes to A and, as such, A cannot write a review on the company’s performance, which was discussed in the meeting. The CEO of the company is most displeased with A’s performance. Could A take action against B for failing to deliver the notes? Could it be said that A and B intended to enter into legal relations with one another? Based on the presumption that social arrangements are not intended as being legally binding, A and B do not have a contract. The arrangement is clearly social: B is doing A a favour,
which presumably A should be doing himself. As in Coward v Motor Insurers’ Bureau, there is a commercial purpose underlying the arrangement as it concerns employment. However, the parties’ intentions are what must be analysed objectively to determine if they were seeking to create a legally enforceable agreement or not. A cannot sue B for not delivering the meeting notes. [2.125] However,
the general presumption against intention for social agreements may be rebutted in certain circumstances. For instance, in Simpkins v Pays [1955] 3 All ER 10; 1 WLR 975, the plaintiff, defendant and the defendant’s granddaughter regularly entered into a newspaper fashion competition using only the defendant’s name. All parties shared associated expenses (such as postage) and agreed to share the winnings if successful. Upon being awarded a prize, the defendant refused to share it, arguing there was no contract between the parties as they never intended the agreement to be legally enforceable. The plaintiff sued to recover her third of the prize. The court held that, notwithstanding it was a social arrangement, viewed objectively, the parties intended to be legally bound by the agreement. The obvious implication in the circumstances was that the parties would share equally in any prizes if they were successful.103 The defendant [page 84] was therefore legally required to share the winnings. The same conclusion was reached in the factually similar case of Trevey v Grubb (1982) 44 ALR 20.
[2.126] Generally speaking, in the absence of evidence to the contrary, it is
presumed that agreements to undertake voluntary work for charitable or other organisations,104 or as part of a voluntary association such as a sporting club or political authority bound by their own rules,105 are not intended to create legal relations.
[2.127] The onus of rebutting the presumption lies on the party who wants to
enforce the contract. Where, on the facts, it is clear that parties intended to be legally bound by their agreement, courts will enforce social promises.106
Commercial agreements [2.128] On the other hand, commercial or business transactions are, prima
facie, presumed to be legally binding.107 In fact, this presumption is relatively difficult to displace;108 a party to a commercial transaction who wants to argue that the agreement was not intended to be legally binding bears a heavy onus of proof. Commercial agreements between family members, too, are generally legally binding when viewed objectively; where the setting of the arrangement is commercial, rather than social or domestic, parties are likely to have intended to create legal relations. In Roufos v Brewster (1971) 2 SASR 218, for example, Mr Roufos entered into an agreement with his wife’s parents, Mr and Mrs Brewster. Pursuant to the agreement, Mr Roufos would transport his in-laws’ truck from Coober Pedy to Adelaide to have it repaired and hire another driver to return the truck to Coober Pedy. Mr Roufos would also benefit by transporting liquor for his business in the truck. The truck was damaged on the return trip and the Brewsters sought to claim damages from their son-in-law for the repair costs. Bray CJ held that the presumption against legal intent was displaced in this case. Notwithstanding the familial relationship between the parties, it was objectively intended that the agreement would give rise to legal consequences. As his Honour explained (at 222): It is true that the appellant is the son-in-law of the respondents, but they were conducting separate businesses at Coober Pedy, there was, according to the evidence of Mrs Roufos, intermittent hostility between the appellant and the respondents, and the appellant had an important commercial interest in the transport of his liquor to Coober Pedy for the purpose of his new restaurant … just as the respondents had a commercial interest in regaining the use of their
[page 85]
truck as soon as possible. The whole setting of the arrangement is commercial rather than social or domestic. [2.129] Consider another scenario:
A and B are brothers. A agrees to sell B his car for $10,000. Do A and B intend to be legally bound by their promises? It is highly likely, that a court would find that A and B intended to enter into legal relations with each other for the sale of the car, notwithstanding their sibling relationship. The party who does not wish to enforce the agreement must convince the court that the agreement was not intended to carry with it any legal obligations. The commercial nature of the transaction, subject matter of the agreement, and the words used will be taken into account when the court makes the assessment. On the face of it, A and B intended to be legally bound by the agreement.
[2.130] The case of Rose and Frank Co v J R Crompton & Bros Ltd [1923] 2 KB
261 is an example of a case where the court held that parties did not intend to be bound by a promise, notwithstanding the commercial nature of the agreement. Here, parties stipulated in writing by way of an ‘honour clause’ that the arrangement was not a formal legal agreement and that it was binding in ‘honour’ only. This demonstrated that the agreement was not intended to be legally enforceable. [2.131]
Essentially, the presumptions reflect which party bears the onus of proof; who must convince the court that parties did or did not intend to enter into legal relations. Thus, their application provides a useful ‘starting point’ for courts when making their objective assessments.
[2.132] Notably, the High Court in Ermogenous v Greek Orthodox Community
of South Australia Inc (2002) 209 CLR 95 at 105–6 stated that the courts should apply presumptions with a degree of caution; it is always necessary to determine intention on a case by case basis taking into account surrounding circumstances. As such, it is important that courts consider a wide range of factors when assessing
whether or not an agreement is legally binding including: the subject matter of the agreement; the circumstances surrounding it; the words the parties used; the subsequent actions of the parties; and the nature of the relationship between the parties. [2.133] In effect, this suggests that a court is not predisposed to find that
parties did not intend to enter into legal relations on the basis of a familial relationship between the parties. A party who wants to enforce an agreement of a domestic, family [page 86] or social nature needs to convince the court that parties intended to be legally bound by the agreement. Equally, in cases where a party denies that the parties intended to be bound by a business transaction, that party will need to convince the court that the parties mutually agreed not to enter into legal relations with each other.109
Government contracts [2.134] It
is important to note that government dealings which are predominantly administrative are generally not enforceable. A contractual obligation will only arise if there was a clear intention that the agreement be enforceable at law. An example case is Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424:
Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424 Brief facts: The Commonwealth Government proposed to give a
subsidy to Australian manufacturers of woollen products in order to decrease the cost of their wool purchases. An exchange of letters between the plaintiff company and the Government confirmed the subsidy arrangement. When the scheme was discontinued, the plaintiff claimed that the government was legally obliged to pay the subsidy. Issue: Was the agreement between the plaintiff and the government legally binding? Did the Commonwealth Government intend to enter into legal relations with the recipient of government services? Conclusion: The court held that the arrangement was not intended to be legally binding as the parties did not intend to enter into legal relations. It was noted that there was neither legislation nor any proper statutory authority in place to accommodate the process for paying the subsidy. There was also no commercial interest for the Commonwealth, and the arrangement was to support the price structure for Australian manufacturers in the post-war period. The Commonwealth was not legally obliged to pay the plaintiff. The administrative agreement was not enforceable.
Certainty and completeness of terms [2.135] The
final element of contractual formation is certainty and completeness. The agreement between the parties must not only involve an identifiable [page 87] offer and acceptance in the nature of a bargained-for exchange of legally sufficient consideration (which was intended to create legal relations), but be certain and complete in form. This element is
inextricably intertwined with the others: an effective offer must sufficiently identify the proposed terms to be accepted or rejected by the offeree; an agreement which is comprehensive and largely certain is objectively more likely to have been intended to create legal relations. [2.136] Importantly, the law of contract does not demand absolute certainty
and completeness. There are sound reasons for this. The use of language as a means of communication is inherently difficult given its breadth and the capacity for parties to attribute their own meanings to words and phrases on the basis of their own subjective understandings and experiences. Drafting contract terms in such a manner that they are universally understood to mean only one thing is therefore a highly challenging task, particularly where complex or unfamiliar subject matter is being discussed. It is simply impossible for parties to eliminate all linguistic ambiguities in their agreements and to account for every possible contingency. [2.137] For this reason, the courts have traditionally endorsed an approach
which seeks to give meaning and effect to contractual agreements, even where these are not entirely certain or complete. In Vestry of St Leonard’s, Shoreditch v Hughes (1864) 17 CB (NS) 137; 144 ER 55, for example, Byles J noted that contracts should wherever possible be construed in accordance with the maxim ut res magis valeat quam pereat (‘it is better for a thing to have effect than to be made void’).110 This view has been validated by the High Court.111 In contemporary times the courts are also clearly sympathetic to the lack of precision often found in commercial contracts and recognise that ‘fluidity and adjustment rather than precise documentation are the working methods of business people’ in the modern economic environment.112 It is therefore critical to assess the degree to which a contract is purportedly uncertain or incomplete (and incapable of redemption through interpretation) before determining it to be legally unenforceable. [2.138] Given
the crucial role of contracts to commercial activity, it is absolutely imperative that they be sufficiently certain and complete so as to enable the transactions they facilitate to proceed with as little
difficulty as possible. [page 88]
Completeness [2.139] We start with the aspect of ‘completeness’ because it is perhaps less
controversial than that of ‘certainty’, though the two aspects are interrelated. It is also logical given that the terms of the agreement must first be established before determining if these lack legal certainty.
General rule [2.140] The
minimum requirement in contract law is that an agreement contain all essential (or critical) terms, as agreed upon by the parties.113 The word ‘essential’ in this context means so important that without the term in question the contract would not be enforced.114 Importantly, however, the courts have stressed that it is the parties who must determine which terms are important and essential to their agreement.115 The courts will consider the general nature of the agreement as well as all relevant circumstances to establish whether the parties intended a given term to be essential.116 They will interpret the contract for the parties to establish if it is sufficiently complete, but they will not write the contract for them. The parties, not the judiciary, are responsible for ensuring that their contract is enforceable.117
[2.141]
By way of example, the commencement date of a lease is regarded as an essential term,118 as are the parties, subject matter and price in a contract for the sale of land.119 Again, however, each contract must be examined individually in the context of the relevant circumstances to determine if the agreement in question is not sufficiently complete so as to be legally enforceable.
ANZ Banking Group v Frost Holdings Pty Ltd [1989] VR 695 Brief facts: Frost Holdings, a publisher, entered into a contract with the ANZ to stage an Australian art exhibition and produce a calendar featuring the 12 paintings on display. The calendars would then be sold by the ANZ. The contract was unclear as to the content, design and style of the calendars, the quality and size of paper to be used, and the quantity to be produced. [page 89] Issue: Was the contract sufficiently complete (that is, were all of the essential terms included) and therefore enforceable? Conclusion: The contract was not sufficiently complete and was therefore unenforceable. The details unclear in (or absent from) the agreement such as style and quantity were essential terms which could not be determined by implication.
Retrospective findings of incompleteness and uncertainty [2.142] If
parties to a contract have already commenced or completed performance of their obligations, it is highly unlikely that the courts will find the contract to be legally incomplete. The fact that the parties have proceeded in this manner makes it difficult to conclude that the contract was so incomplete or uncertain that it was not commercially viable.120 Indeed, the further into the agreement the parties have progressed, the more likely it is that the courts will imply terms as necessary to give effect to the intentions of the parties and avoid destroying the bargain between them.121
Foley v Classique Coaches Ltd [1934] All ER Rep 88; 2 KB 1 Brief facts: The plaintiff, Foley, agreed to sell a piece of land to the defendants, Classique Coaches. Classique Coaches wished to use the land for their motor coach business. The land adjoined other land belonging to Foley. On one of the adjoining pieces of land was a petrol station. The sale agreement was made subject to the condition that Classique Coaches would purchase all of the petrol required for their business from Foley’s petrol station ‘at a price to be agreed by the parties in writing and from time to time’. The sale went through but after three years of purchasing petrol from Foley, and following a series of disputes, Classique Coaches sought to buy petrol elsewhere. Classique Coaches argued that the contract was unenforceable because it was uncertain in its essential terms. Foley sued and sought a declaration of the contract’s validity. Issue: Was the term of the contract as to the setting of the petrol price uncertain, rendering the agreement unenforceable? [page 90] Conclusion: The court found in favour of Foley. It implied a term into the contract that the sale price of the petrol be ‘reasonable’ and that, if the parties could not agree as to what price was reasonable, the matter would be referred to arbitration: at KB 10 per Scrutton LJ; 11 per Greer LJ; 15 per Maugham LJ. The contract was enforceable.
[2.143] In York
Air Conditioning and Refrigeration (Australasia) Pty Ltd v Commonwealth (1949) 80 CLR 11 at 53, Latham CJ remarked: When the parties have shown by their conduct that they understand and can apply the terms of a contract without difficulty, a court should be very reluctant indeed to
pay no attention to such conduct by holding that the terms of the contract are unintelligible by reason of uncertainty. [2.144] This
reluctance stems from the disastrous consequences for commercial parties that can follow from such a finding. If the parties have commenced or completed performance, they will have committed time, finances and resources to do so. Depending on the nature of the agreement this may well involve considerable sums of money, large-scale consumption of resources and substantial numbers of workers. Undoing all of this can be a logistical nightmare for the courts, let alone the parties and any third parties who are indirectly affected by the transaction, such as consumers.
[2.145] Where a contract remains wholly executory, that is, where the parties
have not yet commenced performing their obligations, the consequences for all parties involved will be less serious and the courts may be more inclined to find the contract to be inherently uncertain and legally unenforceable.
Mechanism for determining terms [2.146] It
is possible for parties to a contract to create and utilise a mechanism or formula for determining an essential term of the agreement at a later time. This can occur quite frequently in business. For example, commercial leases often provide a renewal option at a rent to be determined by the parties (many will also provide a means to resolve any disputes in this regard, such as referral to arbitration). Others may simply state that the rent will be adjusted in proportion to increases in the Consumer Price Index (CPI), or via some other standard. In these circumstances the contract need not be entirely ‘complete’ because it will in fact become complete in the future.
[2.147] Earlier in the chapter it was mentioned that the courts have regarded
‘price’ as being an example of an essential term. The suggestion that an essential term can be determined through some mechanism or formula agreed between
[page 91] the parties therefore seems anomalous. However, where such mechanism is sufficiently certain and understandable, the courts will enforce them. Even where there is doubt in this regard, the courts will use all efforts to give meaning to the mechanism or formula prescribed by the parties. In Royal Botanic Gardens and Domain Trust v South Sydney Council (2002) 240 CLR 45, for example, the High Court was required to interpret a clause in a commercial lease which gave the lessors the power to determine the rent payable for each rental period having regard to ‘additional costs and expenses’ incurred in respect of the property. The court considered that this phrase, in the context of the contract and relevant circumstances, could be interpreted as meaning merely that the lessor should not incur a financial disadvantage from the transaction; concepts such as rental and opportunity costs were not relevant and did not render the lease agreement incomplete and unenforceable.122
Booker Industries Pty Ltd v Wilson Parking (Qld) Ltd (1982) 149 CLR 600; 43 ALR 68 Brief facts: The defendant, Wilson Parking, leased a service station and car park from the plaintiff, Booker Industries. The rental period was for three years. The lease contained an option for renewal for a further three years. The renewed lease was stipulated as being upon the same conditions as the original lease except for rent, which was to be mutually agreed between the parties, or fixed by a nominated arbitrator in the event that agreement could not be reached. The parties failed to agree upon new rent and Wilson Parking attempted to exercise the option to refer the matter to arbitration for resolution. Booker Industries argued that this rent provision was too uncertain and therefore unenforceable before seeking to recover possession of the land from Wilson Parking. Wilson Parking sued to enforce the new lease.
Issue: Was the rental clause uncertain, rendering the contract void? Conclusion: The rental clause was not uncertain; the contract (lease) was valid. The rental clause provided a specific mechanism for determining the rent to be paid in the renewed lease, eliminating any uncertainty. Had the clause simply stated that the rent was to be ‘agreed between the parties’, this would have been unenforceable as it is indeterminate and therefore uncertain. Per Gibbs CJ, Murphy and Wilson JJ (at CLR 604–5): [page 92] It is established by authority, both ancient and modern, that the courts will not lend their aid to the enforcement of an incomplete agreement, being no more than an agreement of the parties to agree at some time in the future. Consequently, if the lease provided for a renewal ‘at a rental to be agreed’ there would clearly be no enforceable agreement. On the other hand, it is also well established that the parties to a contract may leave terms — even essential terms — to be determined by a third person … In the present case, the lease itself provides the entire mechanism for determining the rental for the renewed term. There is no further agreement required of the parties. [2.148] In other cases, where the mechanism agreed between the parties fails,
the contract may be regarded as incomplete and incapable of redemption. In George v Roach (1942) 67 CLR 253, for example, the sale contract between the parties stipulated that part of the purchase price for the property in question (a newspaper agency) would be determined by a valuer who then refused to perform the task. The High Court held that the contract was unenforceable as the machinery for determining the purchase price to be paid had failed, meaning this essential term could not be determined. As Starke J noted (at 263): The value of the newspaper agency is fixed through, and by means of, a valuation
and by no other means. Unless a valuation is made the parties have not agreed upon the sale price of the subject matter of the agreement and the agreement does not become effective.
Certainty [2.149] Having
established the essential terms of the contract, and determined that the contract is sufficiently ‘complete’, it becomes necessary to ensure that those terms are certain. If the terms of the contract are uncertain, and the obligations of the parties cannot be accurately ascertained, then the agreement is void. In the commercial world, the importance of ensuring the terms of a contract are certain goes without saying. Lack of clarity can threaten the enforceability of the agreement and potentially unravel the transaction — and the business relationship — to which it relates. It is astonishing to find that many commercially-oriented textbooks do not even consider this element of contractual formation, despite its obvious importance. Uncertainty is equally as important as valid agreement (offer and acceptance), consideration and intention.
[2.150] Uncertainty is not, however, to be confused with mere difficulty in
interpretation; a contract is not uncertain simply because it is wide in its terms or language, or [page 93] because it is somewhat hard to understand.123 What the courts seek to establish is whether it is beyond their interpretative capabilities to understand what the contract means and how it works without having to write the agreement for the parties.
General rule [2.151]
The courts do not endorse a narrow or pedantic approach to the interpretation of a contract when evaluating its certainty; on the
contrary, they will do all possible to attribute meaning to the terms used by the parties unless it is literally impossible to do so: [A] contract of which there can be more than one possible meaning or which when construed can produce in its application more than one result is not therefore void for uncertainty. As long as it is capable of a meaning, it will ultimately bear that meaning which the courts … decide … is its proper construction … The question becomes one of construction, of ascertaining the intention of the parties, and of applying it. … So long as the language employed by the parties … is not ‘so obscure and so incapable of any definite or precise meaning that the Court is unable to attribute to the parties any particular contractual intention’, the contract cannot be held to be void or uncertain or meaningless. In the search for that intention, no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements. Thus will uncertainty of meaning, as distinct from absence of meaning or of intention, be resolved.124 [2.152] It
is therefore clear that the courts appreciate the commercial significance of contracts and will do all possible to keep them alive. Only where those portions of the contract which are uncertain cannot be clarified or severed entirely will the contract be deemed legally uncertain and therefore unenforceable.
Whitlock v Brew (1968) 118 CLR 445 Brief facts: Palmsun Whitlock entered into a contract to sell a large portion of land to John Brew. The land included a petrol station. Clause 5 of the contract provided that Brew would immediately lease part of the land to the Shell Company of Australia ‘upon such reasonable terms as commonly govern such a lease’. Brew subsequently changed his mind about the sale and refused to proceed with the contract of sale, before suing to recover his deposit. He argued that the contract was void for uncertainty given that there were no such ‘common terms’ governing leases of this kind. [page 94] Issue: Was the language of cl 5 of the contract uncertain,
rendering the agreement unenforceable? Conclusion: The contract was void for uncertainty. The expression ‘upon such reasonable terms as commonly govern such a lease’ was not, in the context in which it appeared, capable of referring to either the period of the lease or the rent payable. There was no evidence of such ‘common reasonable terms’ governing leases of this kind which might have cured this uncertainty.
[2.153] Again, as with the issue of completeness, where parties to a contract
have already commenced or completed performance of their obligations, it is highly unlikely that the courts will find the contract to be legally uncertain.125
Meaningless terms [2.154] Where a term in a contract is seemingly meaningless, this will not
automatically render the entire agreement unenforceable on the grounds of uncertainty. This result would clearly be both harsh and extreme. Instead, where it is obvious that the parties have reached agreement on all of the essential terms of the contract such that it is perfectly functional without the inclusion of the meaningless term, the meaningless term may be ‘severed’ (that is, ‘cut out’ of) the contract.
Fitzgerald v Masters (1956) 95 CLR 420 Brief facts: Rupert Masters entered into a contract to purchase a half-share in John Fitzgerald’s farm, with payment to be made in instalments. The contract contained all of the essential terms agreed between the parties but through cl 8 also purported to incorporate ‘the usual conditions of sale in use or approved of by the Real Estate Institute of New South Wales relating to sales by private contract of lands held under the Crown Lands Act’. No such terms actually existed. Eventually, a dispute arose as to
payments before Fitzgerald passed away. Masters sued the executors of Fitzgerald’s estate to enforce the sale. The executors argued that they were not bound to proceed with the contract as it was uncertain on its terms (by virtue of cl 8). Issue: Did the meaningless term (cl 8) render the contract uncertain and therefore unenforceable? [page 95] Conclusion: The contract was not void for uncertainty. The parties ostensibly intended the sale to proceed on the terms outlined in their agreement notwithstanding the mistaken inclusion of cl 8. The contract was clearly operable without the inclusion of cl 8 and it could therefore be severed from the contract altogether. Per Dixon CJ and Fullagar J (at 427): No effect can be given to cl 8, but there is good reason, in our opinion, for saying that cl 8 is severable. No inference can be drawn that the parties did not intend to contract unless effect could be given to cl 8. It seems indeed almost absurd to say that the parties, having agreed on everything essential, intended that the agreement should be nullified if effect could not be given to cl 8.
McTiernan, Webb and Taylor JJ made similar remarks: at 438. [2.155] Cases such as this demonstrate the willingness of the courts to try and
uphold contracts at all costs, particularly in commercial transactions.
Agreements to negotiate in good faith [2.156] Though
the authorities are not harmonious, the current position under Australian contract law appears to be that a term imposing an obligation upon the parties to negotiate in good faith is enforceable.
United Group Rail Services Ltd v Rail Corporation NSW (2009) 74 NSWLR 618 Brief facts: Rail Corporation NSW engaged United Group to design and build new rolling stock for a rail network. The contract contained a clause (cl 35.11(c)) requiring the parties to meet and undertake ‘genuine and good faith negotiations’ in the event of a dispute. United Group argued that cl 35.11(c) was uncertain and therefore void and unenforceable. Rail Corporation NSW argued to the contrary. Issue: Was cl 35.11(c) uncertain and therefore unenforceable? Conclusion: Clause 35.11(c) was not uncertain. Although the place of the doctrine of good faith in Australian contract law was not settled, it was clear that the clause merely required the parties to demonstrate ‘an honest and genuine commitment to the bargain (fidelity to the bargain) and to the process of negotiation for the designated purpose’: at 638 per Allsop P. The parties may act in their own interests, but must do so in a [page 96] reasonable manner and negotiate by reference to their honestly held and genuine beliefs as to their mutual rights and obligations, in the interests of resolving the dispute.
[2.157] Dispute
resolution clauses are a common feature of most modern commercial contracts, and for good reason. Efficient mechanisms to resolve disputes are a prudent inclusion given the tendency for commercial parties to disagree on one or more points of their agreement. As Allsop J remarked in Comandate Marine Corporation v Pan Australia Shipping Pty Ltd (2006) 157 FCR 45 at 95; 238 ALR 457 at 503:
Disputes arising from commercial bargains are unavoidable. They are part of the activity of commerce itself. Parties therefore often deal with the possibility of their occurrence in advance by the terms of their bargain. [2.158] What is crucial is that commercial parties are careful in the manner in
which they draft such terms to avoid any issues of uncertainty threatening their enforceability and thus the validity of the contract itself.
Preliminary agreements [2.159] Occasionally,
commercial parties will reach agreement as to the essential or principal terms of a proposed transaction but seek to record these terms in a more formal manner at a later date. This arrangement goes by many names but is often described as a ‘preliminary agreement’ because it comes before the conclusion of a formal agreement, that is, a contract. Preliminary agreements are often expressed as being ‘subject to contract’ and captured in documents variously described as ‘short form agreement’ or ‘heads of agreement’. It is obvious that preliminary agreements can cause a great deal of uncertainty where the parties themselves are unsure whether they are bound to proceed with the transaction or at liberty to withdraw altogether. An important legal question in this scenario is what the status of the preliminary agreement actually is.
[2.160] To determine the status of a preliminary agreement it is essential to
have regard to the intentions of the parties. This means examining not only the wording of the preliminary agreement itself, but all relevant facts and circumstances. Factors such as the communications exchanged between the parties and their conduct both prior to and after signing the agreement are also relevant. The New South Wales Court of Appeal in Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149 explained:126 The intention of the parties may be found in a series of communications, or it may be shown that the signed document
[page 97]
is only part of their putative contractual relationship. Further, in ascertaining the intention of the parties, whether from a series of communications or from a single document, regard can be had to the commercial circumstances in which the parties exchanged their communications or arrived at the document and to the subjectmatter of the putative contract. The objective intention of the parties is fact-based, found in all the circumstances including ‘by drawing inferences from their words and their conduct in the making of [their] agreement’ … Regard can also be had to the conduct of the parties after the occasion of the putative contract, to cast light on the meaning of the communications in question and otherwise on whether they intended immediately to be contractually bound … [2.161]
The seminal Australian authority on the issue of preliminary agreements is Masters v Cameron (1954) 91 CLR 353.
Masters v Cameron (1954) 91 CLR 353 Brief facts: Violet Cameron agreed to sell her farm to Norman Masters. The parties signed a memorandum of agreement which stated that it was made ‘subject to the preparation of a formal contract of sale which shall be acceptable to [Cameron’s] solicitors on the above terms and conditions’. The memorandum included all essential terms of the agreement, including the subject matter and sale price. Masters paid a deposit to the real estate agent that prepared the memorandum and the parties proceeded on the basis that the transaction would go ahead. No further documentation, as envisaged, was signed. Masters later ran into financial difficulties and refused to pay the balance for Cameron’s property before seeking to reclaim the deposit. Issue: Was the memorandum of agreement itself a ‘contract’ rendering the sale agreement enforceable, or was the requirement for the parties to proceed with the sale contingent on the preparation of a formal contract? Conclusion: The High Court held (at 360 per Dixon CJ, McTiernan and Kitto JJ) that there were, in fact, three possibilities in cases such as this: (1) The parties have finalised the terms of their bargain and intend to be immediately bound, but seek to restate the
terms through more formal documentation which is fuller or more precise but not different in effect; (2) The parties have finalised the terms of their bargain (and do not intend to change them) and are bound, but have made performance of one or more of the terms conditional upon the preparation of a formal contract; (3) The parties have finalised the terms of their bargain but do not intend them to amount to a binding agreement until a formal contract is signed. [page 98] In this case, the use of the phrase ‘subject to the preparation of a formal contract of sale which shall be acceptable to [Cameron’s] solicitors’ implied that the memorandum signed by the parties was merely ‘a basis for a future contract’ and did not in itself constitute a binding agreement: at 362–3. The solicitors may well have sought to amend the terms, or include additional ones: at 364. Accordingly, this preliminary agreement fell into the third category described by the court and was not enforceable. Masters was entitled to withdraw from the transaction and reclaim his deposit. [2.162] As is clear from the decision in Masters v Cameron, it is critical that
commercial parties clearly identify their intentions when a preliminary agreement is signed. This can have significant ramifications for parties who later seek to withdraw from a transaction; they could unwittingly have committed themselves contractually and be exposing themselves to legal action for breach of contract. Category (1) agreements are binding regardless of whether or not the parties sign any additional documentation. Category (2) agreements are binding and oblige the parties to record their bargain in a formal contract. Category (3) agreements are not binding at all
unless a formal contract is signed. [2.163] In Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd
(1986) 40 NSWLR 622 it was suggested (at 628) that there was in fact a fourth category of preliminary agreement, adding to the three outlined in Masters v Cameron. McLelland J described such an agreement as being: … one in which the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms. [2.164] The existence of this fourth category has been accepted by numerous
Australian appellate courts127 though its existence and utility have been questioned in light of the scope of the other three categories identified in Masters v Cameron.128
Certainty in practice: Use of interpretative aids [2.165] It is common in contemporary times for commercial parties to utilise
‘definitions’ clauses in their contracts, or to have separate ‘glossaries’ of terms [page 99] used throughout the agreement. These clauses or glossaries are often found at the very beginning or end of the contract and, when used correctly, are an additional means of safeguarding the certainty of the terms contained within by providing a means of resolving any semantic ambiguities. Defined terms are commonly boldened, italicised, underlined or capitalised to indicate that they are defined more extensively in the definitions or glossary section of the contract. As Espenschied has noted,129 errors can obviously creep in, for example, when: terms are defined but not used in the contract;
terms are indicated as being defined (that is, by being capitalised) but no corresponding definition is provided; definitions are loaded with substantive detail better suited to the body text; and definitions are used in different parts of the contract and produce inconsistencies. [2.166] It is important in practice to carefully draft and review contracts to
ensure that they are clear on their terms and can be interpreted where necessary by reference to the interpretative provisions contained within them. As discussed above, where a contract is so uncertain that it is not possible to attribute meaning to its terms and render it functional, it will be declared void. It is equally important to ensure any subsequent amendments made to the contract are consistent with the entire document and do not inadvertently alter the rights, obligations or liabilities of the parties.130 [2.167] Despite some judicial tolerance for some measure of ambiguity in
contracts, and the courts’ willingness to do all possible to keep commercial agreements afoot, it is still expected that parties are prudent in the preparation of their contracts. In some circumstances the courts will punish ambiguity, rather than find that it renders the contract void for uncertainty. As an example, in the case of exclusion clauses (which purport to limit or exclude a party’s liability for conduct which would otherwise amount to a tort or breach of contract), where on an ordinary and natural interpretation such a clause is ambiguous and capable of more than one meaning, it is construed against the interests of the party seeking to rely upon it.131 [page 100] [2.168] As Wilding has noted,132 there are many basic techniques one can use
to correctly draft a commercial contract and avoid the kinds of uncertainty we have explored in this chapter. For example, you should always be careful to:
utilise a clear structure; use plain English and short sentences; be light on punctuation such as commas, which can change context; strive for clarity and certainty in expression, and avoid being verbose; it is better to repeat words and phrases than use pronouns or cross-references; use standard clauses wherever possible; and be aware of the effect of other laws upon the contract in question, such as consumer laws for goods and services contracts. __________________ 1 2 3 4 5 6 7 8
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United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd [1968] 1 WLR 74 at 82. Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424 at 456. Above. Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 at 171. On puffery, see Chapter 6 at [6.46]. Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401. However, it is possible, and perhaps more commonplace to negotiate the price in relation to the sale of more expensive items such as, for example, electrical goods and furniture. Partridge v Crittenden [1968] 2 All ER 421; Grainger & Sons v Gough [1896] AC 325. See also Electronic Transactions Act 1999 (Cth) s 15B; Electronic Transactions Act 2001 (ACT) s 14B; Electronic Transactions (Northern Territory) Act 2000 (NT) s 14B; Electronic Transactions Act 2000 (No 8) (NSW) s 14B; Electronic Transactions (Queensland) Act 2001 (Qld) s 26B; Electronic Transactions Act 2000 (SA) s 14B; Electronic Transactions Act 2000 (Tas) s 12B; Electronic Transactions (Victoria) Act 2000 (Vic) s 14B; Electronic Transactions Act 2003 (WA) s 18. Spencer v Harding (1870) LR 5 CP 561. Payne v Cave (1789) 3 Term Rep 148; 100 ER 502; Seivewright v Brennan (2005) 12 BPR 22,979; [2005] NSWSC 216. This legal principle has been codified by virtue of Sale of Goods legislation enacted in all Australian jurisdictions in relation to auctions for goods. See Sale of Goods Act 1954 (ACT) s 60; Sale of Goods Act 1923 (NSW) s 20; Sale of Goods Act 1972 (NT) s 60; Sale of Goods Act 1896 (Qld) s 59; Sale of Goods Act 1895 (SA) s 57; Goods Act 1958 (Vic) s 64; Sale of Goods Act 1895 (WA) s 57. See also Barry v Davies [2001] 1 All ER 944. Payne v Cave (1789) 3 Term Rep 148; 100 ER 502. Although eBay and Amazon do not refer to themselves as ‘auctioneers’, facilitating the bidding of items by registered users describes ‘an auction’ as understood in the Australian legislative context. See Sale of Goods Act 1954 (ACT) s 60; Sale of Goods Act 1895 (SA) s 57; Goods Act 1958 (Vic) s 64; Sale of Goods Act 1923 (NSW) s 20; Sale of Goods Act 1896 (Qld) s 59; Sale of Goods Act 1972 (NT) s 60; Sale of Goods Act 1895 (WA) s 57. (1997) 76 FCR 151 at 184; 146 ALR 1 at 29.
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
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(1997) 76 FCR 151 at 214; 146 ALR 1 at 103. Byrne & Co v Leon Van Tienhoven & Co (1880) LR CPD 344. Dickinson v Dodds (1876) 2 Ch D 463. Mobil Oil Australia v Wellcome International (1998) 81 FCR 475 at 501–2; 153 ALR 198 at 224. Hyde v Wrench (1840) 3 Beav 334. Stevenson Jacques & Co v McLean (1880) 5 QBD 346. Goldsbrough Mort & Co Ltd v Quinn (1910) 10 CLR 674 at 678; 17 ALR 42. Australian Securities Exchange, Options Fact Sheet — A Simple Guide, 2009. R v Clarke (1927) 40 CLR 227; [1928] ALR 97. R v Clarke (1927) 40 CLR 227 at 241; [1928] ALR 97. Tinn v Hoffman (1873) 29 LT 271. Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1954) 76 WN (NSW) 72. Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 at 534; Manchester Diocesan Council for Education v Commercial and General Investments Ltd [1969] 3 All ER 1593 at 1599. (1973) 128 CLR 387 at 395. In days gone by, this also included telex and telegrams dispatched and delivered by the post office. See Cowan v O’Connor (1888) 20 QBD 640. At a time where parties either contracted with each other verbally (in person) or, where parties were located at a distance from one another, via letters (post). Re Imperial Land Co of Marseilles (1872) LR 7 Ch App 587 at 594. Brinkibon Ltd v Stahag Stahl und Stahlwarenhandelsgesellschaft mbH [1983] 2 AC 34 at 43. Adams v Lindsell (1818) 106 ER 250. Household Fire and Carriage Accident Insurance Co v Grant (1879) LR 4 Ex D 216. (1879) LR 4 Ex D 216 at 228. (1879) LR 4 Ex D 216. Henthorn v Fraser [1892] 2 Ch 27. Test applied in Entores v Miles far Eastern Corp [1955] QB 327 at 332, 337. Telex and facsimile were held to be a form of instantaneous communication. N M Superannuation Pty Ltd v Baker (1992) 27 NSWLR 26; 7 ACSR 105; Nunin Holdings Pty Ltd v Tullamarine Estates Pty Ltd [1994] 1 VR 74; Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA (No 4) (2009) 255 ALR 632; [2009] FCA 522. [1994] 1 VR 74 at 83. Consider email communications over open-networks where an email is actually received by an Internet service provider or network provider whose server receives and ‘sends-on’ an email to the specified email address. See S Squires, ‘Some Contract Issues Arising from Online Business– Consumer Agreements’ (2000) 5(1) Deakin Law Review 96 at 107. (2009) 255 ALR 632 at [25]; [2009] FCA 522 at [25]. Sale of Goods (United Nations Convention) Act 1994 Sch 3, Arts 15(1) and 18(2). Sale of Goods (Vienna Convention) Act 1987 (ACT); Sale of Goods (Vienna Convention) Act 1986 (NSW); Sale of Goods (Vienna Convention) Act 1987 (NT); Sale of Goods (Vienna Convention) Act 1986 (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 1986 (WA)
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60 61 62 63
64
Each state and territory has mirror legislation in place: Electronic Transactions Act 2001 (ACT); Electronic Transactions (Northern Territory) Act 2000 (NT); Electronic Transactions Act 2000 (No 8) (NSW); Electronic Transactions (Queensland) Act 2001 (Qld); Electronic Transactions Act 2000 (SA); Electronic Transactions Act 2000 (Tas); Electronic Transactions (Victoria) Act 2000 (Vic); Electronic Transactions Act 2003 (WA). Electronic Transactions Act 1999 (Cth) s 14A(1)(a). Electronic Transactions Act 1999 (Cth) s 14A(1)(b). Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110 at 11,118; Magill v Magill (2006) 226 CLR 551 at 210; 231 ALR 277. (1975) 133 CLR 125 at 136; 8 ALR 131 at 139. Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110 at 11. See also the recent United Kingdom case of RTS Flexible Systems Ltd v Molkerei Alois MüGmbh [2010] UKSC 14; 1 WLR 753. Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153; Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd [1985] 2 NSWLR 309; Azzi v Volvo Car Australia Pty Ltd [2007] NSWSC 319. Gibson v Manchester City Council [1978] 1 WLR 520 at 523–4. ‘Consideration is to contract law as Elvis is to rock-and-roll: the King’: J D Gordon, ‘A Dialogue about the Doctrine of Consideration’ (1990) 75 Cornell Law Review 987 at 987 (n 2). It will also naturally depend upon the presence of the other elements of contractual formation discussed in this chapter, that is, valid offer and acceptance (agreement), intention to create legal relations, and certainty and completeness of terms. A W B Simpson, A History of the Common Law of Contract, Clarendon Press, Oxford, 1975, p 321. D W Greig and J L R Davis, The Law of Contract, The Law Book Company, 1987, p 7. C H S Fifoot, History and Sources of the Common Law, Stevens, 1949, pp 398–9. ‘Where a man is under a moral obligation, which no Court of Law or Equity can inforce [sic], and promises, the honesty and rectitude of the thing is a consideration … the ties of conscience upon an upright mind are a sufficient consideration’: Hawkes v Saunders (1782) 1 Cowp 289 at 290; 98 ER 1091 at 1091 per Lord Mansfield. Buller J concurred, saying: ‘The true rule is, that wherever a defendant is under a moral obligation, or is liable in conscience and equity to pay, that is a sufficient consideration’: 1 Cowp 289 at 294; 98 ER 1091. (1840) 11 Ad & E 438 at 450–1; 113 ER 482 at 486–7. K C T Sutton, ‘Promise and Consideration’ in P D Finn (eds), Essays on Contract, Law Book Company, 1987, p 35 at p 36. This has been judicially described as the ‘classic’ definition of consideration: Beaton v McDivitt (1987) 13 NSWLR 162 at 181. (1842) 2 QB 851 at 859; 114 ER 330 at 333–4. It is questionable whether Patteson J intended to transpose the terms ‘plaintiff’ and ‘defendant’ in this statement, as the established common law rule of the time was that consideration must move from the promisee (that is, the plaintiff, who benefits from the defendant’s promise of something more or a concession of some variety in return for the plaintiff’s reiterated promise to fulfil an existing legal duty): Price v Easton (1833) 4 B & Ad 433 at 434; 110 ER 518 at 519 (Denman CJ); Laythoarp v Bryant (1836) 3 Scott 238 at 250 (Tindal CJ). Accordingly, consideration must logically subsist in a benefit to the promisor (defendant) or a detriment to the promisee (plaintiff). Lord Dunedin was citing the words of Sir Frederick Pollock in his work Pollock on Contracts, 8th ed, Stevens & Sons, London, 1911, p 175.
65 66
67
68 69
70 71 72 73
74 75
76 77
78 79 80 81 82 83
84 85 86 87
(1954) 92 CLR 424 at 457. Had B merely relied upon A’s promise, as opposed to bargaining for it (and making it the price of the agreement), this will not constitute good consideration. However, B may have a claim in promissory estoppel. See further Chapter 4. Wolfe v Permanent Custodians Ltd [2012] VSC 275 at [108] citing N Seddon, R Bigwood and M Ellinghaus, Cheshire and Fifoot: Law of Contract, 9th ed, LexisNexis Butterworths, Australia, 2008, p 177. This statement appears in the most recent edition of this work: 10th ed, LexisNexis Butterworths, Australia, 2012, p 181. Westlake v Adams (1858) 5 CB (NS) 248 at 265; 141 ER 99 at 106. See also Haigh v Brooks (1839) 10 Ad & E 309 at 320; 113 ER 119 at 123; Thomas v Thomas (1842) 2 QB 851 at 859. Inadequate consideration may signal a flawed or illegitimate bargaining process and attract enquiries from various principles of equity, that is, the doctrines of duress, undue influence and unconscionability. Statutory consumer law may also apply. See further Chapters 5 and 6. Woolworths Ltd v Kelly (1991) 22 NSWLR 189 at 194. M B Wessman, ‘Retraining the Gatekeeper: Further Reflections on the Doctrine of Consideration’ (1996) 29 Loyola of Los Angeles Law Review 713 at 789. Chappell & Co Ltd v Nestle & Co Ltd [1960] AC 87 (consideration for the right to use a copyrighted song in marketing scheme found in the provision of empty chocolate wrappers). Jamieson v Renwick (1891) 17 VLR 124 (promisee’s promise not to live in a certain area and not to visit or annoy the promisor held to be good consideration for the promisor’s promise of an annual payment of £25). Hamer v Sidway 124 NY 538 (1891) (consideration for payment of $5000 found in promisee’s agreement not to smoke, drink, swear or play cards or billiards for money until age 21). J Paterson, A Robertson and A Duke, Principles of Contract Law, 5th ed, Thomson Reuters, Pyrmont, 2016, p 103. See also Bilke v Havelock (1813) 3 Camp 374; 170 ER 554; Morgan v Palmer (1824) 2 B & C 729; 107 ER 554; Morris v Burdett (1808) 1 Camp 218; 170 ER 935. Corporations Act 2001 (Cth) s 181(1)(a). Gilmore argues that ‘the seamen in Stilk v Myrick were doing more work on the return voyage than they had agreed to do — their own work plus the work of the two deserters’ which should have sufficed as good consideration for the promise of additional wages: G Gilmore, The Death of Contract, Ohio State University Press, 1974, p 24. See also Hanson v Royden (1867) LR 3 CP 47. (1857) 7 El & Bl 872 at 878; 119 ER 1471 at 1473. See, for example, Watkins & Son v Carrig 91 NH 459 (1941). Sir Gunther Treitel, Some Landmarks of Twentieth Century Contract Law, Clarendon Press, 2002, p 14. B J Reiter, ‘Courts, Consideration and Common Sense’ (1977) 27 University of Toronto Law Journal 439 at 461 (n 83). B F Brody, ‘Performance of a Pre-Existing Contractual Duty as Consideration: The Actual Criteria for the Efficacy of an Agreement Altering Contractual Obligation’ (1975) 52(2) Denver Law Journal 433 at 434–5. See also K M Teeven, ‘Development of Reform of the Preexisting Duty Rule and its Persistent Survival’ (1996) 47(2) Alabama Law Review 387 at 419–20. See Chapter 5. (1601) 5 Co Rep 117a, at 117a–b; 77 ER 237 at 237–8. Hirachand Punamchand v Temple [1911] 2 KB 330 at 337–8, 339–40, 342. (1601) 5 Co Rep 117a at 117a–b; 77 ER 237 at 237 (Lord Coke); Couldery v Bartrum (1881) 19 Ch D
88 89 90 91 92
93 94 95 96
97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114
394 at 399–400. Above. Collier v P & M J Wright (Holdings) Ltd [2008] 1 WLR 643. This is discussed later in the chapter as one of the exceptions to the existing legal duty rule. E Peel, Treitel: The Law of Contract, 13th ed, Sweet & Maxwell, London, 2011, p 130. Commissioner of Taxation (Cth) v Sara Lee Household & Body Care (Aust) Pty Ltd (2000) 201 CLR 520 at 533–4; 172 ALR 346; GEC Marconi Systems Pty Ltd v BHP Information Technology (2003) 128 FCR 1 at 63; Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570 at 587; 251 ALR 322. The term ‘beneficiary’ is used in this chapter to describe the party receiving the promise of additional consideration from the promisor (that is, the promisee). (1601) 5 Co Rep 117a at 117b; 77 ER 237 at 238. J W Twyford, ‘Additional Payments under Construction Contracts’ (2007) 25 Construction Management and Economics 739 at 744. Morris v Baron and Company [1918] AC 1; British and Benningtons Ltd v North Western Cachar Tea Co Ltd [1923] AC 48; Royal Exchange Assurance v Hope [1928] 1 Ch 179; Tallerman and Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd (1957) 98 CLR 93; United Dominions Corporation (Jamaica) Ltd v Shoucair [1969] 1 AC 340 at 347–8; Commissioner of Taxation (Cth) v Sara Lee Household & Body Care (Aust) Pty Ltd (2000) 201 CLR 520 at 533–4; 172 ALR 346. Commissioner of Taxation (Cth) v Sara Lee Household & Body Care (Aust) Pty Ltd (2000) 201 CLR 520 at 533; 172 ALR 346. [1892] 1 Ch 104 at 115. N Seddon, R Bigwood and M Ellinghaus, Cheshire and Fifoot: Law of Contract, 10th ed, LexisNexis Butterworths, Australia, 2012, pp 191–2. Price v Easton (1833) 4 B & Ad 433 at 434; 110 ER 518 at 519. Pico Holdings Inc v Wave Vistas Pty Ltd (2005) 214 ALR 392 at 407. Cohen v Cohen (1929) 42 CLR 91. [1955] 3 All ER 10; 1 WLR 975 at 979–80. See, for example, Teen Ranch Pty Ltd v Brown (1995) 87 IR 308. See, for example, Cameron v Hogan (1934) 51 CLR 358. (1982) 44 ALR 20. Edwards v Skywards [1964] 1 WLR 349. Helmos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 235 at [48]. Note, a commercial context will normally indicate that, viewed objectively, parties intended to be legally bound. (1864) 17 CB (NS) 137 at 161; 144 ER 55 at 65. See, for example, Hall v Busst (1960) 104 CLR 206 at 239; York Air Conditioning and Refrigeration (Australasia) Pty Ltd v Commonwealth (1949) 80 CLR 11 at 26. Eastern Health v MIA Victoria Pty Ltd (2009) 22 VR 502 at 515. See also Agius v Sage [1999] VSC 100 at [51]; Macdonald v Australian Wool Innovation Ltd [2005] FCA 105 at [227]. Thorby v Goldberg (1964) 112 CLR 597 at 607. Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101 at 112; [2000] WASCA 27. Some English courts have suggested that an essential term is one which makes the contract ‘commercially workable’: Trollope & Colls Ltd v Atomic Power Constructions Ltd [1963] 1 WLR 333 at 337.
115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130
131 132
See, for example, Thompson v White (2006) 13 BPR 24,537; [2006] NSWCA 350 at [100]; Ormwave Pty Ltd v Smith [2007] NSWCA 210 at [88]. Vroon BV v Foster’s Brewing Group Ltd [1994] 2 VR 32 at 68. Australia and New Zealand Banking Group Ltd v Frost Holdings Pty Ltd [1989] VR 695 at 702. Harvey v Pratt [1965] 1 WLR 1025. Hall v Busst (1960) 104 CLR 206. G Percy Trentham Ltd v Archital Luxfer Ltd [1993] 1 Lloyd’s Rep 25 at 27. F & G Sykes (Wessex) Ltd v Fine Fare Ltd [1967] 1 Lloyd’s Rep 53 at 57; Mineralogy Pty Ltd v Sino Iron Pty Ltd [2016] WASCA 105 at [23]. (2002) 240 CLR 45 at 62. McDermott v Black (1940) 63 CLR 161 at 175. Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429 at 436–7. York Air Conditioning and Refrigeration (Australasia) Pty Ltd v Commonwealth (1949) 80 CLR 11 at 53. [2008] NSWCA 149 at [69], [105] per Giles JA, with whom Hodgson and Campbell JJA agreed. See, for example, Lucke v Cleary (2011) 111 SASR 134 at 152; Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101. See, for example, G J Tolhurst, J W Carter and E Peden, ‘Masters v Cameron — Again!’ (2011) 42(1) Victoria University of Wellington Law Review 49. L E Espenschied, Contract Drafting: Powerful Prose in Transactional Practice, American Bar Association, 2010, pp 122–3. See, for example, The Visurgis [1999] 1 Lloyd’s Rep 218, where an amendment to a charter agreement between the parties resulted in a significant alteration to the defendant ship owner’s liabilities and rendered them responsible for damage caused to the ship (which was chartered by the plaintiffs). The exclusion clause, which would otherwise have excluded the defendants’ liability, became inapplicable as a result of the amendment to the terms of the charter. Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510; 68 ALR 385 at 391. P Wilding, Standard Conditions of Commercial Contracts: Drafting, Reviewing and Negotiating, Thorogood Publishing, 1998, pp 3–4.
[page 101]
CHAPTER 3
Is a Contract Legally Binding?
Key Ideas By the end of this chapter you should be able to identify: ▶
contractual capacity
▶
illegality
▶
privity of contract
▶
agency
[page 102]
Introduction [3.1]
This chapter explores how a contract may be rendered unenforceable notwithstanding valid formation. Four main themes are discussed: contractual capacity; illegality; privity of contract; and agency. The topics of contractual capacity and illegality discuss circumstances (including age of minority, mental incapacity and the illegal nature of a contract under statute and common law) which may lead a party to ask the questions: ‘Is this contract legally binding?’ and ‘Are the rights and obligations legally enforceable?’ Privity of contract stipulates that only parties to a contract can acquire rights and incur liabilities under that contract. As such, a third party does not generally have enforceable rights. Hence, this topic considers the binding nature of a contract with respect to third parties. The final theme, agency, discusses how establishing an agency relationship circumvents the privity rule and is thus a relevant discussion point when considering how agency binds third parties who have entered into a contract with a party purporting to be an agent for another.
Capacity to contract Minors [3.2]
All Australian jurisdictions define a minor as a person under the age of 18 years.1 At common law, a minor does not have the legal capacity to enter into contracts on account of their youth.2 Generally speaking, a contract entered into by a minor is unenforceable. There are, however, two exceptions to this general rule: 1.
where the contract is one which relates to the supply of necessaries; and
2. [3.3]
where the contract is a beneficial contract of service.
These two exceptions provide a party who enters into an agreement with a person under the age of 18 with some legal protection, enabling providers of goods and services to enforce obligations in instances where an agreement with a minor is of the kind which maintains the minor’s condition in life or is of benefit (in light of all the circumstances) to the minor. In effect, the law encourages ‘fair’ dealings between unequal parties on account of one party’s developmental immaturity. Let us now take a closer look at contracts for ‘necessaries’ and ‘beneficial contracts of service’. [page 103]
Necessaries [3.4]
The common law considers ‘necessaries’ as being those goods and services needed to ‘maintain the minor in his status or condition’.3 As such, what is deemed a ‘necessary’ good or service is dependent upon a minor’s personal circumstances at the time of contracting. The court will apply a two-prong test: 1.
Is the good or service capable of being a necessary?
2.
Is the good or service necessary in the circumstances?4
The assessment will be made on a case by case basis. [3.5]
A legislative definition of ‘necessaries’ is provided in sale of goods legislation (note, this statute excludes services) enacted in all Australian jurisdictions. By way of example, South Australia defines ‘necessaries’ as ‘goods suitable to the condition in life of the infant, minor or other person, and to his or her actual requirements at the time of the sale and delivery’.5 The definition is consistent across all jurisdictions.6
[3.6]
The kinds of goods which fall under the umbrella of necessaries are
items such as food, drink and basic clothing, but can also include items which are not basic essentials. In Mercantile Credit v Spinks [1968] QWN 32, a car was deemed a ‘necessary’ as the minor was employed as a salesperson, who required a car to perform his work. In Scarborough v Sturzaker (1905) 1 Tas LR 117, a bicycle was considered a necessary, given that the minor needed to travel between home and his place of employment. However, in Nash v Inman [1908] 2 KB 1, fancy waistcoats purchased by a minor were not considered a necessary because, in light of the minor’s personal circumstances, he already had sufficient waistcoats. Although these cases are not contemporary, the assessment process to be applied by a court is still sound today — in making their assessment, a court will take into account factors such as the nature of the good; the economic and social status (condition in life) of the minor; and requirements of the minor in light of his or her circumstances. A distinction is drawn between goods necessary to maintain a person’s economic and social condition at the time of contracting and goods which are mere luxuries. [3.7]
In today’s digitally connected era, it is worth contemplating whether a computer would be considered a necessary. The sorts of factors a court is likely to reflect on include: the nature/function of a computer; the age of the minor when signing the contract; the social and economic status of the minor; why the computer is [page 104] required (to perform school work, paid work, etc); and the number of computers (or other electronic devices performing similar functions) owned by the minor — is the computer necessary in the circumstances?
[3.8]
Services assessed as being necessaries have included medical7 and legal services.8 Although the assessment will always be made in light of the minor’s personal circumstances at the time of contracting, it is relatively easy to imagine how medical and legal services could be
regarded as very important or even essential to a person’s ‘condition’, whether that be in regards to their health or liberty. Think about whether telecommunication services could be regarded as a necessary service; is a mobile phone a necessary for a youth of today? Again, a court will answer this in light of the minor’s personal situation. The factors to consider are similar to those highlighted above in relation to computers. Given the emphasis young people place on communicating through digital technologies, a contract with a mobile phone service provider may indeed be a commonplace necessary of the digital era. [3.9]
Where goods or services are deemed ‘necessaries’, the contract will be valid. As such, the minor will be bound to pay a reasonable price. In relation to goods, this is reflected in the sale of goods legislation across all jurisdictions.9 What is reasonable will be determined by a court in light of all the circumstances.
[3.10]
Where a good or service is not considered a necessary, the minor will not be legally bound by the contract; the contract is unenforceable at the election of the minor. This means that the seller of the good or the service provider will not be able to sue the minor for the contract price where the minor makes it clear that he or she will not honour the agreement. Notably, in South Australia, where a minor has avoided a contract on the ground of his or her minority, a court may order restitution of the property in question, as long as it has not passed to a third party.10
Beneficial contracts of service [3.11]
At common law, a minor will also be bound by a contract where that contract is deemed to be a beneficial contract of service. Such contracts are of the kind which support self-development. For example, contracts in regards to education, trade (including apprenticeship) or professional development are likely to be labelled beneficial contracts of service. A court will consider whether such a contract is beneficial to the minor in light of the contract as a whole; clauses for and against the benefit of the minor will be weighed
against each other when a court assesses the agreement. [page 105] [3.12]
Employment contracts also fall into this category where the contract is not harsh or oppressive and is actually advantageous to the young person.11 This means that a minor will be liable to his or her employer in the event that he or she breaches the employment contract. Likewise, a minor will have a remedy in contract against the employer should the employer break the agreement.
[3.13]
Beneficial service contracts may be repudiated once a minor turns 18 years of age. This means that a person can renounce his or her obligations under a contract for beneficial contracts of service upon reaching the age of majority.
Point to note [3.14]
New South Wales is the only jurisdiction to have enacted comprehensive legislation pertaining to contracts entered into by minors. The Minors (Property and Contracts) Act 1970 (NSW) significantly alters the common law position that contracts entered into by minors are unenforceable with the exceptions of those of necessaries and beneficial services. Importantly, the statute provides that where the contract is of benefit to the minor and the minor understands the nature of the agreement, it will be presumptively binding.12 Thus in New South Wales, a contract with a 16 year old will be valid and legally enforceable as long as the minor understands the terms of the agreement and the contract benefits the minor.
[3.15]
Interestingly, South Australian legislation provides that a contract entered into by a minor can be approved by a court.13 This provision enables a minor to enter into a valid contract where a court has assessed the agreement as being of benefit to the minor. In effect, it provides the party contracting with a person who has not yet reached
the age of majority with surety as to the enforceability of the agreement. An example of such a contract may be an agreement governing the sponsorship of a professional tennis player who is a minor at the time of signing the agreement. [3.16]
Another novel feature of the South Australian legislation is the provision which enables an adult to guarantee the performance by a minor of his or her obligations under the agreement.14 The guarantee is enforceable against the guarantor as if the minor had attained the age of majority before entering into the contract.15 For example, a parent of a minor could, under this provision, act as guarantor that their child will carry out the obligations as stipulated under the contract. Consider the sponsorship scenario described above — having a parent or other adult guarantee [page 106] that the minor (a professional tennis player) will, for example, wear the required Nike clothing and footwear at all tournaments and public appearances as per the agreement, effectively provides the sponsor with a degree of certainty that these obligations will be honoured (given that the guarantee is enforceable against the parent of the athlete). In essence, this means that the agreement is less likely to be rendered unenforceable. Note, the contract must not be harsh or oppressive; the provision renders the guarantee unenforceable if it would be unenforceable otherwise than for reason of the minority of the person whose obligations are guaranteed.16
[3.17]
Contracts which are not contracts for necessaries or beneficial contracts of service will generally be voidable at the election of the minor. Agreements involving continuing obligations,17 such as contracts involving land, shares or a lease, will be binding unless the minor repudiates (ends or rejects) the agreement either before turning 18 years of age or within a reasonable time after attaining the age of majority. Temporary contracts which are not of a continuing nature are unenforceable unless a minor ratifies the agreement; that is, unless
they take positive action to confirm the contract. At common law, a minor may choose to ratify a contract upon reaching the age of majority as long as he or she does so within a reasonable time. Note, however, South Australia, Western Australia, the Australian Capital Territory and the Northern Territory have enacted legislation which requires a minor to ratify a contract in writing.18 [3.18]
Agreements with minors for the repayment of a loan lent on security are simply void, as are contracts involving a bill of exchange, even for the purchase of necessaries. Victorian legislation specifically provides that a promise made after reaching the age of majority to repay money borrowed during minority is void. Equally, ratification of a contract made during minority will not be effective.19
Mentally impaired and intoxicated persons [3.19]
A person who is either mentally impaired or intoxicated will be liable for obligations owed under a contract for necessaries, as is the case in relation to minors. The common law requires that a reasonable price be paid for goods or services acquired under such contracts — a principle now reflected in statute.20 [page 107]
[3.20]
In the case of all other contracts, the person suffering from a mental impairment or intoxication at the time of contracting may choose to avoid the contract where it can be shown that: they were incapable of understanding the nature of the contract; and the other party was, or should have been, aware of the incapacity.21
[3.21]
Thus, in relation to mental impairment, the person who wants to set the contract aside bears the onus of demonstrating that he or she was suffering from a mental impairment — for example, a brain injury, Alzheimer’s disease, or dementia — which compromised their
understanding of the nature of the agreement at the time of contracting, and that the other party was, or should have been, aware of the incapacity. Where the other party is genuinely not aware of the person’s mental impairment, the contract is enforceable.22 [3.22]
In relation to intoxication, again, the onus of convincing a court that the contract should be set aside lies with the person who wants to avoid liability under the contract. Where a person is so intoxicated by alcohol or drugs that he or she is incapable of understanding the nature of an agreement, one may assume that it would not be arduous to prove that the other party ought to have been aware of the person’s incapacity (given the corresponding physical ‘side-effects’ of intoxication).
Illegality [3.23]
In practice, it is plausible that commercial parties may enter into contracts with one another which involve illegal conduct. For example, the obligations of one or both of the parties may require them to act in a manner which contravenes a statutory provision (statutory illegality) or which is contrary to public policy (common law illegality). The doctrine of illegality is not limited to conduct which is illegal in the criminal sense; it extends to behaviours which are expressly or impliedly prohibited by any statutory provision, or which are not prohibited by legislation but are nonetheless impermissible by virtue of the fact they contravene social morals, standards and expectations. Where a contract, or a term of the contract, entails illegal conduct, it is void (subject to the doctrine of severance, which may allow the ‘illegal’ portions of the contract to be removed and salvage the agreement). Typically illegality is raised in defence of a claim from the other party as to the existence of some common law or equitable right.
[3.24]
Contractual parties may consciously draft their agreement in such a way as to covertly facilitate an illegal enterprise. Alternatively, they may be completely unaware that part or all of their agreement is illegal. In either case, the effects
[page 108] of illegality upon commercial activity are potentially severe. A finding that a contract is illegal under statute or common law threatens the very existence of the agreement, notwithstanding that all the elements of contractual formation (explored in Chapter 2) have been satisfied. It may also cause great prejudice to innocent parties caught up in the illegal transaction. [3.25]
Importantly, the question of illegality should be answered by first identifying whether statute renders any part of a contract unlawful and second by considering the various heads of public policy under which the contract might nonetheless be deemed illegal.23 These are separate issues. If a contract is illegal under statute, there is no need to consider whether it is also illegal at common law. We will now briefly discuss the two principal kinds of illegality which can render a contract legally unenforceable: statutory illegality and common law illegality.
Statutory illegality [3.26]
There are, as Gibbs ACJ stated in Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 at 413; 21 ALR 585 at 588 (Yango), four ways in which the enforceability of a contract may be affected by statute: (1) The contract may be to do something which the statute forbids; (2) The contract may be one which the statute expressly or impliedly prohibits; (3) The contract, although lawful on its face, may be made in order to effect a purpose which the statute renders unlawful; or (4) The contract, although lawful according to its own terms, may be performed in a manner which the statute prohibits.
[3.27]
Accordingly, in the first two cases, the contract is illegal as formed; in the second two cases, the contract is illegal as performed. In the same case his Honour also outlined the process by which the courts determine if a contract is expressly or impliedly prohibited by statute in any such ways.24 His Honour stated that ‘[t]he question whether a statute, on its proper construction, intends to vitiate a contract made
in breach of its provisions, is one which must be determined in accordance with the ordinary principles that govern the construction of statutes’. The Interpretation Acts in each Australian jurisdiction mandate a purposive approach to the construction of statutes25 and so it becomes necessary to determine whether an Act was intended to render a contract void for illegality either through express words to this effect or through implication. The courts must therefore have regard to the expressly stated [page 109] or inferred purpose(s) of the statute in the context of its scope, language and effect, against the backdrop of established common law principles of interpretation.26 [3.28]
The courts are generally hesitant to find that a contract is illegal by virtue of the operation of statute. This is because they recognise that contracts are increasingly regulated through a complex framework of statutory provisions which ‘indirectly impinge upon the contractual relations of parties’ and which would, if rigorously enforced, ‘cause harsh and unwanted deprivation of rights’.27 As discussed earlier, a finding that a contract is void could result in drastic consequences for the parties and, indeed, third parties indirectly involved in the transaction. Whether the parliament intended for a contract as formed or performed to be illegal must therefore be carefully considered by reference to established legal principles and all relevant facts and circumstances.
Express prohibition [3.29]
Where a statute expressly forbids the creation or performance of a particular kind of contract, there is little controversy and the contract will be deemed illegal and void.
Re Mahmoud and Ispahani [1921] 2 KB 138 Brief facts: Pursuant to a statutory regulation introduced in 1919, no person was permitted to ‘buy or sell or otherwise deal in’ specified articles including linseed oil unless licenced. The plaintiff, Mahmoud, sold 150 tonnes of linseed oil to the defendant, Ispahani. Mahmoud was licenced and when he asked Ispahani if he too was licenced Ispahani indicated that he was. In fact, Ispahani did not hold the requisite licence and the sale was in breach of the statutory regulation. Ispahani subsequently refused to accept Mahmoud’s delivery of the linseed oil on the grounds that the contract of sale was illegal. Issue: Was the contract of sale expressly prohibited by the statutory regulation and therefore illegal? Conclusion: The contract of sale was illegal, being expressly prohibited by the statutory regulation requiring buyers and sellers to hold licences. The regulation clearly indicated that the parliament’s intention was to invalidate any agreements to buy or sell the specified articles other than under licence. The regulation was introduced for the public benefit, to regulate the market for the sale of specified articles and invalidate unauthorised transactions.
[page 110]
Pham v Doan (2005) 63 NSWLR 370 Brief facts: The plaintiff, Stephen Pham, entered into a partnership with the defendant, Peter Doan, to co-run two pharmacy businesses and an adjoined post office agency. The plaintiff was a qualified and registered pharmacist whereas the
defendant was not. The partnership agreement did not distinguish between the sale of prescription and nonprescription medications and toiletries. Section 25(1) of the Pharmacy Act 1964 (NSW) provided: A person (not being a pharmacist) … shall not carry on, as owner or otherwise, the business of a pharmacist in a pharmacy or otherwise have a pecuniary interest, direct or indirect, in the business of a pharmacist carried on in a pharmacy.
A dispute arose and the parties dissolved the partnership before feuding over financial entitlements. The plaintiff argued that the partnership agreement (that is, the contract) was illegal as the Pharmacy Act prohibited such an agreement. The defendant argued that the Act did not expressly prohibit such contracts and that its purpose was not to do so. Issue: Did the Pharmacy Act expressly prohibit the agreement between the parties, rendering it an illegal contract? Conclusion: The Pharmacy Act expressly prohibited the contract, rendering it illegal. The purpose of s 25(1) of the Pharmacy Act was to ensure that pharmacists were the only persons financially involved in the operation of pharmacies so that non-pharmacists would not benefit from illegitimate practice. The Act prohibited non-pharmacists from carrying on a pharmacy business and clearly aimed to prevent them from doing so. Accordingly, the contract was illegal: at 378 per Barrett J.
Implied prohibition [3.30]
Even if a statute does not expressly prohibit a particular contract, it may nonetheless do so through implication. That is, the statute may ostensibly render particular types of contract (or methods for their creation or performance) illegal without actually stipulating that this was intended to happen.
[page 111]
Pretorius Pty Ltd v Muir & Neil Pty Ltd [1976] 1 NSWLR 213 Brief facts: Muir & Neil sold therapeutic goods to Pretorius on a wholesale basis. Section 13 of the Therapeutic Goods and Cosmetics Act 1972 (NSW) provided that sellers of such goods were required to be licensed and were subject to significant penalties (including fines and imprisonment) for noncompliance. Muir & Neil did not hold a licence and Pretorius sued to recover the monies spent on obtaining the goods. They argued that the contract was impliedly prohibited on the basis that it required sellers of therapeutic goods to be licenced and imposed heavy penalties for non-compliance with this requirement. Issue: Was the contract between the parties impliedly prohibited and therefore illegal? Conclusion: The contract of sale between the parties was impliedly prohibited by the Therapeutic Goods and Cosmetics Act and was therefore illegal. Considered as a whole, the purpose or object of the statute was to prevent unlicensed sales of therapeutic goods (even though it did not expressly forbid such sales). The fact that the statute severely penalised parties who sold goods without a licence clearly indicated the parliament’s intention to protect consumers from unlicensed sales: at 219–20 per Yeldham J.
Australia Meat Holdings Pty Ltd v Kazi [2004] 2 Qd R 458; QCA 147 Brief facts: The plaintiff, Mainuddin Ahmed Kazi, was employed
by the defendant company, Australia Meat Holdings from 1998. In 2000, Kazi alleged he suffered a workplace injury and sought workers’ compensation. Australia Meat Holdings resisted Kazi’s claim on the basis that Kazi was not a ‘worker’ within the meaning of the Queensland workers’ compensation legislation. This argument was based upon the fact that Kazi never held a valid visa to reside in Australia, and that s 235(3) of the Migration Act 1958 (Cth) provided that unlawful non-citizens who performed work in Australia for reward or otherwise were in breach of this provision and subject to a fine of up to $10,000. Notwithstanding that the Migration Act did not expressly stipulate that contracts for the performance of work by noncitizens were invalid, Australia Meat Holdings argued that they were impliedly prohibited by s 235(3). Issue: Was the contract of employment between the parties impliedly prohibited by s 235(3) of the Migration Act and therefore illegal? [page 112] Conclusion: The Queensland Supreme Court held that Kazi’s contract of employment with Australia Meat Holdings was impliedly prohibited by s 235(3) of the Migration Act. Per Davies JA (at [23]–[24]): If it is in the national interest to prohibit unlawful non-citizens from performing work it must also be in that interest, it seems to me, to prohibit any such person obtaining rights under a contract to perform work. To do so would conduce to the object of the statute. I do not think therefore that the Act intended that a penalty should be the only consequence of a breach of s 235(3). For the reasons which I have given, that a contract to perform work has as its whole object the doing of the very act which the statute prohibits, and that invalidity of a contract by a non-citizen to perform work is within the object stated in [the Migration Act,] I think that the contract here was invalid.
[3.31]
As mentioned earlier, the courts are typically hesitant to find that a contract has been impliedly prohibited by statute, even where some form of illegal purpose underlies it or where it involves illegal conduct. They stress that caution should be taken in finding that a statute is intended to interfere with contractual relations given that a great deal of commercial life is regulated through contracts.28 The judiciary’s ultimate role is to deduce the parliament’s intention and the purpose of the legislation in question. The language and text of the statute will be examined in the context of the statute’s purpose and object. Where these aspects are not offended by upholding a purportedly ‘illegal’ contract, it is likely the contract will be regarded as legally valid.29
[3.32]
In particular, there are two factors which weigh against a finding of implied prohibition: 1.
the statute in question prescribes sanctions for non-compliance with its provisions; and
2.
an innocent party stands to suffer significant loss.
Statute prescribes sanctions for non-compliance [3.33]
Where a statute prescribes sanctions for non-compliance with its provisions, the courts will be less inclined to conclude that its implied purpose is to prohibit non-compliant contracts. Common examples of such sanctions include fines or [page 113] other penalties, including imprisonment. In Nelson v Nelson (1995) 184 CLR 538; 132 ALR 133, McHugh J explained at CLR 612–13 that the penalties for alleged contravention of a statute through contract must be measured against the actual harm that has resulted, and that the courts should not sanction the parties further through a finding of illegality if the penalties for non-compliance are themselves sufficient to address the wrong committed:30
[T]he sanction imposed should be proportionate to the seriousness of the illegality involved. It is not in accord with contemporaneous notions of justice that the penalty for breaching a law or frustrating its policy should be disproportionate to the seriousness of the breach. The seriousness of the illegality must be judged by reference to the statute whose terms or policy is contravened. It cannot be assessed in a vacuum. The statute must always be the reference point for determining the seriousness of the illegality; otherwise the courts would embark on an assessment of moral turpitude independently of and potentially in conflict with the assessment made by the legislature. … [T]he imposition of [additional sanctions] must further the purpose of the statute and must not impose a further sanction for the unlawful conduct if Parliament has indicated that the sanctions imposed by the statute are sufficient to deal with conduct that breaches or evades the operation of the statute and its policies. [3.34]
Kirby J in Fitzgerald v F J Leonhardt Pty Ltd (1997) 189 CLR 215; 143 ALR 569 similarly observed that the courts will ‘require good reason’ to add to the sanctions and remedies prescribed by a statute for its violation additional penalties such as the deprivation of contractual rights.31
Innocent parties will suffer loss [3.35]
Where a finding that a contract is impliedly prohibited by statute is likely to cause significant loss to an innocent party, the courts will be less inclined to reach this conclusion and invalidate the agreement. In Nelson v Nelson, McHugh J noted that the sanctions imposed upon a finding of contractual illegality should be proportionate to the gravity of the wrong that had been committed.32 By extension, a consideration of the likely effects of such a finding upon innocent parties is essential to determining an appropriate outcome. [page 114]
[3.36]
In Yango, for example, First Chicago Australia lent the sum of $132,600 to Yango Pastoral secured by a mortgage over certain property. Yango Pastoral later defaulted and First Chicago Australia sued to enforce the mortgage. Yango Pastoral claimed, however, that the mortgage contract was illegal on the basis of s 8 of the Banking Act 1959 (Cth). This provision prohibited corporations from carrying
on any banking business in Australia without possessing an authority under the Act. The stated penalty for contravention of this penalty was $10,000 per day that the contravention continued. First Chicago Australia lacked such an authority. [3.37]
The High Court rejected Yango Pastoral’s argument and held that the mortgage contract was not impliedly prohibited by s 8 of the Banking Act. If it were read as being so, then the mortgage security would not have been recoverable and the deposits of innocent clients who invested with the plaintiff would have been put at risk. Not only would First Chicago Australia have been incapable of performing its obligations to depositors, but all contracts that it entered into to receive and lend money would have been rendered illegal and jeopardised the financial security of its depositors. The court was particularly influenced by this ‘ripple effect’. The very purpose of the statute was to protect the public interest in a securely regulated financial industry and this purpose was adequately served through the penal provision stipulated in s 8. To go further and render the contract illegal threatened to cause undue hardship to innocent depositors, and this could not have been the intention of the parliament.
Contracts may be legal to start with but become illegal [3.38]
Though rare, it is sometimes the case in commercial practice that parties enter into a contract with one another which is perfectly legal to begin with but then becomes illegal with the passage of time. The most common situation where this would occur is where there is a change in the law which renders the contract illegal and therefore unenforceable. In Gerraty v McGavin (1914) 18 CLR 152, for example, the plaintiffs — Andrew and Clara McGavin — sued the defendant, Mary Gerraty, to regain possession of leased land following alleged breaches of Gerraty’s obligations under the lease. Part of the land contained a bakery, the business of which Gerraty was required to carry on as a condition of the lease. The lease term was for a period of 11 years from 1899, with an option to renew (which Gerraty exercised).
[3.39]
In 1912, the Factories and Shops Act 1912 (Vic) was passed, which varied the previous legal position and effectively required Gerraty to rebuild the bakery to conform with new building regulations in order to carry on the business under the lease. Accordingly, the lease contract when formed was legal but had become illegal as a consequence of a change in the law. The High Court held that the lessee’s performance of her contractual obligations had been rendered impossible, as continuing the bakery business in the assigned premises (without substantial structural modifications to comply with the new building regulations) had been outlawed. [page 115]
[3.40]
Commercial parties should be wary of the tendency of the law to change, and consider how this might affect their business. Often best practice is to stay abreast of legislative developments in the respective industry and consult with legal, financial or other relevant experts to ensure compliance and avoid placing contractual arrangements at risk. Careful drafting which accounts for potential contingencies such as this would also be wise practice.33
Illegal contracts may still be enforced [3.41]
Although the process of creating or performing a particular contract may be expressly or impliedly prohibited by statute, it is nonetheless possible for the courts to find that the contract is not illegal and can be enforced. That is, while the formation or performance of the contract may be illegal, the contract itself may be legally valid.
Tonkin v Cooma-Monaro Shire Council (2006) 145 LGERA 48; [2006] NSWCA 50 Brief facts: The appellant, Norman Tonkin, was the owner and occupier of agricultural land within the jurisdiction of the
respondent council. A council inspector determined that Tonkin had failed to control two noxious weeds on his property, despite statutory rectification notices being issued, and that professional assistance was required to do so. Section 55 of the Local Government Act 1993 (NSW) provided that the council could only enter into contracts for required works where tenders were invited. The council engaged contractors (Buckleys) to spray Tonkin’s land. Buckleys charged $113,482 for the work, which the council sought to recover from Tonkin. Tonkin argued that he was not required to pay the money as the contract between the council and Buckleys was not formed as part of a tender process and therefore contravened s 55 of the Local Government Act, such that it was illegal and unenforceable. Issue: Was the contract between council and the contractors illegal? Could the contract be enforced, requiring Tonkin to pay the council for the works performed by the contractors on his land? Conclusion: The contract was enforceable. Although it was entered into illegally (that is, in contravention of the statute), it was not void. The court considered the scope and purpose of the statute to determine whether it was intended that contracts which did not comply with its provisions were unenforceable altogether, or merely liable to the sanctions provided for in [page 116] the Act. The court held that parliament did not intend to invalidate non-compliant contracts, particularly as the Local Government Act provided sanctions for this. Per Ipp JA (at [91]): In my opinion, it is unlikely that the legislature would have intended that an innocent party, who contracts in good faith with a council that is in breach of s 55(1), is to be left with an unenforceable contract. Parliament has provided a remedy (s 435) that operates in respect of non-compliance with s 55(1).
[3.42]
Whether or not the statute has the effect of invalidating the actual contract (not just the processes for its creation or performance) depends once again upon the purpose of the statute in question, including its language and scope, the consequences for innocent parties and any other relevant considerations.34 Where it is apparent that the parliament intended to penalise particular means of performing a contract rather than the contract itself, and where the purpose or objective of the relevant statute can be met without invalidating the contract, the courts will likely find the contract to be valid. Of course each case must be examined individually as no ‘universal rules’ operate in this regard.35
Common law illegality [3.43]
A contract which is not expressly or impliedly prohibited by statute may still be illegal and unenforceable at common law under various heads of public policy. Where the terms of a contract or its purpose or practical effects violate an accepted principle of public policy, and the contract’s enforcement could detriment society, the contract may be deemed illegal at common law. The rationale for invalidating contracts on this basis is best represented in the Latin maxim ex turpi causa non oritur actio (‘no action arises from a base cause’) — ‘base cause’ here meaning dishonourable or illegitimate basis. There is an obvious public interest in ensuring that contracts do not legitimise behaviour which is otherwise illegal or contrary to the acceptable standards, attitudes and mores of civilised society.
[3.44]
That being said, the courts are wary of the fact that striking down a contract on the basis of public policy may actually do more harm to society than good, notwithstanding an aspect of illegality. In determining whether to invalidate a contract on the basis of public policy, the courts weigh the gravity of particular conduct and the extent to which it will be encouraged if the contract is enforced
[page 117] against the social harm that will be caused if the contract is not enforced.36 The existence and content of a head of public policy is elucidated — not created — by the courts. As Isaacs J explained in Wilkinson v Osborne (1915) 21 CLR 89 at 97–8: [T]he ‘public policy’ which a court is entitled to apply as a test of validity to a contract is in relation to some definite and governing principle which the community as a whole has already adopted either formally by law or tacitly by its general course of corporate life, and which the courts of the country can therefore recognise and enforce. The court is not a legislator: it cannot initiate the principle; it can only state or formulate it if it already exists. [3.45]
Thus, the community is responsible for the creation of public policy. Commercial parties therefore operate within a unique framework of legal and social regulation. Contracts must not only comply with all relevant laws and regulations but with the greater social conscience in order to be valid and enforceable.
[3.46]
There are several recognised categories or heads of ‘public policy’ under which a contract will typically be deemed excessively harmful or unacceptable and therefore illegal. These categories of public policy are variable and evolve through generations as social perceptions as to what is acceptable and what is not shift with the passage of time and adapt to changing social conditions; new heads of public policy emerge and old heads undergo modification.37 Accordingly, the list of categories is not closed and novel categories can and do develop. We will now consider some of the common categories of public policy and examine how they might apply in the commercial context.
Contracts to engage in unlawful conduct [3.47]
Where a contract which requires a party to infringe the law is not expressly or impliedly prohibited by statute, it may nonetheless be void on the basis of public policy. The contract may, for example, oblige one of the parties to commit a crime or tort, or otherwise
violate a statute.38 It might merely contemplate them doing so. In either case, the contract will likely be deemed illegal and struck down.39 The courts will evaluate the consequences of such a finding as well as the gravity of the conduct in question. [page 118]
North v Marra Developments Ltd (1981) 148 CLR 42; 37 ALR 341 Brief facts: The plaintiff, David North, was a stockbroker who was engaged by the defendant company (Marra) to provide advice and services in connection with Marra’s reorganisation of capital and takeover of another company. As part of the takeover strategy, North agreed to buy some of Marra’s shares at an inflated price to raise their market value. North later sued to recover the balance of remuneration allegedly due to him. Marra argued that the contract was illegal as it contravened s 70 of the Securities Industry Act 1970 (NSW), which prohibited persons from doing anything calculated to create a false or misleading appearance with respect to the market for, or price of, any securities. Issue: Was the contract between the parties illegal? Conclusion: The High Court held that, while the contract of services itself was not statutorily prohibited, it was nonetheless contrary to public policy. The object of s 70 of the Securities Industry Act was to protect the integrity and transparency of the securities market and guard against false manipulation and corruption. The agreement between the parties to facilitate the share inflation scheme contemplated the potential breach of s 70 from the outset. It did not matter that Marra approved of North’s strategy; his performance of the agreement involved illegality and the contract was accordingly prohibited.
[3.48]
The courts will typically take into account the gravity or seriousness of the wrong being committed in determining whether to invalidate a contract on the basis of public policy. A contract which involves a minor criminal or tortious act, or trivial infringement of a statute, will not normally be found to be illegal. This is so even when the parties intentionally commit the wrong in question. A contract requiring a courier to unload goods in a restricted area is less offensive than a contract requiring the courier to burn down the recipient’s place of business. A party seeking to raise illegality in proceedings bears the onus of proving that the other party entered into the contract intending to engage in unlawful conduct.
[3.49]
Where a contract is alleged to have been formed with the intent of infringing the law, the intended wrong must go to the heart or substance of the transaction before it will be deemed contrary to public policy: Neal v Ayres (1940) 63 CLR 524. In other words, the illegal conduct in question must be central — not merely ancillary — to the contract. For example, where two parties enter into a contract for the sale of premises, and the purchaser (to the knowledge of the vendor) intends to use the premises for an illegal purpose, the contract will likely be upheld as the proposed illegal use of the premises is distinct from, and secondary to, the legal [page 119] transfer of the premises. The transfer of title to the premises is at the heart of the sale contract, not the use(s) to which the premises will be put.
Contracts to prejudice the administration of justice [3.50]
Where a contract has the object of prejudicing the administration of
justice, it will be deemed contrary to public policy and illegal. Examples of contracts which prejudice the administration of justice include contracts to conceal the commission of a crime, withhold evidence in court proceedings and to stifle a prosecution.
Callaghan v O’Sullivan [1925] VLR 664 Brief facts: The defendants, four police officers, threatened to prosecute the plaintiff, Terence Callaghan (and his daughter), for possession of stolen goods unless Callaghan paid the defendants a sum of money. Callaghan ultimately agreed to pay £6500 to avoid prosecution. He paid an instalment several days after the agreement was made and the defendants did not initiate any proceedings against him or his daughter. Following news that an enquiry would be held, Callaghan initiated legal proceedings seeking to recover the money he had paid. Issue: Was the contract between the parties enforceable? Could the plaintiff recover the money he had paid under the agreement? Conclusion: The contract was unenforceable as it was specifically created in order to stifle a prosecution and was therefore contrary to public policy. Consequently, the plaintiff was not entitled to recover the money he had paid under this illegal contract.
A v Hayden (1984) 156 CLR 532; 56 ALR 82 Brief facts: The plaintiffs were members of the Australian Secret Intelligence Service (ASIS). At the direction of the Commonwealth, they participated in a security training exercise which required them to rescue a ‘hostage’ from a Melbourne hotel. During the exercise, property was damaged and staff and patrons of the hotel were frightened. The Victorian Police
requested the Commonwealth to disclose the identities of the intelligence agents involved in the exercise to investigate potential prosecutorial action against them. The plaintiffs sought an injunction to restrain such disclosure, arguing that their contracts of employment with the Commonwealth prohibited the release of this information. [page 120] Issue: Was the confidentiality clause in the plaintiffs’ contracts of employment with the Commonwealth enforceable? Conclusion: The confidentiality clause in the plaintiffs’ employment contracts with the Commonwealth prevented the Commonwealth from providing information to assist in the investigation of potential criminal activity and effectively immunised the plaintiffs against criminal liability. Enforcement of the clause would therefore obstruct the course of justice by stifling the administration of the criminal law. Accordingly, it was illegal on the basis of public policy.
Contracts facilitating conflict between public duty and private interest [3.51]
Where a person in a position of public office (such as a politician, police officer, judge, etc) enters into a contract which promotes a conflict between their own personal interests and their public duties, the contract will be invalidated on the grounds of public policy.
Wilkinson v Osborne (1915) 21 CLR 89 Brief facts: The respondents, John Osborne and George Jones, were both members of parliament. They were approached by the
appellant, William Wilkinson (a land agent), and offered a fee of £250 to lobby the New South Wales Government and encourage the purchase of a particular property valued at £30,000. Pursuant to statute, government approval was necessary for this particular acquisition of land and unless the sale proceeded Wilkinson would not receive his commission from the vendors of the property. The plaintiffs were successful in their efforts and the sale was approved, at which point they sued Wilkinson for the money he promised them. Issue: Was the contract for Wilkinson to pay £250 to Osborne and Jones in return for their efforts to encourage the New South Wales Government to purchase the property enforceable, or was it illegal and unenforceable? Conclusion: The contract was illegal. It promoted a conflict between the public duties of the plaintiffs as members of parliament and their private interests. Fundamentally, they were being paid to influence the government to act in a particular manner for their own financial benefit, rather than in an objective manner consistent with their positions of public office.
[page 121] [3.52]
The importance of preventing public officers from being corrupted goes without saying; as high-ranking members of the public service performing essential functions within vital sectors, these individuals are critical to the efficient, productive and transparent administration of the service. Members of society rely upon these individuals to prioritise their public duties above their own private interests.
Contracts to defraud the public revenue [3.53]
Contracts created for the purpose of defrauding the public revenue
authorities are contrary to public policy and therefore illegal. Agreements which, for example, are intentionally designed to facilitate tax evasion are not enforceable.
Miller v Karlinski (1945) 62 TLR 85 Brief facts: The plaintiff was employed by the defendant under an oral contract for a weekly salary of £10. Income tax was deducted from the appellant’s pay, as is customary. Under the employment contract, the plaintiff was entitled to claim additional ‘travel expenses’, despite having close to none. An excessive amount for such expenses was claimed simply to recover what was paid as income tax. This amount should itself have been assessable and subject to tax. The plaintiff sought to recover arrears of salary for 10 weeks along with other expenses. The defendant disputed the terms of the employment contract and refused to pay. Issue: Was the employment contract enforceable? Conclusion: The plaintiff’s employment contract with the defendant was illegal as it was designed to defraud the public revenue by unlawfully offsetting income tax deductions through false expense claims. Per du Parcq LJ (at 86): [O]n the footing that the £10 was taxable, the plaintiff was told that to make up for the deduction of the tax he would be permitted to draw an additional amount under the heading of travel expenses. The amount did not in truth represent expense at all; it was intended to make up for the payment of income tax. That is not a lawful method of remuneration. It is one by which the Revenue must suffer and the Revenue is thereby defrauded. It would be against public policy to enforce an agreement of that kind.
Contracts to exclude the jurisdiction of the courts
[3.54]
Occasionally, commercial parties attempt to remove the right to resolve a dispute in a court of law by inserting a clause to this effect in a contract. Such clauses are not permitted under the law of contract; the parties cannot exclude or oust the [page 122] jurisdiction of the courts to define the legal rights and obligations of the parties.40 Parties have an immutable common law right to bring an action before the courts,41 and they cannot specify that the decision of some non-curial institution is final and exclusive.42
[3.55]
Even attempts to deter parties from initiating legal action through the wording of a contractual term will likely be deemed unlawful. In Novamaze Pty Ltd v Cut Price Deli Pty Ltd (1995) 128 ALR 540, Drummond J explained that ‘the core of this head of public policy is the notion that the citizen is entitled to have recourse to the court for an adjudication of his legal rights’ and that a ‘disincentive to a person to exercise this right of recourse to the court can, depending upon how powerfully it operates to discourage litigation, amount to a denial of this right just as complete as an express contractual prohibition against litigation’.43
[3.56]
It is not, however, contrary to public policy to make the right to initiate legal proceedings conditional upon a prior attempt to undergo arbitration44 or the completion of some formality (such as obtainment of a certificate).45 Commercial parties would be well-advised to negotiate with one another openly and honestly during the formative stages of the contractual relationship so as to forge a trusting relationship and dispel any potential anxiety or hostility which might cause later disagreements and fuel litigation. They would also be advised to develop appropriate mechanisms for resolving contractual disputes and ensure these are compliant with the law of contract.
Contracts promoting sexual immorality
[3.57]
A contract which serves a sexually immoral purpose is illegal at common law. For example, a contract to let premises intended to be used as a brothel for prostitution will not be legally enforced as this is clearly an activity which falls foul of community values and expectations.46 While it is unlikely in modern [page 123] times that business entities would contract with one another in order to engage in such deviant and unlawful behaviours, this head of public policy is a valuable reminder of the important role that fluid social attitudes play in determining what commercial behaviours are regarded as acceptable or not.
Contracts in unreasonable restraint of trade [3.58]
In certain commercial situations, it is common for parties to include restraint of trade clauses in their contracts. These clauses generally restrict or prevent the right of a party to exercise their rights to freely work or trade. Traditionally, public policy has favoured the preservation of this freedom; however, the law tolerates some exceptions where restrictions upon it are reasonably necessary to protect the interests of the party seeking the restraint and within the public interest. Lord Macnaghten explained it best in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1984] AC 535 at 565: The public have an interest in every person’s carrying on his trade freely: so has the individual. All interference with individual liberty of action in trading, and all restraints of trade themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable — reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public.
[3.59]
[3.60]
Contracts for employment and for the sale of businesses are two of the more common examples where a party seeks to restrain the trade of their counterpart. The objective of using a restraint of trade clause in these scenarios is to prevent, for example, employees from disclosing confidential information or trade secrets specific to their former employer, or to stop vendors of businesses from entering into competition with the business they have just sold. The courts are required to determine if a balance has been struck between protecting the interests of the restraining party and imposing reasonable restraints upon the other party in order to accomplish this end. In Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126; 181 ALR 337, the High Court observed that there were three ‘threshold’ or ‘preliminary’ questions to ask when considering whether a contractual restraint of trade is contrary to public policy.47 [page 124] First, there must be a restraint within the meaning of the doctrine (determined by considering both its form and practical effect). Second, the restraint must be upon trade in the broad sense; it is not, for example, limited to a particular category of skilled occupation and applies to employment generally. Third, the restraint must be one to which the doctrine applies; some restraints are not required to be reasonable. If there is a restraint of trade to which the doctrine applies, it will then become necessary to determine if the scope and duration of the restraint are reasonable or not. An unreasonable restraint will be contrary to public policy and illegal. The party seeking the restraint bears the onus of proving that it is reasonable, whereas the restrained party must prove that the restraint is contrary to the public interest.
[3.61]
The ‘reasonableness’ of a restraint is determined by considering all relevant facts and circumstances at the point of contractual formation.48 It must be reasonable both in reference to the interests of the parties concerned and to the interests of the public; it must be
designed to afford adequate protection to the party seeking it without imposing excessive restrictions upon the other party and injuring the public interest.49 Two principal considerations in this regard will be both the duration of the restraint and the geographical limits within which it operates.50 If a restraint is unreasonably long in duration, or operates over too broad a geographical area than is reasonably necessary, it will be declared void. Evidence of industry practice is also relevant, as is the adequacy of the consideration that the restrained party has received. [3.62]
Some case examples examining restraints of trade in three of the most common commercial situations will now be examined.
Sale of business contracts [3.63]
Where a party purchases a business (and its associated goodwill),51 it is often the case that the vendor is restrained from engaging in competition within the same industry in a certain area for a specified period of time. The interest of the buyer in protecting the goodwill it has acquired from competition by the vendor is a recognised interest which the doctrine of restraint of trade will generally seek to protect. [page 125]
Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 Brief facts: The appellant, Thorsten Nordenfelt, owned and operated a gun manufacturing business which traded worldwide. He then sold the business to the respondent company, Maxim Nordenfelt. The sale contract contained a restraint of trade clause prohibiting Thorsten Nordenfelt from engaging in a competing business or in the trade of gun manufacture for a period of 25 years. Thorsten Nordenfelt later breached this clause by attempting to engage in a weapons manufacturing
venture. He argued that the restraint clause was unreasonable and therefore illegal. Issue: Was the restraint of trade in the contract of sale enforceable? Conclusion: The restraint was reasonable and therefore legally enforceable. The gun manufacture trade was a worldwide industry and it was in the public interest to prevent a person in ‘carrying on a trade in weapons of war abroad’. The restraint enabled Nordenfelt to obtain the full value of what he had to sell; ‘without it the purchasers could not have been protected in the possession of what they wished to buy’: at 573–4.
Employment contracts [3.64]
In the course of their duties, employees are naturally exposed to the inner workings of a business: acquiring unique skills and absorbing specialised knowledge and information relevant to their role. When an employee leaves their employer, they are generally free to enter into competition with their former employer and apply the skills and knowledge they have been vested with. Farwell J explained in Triplex Safety Glass Co Ltd v Scorah [1938] Ch 211 at 215: It would obviously be injurious to the public that a man who has acquired in the workshops or the laboratories of an employer any skill or general knowledge of his trade, as distinct from any information which was the property of the employer, should not be entitled to make use of that after he leaves that employer’s service, and, therefore, any contract which attempts to prevent him making use of such skills or knowledge is not enforceable.
[3.65]
However, there are some restrictions upon this right. Employees who leave their positions cannot take property or documentation from their former employer, solicit old customers, or divulge trade secrets or other confidential information (such as marketing strategies or pricing policies) acquired during their previous position. In some cases such restrictions are imposed by statute.52 In other cases
[page 126] an employer may seek to protect its business through the use of a restraint of trade clause. Again, the restraint must be reasonable in the sense that it protects the legitimate interests of the employer without unduly restricting the employee’s right to work in their profession or trade.
Lindner v Murdock’s Garage (1959) 83 CLR 628 Brief facts: Lindner (appellant) was a mechanic working for Murdock’s (respondents), a motor engineering company based in Crystal Brook, South Australia. Lindner’s contract of employment contained a clause stating that he was not, within one year of termination, permitted to work in any other company in the business of ‘garage proprietors, motor and general engineers, agents for the distribution of or dealers in motor accessories or in any other similar business’ within the area encompassing Crystal Brook and the nearby town of Wirrabara (around 48 kms away). Lindner worked for Murdock’s for nearly four years before terminating his employment and seeking to work with a competing business (East Bros) in Crystal Brook. Murdock’s sued to enforce the restrictive covenant in the contract. Lindner argued that it was an unreasonable restraint of trade. Issue: Was the restraint of trade in the contract of employment enforceable? Conclusion: A majority of the High Court held that the restraint was unreasonable and therefore unenforceable. The restraint was excessive and went beyond what was necessary and reasonable for the protection of Murdock’s business interests. Murdock’s had a legitimate interest in protecting their business against the danger of Lindner luring customers away or divulging trade secrets to his new employer. However, Lindner was merely a
‘leading hand’ in the garage and rarely interacted personally with customers, as management did. Moreover, the geographical area of restriction was too wide; it covered two towns, and Lindner was unlikely to come into contact with customers from another town. His contract did not specify the area in which he was employed. The restraint should have been restricted to the area in which Lindner actually worked, that is, Crystal Brook. The restraint was therefore unreasonable and contrary to public policy, rendering it illegal.
Restricted dealing contracts [3.66]
Commercial parties sometimes enter into contracts with one another under which one of them agrees to buy goods from, or sell goods to, the other on an exclusive basis. The doctrine of restraint of trade is equally concerned with ensuring the voluntarily-assumed restriction this places upon a trader to freely buy or sell products in the marketplace is reasonable. Whether or not such ‘restricted dealing’ [page 127] contracts are enforceable depends once again upon all relevant circumstances and the nature of the restraint in question.
Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288; 1 ALR 385 Brief facts: The plaintiff, Amoco, leased a portion of land containing a service station from the defendant, Rocca Bros. The lease term was for 15 years. Amoco then granted an underlease back to Rocca Bros for the same term less one day. Under the lease contract, Rocca Bros was obliged to carry on the business of a petrol station and purchase a minimum amount of petrol
(8000 gallons per month) exclusively from Amoco for the full lease term. A dispute arose several years into the lease term when Rocca Bros sought to purchase petrol from another supplier. Amoco sought an injunction to restrain Rocca Bros from doing so, Rocca Bros argued that the restraint of trade was unreasonable. Issue: Was the restraint imposed by the exclusive dealing clause in the lease contract enforceable? Conclusion: The restraint was unreasonable and therefore illegal and void. The exclusivity arrangement was not reasonably necessary to protect Amoco’s commercial interests. Per Gibbs J (at CLR 321): [I]t has not been shown that a tie for fifteen years on the terms of the underlease was reasonably necessary to protect the interests of Amoco. On the one hand, the great changes that might occur in the space of fifteen years could render the covenants intolerably burdensome on Rocca … On the other hand, there is nothing whatever to show that a tie for fifteen years was necessary to ensure for Amoco the stable outlet and economical system of distribution at which it was entitled to aim. Further, it was not shown that Amoco’s outlay … could not be recouped with profit in a shorter period.
Severance [3.67]
Any clause in a contract which is found to be tainted by illegality at common law53 may in certain circumstances be severed, that is, deleted or ‘cut out’ of the contract altogether. Theoretically, this then permits the remainder of the contract [page 128] to be enforced. The courts will, where possible, attempt to remove the offending provision but will stop short of rewriting the contract for the
parties. Typically, they apply the same principles when determining whether a term is inherently uncertain.54 There is no one established test of severance; however, a number of relevant principles have been developed over time. [3.68]
One view is that severance is only available where the removal of the defective clause would not affect the very nature of the contract itself. If severance merely changes the extent, and not the form, of the contract, it will be available to cure the problem of illegality. The question is whether the clause is ‘in substance so connected with the others as to form an indivisible whole which cannot be taken to pieces without altering its nature’.55 Another similar view which has been previously expressed is that severance will not be permitted where the illegality in question is an integral feature of the contract.56 That is, where the illegal aspect of the contract is so fundamental as to go to the heart of the agreement between the parties, it will not be possible to simply remove the offending clause. This is particularly the case where a contractual promise is itself illegal and represents the sole consideration in return for a legal promise.57
[3.69]
The Australian Consumer Law also makes provision for the severance of contractual clauses which contravene it. Section 16 provides: If the making of a contract after the commencement of this section contravenes [the Australian Consumer Law] because the contract includes a particular provision, nothing in [the Australian Consumer Law] affects the validity or enforceability of the contract otherwise than in relation to that provision, so far as that provision is severable.
[3.70]
This provision seemingly disregards the common law principles which might otherwise render an illegal clause incapable of severance. It is ultimately a requirement under s 16 that such clauses are removed from the contract wherever this is possible. [page 129]
Independent causes of action
[3.71]
An innocent party to an illegal contract may be able to initiate an independent cause of action in order to obtain a remedy. They could, for example, raise a claim in tort where the other party has made a false statement inducing entry into the illegal contract (tort of deceit) or where goods have been improperly used, detained or otherwise interfered with (tort of trespass to goods). This may also found an estoppel claim.58
[3.72]
In other cases, innocent parties may attempt to make a restitutionary claim to recover money or property transferred under an illegal contract.59 Claims on this basis are informed by the Latin maxim in pari delicto potior est conditio defendenitis (‘when both parties are equally villainous, the defendant’s position is the stronger’), often simply shortened to in pari delicto. Under this principle, a party can only recover money paid or property transferred where it can be shown that they were not in pari delicto, or not as culpable as the other party. Where the parties are equally at fault, the courts will not intervene on the basis that maintaining coherence in the law is of fundamental importance and it would be conducive to inconsistency for them to allow restitution in cases where the parties are as blameworthy as one another.60 The question in each case is whether it would be unjust for the recipient of a benefit under an illegal contract to retain that benefit.
[3.73]
In Callaghan v O’Sullivan [1925] VLR 664 (see [3.50]), for example, we saw that the plaintiff was barred from recovering the money he paid to the defendant police officers under a threat of prosecution. Although the plaintiff was arguably less culpable given he was essentially the victim of a ransom demand, he still elected to submit to the demand of the officers and pay the money. For the purposes of the criminal law, he was therefore as culpable in prejudicing the administration of the justice system. Similarly in South Australian Cold Stores Ltd v Electricity Trust of South Australia (1965) 98 CLR 65, electricity rates paid by the plaintiff company to the Electricity Trust were deemed in excess of the legal limits stipulated in the Prices Act 1948–51 (SA). The company attempted to recover the amount of money it had overpaid but was unsuccessful. The High Court held that the purpose of the
statute was to control prices for the benefit of the general public and not to protect one class of persons (consumers) from the pricing strategies of another class (suppliers). As such, the parties were in pari delicto. [3.74]
Where a party repents before the illegal purpose of the contract is substantially performed, the law may permit that party to make a restitutionary claim.61 [page 130] The rationale underlying this principle is that the parties are no longer in pari delicto by virtue of the fact the repenting party has attempted to make amends for their unlawful behaviour and is less culpable than the other party as a result. The repentant party must obviously make their intentions to withdraw from the illegal activity clearly known before the relevant obligations under the contract are performed. At this point, they will be entitled to seek a restitutionary remedy from the courts to reclaim money or property transferred. The principle of repentance does not apply to situations of statutory illegality.
Privity [3.75]
The doctrine of privity of contract stipulates that only parties to a contract can acquire rights and incur liabilities under that contract. Third parties cannot sue on the agreement, even if they stand to benefit from it, as they are not bound by it. The doctrine is therefore exclusively concerned with identifying the parties to a contract. It was once a cornerstone feature of the law of contract; however, it has endured significant judicial and academic criticism and numerous exceptions have been developed to circumvent it.62 In Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 at 478, Barwick CJ explained the general rule and its underlying rationale: It must be accepted that, according to our law, a person not a party to a contract may
not himself sue upon it so as directly to enforce its obligations. For my part, I find no difficulty or embarrassment in this conclusion. Indeed, I would find it odd that a person to whom no promise was made could himself in his own right enforce a promise made to another. [3.76]
As his Honour explained, it would be notably unusual if a contract bound not only the parties to the contract but also third parties who were not part of the original bargain. This would not only offend the bargain theory of contract but be conducive to considerable uncertainty in the law.
[3.77]
We saw (at [2.109]) that consideration must move from the promisee to a contract. This does not mean that the consideration must go to the promisor (that is, the other party); it may, in fact, go to a third party. To utilise the same example from the previous chapter, assume that A promises to deliver goods to B providing that B pays C the sum of $50: this payment is good consideration in return for [page 131] A’s promise as it has moved from B. B’s money went to C, not A, but this does not matter: the consideration does not have to move to the promisor. The doctrine of privity does not prevent a contractual party from conferring a benefit on a person other than the other party to the contract. Rather, using the given example, it would simply operate to prevent C from attempting to enforce B’s promise to pay C the sum of $50.
Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 Brief facts: Arthur Coulls entered into a contract with a construction company, O’Neil Construction, to allow them to excavate and remove stone from his property. In return for the stone, the company would pay Coulls royalties. The contract stipulated Coulls and O’Neil as the parties to the agreement;
however, it also provided that Coulls authorised the royalties to be paid to him and his wife, Doris, as ‘joint tenants’. The contract was signed by Arthur and Doris Coulls, and a representative from O’Neil. Upon the death of Arthur Coulls, the executor of his estate sought directions from the court as to whether O’Neil was bound to continue to pay the royalties to Doris Coulls, or whether they were merely entitled to. Issue: Did Doris Coulls have an enforceable right under the contract to receive the royalties from O’Neil? Conclusion: The High Court held that Doris Coulls was not a party to the contract and that O’Neil Construction therefore did not owe her any contractual obligations. Arthur Coulls’ authorisation for O’Neil to pay his wife the royalties lapsed at his death. Consequently, pursuant to the doctrine of privity, she was not entitled to enforce the payment of the royalties. The contract was expressly stipulated as being between Arthur Coulls and O’Neil Construction, and the fact she signed it did not automatically make her a party. There was also said to be no express or implied promise that O’Neil would pay the royalties to Doris.
[3.78]
In practice, the identities of the parties to a contract will rarely be in issue, as they will be expressly identified in the contract (generally at the beginning of the contract and in the recitals at the end). In some situations, however, questions arise as to whether any third parties have any enforceable rights under the contract. Though the privity doctrine will generally preclude such third parties from seeking to enforce those rights, some important exceptions have been developed. [page 132]
Exception in Trident v McNiece
[3.79]
In the seminal case of Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; 80 ALR 574, an important exception to the privity rule was forged in the specific context of insurance contracts. This exception is particularly important in commercial practice as it affects the liabilities and entitlements of insurers and third party beneficiaries respectively.
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; 80 ALR 574 Brief facts: Trident drafted an accident insurance policy for Blue Circle Southern Cement Ltd protecting Blue Circle and its contractors. McNiece was one of Blue Circle’s contractors. A crane driver under the direction of McNiece (but employed by another company) was injured during some construction work at Blue Circle’s plant. The crane driver sued McNiece for damages, and McNiece sought indemnity from Trident under the insurance contract with Blue Circle. Trident argued that McNiece, though a beneficiary under the insurance contract, was not a party to it and therefore unable to enforce the indemnity. Issue: Did the doctrine of privity operate to prohibit McNiece from enforcing the contractual indemnity? Conclusion: The High Court held that McNiece was entitled to claim the benefit of the indemnity in Trident’s insurance contract with Blue Circle. The court considered that the doctrine of privity should not apply in the context of insurance contracts given that the likelihood of third parties seeking protection under them was significantly high. To deny them the right to seek indemnity would be unjust. Moreover, third parties such as McNiece will typically order their affairs on the understanding that they will be indemnified under the insurance policy and not make their own insurance arrangements on this basis.
[3.80]
Ironically, as the case was being heard, the Commonwealth
Government passed the Insurance Contracts Act 1984 (Cth), s 48 of which provides that a third party beneficiary under a contract of general insurance has a right to recover (in accordance with the contract) compensation from the insurer for any losses incurred, notwithstanding that they are not a party to the contract. This legislation was inapplicable at the time, as the contract between Trident and Blue Circle was created prior to its commencement. Thankfully, for McNiece, the High Court still felt it appropriate to make an exception to the common law doctrine of privity in the context of insurance contracts. [page 133]
Where the doctrine will not apply Agency [3.81]
Where a party to a contract enters into that contract as an agent for a third party, the privity doctrine will not apply and the third party will be deemed a party to the contract. The third party (or their agent) can then sue to enforce the third party’s rights under the contract. An agent is a person empowered to enter into contracts on behalf of another person. There is no formal process for making someone an agent, and the courts even imply that a relationship of agency exists in certain circumstances.
[3.82]
Typically the principal and his or her agent will discuss the arrangement and formalise it in writing, though in other cases a relationship of agency may be established from the words or conduct of the parties and the surrounding facts, and even from any history of prior habits or arrangements between them.63 ‘If the facts fairly disclose that one party is acting for or representing another by the latter’s authority, the agency exists.’64 The question is whether a reasonable person would understand the alleged ‘agent’ to have the principal’s authority to act and whether the agent was aware of this.
Assignment [3.83]
It is possible for contractual parties to transfer some or all of their contractual rights and obligations to a third party. The process by which this is accomplished is called assignment. Where one party to a contract (the assignor) transfers contractual rights to a third party who is not a party to the contract (the assignee), the third party obtains an enforceable entitlement under the contract and the privity doctrine is circumvented.
[3.84]
A more drastic mechanism by which contractual rights can be transferred is through the process of novation. This term basically describes the situation of a contractual party being substituted by another. For example, A has a contract with B, but the parties intend for C to take the place of B. In this situation the original contract between A and B is terminated and a new one between A and C is created. C then takes B’s place and assumes all rights and obligations under the contract. The doctrine of privity does not then apply, as the third party (C) has taken the place of one of the original parties (B). Privity is then restored between A and C. [page 134]
Trusts [3.85]
If it can be established that a party to a contract holds the benefit of a contractual promise for the enjoyment of a third party, this may establish the existence of a trust. In this case, the contractual party holding the benefit is known as the trustee, while the party for whom the benefit is being held is known as the beneficiary. The trust is an instrument which emerged from equity and if it is shown to exist, the trustee is obliged to act in the best interests of the third party beneficiary, even though the third party is not privy to the actual contract. The trustee may also sue on the contract to enforce the benefit for the third party.
[3.86]
This may seem complicated but in reality the trust is merely a relationship of representation: like an agent acts on behalf of the principal, so does the trustee on behalf of the third party beneficiary. The benefit(s) due to the beneficiary under the contract are in fact forms of intangible property known as a chose in action. In short, this is a right to sue so as to enforce a right. The courts will consider whether the parties either expressly or impliedly intended a relationship of trust to be created.65 If a trust exists, the beneficiary can enforce the promised benefit under the contract by requesting the trustee to do so. If the trustee refuses, the beneficiary can sue them and the other party to the contract to obtain the contractual benefit.
Estoppel [3.87]
Where a party to a contract has induced a third party to believe that he or she will receive a benefit under that contract, and the third party has relied upon the promise and will suffer a detriment if the promise is not fulfilled, the beneficiary may be entitled to raise an estoppel against the promisor. Estoppel is discussed in greater length: at [4.158].
Remedies for the promisee [3.88]
A third party who sues to enforce their right to receive a benefit under a contract between two other parties may not always be able to obtain the full measure of that benefit. The two principal remedies available to the third party in this situation are damages and specific performance. Unless it can be shown that one of the parties to the contract is in a relationship of trust, agency or the like with the third party, and will suffer a loss if a contractual promise is not honoured, the third party can only claim nominal damages.66 If there is such a relationship, and the party to the contract will suffer loss, the third party may claim more substantial damages to the extent capable of fulfilling the benefits they were entitled to receive.
[page 135] [3.89]
It might also be possible for a third party beneficiary to obtain the contractual benefit through an order of specific performance. This will often be the case where it is shown that damages are an inadequate remedy. It must be shown that a contractual party is obligated or otherwise willing to sue on the third party’s behalf before an order of specific performance will be made.67
Agency [3.90]
Before discussing agency, it is first useful to define some important key terms. A principal is a party who designates authority to another (an agent) to act on his or her behalf. An agent is a person authorised to act on behalf of the principal.
[3.91]
Qui facit per alium facit per se — This Latin expression describes an agency relationship: ‘He who acts through another acts himself.’ ‘He’ refers to the principal who acts through ‘another’ by bestowing upon that ‘other’ (who is the agent) authority to act on his or her behalf. This delegation of authority binds the principal as if he or she had acted him or herself. Establishing agency provides an exception to privity of contract.
[3.92]
There are many examples of agency relationships. These include: real estate agents and clients; auctioneers and vendors; solicitors and clients; insurance agents and clients; travel agents and clients; sports management agents and clients; and stockbrokers and clients.
[3.93]
Agents have the authority to act on another’s behalf and are therefore capable of creating legal relations between a principal and a third party. This means that a principal can sue and be sued under a contract between the principal and a third party, as created by the agent.
[3.94]
The association between a principal and agent is of a rather unique kind which is based upon trust and loyalty. This imposes upon the agent both common law and fiduciary duties. Common law duties require the agent to follow the principal’s instructions, act in person,68 and exercise due care, skill and diligence. Given the relationship is one where the principal places considerable trust in the agent, fiduciary duties include acting in the principal’s best interest, acting for proper [page 136] purposes only, not disclosing confidential information, and keeping accurate accounts. An agent will be liable in the event of a breach. Criminal provisions may also apply.69 Agency in action: If A acting as an agent of B (the principal) enters into an agreement with C, B is party to the contract and may sue or be sued. B is a party to the contractual relationship as a result of agency.
[3.95]
The following Figure 3.1 reflects the agency relationship:
Figure 3.1: Agency relationship
Creating an agency [3.96]
To establish an agency relationship, it is necessary to show that the principal either expressly or impliedly consented to the agency relationship authorising the agent to act on behalf of the principal. The exercise of authority by the agent enables the agent to enter into legal relations (form a contract) binding the principal and a third party.
[3.97]
Express consent can be given to an agent by deed or in writing. Alternatively, express consent may be provided orally. It may also be implied from prior dealings between the parties; an agency relationship may be assumed where a principal has previously provided consent authorising the agent to act in a certain way (on the principal’s behalf). Sundberg J in Pola v Commonwealth Bank of Australia [1997] FCA 1476 explains: [page 137] The existence of agency may often be established from the words of the parties and the circumstances of the particular case, and may be implied from prior habits or from a course of dealing between the parties where the agent has repeatedly been permitted to perform similar acts in the past … If the facts fairly disclose that one party is acting for or representing another by the latter’s authority, the agency exists.70
[3.98]
Consent may sometimes be implied by operation of law. This may
occur in instances where agency is formed by reason of necessity. The instances recognised by the law include situations where a person has been entrusted with another’s property (principal’s property); an emergency arises; it is impossible or arduously difficult to communicate with the principal (owner of the property); and the agent acts genuinely in the interests of the principal. Let us consider an example:
Hypothetical Brief facts: B entrusts A to look after her St Bernard (a very large dog breed) while she travels overseas. A is called away interstate unexpectedly to assist a family member who has become terminally ill. A tries to contact B numerous times on the telephone number provided but does not reach B. A takes B’s dog to a dog shelter (C), which accommodates very large breeds, to be looked after until B returns from her trip. Issue: Is B liable for the bill payable for her dog’s stay at the shelter? Is B legally bound to pay C (the dog shelter) by virtue of an agency relationship? Conclusion: B is liable to C. Even though B did not give her express consent permitting A to act on her behalf while she was overseas, this scenario reflects implied consent where A acted as an agent of necessity. A’s emergency was genuine, A unsuccessfully tried to contact B overseas (B was in an area with no mobile phone reception and could not be contacted) and A acted responsibly by securing boarding for the dog until B’s return. B is legally obliged to pay C the outstanding amount owed for dog boarding. See Figure 3.2 showing the relationship between the parties.
[page 138]
Figure 3.2: Agency relationship for dog example
Agency and ratification [3.99]
It is also important to note that an agency relationship may be ratified.71 This means that a principal can provide retrospective authority for previously unauthorised acts.72 Ratification must occur within a reasonable time. What is reasonable will be determined in light of all the particular circumstances.
[3.100] It is important to note that ratification circumvents operation of the
privity rule. This may, in some instances, benefit parties who are afforded protection by virtue of an exclusion or limitation of liability clause which they would not have the benefit of but for the existence of agency. Contracts involving the carriage of goods provide us with a useful example. Stevedores, responsible for loading goods as they arrive at a port for transportation to a designated location, are, prima facie, not privy to a contract for the carriage of goods from a supplier (carrier) of goods to a purchaser (owner). As such, they would not benefit from a limitation of liability clause pertaining to damage to goods provided for in the contract between the supplier and the purchaser. [3.101]
However, where it can be shown that: (a) the terms of the contract — the bill of lading — indicate an intention to protect the stevedore; (b) the supplier was contracting as an agent for the stevedores (as well as
on its own behalf); (c) either the supplier was authorised to enter into a contract on behalf of the stevedores or the stevedores ratified the supplier’s actions; and (d) the stevedore provided consideration to the promisor, the stevedores will be entitled to protection under a limitation of liability clause — agency exists.73 [page 139]
Agency and estoppel [3.102] Underpinning the doctrine of estoppel is the concept of remedying
injustice where a party has acted on reliance of another’s representation and has incurred a detriment as a result. Estoppel may be applied to find apparent agency where a third party has entered into an agreement on a representation that the agent had authority to act on behalf of the principal and the third party relied on that representation. Where it was reasonable for the third party to place reliance on the representation and they incurred a detriment as a result, the principal will be estopped from denying the apparent authority.74 This enables third parties to enforce obligations against a principal; equity remedies what would otherwise be an unjust legal outcome for a third party.
Termination of agency [3.103] Termination
of an agency relationship may occur by mutual agreement between the parties. Alternatively, the association may come to an end on the expiration of the period of agency as defined in the parties’ agreement, or the relationship may come to an end once the particular act or transaction for which the agent was appointed has been carried out (for example, shares have been sold). A principal may terminate the agreement by revoking his or her authority for the agent to act on his or her behalf. Note, the caveat on effective revocation is that it cannot be retrospective.
[3.104] An agency formed by reason of necessity (implied by law), will cease
when the emergency is resolved. So if we refer to the hypothetical scenario relating to the lodging of the St Bernard dog (discussed at [3.98]), the relationship between the parties would terminate when B returns from overseas and pays the outstanding bill owed to C (the dog boarding facility).
[3.105] There are various other means by which a relationship of agency can
cease to exist, including death of the principal. Where the agent has not had notice of the principal’s death, the agent will not be liable for acts carried out after the principal’s death. Agency also terminates where either the principal or the agent have been medically diagnosed as insane. Additionally, an agency relationship ends when either the principal or the agent is declared bankrupt, or where the contract underpinning the agency relationship is frustrated.75 [page 140]
End note [3.106] It is important to note that a statute specific to a particular profession
may govern the actions of agents within a particular industry. For example, real estate agents, auctioneers, solicitors and insurance agents are obliged to act within the bounds of the rules and regulations provided for within their industry-specific laws.76 Such laws sit side by side with state criminal and civil laws. It is possible for an agent to breach professional codes and regulations and be subject to disciplinary proceedings provided for under the industry-specific legislation. The agent may also simultaneously be liable under civil and/or criminal law. __________________ 1
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Age of Majority Act 1974 (ACT); Minors (Property and Contracts) Act 1970 (NSW); Age of Majority Act (NT); Law Reform Act 1995 (Qld); Age of Majority (Reduction) Act 1971 (SA); Age of Majority Act 1973 (Tas); Age of Majority Act 1977 (Vic); Age of Majority Act 1972 (WA). Ultimately, this protects a minor from being legally bound to the terms of an agreement he or she may not fully understand on account of his or her developmental immaturity.
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Chapple v Cooper (1844) 13 M & W 252; 153 ER 105 at 107. Sultman v Bond [1956] St R Qd 180. Sale of Goods Act 1895 (SA) s 2. Sale of Goods Act 1954 (ACT) s 7; Sale of Goods Act 1923 (NSW) s 7; Sale of Goods Act (NT) s 7; Sale of Goods Act 1896 (Qld) s 5; Sale of Goods Act 1896 (Tas) s 7; Sale of Goods Act 1958 (Vic) s 7; Sale of Goods Act 1895 (WA) s 2. Huggins v Wiseman (1960) Carth 110; 90 ER 669. Helps v Clayton (1864) 17 CB (NS) 553; 144 ER 222; McLaughlin v Darcy (1918) 18 SR (NSW) 585. Sale of Goods Act 1954 (ACT) s 7; Sale of Goods Act 1923 (NSW) s 7; Sale of Goods Act (NT) s 7; Sale of Goods Act 1896 (Qld) s 5; Sale of Goods Act 1895 (SA) s 2; Sale of Goods Act 1896 (Tas) s 7; Sale of Goods Act 1958 (Vic) s 7; Sale of Goods Act 1895 (WA) s 2. Minors Contracts (Miscellaneous Provisions) Act 1979 (SA) s 7. Roberts v Gray [1913] 1 KB 520. Minors (Property and Contracts) Act 1970 (NSW) Pt 3. Minors Contracts (Miscellaneous Provisions) Act 1979 (SA) s 6. Minors Contracts (Miscellaneous Provisions) Act 1979 (SA) s 5(1). Minors Contracts (Miscellaneous Provisions) Act 1979 (SA) s 5(1). Minors Contracts (Miscellaneous Provisions) Act 1979 (SA) s 5(2). Sometimes referred to as enduring contracts. Mercantile Law Act 1962 (ACT) s 15(2); Statute of Frauds Amendment Act 1828 (Imp) (NT); Minors Contracts (Miscellaneous Provisions) Act 1979 (SA) s 4; Statute of Frauds Amendment Act 1828 (Imp) (WA). Supreme Court Act 1986 (Vic) s 50(a) and (b). Sale of Goods Act 1954 (ACT) s 7; Sale of Goods Act 1923 (NSW) s 7; Sale of Goods Act (NT) s 7; Sale of Goods Act 1896 (Qld) s 5; Legislation requires a reasonable price be paid in relation to goods: Sale of Goods Act 1895 (SA) s 2; Sale of Goods Act 1896 (Tas) s 7; Sale of Goods Act 1958 (Vic) s 7; Sale of Goods Act 1895 (WA) s 2. Gibbons v Wright (1954) 91 CLR 423. York Glass Co Ltd v Jubb [1925] All ER Rep 285; Hart v O’Connor [1985] AC 1000; [1985] NZLR 159. Fitzgerald v F J Leonhardt Pty Ltd (1997) 189 CLR 215 at 245; 143 ALR 569. Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 at 413–14; 21 ALR 585 at 588. Statutes must be interpreted so as to give effect to the purpose or object underlying them: Acts Interpretation Act 1901 (Cth) s 15AA; Legislation Act 2001 (ACT) s 139; Interpretation Act 1987 (NSW) s 33; Interpretation Act 1978 (NT) s 62A; Acts Interpretation Act 1954 (Qld) s 14A; Acts Interpretation Act 1915 (SA) s 22; Acts Interpretation Act 1931 (Tas) s 8A; Interpretation of Legislation Act 1984 (Vic) s 35(a); Interpretation Act 1984 (WA) s 18. See, for example, Mills v Meeking (1990) 169 CLR 214; 91 ALR 16; Lacey v Attorney-General (Qld) (2011) 242 CLR 573; 275 ALR 646; AB v Western Australia (2011) 244 CLR 390; 281 ALR 684. Fitzgerald v F J Leonhardt Pty Ltd (1997) 189 CLR 215 at 243; 143 ALR 569. St John Shipping Corporation v Joseph Rank Ltd [1957] 1 QB 267 at 288. Fitzgerald v F J Leonhardt Pty Ltd (1997) 189 CLR 215 at 227: ‘Regard is to be had primarily to the scope and purpose of the statute to consider whether the legislative purpose will be fulfilled without regarding the contract as void and unenforceable.’ See also Yango Pastoral Co Pty Ltd v
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First Chicago Australia Ltd (1978) 139 CLR 410 at 434. See also Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 at 413; 21 ALR 585; Tonkin v Cooma-Monaro Shire Council (2006) 145 LGERA 48; [2006] NSWCA 50 at [71]. (1997) 189 CLR 215 at 244; 143 ALR 569. McHugh and Gummow JJ in the same case commented in similar terms (at 227): ‘Regard is to be had primarily to the scope and purpose of the statute to consider whether the legislative purpose will be fulfilled without regarding the contract as void and unenforceable.’ (1995) 184 CLR 538 at 612–13; 21 ALR 585. This could be accomplished through the use of a force majeure clause. See [7.55]–[7.56]. Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd (2007) 232 CLR 1 at 29; 237 ALR 512. (2006) 145 LGERA 48; [2006] NSWCA 50 at [66]. Hardy v Motor Insurers’ Bureau [1964] 2 QB 745. See also A v Hayden (1984) 156 CLR 532 at 557. Re Morris (dec’d) (1943) 43 SR (NSW) 352 at 356. This extends to the laws of other nations as well. A contract which infringes, or has the potential to infringe, the laws of another country will be deemed illegal on public policy grounds: Regazzoni v KC Sethia (1944) Ltd [1958] AC 301. Alexander v Rayson [1936] 1 KB 169 at 182; [1935] All ER Rep 185. Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 432; South Australian Railways Commissioner v Egan (1973) 130 CLR 506. See Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643. If parties abuse this privilege, however, they may be deemed a vexatious litigant and restricted from bringing further legal proceedings: see, for example, Supreme Court Act 1935 (SA) s 39. South Australian Railways Commissioner v Egan (1973) 130 CLR 506 at 513. (1995) 128 ALR 540 at 548–9. See also Materials Fabrication Pty Ltd v Baulderstone Pty Ltd [2009] VSC 405. Anderson v G H Michell and Sons Ltd (1941) 65 CLR 543 at 549–50. Such clauses are known as Scott v Avery clauses after the leading case of Scott v Avery (1856) 5 HL Cas 811; 10 ER 1121. Note that recent amendments to the Commercial Arbitration Acts in each Australian jurisdiction (bar the Australian Capital Territory at the time of writing) have now codified the common law position and made Scott v Avery clauses effective for usage in commercial contracts. Anderson v G H Michell and Sons Ltd (1941) 65 CLR 543 at 549–50; South Australian Railways Commissioner v Egan (1973) 130 CLR 506 at 519. See also Bond v Larobi Pty Ltd (1992) 6 WAR 489 at 499–500. Upfill v Wright [1911] 1 KB 506. See also Pearce v Brooks (1866) LR 1 Exch 213. (2001) 205 CLR 126; 181 ALR 337 at 341. Lindner v Murdock’s Garage (1950) 83 CLR 628 at 653. Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 at 565; Heron v Port Huon Fruitgrowers’ Cooperative Association Ltd (1922) 30 CLR 315 at 324; Buckley v Tutty (1971) 125 CLR 353 at 376. Griffiths & Beerens Pty Ltd v Duggan [2008] VSC 201 at [67]; 66 ACSR 472. The term ‘goodwill’ describes the established reputation, customer base and ‘intangible’ value of the brand of a business, separate to the value of its identifiable assets. It is of incredibly high importance in commerce, as the High Court explained in Commissioner of Taxation v Murry (1998) 193 CLR 605 at 608–9; 155 ALR 67: ‘Goodwill is inseparable from the conduct of a
52 53
54 55 56 57 58 59 60 61 62
63 64 65 66 67 68 69
70 71 72
73
74
75
business. It may derive from identifiable assets of a business, but it is an indivisible item of property, and it is an asset that is legally distinct from the sources — including other assets of the business — that have created the goodwill.’ See, for example, Corporations Act 2001 (Cth) ss 181 (good faith), 182 (use of position) and 183 (use of information). Severance is ostensibly not available where a clause is said to be prohibited by statute: SST Consulting Services Pty Ltd v Rieson (2006) 225 CLR 516 at 531; 228 ALR 417. However, the matter is always one of interpretation and it is conceivable that a statute may only render part of a contractual clause illegal, allowing it to be severed or read down: see, for example, Thomas Brown and Sons Ltd v Fazal Deen (1962) 108 CLR 391. Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 432 at 442. On certainty of terms as an element of contract formation see Chapter 2. McFarlane v Daniell (1938) SR (NSW) 337 at 345 approved in Thomas Brown & Sons Ltd v Fazal Deen (1962) 108 CLR 391 at 407. North v Marra Developments Ltd (1981) 148 CLR 42 at 60–1; 37 ALR 341. Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 432. On estoppel see Chapter 4 at [4.158]–[4.170]. Restitution is discussed in greater depth in Chapter 8. Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498 at 518; 286 ALR 12. Clegg v Wilson (1932) 32 SR (NSW) 109. Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 at 116. Mason CJ and Wilson J noted that this traditional doctrine had been ‘under siege throughout the common law world’. Pola v Commonwealth Bank of Australia [1997] FCA 1476. Above. Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 at 147; 80 ALR 574. Above. Above at CLR 120. An agent cannot delegate their authority unless expressly permitted to do so. See, for example, Criminal Code 2002 (ACT) s 356; Crimes Act 1900 (NSW) s 249B; Criminal Code Act (NT) s 236; Criminal Code Act 1899 (Qld) s 442B; Criminal Law Consolidation Act 1935 (SA) ss 148, 149; Criminal Code Act 1924 (Tas) Sch 1, s 266; Crimes Act 1958 (Vic) s 176; Criminal Code Act 1913 (WA) Ch LV. [1998] ANZ ConvR 402; (1998) Aus Torts Reports 81-460. Cox v Isles, Love and Co [1910] QSR 80; Bolton Partners v Lambert (1899) 41 Ch D 295. The principal must have full knowledge of the terms of any agreements entered into to be able to make a true assessment of the legal responsibilities he or she would be taking on through ratification. Scruttons Ltd v Midland Silicones Ltd [1962] AC 446; Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Aust) Pty Ltd (The New York Star) (1978) 139 CLR 231; 18 ALR 333. In relation to carriage by road, see Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; 211 ALR 342. Tooth v Laws (1888) 9 LR (NSW) 154; 4 WN (NSW) 181a; Freeman & Lockeyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480; 1 All ER 630. Promissory estoppel is discussed at [4.158]. Frustration of a contract occurs where an event outside the control of the parties renders the
76
contract voidable. This concept is explored in Chapter 7. Each state and territory has enacted legislation governing real estate agents, auctioneers, solicitors and insurance agents.
[page 141]
CHAPTER 4
Contents of a Contract
Key Ideas By the end of this chapter, you should be able to identify: ▶
express terms of a contract – written agreements – parol evidence rule and exceptions – specific types of clause – terms v representations – collateral contracts – incorporation of terms ■ by signature ■ by notice ■ in electronic agreements ■ exclusion clauses
▶
implied terms of a contract – in fact – in law
– –
by custom implied duty of good faith
▶
interpretation of contract terms
▶
variation of contract terms
[page 142]
Introduction [4.1]
The contents of a contract are made up of the terms of the agreement. Terms reflect how parties have assigned their rights, obligations and risks. As Mellick and Newlyn explain, a ‘term’ is any part of a contract which binds a party and can be in the nature of ‘clauses, provisions, acknowledgments, covenants, stipulations, conditions and warranties’.1 Terms are generally categorised as either express terms, which are specifically provided for by the parties, or implied terms, which are implied by common law or by operation of statute.
Express terms [4.2]
Contracts are comprised of various terms, these being statements which reflect the legal rights and obligations assumed by the parties. Express terms are terms of a contract specifically provided for by the parties, as opposed to implied terms which (as the name suggests) reflect rights and obligations implied into a contract.
[4.3]
Contracts of significance typically record express terms in writing and require parties to ‘seal the deal’ by signing the written agreement. For example: A leases B a commercial premise. The written lease agreement contains express terms parties have specially agreed upon. Parties sign the agreement. A and B are contractually bound by the rights conferred and obligations owed as per the terms of the lease.
[4.4]
Alternatively, express terms of a contract may be incorporated by
notice. For instance: A is an owner/occupier of a car park. B wants to park his car in A’s car parking facility. As he approaches the entrance, B sees a large sign positioned at the entry point. B reads the terms, takes the ticket with the time of entry stamped on it (which was dispatched after pressing a button on the boom gate) and proceeds into the car park to park his car. B has contracted with A, the express terms of their contract being incorporated by virtue of the sign which alerted B to the conditions he would be agreeing to upon entry. A and B are legally bound by the rights conferred and obligations owed as per the terms.
[page 143] [4.5]
In relation to oral contracts, express terms reflect what is verbally agreed upon by the parties. For example: A asks B if he would be willing to mow her lawn on the first Friday of every month except in the month of June in exchange for $50 cash. B agrees. They ‘seal the deal’ with a handshake. The terms require B to mow A’s lawn on the first Friday of every month, except in June, and require that A pay B $50 cash for this service.
[4.6]
Sometimes agreements may be partly written and partly oral. In such cases, express terms may be found within a written document and within oral statements made. For instance: A agrees to sell B his boat for $10,000; this is documented in written form. A and B also have verbal agreement that the sale of
the boat is contingent upon B being able to borrow a portion of the purchase price from a lending institution — this is not accounted for in the written contract.
[4.7]
Most of the time, parties will be clear about the terms they have agreed to. However, where one of the parties disputes the existence of a particular express term, the central issue becomes: what did parties intend? Did parties intend to assume a contractual obligation in relation to that particular statement?
Written agreements Parol evidence rule [4.8]
The parol evidence rule operates to give parties certainty as to their rights and obligations under a written contract. The rule can essentially be summarised in the following way: where parties intended the contract to be wholly in writing, then all of the terms that parties have expressly agreed to are found within the written agreement. Parties cannot add to, subtract, vary or qualify those terms by reference to extrinsic material, such as oral statements made during negotiations, previous drafts of the contract, or written communications exchanged prior to the written agreement.
[4.9]
An early expression of the parol evidence rule was propounded by Lord Denman in Goss v Nugent (1833) 110 ER 713 at 716: By the general rules of the common law, if there be a contract which has been reduced into writing, verbal evidence is not allowed to be given of what passed between the parties either before the written
[page 144] agreement was made, or during the time that it was in a state of preparation, so as to add to or subtract from or in any manner vary or qualify the written agreement.
[4.10]
This legal principle has been accepted in Australia2 and has evolved (to an extent) over time so as to exclude verbal statements as well as other forms of extrinsic evidence, such as previous drafts and communications pertaining to parties’ intentions, that is, letters, emails, telephone attendance notes, etc.3 The rationale underpinning the parol evidence rule is this: if parties have gone to the trouble of recording the terms of their agreement in a written document, then the parties must have intended the document to contain all of the terms that they finally agreed upon. As noted in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 at 484; 211 ALR 101, ‘the obligations of written agreements cannot simply be ignored or brushed aside’.
Entire agreement clauses [4.11]
To avoid uncertainty surrounding parties’ intentions as to the express terms of an agreement, parties commonly insert a clause into a written contract which is aptly known as an entire agreement clause, or an entire clause. Providing for an entire clause is the clearest way parties can demonstrate that the written contract contains all express terms of the agreement and that statements made during negotiations and other extrinsic evidence (for example, previous drafts, written communications) do not form part of the contract. Disputes as to the identification of terms are minimised given that the parol evidence rule clearly operates to exclude extrinsic material.4 Such a clause could be formulated quite simply. For example: All the terms of the contract are contained in this written document.
This document contains the entire agreement between the parties and nothing has been agreed that does not appear in this written contract.
[4.12]
Of course, not all contracts will include such a clause. Where a bargain is recorded in writing, and an entire clause is not provided for, the parol evidence rule applies where parties intended the written document to contain all of the express terms; it does not apply to contracts which are wholly oral or partly written/partly oral. [page 145] Sometimes it can be difficult to establish whether an agreement was intended to be wholly or partially in writing. Where the parties are in dispute, their intentions will be determined by reference to oral evidence.5 McHugh J in State Rail Authority of NSW v Heath Outdoor Ltd (1986) 7 NSWLR 170 at 191–2 stated: [T]he mere production of a contractual document, however complete it may look, cannot as a matter of law exclude evidence of oral terms if the other party asserts that such terms were agreed. If that assertion is proved, evidence of oral terms cannot be excluded because the court will, by definition, have found that the contractual terms are partly to be found in what was agreed orally as well as the document in question. No parol evidence rule could apply.
[4.13]
Thus, even when a document appears at face value to be a complete and entire record of the bargain, it is not a foregone conclusion that the parol evidence rule applies. Oral evidence may be tendered to answer the question as to whether parties intended the written document to contain all express terms. Upon finding that the written document reflects all of the terms expressly agreed to by the parties, the parol evidence rule applies. From this point onwards, parties cannot tender extrinsic evidence so as to add to, subtract, vary or qualify terms contained within the written document.6 On the other hand, where a court determines that the agreement includes both written and oral terms, application of the parol evidence rule is thwarted. Note that a court will take into account a range of factors when determining which statements constitute express terms of an agreement and which constitute mere representations. This is considered at [4.21].
Exceptions to the parol evidence rule [4.14]
There are a range of circumstances which may be described as exceptions to the parol evidence rule. These are considered in turn below.
Collateral contract [4.15]
Where it is established that the parties have entered into a collateral contract, the parol evidence rule will not apply. Evidence as to allegedly promissory statements which are not reflected in the main contract must necessarily be admitted so as to determine whether a collateral contract actually exists. See the discussion at [4.32]. [page 146]
Estoppel [4.16]
In Saleh v Romanous (2010) 79 NSWLR 453 at 459–60, the New South Wales Court of Appeal noted that the doctrine of promissory estoppel imposed equitable restraints on the enforcement of contractual and other rights before expressly confirming that it also trumped the parol evidence rule. It would seem, therefore, that evidence as to precontractual promises cannot be precluded by the operation of the parol evidence rule as this would inhibit the operation of the equitable doctrine.
Implied term [4.17]
As explained at [4.97], the courts will imply terms into a contract where it is deemed necessary to do so. This exercise requires consideration of extrinsic evidence, including what the parties have said to one another pre-contract. As such, the parol evidence rule has no application where the courts are seeking to identify the terms of a
contract.
Conditions precedent [4.18]
Where a contract is subject to a condition precedent, the parol evidence rule will have no application.7 A condition precedent is a provision which must be fulfilled before the contract will bind the parties and require them to perform their obligations. Extrinsic evidence will be admitted where this evidence establishes that the very existence of a written contract, or the requirement that it be performed, is contingent upon a condition precedent being satisfied. Assume, for example, that A enters into a contract with B to purchase B’s sailing yacht. Prior to signing the sale contract (stipulating the agreed price and other terms), A verbally states to B that she can only go ahead with the purchase if she successfully obtains her boat licence by the end of the month. B agrees to A’s stipulation, notwithstanding that it is not reflected in the sale agreement. A fails to obtain her boat licence, and B seeks to enforce the sale agreement.
[4.19]
The parol evidence rule would normally exclude any evidence of the prior conversations between the parties and focus solely on the written agreement. However, where the extrinsic oral evidence is crucial to determining whether a contract has actually come into effect and imposes enforceable obligations upon the parties, it is admissible.8 In this case, A’s caveat that the sale is conditional on her attainment of a boat licence, and B’s consent to this caveat, are critical in proving that the contract was not intended to become effective without the condition precedent (A’s attainment of a boat licence) being satisfied. Evidence of this conversation would therefore likely be admitted into court. [page 147]
Ambiguity
[4.20]
Where the terms of a contract are ambiguous in the sense that they are uncertain or are capable of more than one meaning, the parol evidence rule can be circumvented and extrinsic evidence admitted to aid in resolving the ambiguity. Such evidence may include, for example: telephone conversations, faxes or emails, oral testimony, drafts, plans, notes, or any other documents or correspondence preliminary to the contract being created. For example, in Akot Pty Ltd v Rathmines Investments Pty Ltd [1984] 1 Qd R 302, the plaintiff agreed to purchase ‘unit number 115’ on the 15th floor of a proposed apartment complex to be built by the defendant. The issue was that the building contract and floor plans indicated that there were five separate units on level 15 and that they were not individually numbered. There was, however, extrinsic evidence in the form of a brochure offered to the plaintiff and oral testimony from the agent who accompanied the purchaser to view the available apartments. This evidence capably identified the unit in question. The court held that the evidence was admissible as it served to identify the unit which formed the very subject of the sale agreement. It did not add to the contract but was merely an aid in resolving an inherent ambiguity within it. The parol evidence rule therefore did not apply.
Terms v Representations [4.21]
Where parties contract on the basis that the written agreement contains all of the express terms of the contract, operation of the parol evidence rule excludes any extrinsic evidence (oral statements as well as written communications, previous drafts of the agreement) from adding to, subtracting from, varying or qualifying the terms expressly provided for in the written agreement. Where this is not clear, the party claiming that the agreement was partly written and partly oral will have to convince a court that statements made during the negotiation phase were in fact express terms. A court will need to distinguish between those statements which represent the terms of a contract and those which are mere representations.
[4.22]
Representations are statements made during the course of
negotiations which may influence the other party in respect to a particular aspect of a contract. However, representations are not intended to be legally binding; they hold no legal significance (unless they are materially misleading).9 On the other hand, a term of a contract is a promissory statement — it reflects a legal obligation owed under the agreement as determined by the parties. If a term of the contract is breached, remedies can be pursued by the aggrieved party as the obligation is legally enforceable. [page 148] [4.23]
Consider the hypothetical scenario below:
Hypothetical Brief facts: A is considering purchasing a second hand table tennis set (complete with table, bats, net and balls) from B for a purchase price of $300. A has ‘shopped around’ online and is familiar with how much used table tennis sets are selling for. She inspects the set and queries why the price is so high. B replies that the four bats are the highest quality bat. When A asks ‘are they KillerSpin 200s?’ (most expensive brand of tennis table bat available retailing for $600 each) B replies ‘I think so — the labels have worn off so I am not entirely sure, but they were really expensive’. B adds ‘I don’t mind if you take one to a sports shop if you want to make sure’. A thinks they must be KillerSpin 200s if they were expensive so she purchases the table tennis set from B for the asking price. Later A’s friend informs her that the bats cannot be KillerSpin 200s as KillerSpin 200s have a special marking at the base of the bat — the bats she has purchased do not. A demands that B returns the $300 she paid for the table tennis set. Issue: Is B’s statement about the brand/type of table tennis bats a representation or a term of the contract? Remember, A will
only have a remedy against B if the statement is a term of the contract.
[4.24]
It is not always easy to determine whether something said during negotiations is a term of the contract or is merely a representation. It all depends on whether parties intended it to become a term. Where parties are in dispute about whether a statement is a term of the contract, a court will make an objective assessment:10 would a reasonable person in the position of the parties have understood the statement to be legally binding?
[4.25]
How would this test apply to the factual scenario above involving the purchase of the tennis table set?
Hypothetical Issue: Would a reasonable person in A’s position consider the statement about the brand/type of table tennis bats to be legally binding? On these facts it is unlikely. Conclusion: B thought the bats were KillerSpin 200s, but admitted he was unsure about this fact. A had the opportunity to verify the brand of table tennis bat which she did not bother doing. Based on the words spoken and [page 149] the conduct of the parties, a reasonable person is likely to think that B’s comment influenced A’s decision to an extent, but that it was not intended to be a term of the agreement between A and B. B is not required to return the $300 to A.
[4.26]
If what parties intended is not so readily apparent, a court may take
into account a range of factors when determining whether a statement is a representation or a term of the contract. For example, the length of time which passes between making the statement and entering into the agreement can be relevant. Where a statement is made towards the beginning of a negotiation and there is significant passing of time before a final agreement is reached, a court is more likely to view the statement as being a representation rather than a term. [4.27]
This was the case in Routledge v McKay [1954] 1 All ER 855. The plaintiff and defendant entered into negotiations regarding the sale of a motorcycle. At the start of the negotiation process, the seller informed the buyer that the motorcycle was a 1942 model. This particular feature of the motorcycle was not noted in the written agreement when the contract of sale was finalised a week later. Upon discovering that the motorcycle was in fact a different model, the plaintiff sued the defendant. The court held that the statement was a representation and not a term of the contract, finding that the passing of time between when the statement was made and the execution of the contract of sale was indicative of the fact that parties did not attach legal significance to the statement.
[4.28]
Where the person making the statement clearly indicates that he or she does not warrant the accuracy of the statement, the statement is more likely to be a representation rather than a term of the contract. The hypothetical scenario about the sale of the table tennis equipment illustrates this point: B did not warrant the accuracy of the statement that the table tennis bats were in fact KillerSpin 200s. The case of Ecay v Godfrey (1947) 80 LI LR 286 provides another good case example on this point:
Ecay v Godfrey (1947) 80 LI LR 286 Brief facts: The seller of a boat made a statement to the buyer that the boat was in good condition. However, the seller advised the buyer to have the boat surveyed to make sure the boat was in fact sound. The buyer purchased the boat but did not have it surveyed.
Issue: Was the statement that the boat was in good condition a term of the contract (which would allow the buyer to seek a legal remedy against the seller) or was it merely a representation with no legal significance on the facts? [page 150] Conclusion: The court held that the statement was not a term of the contract. From an objective perspective, neither party had intended the statement to be binding. The buyer did not warrant the accuracy of the statement. The statement that the boat was in good condition was a mere representation — it was the seller’s opinion. The buyer had no legal remedy against the seller as the seller had not breached a term of the contract.
[4.29]
So when does a statement of opinion (a representation) morph into a legally binding statement? There is no clear cut answer. However, a court may be inclined to consider a statement legally binding and more than mere opinion where a reasonable person would consider the statement an assurance. Consider the facts in Ecay v Godfrey. Let us assume that the seller of the boat remarked ‘I assure you that this boat is sound — it would be a waste of money to have it surveyed’. It is likely that a reasonable person in the position of the parties would view this remark as assurance as to the boat’s sound condition. The statement is likely to be considered more than a mere representation — the statement is capable of dissuading the buyer from verifying the accuracy of the statement. Thus, it is more likely to be considered a term of the agreement.
[4.30]
Where one of the parties possesses a special skill or has knowledge on which the other party relies, the statement is more likely to be a term rather than a mere representation. As such, a statement made by an expert, or a person who holds him or herself out as being an expert, is likely to be regarded as a term of a contract. Consider this hypothetical scenario:
Hypothetical Brief facts: Since being selected as a ‘first violinist’ for the Australian Youth Orchestra, A decides it is time to ‘upgrade’ her violin. A is hoping to purchase a quality instrument, preferably one which is around 200 years old (the age of the wood influences the depth of tone produced). She seeks advice from B who is a highly experienced and very well-known violin teacher who has worked as a violin restorer and valuer for over 30 years. He is also known for sourcing quality instruments (made in Europe) to sell to upcoming virtuosos. B describes himself as an expert in 19th century violins. B shows A a violin which appears quite new to A. After questioning B on the age of the instrument, B replies ‘the violin is definitely 180 years old. The stamp inside has faded but as an expert I can tell this violin was made in 1836 — the embellishments on the scroll of the instrument are of that era’. B does not dispute the statement, thinking ‘B is the expert and he would know’. A purchases the violin for $8000. Sometime later A discovers that the instrument was not made in the mid to late 19th century and that it was in [page 151] fact a fairly new instrument made in a violin factory in 1985; it was a copy, albeit a very precise copy, of the violins hand-carved in the 19th century. A is most displeased and argues that B breached a term of their agreement. Issue: Is B’s statement as to the age of the violin a term of the agreement? Conclusion: The fact that B claims to be an expert on violins is an important factor on this set of facts. A clearly relied on B’s knowledge of violins when purchasing the instrument. A reasonable person is likely to think that the parties contracted on
the basis that the instrument was in fact a violin hand-carved in the 19th century. It is likely that a court would classify the statement as a term rather than a mere representation. Thus, B has breached the contract.
[4.31]
The case of Oscar Chess v Williams [1957] 1 WLR 370 provides us with another useful illustrative example. There, the defendant, Williams, offered to buy a car from the plaintiff car dealer in exchange for his car. The trade-in value of the defendant’s car was assessed based on the car’s age, as stipulated in the car registration book. It was later discovered by the car dealership that the car was in fact an earlier model of less value, thus, the trade-in value of the car had been overestimated. The dealership sought to recover the difference between the trade-in value and the actual value. The court held that the defendant’s statement about the age of the car was a representation as opposed to a term of the agreement, the reason being that the defendant had no special skill or knowledge in cars so as to know what the true model of the car was. Moreover, the car dealership was the party possessing knowledge of cars — they should have known the true age of the car. As such, there was no remedy for the car dealership.
Collateral contracts [4.32]
A collateral contract is a unique contractual arrangement comprised of a binding promise (ancillary contract) made prior to entry into the written contract (the main contract). The promise — often made orally, but can be a written communication separate to the main written agreement — may be conceptualised as a statement which lies in between a representation and an express term. It is not an express term as it does not form part of the main contract between the parties, yet it amounts to more than a mere representation because it was intended to have some contractual significance. Thus, the promise is regarded as a contract ancillary to the main contract and is legally enforceable given that the promise is consideration for entry into the
written agreement. The two contracts sit side by side each other, with one intrinsically linked to the other by virtue of the fact that the main contract would not have come into existence but for the ancillary bargain. The case of De Lasselle v Guildford [1901] 2 KB 215 provides us with a useful case example. [page 152]
De Lasselle v Guildford [1901] 2 KB 215 Brief facts: The plaintiff and defendant entered into a lease agreement. Before signing the lease the plaintiff asked the defendant whether the drains were in good working order. In the plaintiff’s previous house they had been blocked and the house flooded so it was important to him that this not occur again. The defendant confirmed that the drains were sound; however, this was not reflected in the written agreement (the lease). The drains were faulty and the house flooded. Issue: Did the oral statement about the drains being in good working order constitute a collateral contract, the consideration for which was entry into the lease? Conclusion: The court held that a collateral contract existed, finding that the defendant’s oral assurance that the drains were in working order induced the plaintiff’s entry into the written contract (the lease agreement). The consideration for the ancillary promise (the assurance) was the signing of the lease agreement. The plaintiff was awarded damages for breach of a collateral contract.
[4.33]
So as to avoid impinging upon the parol evidence rule, which provides contracting parties with some certainty about the contents of a written agreement (that is, the express terms agreed upon), the courts are reluctant to find a collateral contract too readily. For a collateral
contract to exist, two criteria must be established:
[4.34]
1.
The oral statement must be promissory and intended to induce entry into the written contract.
2.
The oral statement must not be inconsistent with a term of the written contract.
Let us consider the first element. For the oral statement to be promissory, the parties must intend the statement to be legally binding. A representation will not suffice; both parties must intend that ‘there should be contractual liability in respect of the statement’.11 Furthermore, the promise must be of such importance that the parties would not have entered into the written contract but for the collateral promise. A collateral contract will not be established where the promise is one of several factors which induced entry into the main contract; it must be the only reason the main contract came into existence.12 [page 153]
[4.35]
The second element requires that the terms of the collateral contract are not inconsistent with the written agreement. Clearly, a collateral contract cannot be established in cases where the written agreement contains an entire clause; parties have clearly stipulated that all of the express terms are found wholly in the written contract. The case of Hoyts v Spencer (1919) 27 CLR 133 is a case example where the oral promise comprising the alleged collateral contract was inconsistent with the express terms of the written agreement (in this instance the main contract was a sublease agreement). The oral promise could not be enforced; the court held that there was no collateral contract. Knox CJ stated (at 139): [A] distinct collateral contract is … valid and enforceable even though the main agreement be in writing, provided the two may consistently stand together so that the provisions of the main agreement remain in full force and effect notwithstanding the collateral agreement.
[4.36]
The Australian Consumer Law13 may be able to provide relief in instances where a contract is induced by a false promise or a promise that leads the consumer into error (misleading or deceptive conduct) even though the promise is inconsistent with a term of the main contract.14 Also, estoppel may provide equitable relief which prevents the other party from denying the binding nature of their promise.15
Incorporation of terms by signature [4.37]
The most common way by which parties incorporate express terms into their written contracts is through signature. The general rule is that a person who signs a contractual document will be bound by the terms expressed in that document, irrespective of whether or not he or she has read and understood them. This is commonly known as the rule in L’Estrange v Graucob [1934] 2 KB 394. The rule was approved by the High Court in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; 211 ALR 342. In that case, Alphapharm imported a flu vaccine into Australia. The vaccine was sensitive to changes in temperature. Alphapharm entered into a contract with Toll pursuant to which Toll would collect the vaccine on arrival and transport it to a warehouse before distributing it to customers. During transport and in storage, some batches of the vaccine were exposed to incorrect temperatures and damaged. Alphapharm sued Toll on the basis it had been negligent in allowing the vaccine to be damaged. Toll relied upon an exclusion clause in the contract, which Alphapharm had signed but not read. Alphapharm subsequently argued that they were not bound by the exclusion clause. [page 154]
[4.38]
The High Court held that the exclusion clause excluding Toll from liability for negligence was as an express term in the contract and therefore enforceable, notwithstanding that Alphapharm did not read the agreement before signing: The general rule, which applies in the present case, is that where there is no
suggested vitiating element, and no claim for equitable or statutory relief, a person who signs a document which is known by that person to contain contractual terms, and to affect legal relations, is bound by those terms, and it is immaterial that the person has not read the document.16 [4.39]
By signing the contract, Alphapharm objectively indicated that it understood and assented to the terms of the arrangement, even if it did not actually do so. A reasonable person in Toll’s position would have understood signature to indicate conclusive acceptance of all terms within the contract, including the exclusion clause. It was not necessary for Toll to give Alphapharm due notice of such terms. The court explained (at CLR 182): Legal instruments of various kinds take their efficacy from signature or execution. Such instruments are often signed by people who have not read and understood all their terms, but who are nevertheless committed to those terms by the act of signature or execution. It is that commitment which enables third parties to assume the legal efficacy of the instrument. To undermine that assumption would cause serious mischief.
[4.40]
The High Court (at CLR 180–1) also elaborated upon the significance of the gesture of signature in the commercial world, and emphasised that parties who signed contracts without reading them did so at their own peril: It should not be overlooked that to sign a document known and intended to affect legal relations is an act which itself ordinarily conveys a representation to a reasonable reader of the document. The representation is that the person who signs either has read and approved the contents of the document or is willing to take the chance of being bound by those contents, as Latham CJ put it, whatever they might be. That representation is even stronger where the signature appears below a perfectly legible written request to read the document before signing it.
[4.41]
Toll was therefore exempt from liability for the negligently damaged vaccine batches. This is a classic case example demonstrating the critical importance of reading and understanding contracts before signing them. Commercial parties should always take the time to thoroughly peruse the terms of any contractual [page 155]
agreement and seek clarification from the other party or legal counsel if there are any potential ambiguities or misunderstandings. Once signature is placed upon a written contract, the law assumes that the signatory has read and understood all of the terms contained within it. It does not matter if a party arbitrarily chooses to sign a contract without reading it: that is entirely their choice (albeit an extremely foolish one!).
Exceptions to the rule in L’Estrange v Graucob [4.42]
The general rule in L’Estrange v Graucob (described above) is subject to a number of exceptions, both of which are stipulated in the wording of the rule itself.
Misrepresentation [4.43]
The general rule in L’Estrange v Graucob will not apply where the contents of a document (which has been signed by one party and which the signatory knows or ought to have known contains contractual terms) have been misrepresented by the other party, where the principle of non est factum applies,17 or where there are statutory or equitable grounds for relief.18 We will focus here on the misrepresentation exception and examine a key example case which demonstrates the exception in action.
Curtis v Chemical Cleaning & Dyeing Co [1951] 1 KB 805; 1 All ER 631 Brief facts: The plaintiff, Mrs Curtis, took her white satin wedding dress (trimmed with beads and sequins) to the defendant’s shop for cleaning. The shop assistant handed Mrs Curtis a paper headed ‘Receipt’ and asked that she sign it. Mrs Curtis asked why she was required to sign it and the assistant responded that the defendant would not accept liability for certain specified risks, including the risk of damage to the beads and sequins adorning the dress. Mrs Curtis signed the ‘receipt’;
however, it turned out that it actually contained a condition that the defendant accepted no liability for damage however it arose. When the dress was returned, it was stained. Mrs Curtis sued for damages; however, the defendant relied upon the exclusion clause to deny any liability. Issue: Was the plaintiff bound to the terms of the document she signed, which included the exclusion protecting the defendant? [page 156] Conclusion: The court found in favour of the plaintiff. The rule in L’Estrange v Graucob did not apply as the defendant’s shop assistant had misrepresented the scope of the exclusion clause. The assistant stated that the clause excluded liability for damage to the beads and sequins on the dress, but did not state that it also extended to cover other forms of damage such as staining. The defendant therefore could not rely upon the exclusion clause to exclude its liability for the damage to the plaintiff’s dress.
Document appears to be non-contractual [4.44]
The general rule in L’Estrange v Graucob will also not apply where the document being signed could not reasonably be regarded as contractual in nature. For example, where a party requests a signature upon a document which appears to be little more than a receipt, information flyer, delivery acknowledgment, timesheet or the like, the courts are likely to infer that a reasonable person would not regard such documents as containing contractual terms intended to affect the legal relations between the parties.19
D J Hill & Co Pty Ltd v Walter H Wright Pty Ltd [1971] VR 749
Brief facts: The defendant, Wright, was in the business of transportation and carriage. The plaintiff, Hill, engaged Wright to transport some expensive heavy machinery between its business premises. The contract was entirely oral being formed via telephone. The machinery was damaged in transit as a result of Wright’s negligence. Upon delivery of the machinery to its destination, one of Hill’s employees signed a document presented by Wright’s courier. On the back of the document was a list of terms and conditions, including an exclusion clause which excluded liability for damage of any kind ‘caused by any acts, defaults, or negligence of the carrier’. Hill’s employee did not read the document, nor realise that it contained terms and conditions. Rather, the employee thought it was a mere delivery docket. Hill sued Wright for damages. Wright defended the action, relying upon the exclusion clause. Issue: Did the exclusion clause form a part of the contract? Was it therefore binding on the plaintiff as soon as its employee signed the form, as per the rule in L’Estrange v Graucob? Conclusion: The court found in favour of the plaintiff. There was no evidence that Hill’s employee was aware of the terms and conditions [page 157] contained within the document. A reasonable person in Hill’s employee’s position would not have regarded the document to be contractual but rather a mere acknowledgment of delivery. Accordingly, the plaintiff was not bound by the terms contained within the document under the rule in L’Estrange v Graucob, and the defendant could not rely upon the exclusion clause to exclude its liability for the damaged machinery.
[4.45]
In Curtis v Chemical Cleaning & Dyeing Co,20 Denning LJ noted that
the very nature of the ‘receipt’ that was offered to Mrs Curtis when she dropped her dress off for cleaning was anomalous: Mrs Curtis may well have assumed (had the defendant’s shop assistant not said otherwise) that the document did not contain contractual terms but rather was merely the voucher she would need to produce when collecting her goods. Given that the assistant informed her as to the nature of the document and the fact it contained terms and conditions, however, this exception did not apply.
Other exceptions [4.46]
It is also possible to avoid the application of the rule in L’Estrange v Graucob through the application of the doctrine of promissory estoppel.21 For example, where a party (A) signs a document containing terms and conditions, but prior to signature the other party (B) assures A that it will exercise its legal rights under the agreement in a particular manner, such an assurance may be enforceable where A relies upon this promise to his or her detriment.22 The law is a little unsettled on this point, as in other cases courts have ruled that oral representations made prior to signing a contract and which have been relied upon to the signatory’s detriment do not circumvent the rule in L’Estrange v Graucob.23 Moreover, the parol evidence rule (discussed earlier at [4.8]) ordinarily excludes regard to pre-contractual statements when interpreting the terms and effect of a written contract.
[4.47]
More recently, however, the New South Wales Court of Appeal in Saleh v Romanous (2010) 79 NSWLR 453 at 461 confirmed that the rules of equity trump legal rights. Consequently, a party who detrimentally relies upon their counterpart’s promise to exercise legal rights under a contract in a particular manner may be able to raise an estoppel against that party. In other words, estoppel may operate to override the terms recorded in the written contract and sidestep the rule in L’Estrange v Graucob.
[4.48]
Where a contract is subject to a condition precedent, this will also avoid the application of the rule in L’Estrange v Graucob. As explained
earlier in the [page 158] chapter (and later in Chapter 7), a condition precedent is a provision which must be fulfilled before the contract will bind the parties and require them to perform their obligations. Generally, the courts will prefer to interpret such provisions on the basis that they determine whether the parties are obliged to perform, rather than whether the contract has actually come into existence.24 [4.49]
A common example of a condition precedent is a finance clause in a real estate contract. The prospective purchaser enters into an agreement with the vendor to purchase a house, provided that the required finance can be obtained by a certain date. This agreement, as is invariably the case in commercial practice, is made in writing and signed by both parties. If that date passes and the purchaser cannot obtain the finance, they are not obligated to proceed with purchasing the house, and the vendor is not obliged to sell the house to the purchaser. This is because the specified act upon which the performance of the parties’ respective obligations under the contract are contingent — the purchaser’s obtainment of finance — has not occurred. Accordingly, it would not matter if the purchaser had signed the contract and thereby bound themselves to its terms: the obligation to proceed with the sale would no longer be enforceable.
Incorporation of terms by notice [4.50]
Where a contract is not signed, terms of a contract may be incorporated by way of notice. Notice can be provided in a variety of ways. Commonly, terms are printed on signs (for example, at the point of entry at facilities such as a car park, an ice rink, roller skating arena or swimming pool) and on tickets (for example, tickets issued for public transport such as a bus, train and ferry). Often, the terms will include an exclusion clause, which limits or excludes the contractual
liability of one of the parties. However, for terms to have effect they must be incorporated validly; reasonable notice must be provided. Reasonable notice comprises of the following three elements: 1.
The notice must be provided before or at the time of contracting.
2.
The document in which the terms are contained must be contractual in nature.
3.
The term(s) must be reasonably brought to the other party’s attention.
Where one of the above three elements cannot be established, reasonable notice will, prima facie, not have been provided and the term(s) will not be validly incorporated as part of the contract. [page 159]
Before or at the time of contracting [4.51]
Where a party purports to incorporate a term by notice, notice of the term needs to be given before or at the time of contracting. Hence, the time at which notice of the term is given is crucial. An illustrative case is Olley v Malborough Court [1949] 1 KB 532.
Olley v Malborough Court [1949] 1 KB 532 Brief facts: The plaintiffs arrived at the defendant’s hotel, paid for a week in advance and proceeded to the hotel room. A notice stating that the hotel will not assume liability for articles lost or stolen unless handed to managers for safe keeping (an exclusion clause) was hung on one of the walls. When the wife’s valuables were stolen, the hotel relied on the term to exclude their liability. Issue: Had the term (exclusion clause) been validly incorporated?
Conclusion: The court held that the term provided for by way of notice (a sign) had not been incorporated validly. The term printed on the sign in the hotel room was not effective notice; notice had been given after the contract has been executed. Consequently, the hotel could not rely upon the term to exclude their liability for the stolen valuables.
[4.52]
Next time you enter the premises of a dry cleaner, car park, sporting event or leisure activity facility take a moment to consider where the sign or poster pertaining to the terms and conditions is placed. Is it at the front entrance? Is it at the cashier desk? The placement of a sign containing a term will always depend upon the nature of the contract. Generally speaking, notices which exclude one party’s liability will be located at the front of the entrance or at the payment desk to ensure notice has been incorporated validly and can therefore be relied upon.
Document must be contractual in nature [4.53]
The nature of the document on which the term to be incorporated is printed is very important. To constitute reasonable notice, the document upon which contractual terms are printed must be of the kind a reasonable person would regard as being contractual in nature. The types of documents a reasonable person is unlikely to consider contractual in nature could include vouchers given for hire goods,25 tickets issued at automated machines,26 delivery dockets27 and travel brochures.28 [page 160]
[4.54]
The case of Causer v Browne [1952] VLR 1 provides us with a useful example where reasonable notice was not established; terms were not incorporated validly. In this case, terms purporting to avoid liability were printed on the front of a dry cleaning receipt/docket. The dry cleaners sought to rely on this term in order to exclude their liability
for damage caused to the plaintiff’s garment. The court found that the receipt/docket could reasonably be likened to a voucher to be handed over at the time the garment was ready for collection and that a reasonable person would not consider it to be a contractual document.
Term must be brought to the other party’s attention [4.55]
A term provided to another party by way of notice must reasonably be brought to the other party’s attention. For example, a sign displayed at the front of a car park (before the contract is made) printed in clear font which is large enough for an ordinary person to be able to read is likely to constitute reasonable notice. In this way, the terms are printed in a manner which reasonably brings them to the other party’s attention. On the other hand, notice of a term printed on a poster in inconspicuous font is far less likely to be considered reasonable notice, notwithstanding it has been positioned at the cashier’s desk. Consider the following examples of signs containing terms of use/entry for an amusement park ride: Figure 4.1: Amusement park ride terms of use
WARNING This ride involves high speed, sharp turns and sudden drops. Do not use this ride if you: are pregnant; are afraid of heights or the dark; are claustrophobic; are sensitive to strobe lighting effects; have recently had surgery;
suffer from abnormal blood pressure, motion sickness, heart, back or neck problems, or any other conditions which may be aggravated through using this ride. We exclude any and all liability for any harm suffered through the use of this ride against our advice. We further exclude any liability for any personal injuries sustained as a result of negligence on the part of SuperLand Inc., its employees and subsidiaries.
[page 161]
Figure 4.2: Amusement park ride terms of use Warning! This ride involves high speed, sharp turns and sudden drops. Do not use this ride if you: are pregnant; are afraid of heights or the dark; are claustrophobic; are sensitive to strobe lighting effects; have recently had surgery; suffer from abnormal blood pressure, motion sickness, heart, back or neck problems, or any other conditions which may be aggravated through using this ride.* *We exclude any and all liability for any harm suffered through the use of this ride against our advice. We further exclude any liability for any personal injuries sustained as a result of negligence on the part of SuperLand Inc., its employees and subsidiaries.
[4.56]
Imagine that the sign in Figure 4.1 is located at the entry and payment point to the ride. This would satisfy all conditions of reasonable notice specified above: timing is satisfied as the terms are provided prior to entry into the contract, the sign is obviously in the nature of a warning sign (a suitably contractual document) and the terms are presented clearly and boldly with attention drawn to the critical terms of use (especially the exclusion clause at the bottom!). Now consider Figure 4.2, located inside the entrance to the ride and
after the payment point. There are issues here on two conditions of reasonable notice: timing is not satisfied as the terms are provided after the contract has already been entered into, that is, after the ticket to use the ride is purchased. There is also a potential issue with reasonably bringing the terms to the other party’s attention because the sign is inconspicuous and the terms are poorly presented. The font is small and difficult to read, and users of the ride are unlikely to recognise the importance of the information contained on the sign. If a party were to use the ride and suffer injury, it is likely that the disclaimer on the sign in Figure 4.1 would protect the amusement park. The sign in Figure 4.2, on the other hand, may be more easily challenged in court by the injured party.
Unusual or onerous terms [4.57]
Where terms to be incorporated into a contract are unusual, the party seeking to rely on the unusual term must show that the term had reasonably been brought to the other party’s attention before or at the time of contracting. In order to satisfy the reasonable notice requirement, special notice may be necessary where terms are particularly onerous. In the case of Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433; [1988] 1 All ER 348 the unusual term related to an onerous lending fee for the hire of photographic transparencies. This fee was much greater than comparative lending fees in the industry. Dillon LJ (at 352) remarked: If one condition in a set of printed conditions is particularly onerous or unusual, the party seeking to enforce it must show that the particular condition was fairly brought to the attention of the other party.
[page 162] The court held that the plaintiffs had not satisfied the requirement of special notice. Accordingly, the defendants were not liable for the onerous lending fee.
[4.58]
Special notice may be satisfied in numerous ways depending on the nature of the contract. It may, for example, be achieved by making the term more conspicuous (more noticeable). This may be accomplished through the use of bold print or an asterisk on a sign or, in relation to oral contracts, may be satisfied through express verbal statements. Notably, the Australian High Court in Toll Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 185; 211 ALR 342 rejected the requirement for special notice of unusual terms in relation to written signed contracts noting: … a person who signs a document which is known by that person to contain contractual terms, and to affect legal relations, is bound by those terms, and it is immaterial that the person has not read the document.
Incorporation of terms by prior course of dealings [4.59]
In practice, many parties transact with one another more than once. Where the parties have established a history of prior dealings, it is possible for terms used in previous contracts to be incorporated into subsequent contracts notwithstanding that the ordinary rules for incorporation (providing reasonable notice) have not been satisfied. This principle is important because it means that previous transactions with regular commercial partners may influence future transactions, even where this was not necessarily intended.
[4.60]
A seminal case on point is Balmain New Ferry Co Ltd v Robertson (1906) 4 CLR 379. The defendant was a ferry company operating a steam ferry that travelled from Sydney to Balmain. A notice placed above its private wharf stipulated that a fare of one penny must be paid when entering or leaving the wharf through the staffed turnstiles. The plaintiff, Mr Robertson, paid his fare to enter the wharf but missed the ferry he wanted to catch. He sought to leave the wharf and was asked to pay another penny. He refused to do so and was detained. He eventually escaped through a gap beside the turnstiles and commenced legal proceedings against the defendant for assault and false imprisonment. The contract issue arose because if the
requirement to pay the penny was incorporated into the agreement between the parties then the officers had a legal basis for detaining the plaintiff (and thus a valid defence to the plaintiff’s action). [4.61]
The High Court held that the payment term was incorporated into the agreement between the parties and therefore bound the plaintiff. Mr Robertson was contractually obliged to pay the one penny fee upon leaving the wharf. Ordinarily, as we have seen, for terms to be incorporated by notice the notice must be both timely and reasonable. However, where the parties have established a history of [page 163] prior dealings with one another such that they are well aware of the terms usually included in their transactions, those terms may thereby become incorporated into subsequent contracts. Here, Mr Robertson had travelled on the defendant’s ferries many times and paid his fares. He was well aware of this requirement. Accordingly, it formed part of the contract in question. Per Griffith CJ: There is no doubt that in fact the terms were that persons should obtain admittance on payment of one penny, and when admitted should be free to depart from the premises by water, but should not be entitled to egress by land except on payment of another sum of one penny. If the plaintiff was aware of these terms he must be held to have agreed to them when he obtained admission. If he had been a stranger who had never before been on the premises, it would have been sufficient for the defendants to prove that they had done what was reasonably sufficient to give the plaintiff notice of the conditions of admittance. In this case, however, it appeared that the plaintiff had been on the premises before, and was aware of the existence of the turnstiles and of the purpose for which they were used. It was therefore established that he was aware of the terms on which he had obtained admittance, and it follows that he had agreed to be bound by them.29
[4.62]
For terms to be incorporated into a contract by prior course of dealings, evidence of prior use is not in itself sufficient. It must be demonstrated that the course of dealings between the parties has been consistent and relatively uniform. So the number of previous transactions, as well as the nature of each transaction, must be considered in determining whether or not the terms of these previous
agreements have been incorporated into a subsequent agreement between the parties. This is ultimately an analysis to be undertaken on a case-by-case basis. [4.63]
In Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31, the plaintiff game farmers purchased from the defendant quantities of animal feed for pheasants and partridges. They had previously entered into similar transactions three to four times a month for the previous three years. The House of Lords held that this amounted to a sufficiently consistent pattern of prior dealings, such that the terms of previous sales were incorporated into the disputed agreement. Similarly in Hays Personnel Services (Australia) Pty Ltd v Motorline Pty Ltd [2008] QCA 375 the Queensland Court of Appeal considered nine instances of written correspondence (with attached ‘Terms of Business’) exchanged between the parties in the course of an eightmonth period to amount to a sufficient course of dealings. [page 164]
[4.64]
These findings can be contrasted with that in Hollier v Rambler Motors (AMC) Ltd [1972] 2 QB 71. In that case the plaintiff had his car repaired at the defendant’s garage three or four times over a period of five years. On previous occasions, the plaintiff had signed (but not read) a form which stated that the defendant was not liable for any damage caused by fire to customer vehicles on the premises. On this occasion the defendant orally agreed to repair the plaintiff’s car and owing to the defendant’s negligence, the car was damaged by fire. The plaintiff sued for damages while the defendant defended the claim and sought to rely upon the exclusion clause in the written document it traditionally produced to the plaintiff. While it was not signed in this particular instance, the defendant argued that it had been incorporated into the parties’ subsequent agreement by prior course of dealings. The English Court of Appeal held that there was not a sufficient course of prior dealings as the transactions were too few and far apart that they lacked the requisite consistency.
[4.65]
While there is no single test for the incorporation of terms into a contract based on a prior course of dealings, there are, as Buss JA noted in La Rosa v Nudrill Pty Ltd [2013] WASCA 18 at [68] (La Rosa) several factors which might inform the question of whether terms have been incorporated in this manner: It will be a question of fact and degree whether, in a particular case, the parties, by their conduct, have incorporated a term into their contract by a previous course of dealings. Each case turns on its own facts and circumstances. Factors of relevance in determining whether the alleged term was incorporated include the number of prior dealings, how recent they were, and the consistency in the prior dealings and the dealing in question (for example, the similarity between the subject matter of the dealings and the manner in which the dealings were entered into or concluded). This is not, of course, an exhaustive statement of relevant factors.
The common law appears to be unclear as to whether terms can be incorporated into an agreement through a course of dealings, even where one of the parties has never on any occasion: had notice of the terms before or at the time of contracting; recognised the document in which the terms are contained as being contractual in nature; or had the terms brought to their attention via reasonable means. In other words, the law is not settled as to whether the normal requirements for incorporation of terms by notice (outlined at [4.50]) apply where terms are sought to be incorporated by course of dealings. Buss JA in La Rosa suggested (at [71]) that it was not essential, in order for a term to be incorporated by course [page 165] of dealings, that the term has been ‘sent or given to the party sought to be bound at or prior to the formation’ of the contracts comprising the course of dealings, or that the term has been incorporated in at least one of the contracts constituting the previous course of dealings. In the recent decision of Privatbraurei Erdinger Weissrau Werner Brombach GMBH v World Brands Australia Pty Ltd [2016] WASC 9,
Gething AM approved of the principles expressed in La Rosa, emphasising that the critical enquiry is whether an express term is incorporated into a contract as a result of an inference arising from the prior conduct of the parties as a whole: at [28]. As such, the legal position appears to be that, while factors such as the timing and presentation of terms utilised in a course of dealings are relevant to the question of whether they bind the parties in subsequent transactions, they are not determinative. The ultimate enquiry is whether the facts and circumstances objectively demonstrate that the parties intended to be bound by the terms of prior dealings. If, for example, on numerous occasions a party has had but neglected an opportunity to read the terms of the transaction (howsoever presented), this will support the inference that the party was willing to be bound by the same terms in subsequent transactions regardless of their actual knowledge. [4.66]
As a matter of good commercial practice, it would not be prudent to rely upon this principle to incorporate terms into subsequent contracts with the same party. As mentioned earlier, the fact that the same or substantially similar terms have been used on prior occasions is not in itself a sufficient basis for incorporation. The courts will consider the frequency with which parties deal with one another, as well as the nature of each transaction, in deciding whether the parties have by their conduct demonstrated an intention to be bound by the same terms as in previous transactions. It is far more sensible to have parties expressly sign a document outlining all relevant terms and conditions for each individual transaction (even where these are the same as before) to avoid any uncertainties arising.
Incorporation of terms in electronic agreements [4.67]
In Chapter 2 we saw how the digital age has revolutionised the process by which parties contract with one another. Contracts can now be formed entirely online, with the relevant offer and acceptance
taking place through a computer screen. In the same way, the manner in which the terms of such electronic agreements are incorporated into those agreements has also been affected by the advent of digital technologies. Many contracts are now made electronically through emails or over the internet and so the application of traditional principles of contract law, many of which were made at a time when computers did not exist, is somewhat curious. As such, courts face a new challenge in seeking to identify how terms can be incorporated into electronic agreements. [page 166]
Types of electronic agreement [4.68]
There are three basic kinds of ‘online’ contract which are utilised frequently in electronic commerce: shrinkwrap, browsewrap and clickwrap. Each of these seeks to incorporate terms into the contract between the parties in a different manner. In many cases, these types of contracts are utilised to facilitate the sale or use of computer software.
Shrinkwrap contracts [4.69]
Shrinkwrap contracts are contracts which are formed by a party opening a package containing a particular product. The name ‘shrinkwrap’ derives from the practice of retailers covering their products (especially computer software) in plastic or cellophane film. Traditionally the terms of use are printed on the outside of the packaging and accompanied by a notice stipulating that the user is deemed to have accepted those terms once they proceed with opening the package. Provided the terms are presented in a reasonably clear and perceptible manner, this will likely suffice as legal notice. However, in recent times the practice of placing the terms on the inside of the package has become common; a notice on the outside of the packaging will merely state that the user signifies acceptance of the terms of use once the package is opened or the software is loaded
onto a computer. Here is an example: Figure 4.3: Shrinkwrap contract notice LEGIONS OF THE GALAXY IV: SOLAR WARS Use of this software is subject to the Licence Agreement, the full terms of which are contained within this package. By opening this package and using this software you signify that you agree to the terms of the Licence Agreement. The licence granted under this Licence Agreement is a nonexclusive and non-transferrable licence to use this software and is restricted to personal and domestic use. Reproduction or commercial use of this software is strictly prohibited. The Licensor accepts no liability for any loss, damages, expenses or costs incurred by any person as a result of using this software.
[4.70]
This type of shrinkwrap contract is controversial given that it appears to conflict with notions of reasonable notice for the incorporation of terms in unsigned documents (discussed earlier in the chapter). The purchaser does not have access to the terms of use until after payment has been made and the contract has been formed, which casts doubt on their general enforceability status.30 [page 167]
[4.71]
Some American courts have confirmed the validity of agreements which provide the terms upon opening of a package where, despite the package having been opened, the purchaser is entitled to avoid using the product within and return it.31 Continued use would therefore constitute acceptance of the terms and bind the purchaser. Where there is no such option, however, the legal position is distinctly unclear and some courts appear to have expressed significant doubt
as to the enforceability of shrinkwrap contracts of this kind.32 [4.72]
In 2002, the Australian Copyright Law Review Committee (CLRC) examined the relationship between contract and copyright and considered the legal status of shrinkwrap agreements. In its comprehensive report, the committee stated:33 While Australian courts have yet to consider whether shrinkwrapped terms can be properly incorporated into a contract, the Committee notes that these terms may be enforceable on the basis of the so-called ticket cases. In Australia, the purchaser is generally considered to be the offeror and the vendor the offeree for the purposes of retail sales. However, the ticket cases have held that a ticket received after payment for a service may represent an offer containing terms which are accepted when the recipient goes ahead with the contract. A term may be incorporated in this way if (i) reasonable notice of the term is given and (ii) there is a reasonable opportunity to reject the term, prior to the assumption of binding contractual obligations. The more unusual and/or harsh a term, the greater the effort that must be made to bring it to the attention of the party to be bound.
[4.73]
The CLRC went on to cite a number of conflicting United States authorities before noting that it was at least possible, on the basis of analogous reasoning drawn from the ‘ticket cases’, for shrinkwrap agreements to be enforced under Australian law. From a commercial perspective, in light of the considerable uncertainty surrounding this area of Australian contract law, it would be most advisable to ensure that the party to be bound has ample notice of the terms of use prior to binding them. The terms should either be printed on the packaging of the product or accompany the product, or be incorporated by reference to a readily ascertainable document or location (such as a website).
Clickwrap contracts [4.74]
Clickwrap contracts are contracts which are formed by a party clicking a button on a website (normally stating ‘I agree’ or ‘I accept’), or requiring the party to type [page 168]
a statement signifying their acceptance and clicking a second button. A typical example of a clickwrap contract is a website which offers you a licence to use specified software and presents a dialogue box to you to allow you to either accept or reject the terms of use:
Figure 4.4: Clickwrap contract
[4.75]
Here is another common example:
Figure 4.5: Clickwrap contract
[4.76]
These types of dialogue boxes are typically found at the end of a list of terms and conditions displayed on the screen, or on the last of a series of subpages the user must progress through in order to access the dialogue box. The placement of such boxes has important implications as it is critical for establishing that reasonable notice has
been provided; specifically, that the terms were presented to the party to be bound prior to acceptance. Placing such boxes at the top of the page, or not proximate to the end of the list of terms, is therefore perilous and endangers the enforceability of the electronic agreement. [4.77]
There are Australian authorities confirming the validity of clickwrap contracts and their methods for the incorporation of terms. The case of eBay International AG v Creative Festival Entertainment Pty Ltd (2006) 170 FCR 450 is a useful illustration. Creative was the promoter of popular music festival Big Day Out [page 169] (BDO). It printed a condition (cl 6) on the back of its tickets to the festival which pertained to ticket resales. The provision stipulated that, should the ticket be resold at a profit, it would be cancelled and the ticketholder barred from the festival. Resale through online market or auction sites, including eBay, was also specifically prohibited. Tickets for BDO were released and sold online through the BDO and Ticketmaster websites. On the BDO website, purchasers were required to click a button next to the words ‘I have read and agreed to the following terms and conditions’. On the Ticketmaster website, however, purchasers were required to agree to Ticketmaster’s terms of sale, a copy of which was stated as being available for inspection at time of purchase or ticket collection (that is, after the contract was concluded).
[4.78]
eBay commenced proceedings against Creative alleging that Creative’s reliance on cl 6 for tickets sold through the Ticketmaster website was misleading or deceptive (contrary to trade practices legislation) in that it implied that the provision was enforceable when in fact, owing to a lack of reasonable notice, it was not. The Federal Court agreed and held that the contract for the purchase of a BDO ticket was concluded once the respective processes on each website were completed. Whereas with the BDO website purchasers had the option of viewing the terms of sale prior to purchase, purchasers
through the Ticketmaster website did not. Accordingly, purchasers who obtained tickets through the Ticketmaster website did not have prior notice of the terms they were purportedly assenting to. Therefore, those terms (including cl 6) were not incorporated into the contracts of sale for BDO tickets completed over the Ticketmaster website. Creative had therefore misled and deceived consumers by asserting the enforceability of cl 6. [4.79]
Importantly, Rares J appeared to equate clicking ‘I agree’ on the website with traditional signature upon a written document,34 though the issue appears very much unsettled in Australia.35 Various commentators and international courts appear to regard a digital signature of this kind as synonymous with a written one.36 Some clickwrap contracts allow users to hold down the button on their computer mouse and guide the cursor to create a ‘written’ signature on the computer screen. Some touchscreen devices such as tablets even allow users to ‘draw’ their signatures with their finger or a digital pen. This would seem even closer to a traditional handwritten signature upon paper and indeed such a digital [page 170] version was accepted in Getup Ltd v Electoral Commissioner (2010) 189 FCR 165; 268 ALR 797 as sufficient for the purposes of electoral registration.
[4.80]
On a reading of the Electronic Transactions Acts (ETAs) in force in all Australian jurisdictions, it would seem that clicking ‘I accept’, ‘I agree’ or similar statements in clickwrap contracts would likely suffice as a ‘signature’ for the purposes of incorporating terms into such contracts. The ETAs provide that, in the context of electronic communications, where a law requires a person’s signature, this requirement is taken to have been met where an appropriately reliable method (in the light of all circumstances) has been used to identify the person and demonstrate their intention in relation to the information communicated.37 Ostensibly, then, clicking the relevant consent
button at the end of a list of terms within a clickwrap contract would appear to be the most appropriately reliable method of signalling the signatory’s intention to be bound by those terms.
Browsewrap contracts [4.81]
Browsewrap contracts are similar to clickwrap contracts in that they are formed by the user clicking the consent button (that is, ‘I agree’ or ‘I accept’) to signify their agreement with the stipulated terms. However, unlike with clickwrap contracts, browsewrap contracts typically provide links to subpages within the relevant website or hyperlinks to separate webpages or documents containing the terms and conditions. Often there will be a separate button or a hyperlinked sentence in a body of text reading ‘click here for terms and conditions’ which, when clicked, directs the user to a different location in order to access those details. Another feature distinguishing a browsewrap contract from a clickwrap contract is that the former does not normally require the user to actually read the terms prior to indicating their agreement by clicking the consent button. Here is a common example:
Figure 4.6: Browsewrap contract
[page 171] [4.82]
Again, as with clickwrap contracts, it is important for parties who seek
to sell goods and services through browsewrap contracts to ensure that effort has been made to provide the prospective purchaser with reasonable notice of the terms and conditions. This is perhaps more difficult with browsewrap contracts given that hyperlinks to contract terms can be easily unnoticed or ignored by users before they indicate their consent to be bound. [4.83]
Specht v Netscape Communications Corporation 306 F 3d 17 (2d Cir 2002) demonstrates the difficulties inherent in browsewrap contracts. In that case, Netscape provided computer software programs which were downloadable from its website. To facilitate the download, users were required to click on a ‘Download’ button. At the bottom of the webpage was some text referring to the Licence Agreement (LA): ‘Please review and agree to the terms of the Netscape SmartDownload software license agreement before downloading and using the software.’ Users were not required to view or affirmatively indicate their assent to the LA before proceeding with their download. If a user clicked on the underlined text in the invitation, they were redirected to a webpage with the full terms of the LA. One such term was that all disputes would be resolved through arbitration. Specht complained of breaches of privacy committed by Netscape and commenced legal proceedings against them. Netscape sought to enforce the arbitration clause.
[4.84]
The Second Circuit Court of Appeal confirmed the earlier decision of the District Court for the Southern District of New York and held (at 18) that the terms of this browsewrap contract, including the arbitration clause, were not enforceable due to a lack of notice: [A] reasonably prudent Internet user in circumstances such as these would not have known or learned of the existence of the license terms before responding to defendants’ invitation to download the free software, and that defendants therefore did not provide reasonable notice of the license terms. In consequence, plaintiffs’ bare act of downloading the software did not unambiguously manifest assent to the arbitration provision contained in the license terms.
[4.85]
The court emphasised that a consumer’s clicking on a ‘download’ button or the like does not communicate assent to contractual terms unless it is made absolutely clear to the consumer that clicking on
said button signifies assent to the terms. The principles of Australian contract law with respect to reasonable notice are therefore of particular pertinence here. If a party chooses to utilise browsewrap contracts, they must be careful to ensure that the relevant hyperlinks to the terms of the agreement are prominent and placed before (or above) the consent button on the webpage. It is perhaps safer in practice to use clickwrap agreements but again, commercial parties must be wary of ensuring that adequate notice has been provided. [page 172]
Exclusion clauses [4.86]
This section focuses on interpreting the meaning of express terms which seek to limit or exclude the contractual liability of one party for loss (damage/injury) sustained by another party. These terms are known as exclusion clauses or exemption clauses. As noted in the previous section on ‘incorporation by notice’, exclusion clauses are commonly incorporated into a contract by way of a sign or a document which alerts the other party to the term. Valid incorporation of an exclusion clause is necessary in order for a party to rely on the term. There is no need to consider the meaning of an exclusion clause if it is not part of the contract, as it has not been incorporated validly. As such, it is useful to consider analysis of an exclusion clause in two stages: 1.
Step 1 considers valid incorporation of an exclusion clause: is the term part of the contract? This stage of analysis is discussed at [4.50].
2.
Step 2 considers interpreting an exclusion clause: what does the term mean? This stage is discussed below.
Legal rules informing the interpretation of exclusion clauses
[4.87]
Sometimes parties dispute the meaning of an exclusion clause which purports to limit or exempt the liability of one of the parties. Courts approach interpretation of such a clause with a degree of caution, careful not to construe the clause in an overly broad manner. There are a range of legal principles which are relevant when construing an exclusion clause. These rules will be discussed in turn below.
General rule [4.88]
First, a general rule. Courts will interpret the meaning of an exclusion clause in the context of the contract as a whole and in accordance with the ordinary, natural meaning of the words stipulated in the clause. This legal principle was propounded in Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500; 68 ALR 385, with the High Court asserting that this approach gives ‘weight to the context in which the clause appears including the nature and object of the contract’.38 Thus, while the specific words of the clause will be considered according to their ordinary or lay definition, the courts will contextualise individual words to give effect to the purpose of the contract. Where ambiguity as to the expression of the clause remains, the courts look to a range of other principles.
Contra proferentum [4.89]
Where a clause is ambiguous it is construed contra proferentum. This is a Latin phrase which is an abbreviation of the full phrase verba chartarum forties accipiuntur contra proferentum. This translates to the words of a written [page 173] document are more forcefully construed against the person insisting on them. As the translation denotes, this rule essentially provides that any ambiguity is interpreted against the party seeking to enforce the clause.39 It therefore protects the vulnerable party; the party whose right to seek compensation for loss sustained will be infringed.
Negligence rule [4.90]
This rule applies where a party seeks to exclude or limit their liability for negligence. Liability for negligence can be excluded where the clause purporting to protect a party from negligence claims consists of specific words to that effect. For example: A attends B’s horse riding facility. At the cashier desk, a large, bold sign stipulates that B will not be liable for any personal injuries sustained as a result of B’s negligence.
[4.91]
There is no uncertainty as to whether or not the parties have contracted on the basis that B assumes no liability for injuries sustained by A, perhaps sustained by falling off a horse, even where those injuries are caused by B’s negligence, such as failing to attach the saddle on the horse correctly.
[4.92]
A party may also express a clause purporting to exempt or limit liability for negligence more broadly. Using the same scenario as above, suppose the sign stipulates: B will not be liable for loss, damage or injuries sustained on these premises howsoever caused.
[4.93]
The reference to ‘howsoever caused’, while a broad statement, is specific enough to cover negligence.40 The language clearly encompasses tortious liability through its references to injury and damage which would only be incurred through negligence on the part of the horse riding facility. However, the case of White v John Warwick & Co [1953] 2 All ER 1021 highlights that parties may not be protected by an exclusion clause where a claim can be brought on another ground, that is, breach of contract:
[page 174]
White v John Warwick & Co [1953] 2 All ER 1021 Brief facts: The plaintiff hired a tricycle from the defendant to deliver newspapers. As the defendant was riding the tricycle the seat broke off and he suffered injury. The contract contained an exclusion clause which stipulated ‘nothing in this agreement shall render the owners liable for any personal injuries to the riders of the machine hired’. The defendant owed the plaintiff a contractual duty to maintain the tricycle in working order. He also owed the plaintiff a duty of care in tort (to take reasonable care in ensuring the tricycle was safe to ride). The plaintiff sued the defendant. Issue: Could the defendant rely on the exclusion clause? Conclusion: The court held that there were two possible causes of action (implied duty in contract to maintain the tricycle for its purpose and duty of care owed in tort) for the loss in question: one in contract and one in tort; the exclusion clause will only cover negligence where so expressed in the clause.
[4.94]
Had the defendant inserted words to the effect of (or similar to) ‘whether liability arises from negligence or otherwise’ at the end of the clause, this outcome may have been avoided. The addition of these words reflects parties’ intentions to contract on the understanding that liability arising from more than one cause of action, and specifically including negligence, will be avoided by virtue of the exclusion clause.
Four corners rule [4.95]
Exclusion clauses are generally not construed so as to exempt the
party seeking to rely on the clause from liability for acts which are not governed by the contract. The essence of the rule is this: an exclusion clause functions only to cover loss which occurs within the operations governed by the contract. Exclusion clauses will have no effect outside the terms of the contract. The case of Council of the City of Sydney v West (1965) 114 CLR 481 provides a useful case example.
Council of the City of Sydney v West (1965) 114 CLR 481 Brief facts: The plaintiff owned a car park. Upon entering the car park, the defendant was issued with a ticket which he did not read. An exclusion clause was printed on the ticket. The exclusion clause excluded the plaintiffs from liability in relation to any loss or damage to any vehicle or thing in or upon any vehicle or for any injury to any person however such loss or damage may arise or be caused. Additionally, the terms stated that the ticket must be presented before taking delivery of the vehicle. A car [page 175] park attendant allowed an unauthorised person (using a duplicate ticket) to drive the defendant’s car out of the car park. The car was later found damaged. West sued for breach of contract. Issue: Could the plaintiffs rely on the exclusion clause to protect themselves from being liable for the damage caused to the defendant’s car? Conclusion: The court held that the plaintiffs could not rely on the clause as release of the car was not merely a negligent act, it was an unauthorised act — an act which lay outside the terms of the contract altogether. Parties had agreed that the plaintiffs
would not be liable for loss or damage caused in connection with the storage of the car; however, nowhere in the contract did parties envisage that the clause could cover the plaintiffs’ loss sustained outside of the car parking facility.
Deviation rule [4.96]
This rule has particular application in relation to goods transported by a carrier. Generally speaking, a carrier will not be able to rely on an exclusion clause to protect itself from liability where the carrier deviates from the stipulated route or voyage; that is, where they use a route to transport the goods different to the one preauthorised or contemplated under the contract. The case of Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353 illustrates this point aptly.
Thomas National Transport v May & Baker (Australia) (1966) 115 CLR 353 Brief facts: The plaintiff was contracted to transport May & Baker’s goods from Melbourne to Sydney. The plaintiff employed a subcontractor to collect the goods for transport to Sydney. The subcontractor was unable to return to the plaintiff’s depot before closing time and hence stored the goods in his own garage. That night the goods were destroyed by fire. The plaintiffs sued for breach of contract. The defendants sought to rely upon the exclusion clause to exempt them from liability. Issue: Did the exclusion clause protect the plaintiffs from liability? Conclusion: The court held that the parties did not contemplate the goods being stored on the subcontractor’s property. The carrier had veered off the route contemplated by parties which amounted to an unauthorised deviation. The plaintiffs could not rely on the exclusion clause.
[page 176] Note, it is possible to displace this rule. It would depend on how an exclusion clause seeking to protect a party from liability arising from a deviation to the contemplated route or voyage is worded and construed.
Implied terms [4.97]
Whereas express terms are terms the parties have expressly included in their contractual agreements, implied terms are those which are incorporated into a contract by the courts or by operation of law. The courts are typically hesitant to imply terms into a contract on the basis that their role extends to the interpretation and not to the drafting of such agreements. However, given the importance of contracts to economic exchange, there are many sound reasons to imply terms into such agreements where this is essential to ensure their viability. Often parties will simply have omitted details which were obviously intended to be included in the contract but forgotten during the drafting phase. In other cases the courts are not so much undertaking an exercise in gap-filling but rather seeking to effect desired changes to the rights and obligations of the parties. What the courts will do is first identify the express terms then, where necessary, imply additional terms.
[4.98]
There are three main types of implied terms, each of which has its own unique process: 1.
terms implied in fact;
2.
terms implied in law; and
3.
terms implied by custom.
Terms implied in fact [4.99]
Terms implied in fact are those which are implied on the basis of the presumed intentions of the parties and tailored specifically for the particular contract in question. The courts will examine the terms of the contract before them and identify what the parties were trying to accomplish so as to establish whether it requires additional terms to achieve that purpose. In other words, terms implied in fact are terms implied ad hoc into the specific contract at hand. The process by which to imply terms in fact depends upon whether the parties have executed a formal contract (that is, a written agreement) or an informal one (that is, an agreement in which the parties have not attempted to spell out the full terms of their contract).
Formal contracts [4.100] To
imply a term in fact into a formal written contract, the test established in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 (BP Refinery) [page 177] is applied. In that case (at 283) Lord Simon of the Privy Council identified the five criteria to be satisfied: [F]or a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.
[4.101]
The Australian High Court has approved of this statement many times and it remains the principal test by which to ascertain the presumed intentions of the parties and establish whether or not a term should be implied in fact into their agreement. We will now consider each of these criteria in turn.
Reasonable and equitable [4.102] This criterion appears to weigh the overall ‘fairness’ of the prospective
term by reference to its effects upon the rights and obligations of the parties. Where a term is so severe in its operation that it goes beyond what the parties could have reasonably contemplated, it will not be regarded as reasonable and equitable.41 In BP Refinery, the Shire of Hastings (located in Victoria) entered into a contract with BP for them to develop an oil refinery on a site within its boundaries. As part of the agreement, BP would receive subsidies on the rates payable on the land. When BP’s head company underwent a restructure following the insolvency of a co-subsidiary, BP yielded occupation of the site to another co-subsidiary which sought to enforce the rate agreement. The shire treated the change in occupation as bringing the rate agreement to an end and levied a general rate on the new occupier. [4.103] The Privy Council held that there was an implied term in the contract
between the shire and BP which permitted the right to preferential rates to be assigned to co-subsidiaries within its corporate group. Such a term would be both reasonable and equitable in the circumstances given the consequences of holding otherwise. BP had invested enormous sums of money in the refinery sited to the shire’s advantage and, if the term permitting assignment were not implied, BP would have to either accept being locked in an inconvenient corporate structure or forego the preferential rating agreement which was the incentive offered by the shire to ensure the refinery site was property maintained and operated.42 [page 178]
Necessary for business efficacy [4.104] For a term to be implied in fact in a contract it must be essential to
ensure that the agreement is commercially workable and gives full effect to the presumed intentions of the parties.43 Accordingly, if the contract is effective without the term, it will not be implied. In The
Moorcock (1889) 14 PD 64 the defendants agreed to allow the plaintiff shipowner to dock his ship (The Moorcock) at a wharf they owned and operated on the River Thames in England. The plaintiff sought to load and unload cargo and paid the plaintiffs a sum of money for this purpose. Given the geography of the area, the ship would rest on the muddy river floor at low tide. When the tide went out, the plaintiff’s ship settled onto a ridge of hard ground beneath the mud and was damaged. The plaintiff sued for damages. [4.105] The English Court of Appeal found in favour of the plaintiff. As a
matter of business efficacy it was important that the ship not be permitted to moor in an unsuitable area which might cause damage to it and therefore undermine the purpose of the agreement. The court held that the defendants had breached an implied term to take reasonable care to determine what the condition of the berth was and to either have made it reasonably fit for the purpose or informed the plaintiff that it was not so.44 The defendants were better placed to determine the safety of the berth and could easily have done so. It is incumbent on the parties to a business transaction to ensure that both sides enjoy the fruits of the contract, and this duty extends as far as practicable to preventing the impact of latent dangers.45
So obvious it ‘goes without saying’ [4.106] The question of obviousness is typically answered by reference to the
following remarks of MacKinnon LJ in Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206 at 227: Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common ‘Oh, of course!’. [4.107] To satisfy this criterion, therefore, the term sought to be implied must
be so obvious that the parties would have readily agreed to its inclusion if it were suggested to them during negotiations. Codelfa Construction Pty Ltd v State
[page 179] Rail Authority of New South Wales (1982) 149 CLR 337 is a case normally cited to demonstrate this point.46
Capable of clear expression [4.108] A term implied in fact into a formal contract must be capable of clear
expression in the sense that its meaning and application must be reasonably certain.47 This means that the term must be expressed in comprehensible terms and its scope and effect must be specified with a sufficient degree of precision. In Shell UK Ltd v Lostock Garage Ltd [1976] 1 WLR 1187, the defendant garage (Lostock) entered into an agreement with Shell on terms that it would only purchase petrol from them. Two of Lostock’s competitors were in a similar contractual arrangement with Shell. Nine years later, following an oil oversupply crisis and an ensuing price war, Lostock was contractually obligated to sell petrol at prices higher than other local competitors. Those competitors tied to Shell received subsidies which Lostock did not (by virtue of a scheme introduced after Lostock had entered into a contract with Shell). Lostock sought to obtain petrol supplies elsewhere and argued that Shell had breached an implied term preventing them from discriminating against Lostock. Shell sought an injunction preventing Lostock from obtaining or selling petrol obtained from anyone other than Shell. [4.109] The
English Court of Appeal held that such a term could not be implied in the circumstances. First, it was not necessary to give business efficacy to the contract. Second, it was not one which could be formulated with sufficient precision.48 Implying a term to the effect that Shell would not treat Lostock any differently to its other tied companies was not possible without introducing considerable uncertainty into the agreement. It could not be clearly expressed in such a way to achieve Lostock’s goals without prejudicing Shell’s right to contract with companies on any terms it saw fit.
Does not contradict the contract’s express terms
[4.110]
Finally, an implied term in fact must not contradict the express terms of a contract. This extends to situations where a term sought to be implied covers ground already adequately addressed by an express term of the agreement. In Kitching v Phillips (2011) 278 ALR 551 at 563, Murphy JA summarised the relevant principle: [A]n implied term will contradict an express term of the contract if it is inconsistent with the express terms properly construed, including where there is an express term which appears to be intended to cover the field that would otherwise be occupied by the implied term and where it appears on the face of the agreement that the parties have adverted to the point and deliberately abstained from dealing with it.
[page 180] [4.111]
A useful case example in which an implied term was held to contradict the express terms of the contract is Ikin v The Danish Club ‘Dannebrog’ Inc [2001] VSCA 123. The plaintiff, Paul Ikin, was the former manager of the defendant club. His contract of employment stated the grounds upon which his employment could be terminated. The defendant dismissed Ikin on the basis of lost confidence, which was not one of the stipulated grounds for termination. The defendant argued that there was an additional implied term which empowered them to dismiss any employee on this basis. The Victorian Court of Appeal rejected this argument and held that the plaintiff had been wrongfully dismissed. The implied term would have directly contradicted the express terms of the plaintiff’s employment contract, which explicitly outlined the grounds upon which employees in his position could be dismissed.49
Informal contracts [4.112]
The BP Refinery test applies to situations where the parties have recorded their agreement in a formal written contract. Where there is no formal contract, the applicable principle is different. As McHugh and Gummow JJ stated in Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 442; 131 ALR 422:
[W]here the contract is not in writing and is oral or partly oral or it appears that the parties themselves did not reduce their agreement to a complete written form, caution is required against an automatic or rigid application of the cumulative criteria identified in [BP Refinery]. [4.113]
There are many common situations where parties may have contracted with one another without having spelt out the full terms of their agreement. Verbal or partly written contracts are the obvious example; however, other forms of contract such as simple shop sales, visiting your doctor, or buying a bus ticket would also qualify as ‘informal contracts’. In these situations, where a contract has not been reduced to complete written form, the relevant principle is that expressed by Deane J in Hawkins v Clayton (1988) 164 CLR 539 at 573; 78 ALR 69:50 [I]n 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.
[page 181] [4.114]
The test for the implication of terms in fact for informal contracts is necessarily different by virtue of the fact that such contracts do not exhaustively spell out their terms and so satisfying the stringent criteria in BR Refinery is a highly onerous exercise. Indeed, in many such cases, it would be near impossible to do so. In the interests of justice, there must also be a different mechanism for implying terms in fact into informal contracts.
Terms implied in law [4.115]
A term implied in law is one which is applied to all contracts of a particular class or which answer a given description.51 Terms can be implied into a contract in law by operation of statute or by common law.
Statute [4.116]
Many statutes automatically imply terms into particular kinds of contract. For example, contracts for the sale of goods have terms implied to them by operation of the Sale of Goods Acts in each Australian jurisdiction.52 These statutes impose conditions pertaining to such matters as fitness for purpose, sales by description and merchantable quality. For example, s 13 of the Sale of Goods Act 1895 (SA) reads: Where there is a contract for the sale of goods by description, there is an implied condition that the goods shall correspond with the description; and if the sale be by sample, as well as by description, it is not sufficient that the bulk of the goods corresponds with the sample if the goods do not also correspond with the description.
[4.117]
And so, in any contract where there is a sale of goods by description (where the buyer purchases the goods as described by the seller) a term is automatically implied into the agreement that the goods purchased will correspond with the vendor’s description. If the goods do not correspond with this description, the vendor will be in breach of contract. In practice, most vendors of goods who utilise formal contracts will include such provisions as express terms. However, even where they do not do so, such a term will be implied in law.
[4.118]
Under the Australian Consumer Law (ACL), certain guarantees relating to the supply of goods and services are also automatically implied into applicable consumer contracts.53 As an example, s 54 of the Australian Consumer Law provides that where a person supplies goods to a consumer and the supply [page 182] does not occur by way of sale by auction, there is an implied guarantee that the goods are of acceptable quality. This means they must be fit for their purposes, acceptable in appearance and finish, free from defects, safe and durable.54 There are a variety of potential
remedies for breach of a consumer guarantee under the Australian Consumer Law, including damages and injunctions. Any contract clause which purports to exclude, restrict or modify a consumer’s rights under the ACL is void.55 However, in the context of the supply of goods or services ordinarily acquired for personal, domestic or household use or consumption, a vendor may in some circumstances limit their liability to rectification (that is, repair/replacement of goods, resupply of services etc).56 Again, most vendors in practice will expressly stipulate the purchaser’s rights to refund, replacement etc.
Common law [4.119]
In Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322 at 348, Samuels JA noted that ‘[t]he imposition of terms as a matter of law amounts to no more than the imposition of legal duties in cases where the law thinks that policy requires it’. Unlike terms implied in fact, which are implied based upon the presumed intentions of the parties, terms implied in law are founded upon policy considerations. Both the High Court and Federal Court have previously stated that many of the terms implied in law into various classes of contract likely started out as terms implied in fact before eventually becoming so common as to be incorporated into all transactions of a particular kind.57 Some, as with terms implied into contracts for the sale of goods (described above at [4.116]), are even codified in statute.
[4.120] To imply a term in law in the first instance, it must first be established
what class of contractual relationship subsists between the parties. It must then be determined if the term to be implied is appropriate for implication into all contracts of that class.
Class of contractual relationship [4.121]
To establish this, the courts need only examine the nature of the contractual relationship between the parties and identify a discernible class or category in this regard. For example, the contract might be between a landlord and tenant in a lease arrangement for a private
residence, in which case the class of contract affected is lease contracts; the parties affected are lessors and lessees. [page 183]
Appropriate for implication [4.122] For a term to be implied in law, it must satisfy the test of ‘necessity’. It
must be established that, without the term in question being implied, ‘the enjoyment of the rights conferred by the contract would or could be rendered nugatory, worthless, or, perhaps, be seriously undermined’,58 or that the contract would be ‘deprived of its substance, seriously undermined or drastically devalued’.59 It is not enough that the term be reasonable for inclusion; it must be ‘justified functionally by reference to the effective performance of the class of contract to which [it applies], or of contracts generally in cases of universal implications’.60 [4.123] The case of Liverpool City Council v Irwin [1977] AC 239 provides an
illustrative example of the ‘necessity’ requirement being considered in the context of implication of terms in law. The council was the landlord of a 15-storey apartment block into which the defendants, Leslie and Maureen Irwin, moved to live. Pursuant to the Housing Act 1961 (UK), the landlord was responsible for providing subsidised housing to select members within the council’s constituency (determined on a need basis). The express terms of the lease agreement between the parties outlined the tenants’ obligations but did not specify any for the landlord. The Irwins argued that the council was responsible for maintaining the common areas of the apartment block including the stairways, elevators and rubbish chutes, which were in a deplorable condition. They sued for breach of the lease contract, arguing that such an obligation should be implied in the lease. [4.124] The House of Lords found in favour of the plaintiffs, holding that there
was an implied obligation on the part of the landlord to take
reasonable care of the common areas and keep them in a state of reasonable repair and efficiency. Tenant access to and enjoyment of residential properties within the apartment block necessarily depended upon appropriate means of access and safe and sanitary conditions. The relevant class of contract was lease contracts for highrise apartment blocks; the contractual relationship between the parties was one of landlord and tenant. The next question was whether such an implied term was appropriate for implication, that is, necessary in the circumstances. On this point, Lord Wilberforce noted:61 [The stairways, elevators and rubbish chutes] are not just facilities, or conveniences provided at discretion: they are essentials of the tenancy without which life in the dwellings, as a tenant, is not possible. To leave the landlord free of contractual obligation as regards these matters, and subject only to administrative or political pressure, is, in my opinion, inconsistent totally with the nature of
[page 184] this relationship. The subject matter of the lease (high rise blocks) and the relationship created by the tenancy demand, of their nature, some contractual obligation on the landlord. [4.125] The court held that it would have been unreasonable to impose an
absolute duty upon the landlord to maintain the common areas, as the tenants themselves had responsibilities in this regard.62 Rather, it was necessary that landlords in the position of the council (who have dominion over high-rise apartment blocks) be contractually obligated to take reasonable care to maintain common areas. Accordingly, such a term was incorporated into all lease agreements of this class.
Customary examples of terms implied in law [4.126] Some customary examples of terms implied in law were outlined by
the High Court of Australia in Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 448; 131 ALR 422 (citing an academic article): The implied conditions of reasonable fitness and merchantable quality on a contract of sale of goods, the rule that payment and delivery of goods are concurrent conditions, the implied warranty of seaworthiness, the implied condition on the
letting of a furnished house that it is reasonably fit for habitation, the implied promise by one who agrees to build a house that the house will be reasonably fit for habitation, the implied promise by a servant not to disclose secret processes, not to hand over to a rival written work completed for the master, and not, while still in his master’s employment, to solicit the master’s customers to transfer their custom to himself, the implied promise by an employer (in some cases) to furnish work, the implied duty of care in the carriage of passengers and in looking after bailed goods, and the implied promise by a banker not to disclose the state of his customer’s account.
Terms implied by custom [4.127] A term may also be implied into a contract on the basis of a custom
specific to a given industry, market, locality or context. The leading case on point is Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Pty Ltd (1986) 160 CLR 226; 64 ALR 481. In that case the High Court (at CLR 236–8) identified the relevant principles which inform the question of whether a term should be implied into a contract on the basis of custom: ‘The existence of a custom or usage that will justify the implication of a term into a contract is a question of fact’; [page 185] ‘There must be evidence that the custom relied on is so well known and acquiesced in that everyone making a contract in that situation can reasonably be presumed to have imported that term into the contract. … However, it is not necessary that the custom be universally accepted’; ‘A term will not be implied into a contract on the basis of custom where it is contrary to the express terms of the agreement’; and ‘A person may be bound by a custom notwithstanding the fact that he had no knowledge of it’. [4.128] Of great importance is that the custom in question be ‘so notorious
that everybody in the trade enters into a contract with that usage as
an implied term. It must be uniform as well as reasonable, and it must have quite as much certainty as the written contract itself’.63 In ConStan, the appellant (Con-Stan Industries) engaged Bedford Insurances as its insurance broker. The respondent, Norwich, was selected as the appropriate insurer and numerous policies were arranged. Con-Stan paid the premiums due on the policies to Bedford, but Bedford failed to pay them to Norwich. Bedford then went into liquidation and Norwich subsequently sued Con-Stan to recover the unpaid premiums. Con-Stan argued that there was an implied term in the insurance contract that it was only obligated to pay the premiums to the broker and that it was the broker, not the insured party, who was then responsible to pay the premiums to the insurer. The High Court rejected Con-Stan’s argument, stating:64 In order to establish a custom to the effect that a broker is alone liable to an insurer for payment of a premium on a policy of insurance, it is not sufficient to show that in the ordinary course of events the premium is paid to the insurer by the broker, nor is it sufficient to show that where a broker has failed to pay a premium the insurer makes its first demand for payment from the broker. Both circumstances are consistent with the continued liability of the assured. It is necessary to establish a clear course of conduct under which insurers do not look to the assured for payment of the premium. This may be established by proving either an absence of claims by insurers against assured, or the existence of claims directed exclusively to brokers as a practice rarely if ever departed from. Having examined the evidence of custom that was led in the present case, we do not think this requirement is satisfied. [4.129] Thus,
no such custom as pleaded by Con-Stan existed here. The evidence did not demonstrate such a well-established convention existing within the insurance [page 186] industry. In practice it would therefore be prudent to be firmly confident of the existence of such a custom before seeking to imply a term into a contract on this basis.
Good faith as an implied term
[4.130]
[4.131]
In Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45, the High Court of Australia left open the question of whether an implied duty of good faith in contractual performance should form a part of Australian law. More recently, in Commonwealth Bank of Australia v Barker (2014) 253 CLR 169, the opportunity to elucidate the current legal position was again passed up. The court noted (at 214) that the issue remained unresolved and that no further comment could be made on the point given that it did not directly arise in the proceedings at hand. Some federal and state courts have recognised a duty of good faith in contractual performance, though the available decisions add little clarity as to the scope of such a duty. Moreover, there is inconsistency in the manner in which the duty is implied: some courts imply it as a term in fact, whereas others have instead regarded good faith as a general standard by which to interpret all contracts. There is also doubt as to what a duty of good faith requires from contracting parties. A common statement to which the courts refer is that of Sir Anthony Mason in a paper published in the Law Quarterly Review in 2000.65 The concept of good faith was seen as embracing three interrelated notions: (1) An obligation on the parties to co-operate in achieving the contractual objects; (2) Compliance with honest standards of conduct; and (3) Compliance with standards of conduct that are reasonable having regard to the interests of the parties.
[4.132] The
case law provides some guidance as to how such principles govern contractual relations. In Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234, for example, the construction contract between the parties conferred numerous powers upon the principal in the event of the contractor’s default. One such power was the right to terminate the agreement where the contractor could not ‘show cause’ to the principal’s ‘satisfaction’ why this power should not be exercised. Following the contractor’s numerous requests for extensions of time to reach practical completion of the work, and allegations of poor workmanship, the principal exercised its power of termination. The contractor regarded this as a wrongful repudiation.
The Supreme Court of [page 187] New South Wales held that the principal was bound to exercise its discretionary power under the contract reasonably, impartially and upon accurate information. [4.133] In Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR
558, the franchise agreement between the parties required the franchisee (Hungry Jack’s) to establish four new Burger King restaurants throughout Western Australia, South Australia and Queensland per year, subject to the franchisor’s approval. The granting of such approvals was within the ‘sole discretion’ of the franchisor (Burger King) based upon criteria specified in the franchise agreement. Burger King refused to give the requisite approval for Hungry Jack’s to comply with the terms of the franchise agreement. This decision was based not upon the criteria specified in the agreement but upon extraneous considerations, particularly a desire to increase its own direct participation in the Australian market without the recruitment of franchisees. Burger King then terminated the franchise agreement, citing Hungry Jack’s inability to satisfy its terms. Hungry Jack’s sued for breach of contract on the basis of a breach of an implied duty of good faith. [4.134] The
New South Wales Court of Appeal held that the franchise agreement contained an implied duty of good faith which prohibited Burger King from exercising its contractual discretion to terminate for an ulterior purpose (other than a failure to conform to the requirements for approval specified in the agreement). This duty was breached as the evidence demonstrated that Burger King was motivated to escape the franchise agreement with Hungry Jack’s and therefore deliberately sought to prevent Hungry Jack’s from being able to satisfy its obligations so as to give rise to a right to terminate.
[4.135] It is possible for an implied term of good faith to be excluded where
the nature and terms of the contract clearly indicate that one party enjoys unfettered discretion with respect to the exercise of certain powers.66 That being said, the cases clearly suggest that such powers must nonetheless be exercised reasonably and for a proper purpose and so commercial parties would be best advised to ensure that they do not make such decisions arbitrarily or on a whim.
Interpretation of terms [4.136] The
High Court has consistently emphasised that the process of interpreting the terms of a contract involves an objective assessment. The courts will seek to identify what the common intentions of the parties were as demonstrated by the evidence. This extends both to the actual words used and to the broader context in which they are used. The actual subjective intentions of the parties are not [page 188] relevant to this assessment. In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; 211 ALR 342, the High Court stated (at CLR 179): References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.
[4.137] This approach can be regarded as having two principal advantages.
For a start it provides a single, uniform standard by which to construe all contractual agreements. This promotes consistency in judicial decision-making, and provides certainty for commercial parties. A consideration of the subjective intentions of the parties would only serve to ‘undermine the security of the written words by means of which the parties recorded their consensus’.67 Second, the objective
approach to the construction of contracts is more efficient. It is generally accepted that seeking out the subjective intentions of the parties would ‘require a fuller search for and examination of extrinsic evidence’.68 The objective approach therefore saves time and cost, both of which the courts and commercial parties can seldom spare. [4.138] Of course the objective approach can be criticised on numerous bases.
Perhaps its most significant shortcoming is that it will bind parties to a particular meaning even where it was not the interpretation of either party. As Gibbs J noted in Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109, where the words used in a contract are unambiguous the courts must give effect to them ‘notwithstanding that it may be guessed or suspected that the parties intended something different’. That being said, the contemporary approach of the courts is to endorse a more flexible approach where an objective literal assessment produces an obviously absurd result;69 ‘This is because the court will assume that the parties did not intend their bargain to bring about irrational consequences.’70 The default assumption is that parties intend to produce a commercial result and so the courts will employ a reasonable construction to avoid commercial anomalies or inconvenience.71 Similarly, where the language of a contract is open to more than one construction, the courts will favour an interpretation which avoids ‘capricious, unreasonable, [page 189] inconvenient or unjust’ consequences and is therefore more likely to align with the probable intentions of the parties.72 [4.139] In any event, as Paterson, Robertson and Duke note: … if courts make use of the full range of evidence available to them about the circumstances in which the contract was made, the parties’ real intentions may typically coincide with the construction arrived at by the court using the standard of the reasonable person.73 [4.140] From a practical perspective, it is ultimately of the highest importance
to ensure that a contract is drafted in clear and unambiguous language so as to accurately reflect the subjective intentions of the parties. This will ensure that, should a dispute arise, the courts discern these intentions and not those of the ‘reasonable person’ in the positions of the parties.
Variation of contract terms [4.141]
Once a contract has been made, the parties are at liberty to vary the terms of their agreement. Indeed, it is quite common in commerce for this to occur. Despite the most considered and meticulous efforts to draft a comprehensive agreement, contingencies invariably arise which require amendments to be made. In other cases, the need to accommodate one of the parties who is at risk of defaulting also prompts changes. The issue for contractual parties is to ensure that such variations are legally enforceable so that avenues for potential disputes are closed rather than opened. There are certain methods by which to accomplish a legal variation, which we will now consider.
Variation by contract [4.142] It might sound strange but to effect a legal variation to a contract you
do not simply change the wording of the original agreement: a contract can only be varied by a further contract. In other words, to change a contract, you have to make another one which facilitates the amendment to the first one. As the High Court explained in Commissioner of Taxation of the Commonwealth of Australia v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520 at 533–4 (Sara Lee), ‘When the parties to an existing contract enter into a further contract by which they vary the original contract, then, by hypothesis, they have made two contracts’. [page 190]
[4.143] The consequences of this are significant: it follows that the second
contract (that is, the one which modifies the original contract) must also comply with the rules of contract formation examined in Chapter 2. There are numerous judicial statements supporting this view.74 An unequivocal statement to this effect was made by Finn J in GEC Marconi Systems Pty Ltd v BHP Information Technology (2003) 128 FCR 1 at 63; [2003] FCA 50: Parties to an existing agreement may vary or extinguish some of its terms by a subsequent agreement. In so doing the parties will have made ‘two contracts’ with the latter, no less than the former being subject to the ordinary rules governing contract formation.
This applies both to oral, written, or partly written/oral contracts. [4.144] This has the potential to catch out commercial parties who do not
prudently amend their agreements with due regard for the law of contract. Many disputes in the context of renegotiation (the term used to describe the process of varying the terms of a contract) arise out of promises made impulsively. This is certainly the case with smallerscale agreements. Consider the following scenario: You decide to erect a fence at the front of your house to add value before it goes on the market for sale on 30 June. You pay a builder $500 to have the fence up by 27 June. The builder agrees and commences work. On 25 June the builder tells you that his suppliers are experiencing a shortage in materials and there will likely be a delay in completion. The fence will not be finished until around 3 July. You are desperate to have the fence done before the house goes on the market so you ask the builder if there is any other way he can finish on time. The builder suggests purchasing the materials from another supplier but notes that the costs will increase by $150 because of this. You agree and pay the $150. The builder buys the new materials, finishes the fence by 30 June, and seeks the additional $150 promised by you.
[4.145] In
many situations such as this, you (the promisor) will pay the additional money as agreed and the contract will end through completion. However, on closer inspection, you are not legally obliged to pay the extra $150 to the builder, even though you promised it to him. Recalling that the agreement to vary the contract must comply with the requirements of formation (explored in Chapter 2), you [page 191] will notice that this arrangement violates the existing legal duty rule: the builder has done no more than promise to complete the fence by 30 June. This was his original legal obligation. In the vast majority of cases no dispute will arise because the promisor will be good enough to pay the additional money and the need for this money will have arisen out of genuine circumstances rather than a mere act of extortion. As Collins explains:75 Commercial contractors expect a degree of ‘give and take’ during performance. They will offer indulgences, refrain from pedantic insistence upon strict contractual rights, and seek genuine accommodations in cases of difficulty. They do so in order to cooperate, so that the contract is performed, and to preserve goodwill in longterm informal commercial relations.
[4.146] Assuming, however, that you refused to pay the money and the builder
then sued you, he would have to establish consideration through one of the methods examined in Chapter 2 in order to enforce the promise.76 The existing legal duty and, more broadly, the consideration requirement, do not serve a commercially acceptable end in this scenario because the most appropriate outcome would be for you — the promisor — to make good on your word, notwithstanding that the peculiar and technical rules of renegotiation have not been precisely adhered to.77 Essentially, in practice, parties will adhere to their word even where, strictly speaking, they have no legal obligation to do so. They might also be held to their word under the rules of equity. [4.147] An oft-cited case in which a dispute over a contract variation arose is
Sundell & Sons Pty Ltd v Emm Yannoulatos (Overseas) Pty Ltd (1955)
56 SR (NSW) 323. There the defendant agreed to sell the plaintiff a quantity of galvanised iron at a fixed price. Later the defendant informed the plaintiff that a price increase was ‘inevitable’ due to intervention by the French Government. The plaintiff vehemently opposed the price increase but nevertheless increased its letter of credit in favour of the defendant. After claiming the iron and paying the inflated price the plaintiff sued [page 192] to recover the overpayment, arguing that the agreement to increase the price was not supported by consideration from the defendant, who was merely doing what he was legally bound to do in delivering the iron. The New South Wales Supreme Court held in favour of the plaintiff, agreeing with his submission on the consideration point: ‘One person cannot by any promise or performance which does not go beyond the limits of his pre-existing legal duty to another person provide a new consideration for a promise by that other person in his favour.’78 [4.148] Again,
this case emphasises the importance of ensuring that a contractual variation satisfies all elements of formation, particularly consideration. In practice, the safest option is for parties to openly negotiate a variation to the contract between them and ensure that the terms as varied are acceptable on both sides. A unilateral variation to a contract which does not have the consent of both parties may well amount to repudiation.79 Terms which permit one party (but not the other) to vary the terms of a standard form contract might even contravene the Australian Consumer Law.80 Variations should be made in writing to avoid any potential disputes as to what was and was not agreed to in the renegotiation phase. Parties should also exchange even nominal consideration (financial or otherwise) to ensure the enforceability of the variation. Utilising a deed will, however, dispense with this requirement and many businesses often do so whenever seeking to amend their contracts.
Variation clauses [4.149] In some contracts, specific variation clauses can be found which aim
to more easily facilitate renegotiations. Often they will provide a specific mechanism for variation (for example, by stipulating that all variations must be in writing and signed by the parties) or define the type of particular variations to occur (for example, price determination clauses which calculate a rate of payment based upon a shifting formula). Some examples are below: All variations to this agreement must be made in writing and signed by both of the parties identified in Section 1 of this agreement in order to be effective.
[page 193] [4.150] This clause clearly stipulates that all variations to the contract are
ineffective unless made in writing and signed by both parties. However, as will be seen later in the chapter (at [4.153]) when we consider oral variations to a contract, these clauses are not foolproof. Now consider another example: 3.5 Party A will pay Party B the sum of $10,000 per month, payable on the fifth day of each month. 3.6 In the event that a payment due under cl 3.5 is made late, interest will be payable on the amount outstanding by Party A to Party B at the Australian Tax Office (ATO) General Interest Charge rate current at the due date for payment. The interest shall be calculated daily and paid monthly.
[4.151]
This clause is different in that it allows the amount payable from Party
A to Party B under cl 3.5 of the contract to vary according to cl 3.6 in the event that full payment is not made by the fifth day of each month. The amount payable could therefore vary dramatically from month to month. The clause allows for this contingency while avoiding the need to replace the original contract on each occasion that the amount payable changes. It is therefore an efficient means of varying the contract without the hassle of further documentation. [4.152] Of
course even renegotiation clauses can sometimes lead to legal disputes. In Commonwealth v Crothall Hospital Services (Aust) Ltd (1981) 36 ALR 567, for example, Crothall was engaged by the Commonwealth Government to clean buildings occupied by the Department of Defence in Canberra for the sum of $158,492 per annum. The contract contemplated variations in the contract price due to variations in wages paid and areas cleaned. The parties enjoyed a seven-year working relationship during which Crothall, at certain times, claimed increased fees for its services. The Commonwealth paid these sums but later terminated the agreement and sought to claim what it contended were ‘overpayments’ miscalculated under the variation clause. The Commonwealth’s claim was dismissed, the Federal Court holding that, notwithstanding how they were calculated, the inflated invoices submitted by Crothall constituted an offer to vary the contract which was accepted by the Commonwealth’s payment of these invoices.81
Oral variations [4.153] It goes without saying that an oral contract can be varied orally as the
terms have not at any stage been recorded in writing. In rarer cases, an oral contract [page 194] may be varied in writing. An oral contract can also modify (and terminate) a written contract, even where the written contract
stipulates that all variations are only to be made in writing.82 This does not mean that clauses mandating all variations to be in writing are worthless; on the contrary, the courts treat them as vital evidence as to whether or not a purported variation was actually intended in a given situation. The courts will consider all the facts and circumstances to establish, objectively, whether an oral variation to the written agreement was intended notwithstanding the presence of the ‘written variations only’ clause. In any event, it is worthwhile reducing all agreed variations into written form, if only to avoid the evidentiary difficulties that flow from seeking to establish an oral promise to vary a written contract. [4.154] Contracts to which the Statute of Frauds of 1677 applies, however, are
treated differently: variations can only be effected in writing whereas an oral agreement to terminate the contract is enforceable. The Statute of Frauds is an old English statute which required certain types of contract to be in writing, including contracts of guarantee, contracts for the sale of goods of a specified value, and contracts for the sale of an interest in land. Fraud and perjury were common problems in England at this time and the English Parliament sought to address this through a statute mandating that contracts of particular significance and value be recorded and varied in writing. This avoided disputes as to the legitimacy of witness testimony alleging the existence of an oral contractual promise. [4.155] Some provisions of the Statute of Frauds have been adopted by the
Australian jurisdictions, although there is great variance in this respect. One universally accepted provision concerns contracts for the sale of land: all such contracts must be in writing.83 A contract required to be in writing under the Statute of Frauds can only be varied by writing.84
Has a contract been varied or replaced? [4.156] As the previous discussion would have made clear, the question of
whether a contract has been varied or supplanted altogether is central to the process of renegotiation. Whether or not a purported variation
has the effect of rescinding and replacing, rather than varying, the original contract is determined by [page 195] objectively considering the intentions of the parties.85 In Sara Lee it was noted that this will often ‘turn upon the place, or the time, or the form, of the [renegotiated] contract’.86 The extent to which the terms have been varied, as well as the nature of those modifications, are also useful indicators as to whether variation or total replacement was intended.87
Other methods for effecting a variation [4.157] A contract might also be varied by virtue of the application of two
other doctrines: promissory estoppel and waiver. Each will now be briefly considered.
Promissory estoppel [4.158] It is common for commercial parties to make additional promises to
one another during the life of a contract. As Stewart Macaulay’s famous sociological study of 1963 revealed, these promises are often given on a whim and with little to no regard for the formalities of contract law.88 Sometimes these promises are not honoured by the promisor, which results in the promisee incurring a detriment. Recall the fence-building scenario from earlier in the chapter (at [4.144]): You decide to erect a fence at the front of your house to add value before it goes on the market for sale on 30 June. You pay a builder $500 to have the fence up by 27 June. The builder agrees and commences work. On 25 June the builder tells you that his suppliers are experiencing a shortage in materials and there will
likely be a delay in completion. The fence will not be finished until around 3 July. You are desperate to have the fence done before the house goes on the market so you ask the builder if there is any other way he can finish on time. The builder suggests purchasing the materials from another supplier but notes that the costs will increase by $150 because of this. You agree and pay the $150. The builder buys the new materials, finishes the fence by 30 June, and seeks the additional $150 promised by you.
[page 196] [4.159] Imagine now that you do not pay the additional $150 you promised to
the builder. As we discussed earlier in the chapter (at [4.145]), technically you are not obliged to pay the additional money because the promise was not contractual. This is because the builder promised no additional consideration in return. Remember, any purported variation must also follow the rules of formation, which means you must have all the elements: offer and acceptance (agreement), consideration, intention, and certainty and completeness of terms. To enforce your promise the builder had to give something in return, other than what he was already obligated to do. Accordingly, there is no bargain and the builder is now $150 worse off because of your broken promise. This is where the doctrine of promissory estoppel may serve to render your promise enforceable and effect a variation to the contract. [4.160] The doctrine of promissory estoppel is a creature of equity. As we saw
in Chapter 1, the English Court of Chancery emerged in the 15th century and was the principal judicial body through which cases in equity were administered. Equity as a body of legal principle was crafted to mitigate the austerity of the common law. The doctrine of consideration was one common law doctrine in particular which often produced unjust results where a party was promised something from their counterpart and relied upon the promise, only for the other party
to renege and cause the relying party to suffer detriment as a consequence. Contractually, the promise-breaker was not liable as the beneficiary had promised nothing in return. The renegotiation could not be enforced due to a lack of consideration. The doctrine of promissory estoppel was created, among other purposes, to address this shortcoming of the common law. [4.161]
The word estoppel comes from the Old French word estoupail which was a term used to describe a plug, cork or stopper that prevented something from coming out. The purpose of raising an estoppel, then, is to ‘stop’ the party making the representation from denying the truth of the representation they have made. In Thompson v Palmer (1933) 49 CLR 507 at 547 Dixon J described the function of estoppel as being: … to prevent an unjust departure by one person from an assumption adopted by another on the basis of some act or omission which, unless the assumption be adhered to, would operate to that other’s detriment.
[4.162] The core elements of promissory estoppel are as follows:
The relying party has adopted an assumption. This assumption was induced by the representor’s conduct. The relying party will suffer detriment in reliance on the assumption if the representor does not adhere to that assumption. [page 197] [4.163] The leading Australian case on point is Waltons Stores (Interstate) Ltd
v Maher (1988) 164 CLR 387; 76 ALR 513.
Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513 Brief facts: Mr and Mrs Maher owned a piece of land in Nowra, New South Wales with a commercial property upon it. Waltons Stores was interested in leasing the land and offered to do so
provided that the existing building upon it was demolished and a new one constructed to Waltons’ specifications. The Mahers sought certain amendments to the proposed lease agreement before any demolition work commenced. Waltons’ solicitors drafted and sent a copy of the amended lease agreement to the solicitors for the Mahers. Waltons’ solicitors indicated that they expected their client to agree to the terms of the lease but would let the Mahers’ solicitors know the following day if there were any problems. Nothing more was said and the Mahers signed and returned the lease agreement to Waltons before commencing demolition works on their site. To have the construction works completed on time it was essential that the Mahers moved quickly. Around a week later Waltons had second thoughts and their solicitors accordingly instructed them to ‘go slow’ with the transaction. The lease was not countersigned. Two months later, when the new building was 40 per cent completed, Waltons informed the Mahers that they did not intend to proceed with the transaction. There was no contract between the parties as the lease had not been signed. The Mahers sued Waltons for breach of contract on the basis that Waltons was estopped from denying the existence of the lease agreement. Issue: Although there was no contract between the parties, could Waltons Stores be estopped from denying that it was bound to the lease agreement? Conclusion: The High Court found in favour of the Mahers. Although there was no binding lease contract between the parties, Waltons Stores was estopped from denying that it was bound to the lease agreement. According to the majority, the Mahers had adopted the assumption that the lease would be signed and the contractual exchange completed as a consequence of Waltons’ conduct. By departing from that assumption, Waltons had caused the Mahers to suffer a significant detriment. This unconscionable conduct gave rise to an equity in favour of the Mahers, satisfied by treating Waltons as if it had executed and delivered the lease.
[page 198]
Nature of the ‘detrimental reliance’ [4.164] Je Maintiendrai Pty Ltd v Quaglia (1980) 26 SASR 101 was another
case in which promissory estoppel was raised to enforce a unilateral variation (that is, a variation which only affects the rights or obligations of one of the parties). It is interesting because it further considers the concept of ‘detriment’ in the context of promissory estoppel. The Quaglias (defendants) leased a shop from the plaintiff out of which they ran their hairdressing business. The Quaglias negotiated with the plaintiff to reduce the monthly rent payable on account of their financial hardship. The plaintiff agreed to accept a reduced amount of rent for no consideration and for an indefinite period of time. The defendants paid the reduced rental for approximately 18 months before seeking to leave the shop. The plaintiff then sued to recover the arrears of the full rent. [4.165] The Quaglias successfully raised promissory estoppel to prevent the
lessor from denying the truth of his promise to accept a lower rent and attempting to claim the arrears. Per King CJ (at 106–7): In my opinion, a person who promises or states his intention to another not to enforce or insist upon his legal rights is not estopped from resiling from that position and reverting to the strict legal position, unless his doing so would result in some detriment and therefore some injustice to that other. In the present case there was an intimation that the rent legally due under the lease was reduced. This clearly amounts to a promise not to enforce the legal right to the difference between the reduced amount and the amount legally due. … The respondents conducted a small business. There was some evidence of their financial position and the learned trial Judge heard it given. He was in a better position than is this Court to judge whether the accumulation of arrears of this magnitude would be a detriment to the respondents, and to assess whether any significance was to be attached to the respondents’ failure to say so expressly. I think that we should accept the conclusion which he reached. [4.166] Both King CJ and White J considered the Quaglias’ reorganisation of
their financial affairs on the basis of the lessor’s promise, as well as the
liability to pay the arrears as a lump sum, to amount to a ‘detriment’ for the purposes of the doctrine of promissory estoppel.89 The requirement to pay the arrears itself could not amount to a detriment because the Quaglias were already contractually obligated to do so. White J also controversially identified detriment in the Quaglias electing to continue with the lease, assuming the attendant liabilities as lessees, and foregoing alternative options open to them such as abandonment of [page 199] the lease.90 Cox J dissented, opining that the Quaglias’ inability to pay the arrears as a lump sum did not suffice as a detriment in this context. There was, according to his Honour, no evidence of the Quaglias changing their position in such a way that they suffered detriment in reliance on the lessor’s promise.91 [4.167] The types or categories of ‘detrimental reliance’ which will satisfy the
doctrine of promissory estoppel are not closed. Typically it will be in the nature of financial outlay or wasted expenditure of resources, time and effort. It might even be a lost opportunity to avoid some kind of loss or obtain a benefit. What is critical is that the detriment be substantial in the sense that it is not minor or insignificant, and that it would consequently be unconscionable for the representor to resile on their promise.92 The courts in practice consider all available evidence, particularly as to the circumstances of the relying party, in determining whether detrimental reliance subsists on the facts.
Reasonableness of the reliance [4.168] Where
a contractual party has relied upon a promise to their detriment, that reliance must be reasonable in order to support an estoppel. The courts impose this requirement so as to limit liability: it would be unjust and impractical for all such instances to give rise to an equitable estoppel without evaluating the circumstances in which the promise was made, relied upon and ultimately broken. In
Commonwealth Bank of Australia v Carotino (Australia) Pty Ltd [2011] SASC 42 at [145], Kelly J outlined the relevant factors to take into account when making this determination:93 [R]eliance on the assumption must be reasonable in two ways. First, it must be reasonable for the representee to adopt the assumption in question on the strength of the representation made. Secondly, the action taken by the representee in reliance upon the representation must be itself reasonable. [4.169] It
would thus be highly difficult to conclude that a representor’s departure from their promise was unconscionable (as required under the doctrine) where the relying party’s reliance was not reasonable to begin with.94 Whether such departure is unconscionable is determined by reference to all of the circumstances.95
[4.170] Significantly,
the doctrine of promissory estoppel provides a mechanism for non-contractual promises to be enforced on the basis of detrimental reliance. [page 200] In the context of contractual variations, whenever a unilateral variation is agreed between the parties, it may be enforceable in equity through promissory estoppel notwithstanding that it lacks consideration from the beneficiary of the variation. In the commercial context this is quite important because it broadens the boundaries of liability: parties may be held to their promises despite the fact those promises do not form part of their contractual agreement. A variation to a contract can therefore come about through estoppel without the common law requirements of formation being present.
Waiver [4.171]
Though the law is a little unsettled in this area, it would seem that contractual parties can effect variations to their agreement through the doctrine of waiver. The term ‘waiver’ has various meanings within the law and ‘is commonly used loosely to encompass doctrines as
diverse as election, estoppel and contract variation’.96 Generally speaking it is said to apply to circumstances where a party has voluntarily or intentionally abandoned or relinquished a ‘known right, claim or privilege’, though it is debatable whether it is a doctrine in and of itself.97 Let us come back to our fence-building scenario for a moment and assume the following additional facts: You decide to erect a fence at the front of your house to add value before it goes on the market for sale on 30 June. You pay a builder $500 to have the fence up by 27 June. One of your specifications is that the builder refrains from parking in front of your house or in the driveway as you want passers-by to have full view of it to increase its prospects of sale. The builder agrees and you both sign a contract. During the construction phase, the builder asks you if you would mind him parking in front of your house or in the driveway because he finds it difficult to transport materials from the next available park down the road. It is also time-consuming to do so, which threatens to delay completion. You tell the builder that he can park in front of your house, notwithstanding the contract stipulates otherwise. The builder then parks his truck out front accordingly.
[page 201] [4.172] On a strict reading of these facts, the builder is in breach of contract
for violating the term stipulating that he is not to park his truck out front of your house or in the driveway. However, the Australian authorities appear to suggest that a waiver could operate in this situation to give force to your subsequent agreement with the builder and modify the terms of the original contract. This is because the case law implies that a waiver can only be effective where it relates to the ‘mode and manner’ of the performance of an existing obligation.98 It certainly does so here: the variation to the contract has merely affected the methods by which the builder completes the building
work, not the obligation itself. [4.173] Imagine, now, that the builder told you that he was running a bit short
on money and was not likely able to complete the job. You then offered to pay the builder an additional $200 to ensure the fence was completed before your house went on the market. Once the fence is finished, the builder seeks the additional money but you refuse. The default position is that the existing legal duty rule applies. However, if the builder can establish consideration through one of the methods described in Chapter 2, or demonstrate detrimental reliance supporting an action in promissory estoppel, your promise may be enforced. Assuming that none of these options is available, could the builder argue that you had waived his obligation to perform the building work at the original price (and your corresponding right to the contract price as initially agreed)? The Supreme Court of New Hampshire’s ruling in Watkins & Son v Carrig (1941) 91 NH 459 suggests that he could. However, the English and Australian authorities imply that legally sufficient consideration must be exchanged in order for a waiver to take effect.99 [4.174] Moreover, this would go beyond altering the mere ‘mode and manner’
of performance and change a fundamental obligation in the contract, namely the contract price for the work to be completed. In such cases: … where the modified version of the original contract involves such changes in the contractual obligations of the parties that its structure is clearly affected, then the change goes beyond any question of waiver and must be regarded as a ‘variation’ requiring consideration or a deed.100 [4.175] There
is also considerable doubt as to the duration of an alleged waiver of a contractual right. That is, will a waiver effect a temporary or permanent variation in the terms of a contract? Some guidance was provided by Kirby J in Agricultural [page 202] and Rural Finance v Gardiner (2008) 238 CLR 570; 251 ALR 322.101 His
Honour suggested that a waiver could effect a permanent change provided that: 1.
the parties were not subject to any relevant ‘disability or disadvantage’; and
2.
it would be ‘manifestly unfair’ on the beneficiary for the party that waived its legal rights to later adopt an inconsistent position and seek to enforce those rights.
[4.176] In practice, as Bevan rightly states, it would be far more prudent for
the beneficiary of a unilateral contract variation to utilise one of the more established and less controversial methods to attempt to enforce an additional promise made to them.102 In our fictitious scenario, the builder should attempt to establish that consideration had been provided for your promise of additional money, or otherwise rely upon the doctrine of promissory estoppel, as a means of preventing you from reneging on that promise. If you are the beneficiary in a business situation such as this, then you would be well advised to offer nominal consideration in return for the other party’s secondary promise, or otherwise incorporate the arrangement into a deed. __________________ 1 2 3 4 5 6
7 8 9 10 11 12
J Mellick and D Newlyn, Contract Law, LexisNexis Butterworths, Australia, 2015, p 122. Mercantile Bank of Sydney v Taylor (1891) 12 LR (NSW) 252. Codelfa Constructions Pty Ltd v State Railway Authority of New South Wales (1982) 149 CLR 337 at 347. Hope v RCA Photophone of Australia Pty Ltd (1937) 59 CLR 348. L G Thorne & Co Pty Ltd v Thomas Borthwick & Sons (A/Asia) Ltd (1955) SR (NSW) 81 at 94. Note, however, an entire agreement clause will not prevent promissory estoppel from applying. Where a party is able to establish a claim in estoppel based on pre-contractual negotiations, an entire agreement clause will be displaced (parol evidence rule will not apply). This view was endorsed in Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407 at [554], Campbell JA remarking that ‘equity would not permit an entire agreement clause to stultify the operation of its doctrines’. Promissory estoppel is discussed at [4.158]. Conditions precedent are discussed in greater depth in Chapter 7. Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 333–4. Misleading conduct in its various forms will be discussed in Chapters 5 and 6. Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41; 55 ALR 417. Heilbut Symons & Co v Buckleton [1913] AC 30 at 51. J J Savage & Sons Pty Ltd v Blakney [1973] VR 385.
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
Competition and Consumer Act 2010 (Cth) Sch 2. Dibble v Aidan Nominees Pty Ltd [1986] ATPR 40-693. See [4.158]. Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 185; 211 ALR 342. This is a species of the doctrine of mistake and concerns situations where a party signs a document in circumstances where they were unaware of the nature of the document. See Chapter 5. Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 185; 211 ALR 342. Such grounds include fraud, duress, undue influence and unconscionable conduct. These doctrines are discussed in Chapter 5. (2004) 219 CLR 165 at 187; 211 ALR 342. Curtis v Chemical Cleaning & Dyeing Co [1951] 1 KB 805 at 809. This doctrine is discussed at [4.158]. See, for example, Anaconda Nickel Ltd v Edensor Nominees Pty Ltd (2004) 50 ACSR 679; [2004] VSCA 167. See, for example, State Rail Authority of New South Wales v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170. Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 552; 41 ALR 441. Chapelton v Barry Urban District Council [1940] 1 All ER 356; 1 KB 532. Thornton v Shoe Lane Parking [1971] 2 QB 163. D J Hill & Co Pty Ltd v Walter H Wright Pty Ltd [1971] VR 749. Oceanic Sun Line Special Shipping Co Inc v Fay (1988) 165 CLR 197. (1906) 4 CLR 379 at 386. See S Lewis, ‘The Formation and Enforceability of Shrinkwrap, Clickwrap and Browsewrap — A Comparative Analysis’ (2003) 14 Australian Intellectual Property Journal 208 at 211–14. See, for example, ProCD Inc v Zeidenberg and Silken Mountain Web Services Inc 86 F 3d 1447 (1996) (Zeidenberg). See, for example, Klocek v Gateway 2000 Inc 104 F Supp 2d 1332 (2000); Softman Products Company v Adobe Systems Inc 171 F Supp 2d 1075 (2001). Australian Federal Government — Copyright Law Review Committee, Copyright and Contract, 2002, [5.06]. eBay International AG v Creative Festival Entertainment Pty Ltd (2006) 170 FCR 450 at 464. See E Macdonald, ‘Incorporation of Standard Terms in Website Contracting — Clicking “I Agree”’ (2011) 27 Journal of Contract Law 198. See, for example, S Mason, Electronic Signatures in Law, Cambridge University Press, UK, 2012, p 215; S Blount, Electronic Contracts: Principles from the Common Law, LexisNexis Butterworths, Australia, 2008, p 14; S Davenport and D Parker, Business and Law in Australia, Lawbook Co, Australia, 2015, p 395; Rudder v Microsoft Corp (1999) 2 CPR (4th) 474; Hotmail Corp v Van$ Money Pie Inc 49 USPQ 2d 1020 (1998). Electronic Transactions Act 1999 (Cth) s 10; Electronic Transactions Act 2001 (ACT) s 9; Electronic Transactions Act 2000 (NSW) s 9; Electronic Transactions (Northern Territory) Act 2000 (NT) s 9; Electronic Transactions (Queensland) Act 2000 (Qld) s 14; Electronic Transactions Act 2000 (SA) s 9; Electronic Transactions Act 2000 (Tas) s 7; Electronic Transactions (Victoria) Act 2000 (Vic) s 9; Electronic Transactions Act 2011 (WA) s 10. (1986) 161 CLR 500 at 510; 68 ALR 385. See also, Nissho Iwai Australia Ltd v Malaysian
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
International Shipping Corp, Berhad (1989) Aust Torts Reports 80-254. Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353; Alex Kay Pty Ltd v General Motors Acceptance Corporation & Hartford Fire Insurance Company [1953] VR 458. Davis v Pearce Parking Station Pty Ltd (1954) 91 CLR 642. Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 95; 55 ALR 417. BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 280. Heimann v Commonwealth of Australia (1938) 38 SR (NSW) 691 at 695; Sekisui Rib Loc Australia Pty Ltd v Rocla Pty Ltd (2012) 291 ALR 140 at 153; Kuhadas v Gomez [2014] FCCA 1130 at [67]. (1889) 14 PD 64 at 67. Above at 70. For a more recent case example see Gwam Investments Pty Ltd v Outback Health Screenings Pty Ltd [2010] SASC 37. Breen v Williams (1996) 186 CLR 71 at 104. Shell UK Ltd v Lostock Garage Ltd [1976] 1 WLR 1187 at 1197. Ikin v The Danish Club ‘Dannebrog’ Inc [2001] VSCA 123 at [17]. The court also expressed doubts as to whether the implied term satisfied any of the other elements of the BP Refinery test. See also Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 442; 131 ALR 422. Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 448; 131 ALR 422. Sale of Goods Act 1954 (ACT); Sale of Goods Act 1923 (NSW); Sale of Goods Act 1972 (NT); Sale of Goods Act 1896 (Qld); Sale of Goods Act 1895 (SA); Sale of Goods Act 1896 (Tas); Goods Act 1958 (Vic); Sale of Goods Act 1895 (WA). Australian Consumer Law ss 51–62. Australian Consumer Law s 54(2). There are some exceptions, as stipulated in the provision. Australian Consumer Law s 64. Australian Consumer Law s 64A. Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 449; 131 ALR 422; University of Western Australia v Gray (2009) 179 FCR 346 at 375; 259 ALR 224. Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 450; 131 ALR 422. Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 453; 131 ALR 422. Commonwealth Bank of Australia v Barker (2014) 253 CLR 169 at 189; 312 ALR 356. [1977] AC 239 at 254. Above at 256, 259, 263, 269. Thornley v Tilley (1925) 36 CLR 1 at 8. (1986) 160 CLR 226 at 238; 64 ALR 481. A F Mason, ‘Contract, Good Faith and Equitable Standards in Fair Dealing’ (2000) 116 Law Quarterly Review 66 at 69. See, for example, Vodafone Pacific Ltd v Mobile Innovations [2004] NSWCA 15; Trans Petroleum (Australia) Pty Ltd v White Gum Petroleum Pty Ltd [2012] WASCA 165. Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444 at 458. Above. Fitzgerald v Masters (1956) 95 CLR 420 at 426–7. Fitzwood Pty Ltd v Unique Goal Pty Ltd [2001] FCA 1628 at [47]. Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 656–7; 306 ALR
72
73 74
75 76 77
78
79 80 81 82 83
84 85
25. Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109. See also Lewis Construction (Engineering) Pty Ltd v Southern Electric Authority of Queensland (1976) 11 ALR 305 at 315; 50 ALJR 769. Australian Casualty Co Ltd v Federico (1986) 160 CLR 513 at 520; 66 ALR 99. J Paterson, A Robertson and A Duke, Principles of Contract Law, 5th ed, Lawbook Co, Australia, 2016, p 324. (2000) 201 CLR 520 at 533–4; 172 ALR 346; GEC Marconi Systems Pty Ltd v BHP Information Technology (2003) 128 FCR 1 at 63; [2003] FCA 50; Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570 at 587; 251 ALR 322; SAS Realty Developments Pty Ltd v Kerr [2013] NSWCA 56 at [70]; Slipper v Berry Buddle Wilkins Lawyers [2015] NSWSC 810 at [42]. H Collins, The Law of Contract, 4th ed, Cambridge University Press, UK, 2003, p 346. Additional methods, including the doctrines of waiver and promissory estoppel, are discussed later in the chapter at [4.171] and [4.158] respectively. This is very likely why the English Court of Appeal in Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1 went to such great lengths to detect consideration in the practical benefits conferred upon the defendants by the plaintiff’s performance. The plaintiff was in significant financial troubles and was offered additional money from the defendants in order to complete the work; there was no duress or pressure of any kind from the plaintiff. He offered nothing in return other than his assurance he would complete the job. The defendants made the promise to ensure that the refurbishment work was completed on time and no thought was given to the implications of the existing legal duty rule. The Court of Appeal recognised that it would have been unconscionable and unjust for the defendants to escape liability to pay the additional money promised to the plaintiff by asserting that the contract had not been varied correctly: see the comments of Russell LJ (at 17) in the judgment. (1955) 56 SR (NSW) 323 at 327. The court also briefly considered the question of whether the modified agreement was void on the ground of economic duress; however, no clear ruling on this point was made. The judgment does suggest however that the secondary agreement, even if it were deemed to replace, rather than modify, the original sale agreement, was voidable insofar as it required the additional payment to be made ‘under compulsion’: at 327–8. On the doctrine of duress, see Chapter 5. Gibson Motor Sport Merchandise Pty Ltd v Robert James Forbes [2005] FCA 749 at [226], [248]. See Australian Consumer Law ss 23, 25(1)(d). See further Chapter 6. (1981) 36 ALR 567 at 580–1. Liebe v Molloy (1906) 4 CLR 347; Alstom Ltd v Yokogawa Australia Pty Ltd (No 7) [2012] SASC 49; Energy Venture Partners Ltd v Malabu Oil and Gas Ltd [2013] EWHC 2118. Civil Law (Property) Act 2006 (ACT) s 204(1); Conveyancing Act 1919 (NSW) s 54A(1); Law of Property Act 2000 (NT) s 62; Property Law Act 1974 (Qld) s 59; Law of Property Act 1936 (SA) s 26(1); Conveyancing and Law of Property Act 1884 (Tas) s 36(1); Instruments Act 1958 (Vic) s 126(1); Property Law Act 1958 (Vic) s 53(1)(a). Phillips v Ellinson Bros Pty Ltd (1941) 65 CLR 221. Morris v Baron and Company [1918] AC 1; British and Benningtons Ltd v North Western Cachar Tea Co Ltd [1923] AC 48; Royal Exchange Assurance v Hope [1928] 1 Ch 179; Tallerman and Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd (1957) 98 CLR 93; United Dominions Corporation (Jamaica) Ltd v Shoucair [1969] 1 AC 340 at 347–8; Commissioner of Taxation of the Commonwealth of Australia v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520 at 533–4; 172 ALR 346.
86 87 88 89 90 91 92 93 94 95 96
97
98 99
100 101 102
(2000) 201 CLR 520 at 533; 172 ALR 346. Concut Pty Ltd v Worrell (2000) 176 ALR 693; Seven Cable Television Pty Ltd v Telstra Corp Ltd [2000] FCA 350; Koh v Pateman [2005] WASC 172. S Macaulay, ‘Non-Contractual Relations in Business: A Preliminary Study’ (1963) 28(1) American Sociological Review 55 at 60–1. Je Maintiendrai Pty Ltd v Quaglia (1980) 26 SASR 101 at 106–7, 115–16. Above at 115–16. Above at 120–1. Donis v Donis (2007) 19 VR 577; [2007] VSCA 89 at [20]. See also Standard Chartered Bank Australia Ltd v Bank of China (1991) 23 NSWLR 164 at 180–1; Murphy v Overton Investments Pty Ltd (2001) 112 FCR 182 at 202; 182 ALR 138. Galaxidis v Galaxidis [2004] NSWCA 111 at [94]. Commonwealth v Verwayen (1990) 170 CLR 394 at 445; 95 ALR 321. Pacific Brands Sports & Leisure Pty Ltd v Underworks Pty Ltd (2006) 149 FCR 395 at 421; Commonwealth v Verwayen (1990) 170 CLR 394 at 406–7, 431, 451–3, 491; Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570 at 587; 251 ALR 322. Pacific Brands Sports & Leisure Pty Ltd v Underworks Pty Ltd (2006) 149 FCR 395 at 421; Banning v Wright [1972] 1 WLR 972 at 979. Commonwealth v Verwayen (1990) 170 CLR 394 clarified the need for ‘intention’ in this context: ‘That is not to say that there must be an intention to bring about the consequences of waiver; rather, the conduct from which waiver may be inferred, must be deliberate’: at 473 per Toohey J. As to the question of whether waiver exists as an independent doctrine, see J S Ewart, Waiver Distributed, Harvard University Press, USA, 1917, p 5. See, for example, Phillips v Ellinson Bros Pty Ltd (1941) 65 CLR 221 at 233–4, 243–4. See also Bacon v Purcell (1916) 22 CLR 307. Mulcahy v Hoyne (1925) 36 CLR 41; Brikom Investments Ltd v Carr [1979] QB 467; 2 All ER 753. It is arguable, however, that in this situation a simple renegotiation will have been accomplished because the rules for formation will have been followed. Watson v Healy Lands Ltd [1965] NZLR 511 at 513. (2008) 238 CLR 570 at 620; 251 ALR 322. C Bevan, ‘Waiver of Contractual Rights: A Non Sequitur’ (2009) 83 Australian Law Journal 817 at 838.
[page 203]
CHAPTER 5
Is There Genuine Agreement?
Key Ideas By the end of this chapter, you should be able to identify: ▶
mistake
▶
misrepresentation
▶
duress
▶
undue influence
▶
unconscionable conduct
[page 204]
Introduction [5.1]
As discussed in Chapter 2, agreement between the parties reflects mutual assent to be bound by the contract terms. There are, however, a range of circumstances which can vitiate an agreement. This chapter will consider how the doctrines of mistake and misrepresentation may render a contract void or voidable at the election of the innocent party where there has been misinformation about an aspect of the contract. It also discusses how duress, undue influence and unconscionable conduct vitiate consent in circumstances where there has been a misuse of power by one of the parties. Lack of genuine agreement, whether through a misinformation or abuse of power, impedes consensus ad idem.
Mistake [5.2]
A contract may be void at common law where parties have made an operative mistake. Only a fundamental error will be regarded as operative; it is the making of a fundamental error which reflects the parties’ failure to reach consensus. There are various forms of mistake which may negate genuine consent to an agreement: common, mutual and unilateral mistake. Each type of mistake will be considered in turn.
Common mistake [5.3]
Common mistake occurs where parties to the contract make the same mistake as to a fundamental fact (an essential aspect of the contract). Simply stated, this situation arises where:
A and B make the same mistake about X.
Existence of the subject matter [5.4]
Occasionally, parties may make a mistake about the existence of the subject matter of their agreement. The subject matter may never have existed at all; alternatively, it may have ceased to exist at the time of contracting — res extincta.1 Couturier v Hastie (1852) 8 Ex 40 provides us with a useful case example on this point. [page 205]
Couturier v Hastie (1852) 8 Ex 40 Brief facts: The parties entered into an agreement to purchase a consignment of corn. At the time the contract was made the corn was being transported by ship. Unbeknown to the parties, the corn began to ferment and, as a result, had to be sold at a port before reaching journey’s end (the corn would have perished had it not been sold during the voyage). Upon reaching its expected destination, the consignor sought payment from the buyer. Issue: Could the contract be enforced against the buyer? Conclusion: The House of Lords held that the buyer was not required to pay for the corn, noting that both parties had been mistaken as to the existence of the subject matter at the time the contract came into being. A purchaser is only obligated to pay for goods which are actually in existence and capable of delivery at the time of contracting. The contract was void for common mistake.
[5.5]
For the doctrine of common mistake to apply in relation to res extincta, neither party must know of the demise or destruction (and subsequent non-existence) of the subject matter, or be at fault for its destruction. Uniform sale of goods legislation enacted in Australia post-Couturier v Hastie provides that a contract for the sale of goods will be void where, without the knowledge of the seller, the goods perished at the time the contract was made.2
[5.6]
However, where a party impliedly promises that the subject matter exists, mistake will not vitiate agreement.3 This point is demonstrated in the case of McRae v Commonwealth Disposals Commission (1950) 84 CLR 377.
McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 Brief facts: The defendants, the Commonwealth Disposals Commission, sought tenders for the salvage of an oil tanker described as ‘lying on the Jourmaund Reef’. McRae, the plaintiff, was successful in the tender process and spent a significant amount of money fitting out an expedition to [page 206] salvage the tanker. The tanker could not be located as it had never existed. McRae sued the defendants for breach of contract and misrepresentation. The defendants claimed that the contract was void for common mistake on the basis that both parties were mistaken as to the existence of the tanker. Issue: Was the contract void for common mistake? Conclusion: The High Court held the contract was not void for common mistake. Upon proper construction of the contract, the agreement included a promise by the Commission that there was
in fact a tanker in existence; the tender process promised a tanker existed at the Jourmaund Reef. Notably, the mistake was induced by the Commission’s own servants who recklessly asserted a tanker existed without any reasonable grounds for making the assertion. As such, the defendant could not rely on the doctrine of common mistake to vitiate the agreement. The High Court found the Commission to be in breach of contract and, as a result, McRae was entitled to damages.
[5.7]
Therefore, while a genuine mistake as to the existence of the subject matter of a contract by the parties voids the agreement at common law, the doctrine of common mistake will not apply in instances where the error is brought about by the party seeking to have the contract declared null and void.
Mistake as to title [5.8]
Where parties make a common mistake in relation to the title (ownership) of property, they make a mistake in relation to a fundamental aspect of the agreement. As such, the contract may be declared void on the basis that parties were not at consensus ad idem. Such a mistake could occur where unbeknown to the parties at the time of contracting, a third person actually owns the subject matter of the agreement. For example: A (purchaser) and B (vendor) enter into a contract for the sale of a small group of shops. The shops are located in a small country town and had been erected 150 years ago to service the local community. Neither party had knowledge that the last shop of the group had been erected on adjoining farming land. A discovers the mistake and claims the contract is void for common mistake. A and B make the same mistake in relation to a fundamental matter (the title of the property). This vitiates agreement at common law; the contract is void.
[page 207] [5.9]
Alternatively, an action for breach of an implied condition that the seller has the legal right (good title) to sell the property may be brought against the seller.4 Consider the following scenario: A and B enter into a lease agreement. Unbeknown to the parties at the time of contracting, A already owned the property she is seeking to lease from B.
[5.10]
This describes a situation referred to as res sua; a Latin expression for ‘the thing was already his’. A case example on this point is Cooper v Phibbs (1867) LR 2 HL 149. Here a fishery was leased to a party who already owned the property. Although the contract in this case was set aside on equitable grounds, the House of Lords in Bell v Lever Brothers Ltd [1932] AC 161 held that mistake as to title renders a contract void at common law. Lord Atkin stated (at 218): Corresponding to mistake as to the existence of the subject matter is mistake as to title in cases where, unknown to the parties, the buyer is already the owner of that which the seller purports to sell to him. The parties intended to effectuate a transfer of ownership: such a transfer is impossible: the stipulation is naturali ratione inutilis.
Quality of the subject matter [5.11]
Issues of quality in relation to goods and services are largely addressed by legislation, primarily through the Australian Consumer Law (ACL).5 The ACL provides consumers with statutory protection from unfair business practices. A range of implied consumer guarantees place an onus on businesses to supply goods and services of a particular quality. For example, where goods supplied and services provided are sold by description, they must match their description,6 be of acceptable quality,7 and be fit for any disclosed purpose.8 Consumers are entitled to a range of remedies where
consumer guarantees are flouted. Many consumer guarantees are provided for in sale of goods legislation by way of implied conditions.9 However, a key point of distinction is that the consumer guarantees cannot be excluded by any of the parties under the ACL; implied conditions can be excluded under the sale of goods legislation. Furthermore, [page 208] sale of goods legislation governs the sale of goods only and excludes services. Where statute applies, an action for common mistake as to the quality of the subject matter of a contract is superfluous. [5.12]
The question as to whether a common mistake regarding a legal right to be compensated for the loss of employment could invalidate an agreement for compensation was considered in the following case.
Bell v Lever Brothers Ltd [1932] AC 161 Brief facts: Bell was employed by Lever Bros Pty Ltd. An amalgamation of the business resulted in negotiations regarding the plaintiff’s position of employment. Bell agreed to end his employment for monetary compensation of £30,000. Shortly after the compensation was paid, the defendants learned of the plaintiff’s misconduct which would have enabled them to terminate Bell’s employment without notice and without the requirement for compensation. As such, the defendants wanted to recover the £30,000 claiming the compensation agreement was void as both parties had contracted on the basis of a mistake as to the plaintiff’s legal right to receive compensation. Issue: Was the compensation agreement void at common law for common mistake? Conclusion: The court held the contract was not void for
common mistake deeming a mistake as to quality only does not affect assent and vitiate the agreement unless the mistake by both parties is as to ‘the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be’: at 218. The subject matter of the agreement related to the plaintiff’s employment and termination. The fact that the agreement was based on the plaintiff’s legal right to be compensated for the loss of employment did not render the contract an essentially different thing from that as it was believed to be, which was essentially a means of ending the plaintiff’s employment. It was immaterial that the defendants could have arrived at the desired result — termination of Bell’s employment — a different way.
[5.13]
The test propounded by the court in Bell v Lever Bros, namely, that a common mistake as to quality of the subject matter will only void a contract at common law where the mistake renders the subject matter something fundamentally different to that contemplated by the parties at the time of contracting, is a narrow one. The party seeking to have the contract declared void must be able to demonstrate [page 209] that the subject matter is something radically different to that agreed upon when the bargain was made. Consider the scenario below: A and B are mistaken as to the true identity of the artist of a painting. A buys the painting on the belief that the painting is the creation of a particular artist. Sometime later A discovers that the piece of art was actually painted by someone else. Is the contract between A and B void for mistake?
[5.14]
Although the identity of the artist is often very important to a
purchaser in the market for a painting — some buyers may purchase particular pieces based solely on the authorship of the work — it is unlikely that a common mistake of this kind, that is, a mistake as to quality, will be sufficiently serious so as to render the painting (subject matter) something fundamentally different.10 In accordance with the Bell v Lever Bros test, the painting is still a painting of a particular thing. This scenario was considered in Leaf v International Galleries [1950] 2 KB 86. Here, both the plaintiff and defendant were genuinely mistaken as to the identity of the artist of a painting of ‘Salisbury Cathedral’. Parties believed the artist to be Constable. When the purchaser discovered that the painting was not in fact a work of art by Constable, the plaintiff claimed the contract was void for common mistake. The English Court of Appeal noted that there was no essential or fundamental error as to the quality of the subject matter. The painting was what it was thought to be at the time parties entered into the agreement — a painting of Salisbury Cathedral. The contract was not void.
Equity and common mistake Rectification [5.15]
Sometimes a contractual document may not accurately reflect what parties agreed upon; there may be an error in recording the parties’ intentions. Where parties enter into a contract which does not mirror the true nature of the agreement, equity may provide relief in the form of rectification.11 The party seeking rectification will bear the onus of providing the court with evidence of what the parties mutually assented to. Rectification may involve striking out or adding particular words.12 The role of equity here is fairly uncontentious; it would be [page 210] unconscionable not to give effect to the parties’ true intentions by
virtue of a common mistake in the form of a recording error.
Equitable doctrine? [5.16]
The question of whether equity can set aside a contract on the ground of common mistake is not entirely clear in Australia. As such, it is apt to describe this area of law to be in a state of flux. The background to the current (somewhat uncertain) position is best explained by reference to two influential cases: Solle v Butcher [1949] 2 All ER 1107 and Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2003] QB 679 (Great Peace Shipping): see 5.19 below.
[5.17]
The case of Solle v Butcher provided authority that there was an equitable doctrine of common mistake. Specifically, that a contract formed on the basis of a common mistake could be rendered voidable where it was unconscionable to treat the contract as an accurate reflection of the parties’ intentions. Lord Denning in his judgment articulated the relationship between common mistake and equity stating (at 692–3): A contract is liable in equity to be set aside if the parties were under a common misapprehension either as to facts or as to their relative and respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault.
[5.18]
Thus, the test for setting aside a contract formed on the basis of common mistake enquires: was there a fundamental misapprehension by the parties to the agreement which neither party brought about themselves? The High Court of Australia endorsed Solle v Butcher in Taylor v Johnson (1983) 151 CLR 422 at 431; 45 ALR 265, referring to the English case as a concrete example of unconscionable dealing in which equity could properly give relief by setting aside the contract. The criteria for setting aside a contract for common mistake on equitable grounds expressed in Solle v Butcher are markedly similar to the common law requirements expressed in Bell v Lever Bros.
[5.19]
Great Peace Shipping was a seminal English Court of Appeal decision which clarified the English position of equity with respect to the
doctrine of common mistake.
Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2003] QB 679 Brief facts: Tsavliris Salvage (TS) was contracted to provide salvage services for a stricken vessel (Cape Providence). TS arranged a tugging service which would take five to six days to reach the location of the Cape Providence. As the vessel was in danger of sinking, TS required a merchant vessel to come to the aid of the stricken vessel in case it became necessary [page 211] to evacuate the crew. The owners of Cape Providence received information from a third party that a merchant vessel named the ‘Great Peace’ was 35 miles away and could reach the Cape Providence within 12 hours. TS entered into an agreement with the merchant vessel whereby Great Peace would stand by the Cape Providence for the purpose of life saving for a minimum of five days for a daily rate. Unbeknown to either party, the vessels were 410 miles apart taking the Great Peace 39 hours to arrive at the location. Upon uncovering the true distance between the vessels, and having discovered a vessel capable of providing assistance closer by, TS cancelled the contract with Great Peace. Issue: Was the mistake as to the proximity of the Cape Providence and Great Peace one which could render the contract void? Alternatively, could the contract be set aside on equitable grounds? Conclusion: The English Court of Appeal held that the contract was valid; it was not void at common law. The court endorsed the test applied in Bell v Lever Bros and concluded that the mistake as to the proximity of the two vessels did not render the contract
(for providing standby assistance) essentially different from what it was believed to be at the time of contracting. The Great Peace was not so far away as to be incapable of providing the services; contractual performance was not impossible. The court held that there was no equitable jurisdiction to grant rescission of the contract on the ground of common mistake where that contract is valid and enforceable on ordinary principles of contract law, noting ‘it is impossible to reconcile Solle v Butcher with Bell v Lever Bros Ltd’.
[5.20]
The court in Great Peace Shipping observed the confusion of the law in relation to this area for common mistake stating (at 725): [T]he premise of equity’s intrusion into the effects of the common law is that the common law rule in question is seen in the particular case to work injustice, and for some reason the common law cannot cure itself. But it is difficult to see how that can apply here. Cases of fraud and misrepresentation, and undue influence, are all catered for under other existing and uncontentious equitable rules. We are only concerned with the question whether relief might be given for common mistake in circumstances wider than those stipulated in Bell v Lever Bros Ltd [1932] AC 161. But that, surely, is a question as to where the common law should draw the line; not whether, given the common law rule, it needs to be mitigated by application of some other doctrine. The common law has drawn the line in Bell v Lever Bros Ltd. The effect of Solle v Butcher is not to supplement or mitigate the common law: it is to say that Bell v Lever Bros Ltd was wrongly decided.
[page 212] [5.21]
Accordingly, for a contract to be void for mistake at common law (at 703): (i)
there must be a common assumption as to the existence of a state of affairs;
(ii) there must be no warranty by either party that that state of affairs exists; (iii) the non-existence of the state of affairs must not be attributable to the fault of either party;
(iv) the non-existence of the state of affairs must render performance of the contract impossible; (v) the state of affairs may be the existence, or a vital attribute, of the consideration to be provided or circumstance. [5.22]
Great Peace Shipping has been endorsed in Australia in Australia Estates Pty Ltd v Cairns City Council [2005] QCA 328 (Australia Estates). Atkinson J stated (at [64]) that ‘there is no equitable jurisdiction to set aside, on the ground of common mistake, an agreement, which is valid and enforceable at common law’. The recent case of HWG Holdings Pty Ltd v Fairlie Court Pty Ltd (2015) 302 FLR 230; [2015] VSC 519 referred to Australia Estates noting that the correct test to be applied in a case of common mistake is that comprised of the five elements set out in Great Peace Shipping. Great Peace Shipping was also applied in Errichetti Nominees Pty Ltd v Paterson Group Architects Pty Ltd [2007] WASC 77 and Manna v Manna [2008] ACTSC 10. However, the High Court has not yet had the opportunity to clarify the Australian position as to whether or not an equitable jurisdiction in respect of common mistake exists.
Mutual mistake [5.23]
On a literal reading of the expression ‘mutual mistake’ it is, at first instance, difficult to imagine how mutual mistake might differ from ‘common mistake’. The meanings of the terms ‘common’ and ‘mutual’ are, after all, synonymous. The two types of mistakes are, however, quite different.
[5.24]
In instances of common mistake, A and B have both made the same mistake in regards to X at the time of contracting. On the other hand, in cases of mutual mistake: A believes he has contracted in regards to X and B believes he has contracted in regards to Y. Here, parties have effectively entered into different agreements.
[page 213] [5.25]
Consider the following hypothetical example to illustrate: A enters into a contract with B (who owns many racehorses) for the purchase of a racehorse commonly referred to as ‘Freza’ but who is actually named ‘Freeman’. Another one of B’s racehorses also bears the nickname ‘Freza’ — a horse named ‘Freeze’. Both are Arabian racehorses. Both are male and both are two years old. B contracts in the genuine belief A is purchasing ‘Freza’ whose name is ‘Freeze’ and A contracts on the basis that the horse is ‘Freza’ whose name is actually ‘Freeman’. A and B have made a mutual mistake — A thinks he has contracted to purchase ‘Freeman’ and B thinks he has entered into a contract for the sale of ‘Freeze’.
[5.26]
As demonstrated above, parties make a mutual mistake when, viewed objectively, they are at cross-purposes with one another in regards to the subject matter. The contract is void on the basis that there is no meeting of the minds (consensus ad idem). Raffles v Wichelhaus (1864) 2 H & C 906 provides us with a useful case example on this point.
Raffles v Wichelhaus (1864) 2 H & C 906; 159 ER 375 Brief facts: The plaintiff and the defendant entered into a contract for the sale of cotton which was being shipped from Bombay on a vessel named ‘Peerless’. Unbeknown to the parties there were two ships with this name sailing from Bombay, both carrying cotton. The plaintiff thought the cotton was arriving on ‘Peerless’ sailing from Bombay in December and the defendant intended the contract for the October shipment. When the buyer
refused to take delivery of the goods shipped in December, the plaintiff sued the defendant for failing to accept the goods. Issue: Were parties at cross-purposes? Did the doctrine of mutual mistake apply? Conclusion: The court decided in favour of the defendant. The court did not provide reasons for the decision. The defendant’s argument — that the parties had not agreed to the same thing — appears to have been accepted.
[5.27]
Equity is unlikely to provide relief in instances of mutual mistake since neither party is aware of the other’s mistake; they are at crosspurposes. If the mistake is not known to the other party, then equity will not intervene.13 [page 214]
Unilateral mistake [5.28]
A literal reading of the term ‘unilateral mistake’ suggests that this type of mistake is distinguishable from the other forms of mistake (common and mutual), which involve the making of a mistake by more than one party to the contract. Aptly labelled, a unilateral mistake involves a mistake by only one of the parties: A and B enter into an agreement. A makes a mistake in relation to a fundamental aspect of the contract and B knows, or ought to know, of A’s mistake.
Mistake as to a term The mistake may be in relation to the terms of a contract, such as the
price. The case of Chwee Kin Keong v Digilandmall.com Pte Ltd [2005] SGCA 2; 1 SLR 502 provides an example. Although a case heard in the Singapore Court of Appeal, it illustrates this point succinctly.
Chwee Kin Keong v Digilandmall.com Pte Ltd [2005] SGCA 2; 1 SLR 502 Brief facts: The plaintiffs discovered laser printers advertised on the defendant’s website for the mistaken price of $66. The correct price was $3854. The plaintiffs placed a large number of orders for 1606 of the incorrectly priced printers. Upon discovering the mistake, the defendants refused to honour the orders. Issue: Was the contract void for unilateral mistake? Conclusion: The court held that a party could not claim that there was consensus ad idem where a party was aware of the other party’s mistake (in his case, the advertising error). The contract had been vitiated by mistake.
[5.29]
The Australian position as to whether the common law renders a contract void for unilateral mistake is not entirely clear. The case of Taylor v Johnson (1983) 151 CLR 422; 45 ALR 265 is indicative that relief is found in equity.
Taylor v Johnson (1983) 151 CLR 422; 45 ALR 265 Brief facts: The defendant, Mrs Johnson, owned 10 acres of land in New South Wales. She granted the plaintiff an option to purchase the land for $15,000 which was exercised on 14 April 1975. The defendant refused to perform the contract as she believed the price had been $15,000 per acre
[page 215] (which means the land would have been worth $150,000). The plaintiff sued for specific performance. Issue: Could the contract be set aside on the basis of the defendant’s mistake? Conclusion: The High Court held that equitable relief will be available where the enforcement of a validly formed contract is unconscionable. Mr Taylor believed the plaintiff to be under a misapprehension about a fundamental term of the contract (the price) and knowingly set out to ensure Mrs Johnson did not become aware of the error by refraining from mentioning the price and not providing her with copy of the option as requested. The contract was set aside on the basis of a unilateral mistake.
[5.30]
The High Court in Taylor v Johnson (at CLR 432) explained the role of equity in correcting the injustice of a unilateral mistake as follows: [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 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 term and deliberately sets out to ensure that the first party does not become aware of the existence of his mistake or misapprehension.
[5.31]
The court (at CLR 433) continued: In such a situation it is unfair that the mistaken party should be held to the written contract by the other party whose lack of precise knowledge of the first party’s actual mistake proceeds from wilful ignorance because, knowing or having reason to know that there is some mistake or misapprehension, he engages deliberately in a course of conduct which is designed to inhibit discovery of it.
[5.32]
If we break down the criteria for establishing unilateral mistake as enunciated in Taylor v Johnson, equity may intervene where: the mistake by one of the parties is a fundamental one. Note, as well
as indicating that a misapprehension about the terms of a contract (which in this case was the price) by one of the parties constitutes a fundamental mistake, the judgment also suggests that a mistake as to the subject matter of the contract may be deemed one serious enough to invoke equitable relief;14 [page 216] the other party has knowledge of the mistaken party’s misapprehension. Note, the decision suggests that the unmistaken party need only possess constructive knowledge (as opposed to actual knowledge) of the other party’s misapprehension;15 and the other party partakes in some additional impropriety or wrong doing which averts the mistaken party from discovering the error. Note, cases heard since Taylor v Johnson indicate that a failure to disclose the mistake can constitute additional wrongdoing.16
Mistake as to identity [5.33]
Another type of unilateral mistake involves one of the parties erring as to the identity of the other party. For example: A contracts with B on the basis that B is in fact B. In reality, B is a fraud — B is actually X.
[5.34]
A useful typology to apply when considering this area of law is to distinguish cases of mistaken identity where parties are not physically present when entering into a contract from instances where parties contract face-to-face.
Where parties do not contract face-to-face
[5.35]
A discussion on this area of law warrants reference to two English cases decided quite differently. We turn first to Cundy & Bevington v Lindsay (1878) 3 App Cas 459.
Cundy & Bevington v Lindsay (1878) 3 App Cas 459 Brief facts: The defendant, Lindsay, was a linen manufacturer. Alfred Blenkarn of 37 Wood Street wrote to the plaintiff ordering handkerchiefs on credit. The order letter appeared to have been sent by Blenkiron & Co, a firm who conducted a business on Wood Street. The goods were sent on credit to Blenkarn’s address who sold them to bona fide purchasers. He sold 250 handkerchiefs to the plaintiff, Cundy. When Lindsay discovered Blenkarn’s fraud, he claimed the contract for the handkerchiefs was void and, as such, sued Cundy for conversion of the goods. [page 217] Issue: Was the contract void for unilateral mistake — the mistake being as to Blenkarn’s identity? Conclusion: The House of Lords held that the contract was void on the basis that Lindsay had intended to contract only with Blenkiron & Co not with Blenkarn. The identity of the purchaser was a central aspect of the contract.
[5.36]
Thus, in accordance with Cundy & Bevington v Lindsay, a party’s unilateral mistake as to the identity of the other party renders the contract void at common law. This has significant implications for a third party who has acquired the subject of the contract (for example, goods) in good faith. In the above noted case, a finding that the contract between Lindsay and Blenkarn was void ab initio (from the beginning) meant that Blenkarn did not have good title of the goods
to pass to Cundy. As such, Cundy was liable to Lindsay for the value of the handkerchiefs in the tort of conversion. [5.37]
Cundy & Bevington v Lindsay was applied in the relatively recent case of Shogun Finance Ltd v Hudson [2003] UKHL 62 — also a case where parties did not contract face-to-face.
Shogun Finance Ltd v Hudson [2003] UKHL 62 Brief facts: Mr Patel’s driver’s licence was used fraudulently by a rogue to acquire a car on credit under a hire-purchase agreement. The rogue applied for this finance option through a car dealership who sent Shogun the application form (containing Mr Patel’s details and forged signature). Following credit approval, the car dealer delivered the car to the rogue who then sold it on to Hudson, who purchased the car in good faith. Shogun claimed the contract with the rogue was void and that it retained good title to the car. Issue: Was the contract void for unilateral mistake? Conclusion: The House of Lords held that the contract was void. Hudson had not received good title to the car. The court found identity to be a crucial factor in a consumer credit agreement. As such, Shogun had not intended to enter into the contract with the rogue.
[5.38]
The position of English law, then, is that there can be no meeting of the minds in cases of mistaken identity. Note that the parties in the above cases did not contract face-to-face. Is a different outcome possible where one of the parties is mistaken as to the true identity of the other party but where parties contract face-to-face? [page 218]
Where parties contract face-to-face [5.39]
In instances where parties contract with each other in person, the law has developed slightly differently. Where a contract is entered into on the basis of a unilateral mistake as to the identity of one of the parties, the agreement may be voidable and set aside on equitable grounds rather than being declared void at common law. The case of Phillips v Brooks [1919] 2 KB 243 suggests that where A enters into a contract with B on the basis that B is in fact B, but B has misrepresented himself to A (B is actually X), the contract will be voidable because A intended to contract with the person physically present at the time of contracting. The contract itself is not deemed void by virtue of B’s fraud as to his identity. This suggests that there is a sufficient element of assent on which a contract comes into being in cases where A and B are physically present. The issue was considered some years later in Lewis v Averay [1972] 1 QB 198.
Lewis v Averay [1972] 1 QB 198 Brief facts: The plaintiff, Lewis, sold his car to a rogue who claimed he was well-known actor Richard Greene. The rogue showed the plaintiff a TV studio pass (which possessed an official stamp and photo identification) to demonstrate his creditworthiness. The rogue then sold the car to Averay, the defendant, who purchased the car in good faith. Upon discovering that the cheque handed to him was worthless, the plaintiff sought to recover the car from Averay, claiming his contract with the rogue was void and, as such, good title for the car could not pass to Averay. Issue: Was the contract between Lewis and the rogue void for unilateral mistake? Conclusion: The English Court of Appeal held that the contract was not void. Rather, the contract was voidable. Resale of the car occurred prior to voidance. As such, valid title of the car passed to Averay.
[5.40]
Therefore, in line with the majority reasoning in Lewis v Averay, where parties contract face-to-face, a mistake as to the identity of one of the parties will render a contract voidable rather than void. This means that a third party who contracts in regards to particular subject matter in good faith will gain good title to that subject matter unless the mistaken party discovers the error and elects to rescind the contract before a third party takes possession. There have not been many instances which have come before the Australian courts. In Papas v Bianca Investments Pty Ltd (2002) 82 SASR 581; [2002] SASC 190, Doyle CJ approved of Lewis v Avery, finding that the fraudulent purchase of a car using false identification rendered the contract (entered into on a face-to-face basis) voidable [page 219] rather than void ab initio. The most useful remedy available to the mistaken party is likely to be rescission of the contract; an order to have the contract set aside.
Non est factum [5.41]
This type of mistake is not pleaded very often. The phrase non est factum is a Latin term which translates to ‘it is not his deed’. ‘Deed’ in this sense refers to a signed legal document (for example, contractual agreement). Simply stated, where a party claims non est factum, they assert that the contract signed by the parties is an entirely different document from that which they intended to sign. A contract which is declared as such, will be void at common law; parties did not mutually assent to the agreement, such that there is no meeting of the minds. A case which provides authority on this point is Petelin v Cullen (1975) 132 CLR 355; 6 ALR 129.
Petelin v Cullen (1975) 132 CLR 355; 6 ALR 129 Brief facts: The plaintiff, Petelin, was the owner of land near Liverpool, New South Wales which the defendant, Cullen, wanted to acquire. Cullen knew that Petelin spoke and understood little English and could not read English. Cullen’s agent gave Petelin a document granting Cullen an option to buy the land, which was valid for six months, in consideration for $50. Petelin was advised to seek advice from a solicitor. Petelin signed the document. After six months, Cullen sought an extension for the option. He wrote Petelin a letter asking for an extension on the option, enclosing a cheque for $50. Later, Petelin was asked to sign a receipt for the payment of $50. The plaintiff signed this document not understanding its content. The document actually gave Cullen an extension of the option over Peletin’s property. When Cullen exercised the option, Petelin refused to go through with the sale. The plaintiff argued that when he signed the document he thought he was signing a receipt for $50 and that he did not understand the true meaning of the document. Issue: Was the contract void on the grounds of non est factum? Conclusion: The High Court declared the contract void. The court (at CLR 359) gave clear guidance as to whom a plea of non est factum is available. The plea is limited to: … those who are unable to read owing to blindness or illiteracy and who must rely on others for advice as to what they are signing; it is also available to those who through no fault of their own are unable to have any understanding of the purport of a particular document. To make out the defence a defendant must show that he signed the document in the belief that it
[page 220] was radically different from what it was in fact and that, at least as against innocent persons, his failure to read and understand it was not due to
carelessness on his part. Finally, it is accepted that there is a heavy onus on a defendant who seeks to establish the defence.
On the facts, the High Court found there was a ‘radical difference’ between what Petelin thought he was signing and what it actually was, and deemed there had been no carelessness on Petelin’s behalf.
[5.42]
A plea for non est factum was heard by the Supreme Court of Victoria relatively recently in Luong v Du [2013] VSC 723. In this case, the plaintiffs had very limited comprehension of written English and were not able to understand the meaning and effect of the documents they were asked to sign. The court referred to and applied the test enunciated in Petelin v Cullen and proceeded to comment on a particular aspect of the High Court’s qualifications to a successful plea. Emerton J noted that a critical aspect of a non est factum plea relates to the mistaken party’s belief that the document he or she signed had a particular character when, in fact, it had an entirely different character.17 The plaintiffs, on their own evidence, did not understand the contents of the documents they signed and had no belief as to the particular nature of the documents. This emphasises the point that a plea ‘is not available to a person who has simply signed a document put in front of him or her with no belief whatsoever as to the contents of the document’.18
Misrepresentation [5.43]
As discussed in Chapter 4, a representation is distinct from a term of an agreement. Unlike a term which is legally enforceable, a representation holds no legal significance whatsoever unless it contains misinformation. Inaccurate statements may vitiate consent between contracting parties where lack of genuine agreement hinders consensus ad idem.
[5.44]
There are various ways an innocent party can seek redress for misinformation. With the introduction of the Australian Consumer
Law (ACL), a person or corporation may have a range of statutory remedies available to them where a person or trade rival engages in conduct likely to mislead or deceive.19 Alternatively, a party who entered into a bargain on the basis of a false statement made during negotiations [page 221] Table 5.1: Summary of types of mistake Type of Mistake Common
Pictorial Representation Void or Voidable No meeting of the minds Void at common law
Both A and B make a fundamental mistake about X. Mutual Void at common law Both A and B are mistaken as to the subject matter. A and B are at cross-purposes. Unilateral Mistake as to term: A is mistaken about a voidable fundamental aspect of the contract. B knows of Mistake as to identity: A’s mistake. – Not face to face – void at common law –
Face to face –
voidable Non est factum Void at common law X is a radically different document to that which A thought it was at the time of contracting.
[page 222] may have an action in ‘misrepresentation’. A misrepresentation can be described as a false statement made prior to or at the time of contracting which induces the other party to enter into the contract. This avenue for legal redress is particularly important where the ACL does not apply.20 For example, private sales are not covered under the ACL. Consider the following hypothetical scenario: A and B are negotiating the sale of A’s car. A says to B ‘the mechanics of this car are sound — there are no mechanical faults’. B knows that A works for Carfix as a mechanic. B, thinking he has made a good deal, enters into a contract to buy A’s car for $10,000. Two days later, the car breaks down and B’s mechanic tells him that the car’s engine will need replacing (this is expensive!). B informs A who says he will not take the car back. B has been provided with misinformation about the working order of the car. He cannot rely on the ACL to provide relief as this is a private transaction to which the ACL does not apply. Does B have an action in misrepresentation? Was there genuine agreement?
[5.45]
The answer depends upon whether A’s representation falls within the legal definition of ‘misrepresentation’. Misinformation amounts to
actionable misrepresentation where: A makes a statement of fact to B prior to or at the time of contracting; the statement is false; and the statement is intended to induce B to enter into the contract and does in fact induce B to contract with A. Let us consider each legal criterion in turn and consider if B from our above scenario has an action in misrepresentation.
Statement of fact [5.46]
The first element of actionable misrepresentation rests on establishing that a false statement of fact was proffered during negotiations. A statement of fact represents a past or present reality. It is to be distinguished from a promise as a promise involves a statement of intention in regards to the future and, thus, cannot be deemed true or false at the time the representation is made. The exception to this general rule is where the representor — the party making the representation — holds no intention of fulfilling the promise.21 In such cases, the representor’s state of mind is misrepresented; the statement as to a future [page 223] intention has led a party to believe that a certain action was actually intended when, in fact, it was not.
[5.47]
Equally, a statement of fact is to be differentiated from a statement of opinion. An opinion is not necessarily a truth or indication of a reality. Rather, an opinion is a normative and subjective statement which represents a value judgement. As such, where a representor does not warrant the truth or accuracy of a statement, the representation will not be one of fact. The case of Bisset v Wilkinson [1927] AC 177
provides us with an illustrative example.
Bisset v Wilkinson [1927] AC 177 Brief facts: During negotiations for the sale of a sheep farm, the vendor stated that the farm could hold 2000 sheep. Both parties knew that the vendor did not and had not ever run a sheep farm on the property. Upon discovering that the farm could not hold 2000 sheep, the purchaser sought to rescind the contract on the basis of misrepresentation. Issue: Was the vendor’s statement about the number of sheep the farm could hold a misrepresentation? Conclusion: The court held that the statement did not amount to a misrepresentation. Rather, the statement was an honestly held opinion.
[5.48]
There is, effectively, an onus on the party to whom a representation is made to make further enquiries as to the truth of the statement. This principle is encompassed in the doctrine of caveat emptor: ‘let the buyer beware.’22
[5.49]
Importantly, an exaggerated statement of opinion (puff) made to entice a bargain does not amount to a statement of fact. Puffery is frequently used in advertising in order to entice customers to purchase consumer goods and services. Where it can be shown that a reasonable person would consider the statement to be meaningless, the statement will not take on any legal significance.23 That said, an example of a statement which amounted to more than mere puff can be found in Pryor v Given (1980) 30 ALR 189. The court held that a representation by way of advertisement about a subdivision of land (namely, that this was ‘a wonderful place to live’) gave the impression that it would be possible to build residential dwellings on the land. In actual fact, the zoning requirements prohibited the development of such dwellings. Viewed objectively, the representation was one of fact
not exaggerated opinion. [page 224] [5.50]
Opinion will also be deemed a statement of fact where the representor never actually held the opinion. For instance, if during negotiations for the sale of A’s car A says to B ‘the mechanics of this car are sound — there are no mechanical faults’ knowing that the engine is faulty, A’s representation morphs from honestly held opinion into a lie. The statement cannot be construed as mere opinion.
[5.51]
Similarly, where a representor has reasonable grounds for holding a particular opinion, the representation is likely to amount to more than mere opinion. The case of Smith v Land & House Property Corp (1884) 28 Ch D 7 is a useful example of this principle. Smith sold a hotel to Land & House describing the existing tenant as ‘a most desirable tenant’. The tenant was actually significantly in rent arrears. The court held that as Smith had greater knowledge of the facts than Land & House, the statement implied that the tenant was in fact a good tenant; Smith’s knowledge justified his opinion. On this point Bowen LJ (at 15) stated: [I]f the facts are not equally known to both sides, then a statement of opinion by the one who knows the facts best involves very often a statement of a material fact, for he impliedly states that the he knows the facts which justify his opinion.
The court found that Smith’s statement was a misrepresentation; the statement about the desirability of the tenants was one of fact. [5.52]
Let us return to our hypothetical scenario between A and B: Is it reasonable for A to hold the opinion that ‘the mechanics of this car are sound — there are no mechanical faults’? We are told that A is a mechanic. He has special knowledge/skills to be able to judge whether the mechanics of the car are in fact sound. A knows the facts about the working order of the car best; A has greater knowledge of the car’s working order than B. A’s
statement, then, is not merely the current car owner’s lay opinion, rather, it is one of fact. The first element for an action in misrepresentation is established.
Statement must be false [5.53]
A statement will be false where the representation is untrue. Most of the time, a statement will be communicated using spoken or written words. However, in certain situations a person’s action can constitute a representation. For example, a nod or shake of the head or a ‘thumbs up’ or ‘thumbs down’ in response to a query is a way of communicating information without any words being spoken. Let us return to our hypothetical scenario above. Assume that B asks A ‘is the car in sound mechanical condition?’ In response, A simply nods and gives [page 225] B a ‘thumbs up’ hand signal. This action constitutes a misrepresentation in the same manner as the verbal statement ‘the mechanics of this car are sound — there are no mechanical faults’ does. Thus, an ‘untruth’ can be relayed by words or conduct. The common thread between the words and the actions described is that they constitute positive statements. They can be tested as being either true or false. A in our hypothetical scenario proffers a false statement. On the facts given, the second element for actionable misrepresentation is established.
[5.54]
What about silence? Can the act of remaining silent and not making disclosure as to a fact be regarded as being a statement of fact?
Generally speaking, the principle of caveat emptor (let the buyer beware) applies so as not to impose a duty of full disclosure between contracting parties. There are, however, some notable exceptions to this general rule. For example, insurance contracts require full disclosure of essential facts.24 Equally, where a positive representation is made but that representation only reflects part of the factual situation, silence effectively distorts the representation into a ‘halftruth’. Thus, remaining silent may amount to a statement of fact if the circumstances give rise to a reasonable expectation that full disclosure is made. Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563; 130 ALR 1 provides us with an example on this point.
Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563; 130 ALR 1 Brief facts: The plaintiff, Krakowski, entered into a contract to purchase the defendant’s shop premises. During negotiations, the defendant, Eurolynx, made representations that they had arranged a ‘strong tenant’ who would sign a six-year lease. Eurolynx did not disclose that it had a collateral contract with the tenant which provided that the tenant could occupy the shop premises ‘rent-free’ for three months and that Eurolynx would secretly pay the tenant $156,000 for fittings and stock. A short time after taking over the shop, Krakowski found out about the collateral contract and sought to rescind the contract with Eurolynx on the basis of misrepresentation. Issue: Did remaining silent about the collateral contract amount to a misrepresentation by Eurolynx? [page 226] Conclusion: The court held that a failure to disclose all aspects of the arrangement amounted to a misrepresentation. Remaining
silent in regards to the collateral contract meant representations made during negotiations revealed a ‘half-truth’ only.
[5.55]
Additionally, in circumstances where a representation made during negotiations becomes untrue due to a change in circumstances, the representor is under a duty to correct the representation before the bargain is entered into. If the representor does not do so, his or her silence may amount to a misrepresentation of fact.25 For example: A (a vendor) during negotiations with B (a developer) for the sale of a vacant block of land represented that the vacant block of land was zoned as ‘high density residential’. B intends to build residential flat buildings, which he can only do in an area zoned as ‘high density’. Some time before A and B sign a contract, the council informs A that the residential zone affecting his block of vacant land is changing. As of next month, vacant land in the council area will be subject to ‘low density’ zoning, which means that B will not be able to build high-rise residential flats. If A, who wants desperately to sell the block of land, stays silent as to the change in the zoning of the land, his silence is likely to constitute a misrepresentation of fact. A is under a duty to correct his representation about the zoning and must disclose to B the change in circumstance.
[5.56]
It is also important to consider whether any statute displaces the general rule on disclosure. For example, there may be consumer guarantees which impose a statutory obligation on a manufacturer to sell goods of ‘acceptable quality’.26 The general rule that a seller need not alert a buyer as to the defects of a good is superseded by the implied term that the good must be of a particular quality, namely, free from defects; safe; acceptable in appearance; durable and fit for the purposes which goods of that kind are commonly supplied. Industry-specific legislation may also regulate aspects surrounding the disclosure of facts. For example, Australian food labelling laws
mandate disclosure of a wide variety of information.27 [page 227]
Statement intended to induce and did induce the bargain [5.57]
The third aspect of a successful claim for misrepresentation requires the innocent party to prove, on the balance of probabilities, that the false representation was intended to induce entry into the contract and actually had that effect. A court will consider this in light of all the particular circumstances. The representation need not be the sole inducement into the contract; there may be more than one cause which influences a party to enter into a bargain.28 Let us return to our hypothetical scenario between A, the mechanic, and B, the purchaser of the unsound car: On the facts, the third criterion for actionable misrepresentation is established. Viewed objectively, a reasonable person would view the representation ‘the mechanics of this car are sound — there are no mechanical faults’ to be made with the intent to induce B to buy the car. B, we are told, thinks he has made ‘a good deal’ and enters into the agreement with A. On the balance of probabilities, the statement induced B to buy the car. B has a legitimate claim for rescission of the contract on the basis of misrepresentation.
[5.58]
It is important to note that a representation will not induce a person to enter into a contract if he or she did not believe it; that is, if they did not allow the representation to affect their judgement. Equally, where a person does not act on a representation but, rather, acts upon advice obtained independently, the representation cannot be said to induce entry into the contract.29 Furthermore, where a false representation is
corrected before the time of contracting, it will not amount to misrepresentation as the truth is discovered before the parties enter into the contract.30 This rule also applies where a person discovers ‘the truth’ of a statement by virtue of making their own enquiries.
Categories of misrepresentation [5.59]
There are three categories of misrepresentation: fraudulent, negligent and innocent. We will now consider each in turn.
Fraudulent misrepresentation [5.60]
A fraudulent misrepresentation involves making a false statement knowingly or being reckless or careless as to the truth of a statement.31 Making a false statement [page 228] knowingly means that the representor had actual knowledge of the falsity of the statement — they lied. Being reckless as to the truth of a statement means being recklessly indifferent as to whether the representation is true or false and involves conscious risk taking. Carelessness in this context must amount to gross carelessness so as to differentiate fraudulent from negligent misrepresentation. Thus, both constructs — recklessness and carelessness — require the representor to be consciously indifferent to the truth. For example: A during negotiations with B (for the sale of A’s car) represents that ‘the car is in perfect working order — no faults whatsoever’. A has actual knowledge that the car is unsound (for example, has engine defects). The statement induces B to enter into a contract for the purchase of the car. A’s statement is a fraudulent misrepresentation.
A’s statement will also amount to a fraudulent misrepresentation where A upon inspection of the car discovers a large crack under the engine. This signifies a potential problem in relation to the condition or working order of the car’s engine. A, keen to sell this car, ‘shuts his eyes’ to the problem and does not investigate the crack under the engine any further as it may in fact turn out to be quite problematic. If A’s representation that the car is in ‘perfect working order — no faults whatsoever’ induces B to buy the car from A, A makes a fraudulent misrepresentation; A is recklessly indifferent as to the truth of his statement.
[5.61]
An innocent party may elect to rescind the contract entered into on the basis of a fraudulent misrepresentation. This means that parties will be placed, to the greatest extent possible, back into the positions they occupied prior to contract formation. The right to rescind the contract can be lost in some instances. This may occur where restoration to the parties’ previous positions is not possible or where a third party has gained title of the goods in question. Equally, the right to rescind may be lost in instances where the innocent party acts in a manner consistent with keeping the contract on foot and thereby affirms the contract.32 As rescission is an equitable remedy, excessive delay in communicating avoidance of the contract may thwart a plaintiff’s claim for this form of relief.
[5.62]
In addition to rescission of the agreement, an innocent party may claim damages in the tort of deceit where actual loss has been incurred. The aim of damages for fraudulent misrepresentation is to place the innocent party in the same financial position they would have been in but for the fraud. [page 229]
Negligent misrepresentation [5.63]
Negligent misrepresentation is a relatively new category of
misrepresentation and is also known as negligent misstatement. It involves the making of a careless statement in circumstances where the representor owes a duty of care to the representee, that is, the party in receipt of the representation. It must be shown that (a) the representor owed the representee a duty of care; (b) the representor breached their duty of care; and (c) that the representee suffered physical loss or suffered harm as a result. These criteria reflect the ‘neighbourhood test’ as formulated in Donoghue v Stevenson [1932] AC 562.33 The case of Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 demonstrates that negligent misrepresentation is a recognised cause of action.
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 Brief facts: Hedley Byrne were advertising agents. Easipower Ltd were customers of Hedley Byrne. Before proceeding with a large advertising order — an order they would be personally liable for if Easipower did not repay — Hedley Byrne sought advice from Heller & Partners, a merchant bank, in relation to the financial state of affairs of Easipower so as to determine their creditworthiness. The advice, both written and oral, assured the plaintiffs that Easipower would be able to meet its financial obligations. Relying on this advice, the plaintiffs went ahead with the order amounting to £17,000. Easipower subsequently went into liquidation and the plaintiffs effectively lost the £17,000 they had spent on the advertising contracts. Issue: Were Heller & Partners liable to Hedley Byrne on the basis of misrepresentation? Conclusion: Heller & Partners were not liable by virtue of an exclusion clause which limited their liability for advice provided. However, the court recognised the existence of liability for negligent misstatement where a plaintiff suffered economic loss. Hedley Byrne owed a duty of care because they claimed special knowledge/skill; they knew someone would rely on the advice
provided for an investment decision; and it was reasonable for a person to rely on this advice.
[page 230] [5.64]
The negligence criteria established in Donoghue v Stevenson can, thus, be tailored to reflect the Hedley Byrne requirements for negligent misrepresentation. To establish negligent misrepresentation it must be shown that: the defendant owes the plaintiff a duty of care. More specifically stated, where a person giving advice knows or ought to reasonably know that the person is relying on the advice, he or she has a duty not to be careless in providing the advice. This duty will arise where a fiduciary relationship exists or where the person providing advice is an expert in a particular field (where the person claims to have a particular skill/knowledge); the defendant was careless in providing advice where it was reasonable for the plaintiff to rely on the advice in the circumstances; and the defendant suffered economic loss.
[5.65]
The case of L Shaddock & Associates Pty Ltd v Parramatta City Council (No 1) (1981) 150 CLR 225; 36 ALR 385 is an Australian case which has influenced the development of negligent misrepresentation in a significant manner. What makes this case so important in the commercial context is the fact that it extends the circumstances in which a defendant owes a plaintiff a duty of care from situations where a defendant provides advice to situations where a defendant provides a plaintiff with information.
L Shaddock & Associates Pty Ltd v Parramatta
City Council (No 1) (1981) 150 CLR 225; 36 ALR 385 Brief facts: Shaddock, the plaintiff, was a land developer interested in purchasing land in the Parramatta Council area. Shaddock made enquiries as to whether there were any proposals for road widening which would affect the property. The Parramatta Council informed the plaintiff that there were no proposals of such nature pending. On that basis, Shaddock purchased the land. In actual fact, there was a proposal for the council to acquire one third of the land for road widening. Issue: Did the council owe the plaintiff a duty of care when providing information? Conclusion: The council owed the plaintiff a duty of care and were held liable. Even though the defendant was not in the business of giving investment advice, the council had in their possession information largely inaccessible via other avenues. This meant that the council was under a duty to take reasonable care in providing information in circumstances where it was reasonable for the plaintiff to rely on this information. As noted by Gibbs CJ (at 234), the duty is extended to ‘persons who, on a serious occasion, give considered advice or information concerning a business or professional transaction’.
[page 231] [5.66]
It is not sufficient to establish that a provider had knowledge in a particular area and knows, or ought to reasonably know, that the information seeker will rely on the information. The duty of care must be breached; the provider must be careless in the provision of that information in circumstances where it was reasonable for the plaintiff to rely on the information. Furthermore, economic loss must be suffered. Ultimately, the Shaddock decision imposes on providers of
information, such as councils who are often the primary providers of region-specific information, a duty to act prudently when supplying information which could reasonably be relied upon. [5.67]
The forms of relief for negligent misrepresentation are similar to those available for fraudulent misrepresentation. The innocent party can elect to rescind the contract. The same bars to rescission apply. Damages can be claimed in the tort of negligence where the innocent party has suffered economic loss.
Innocent misrepresentation [5.68]
A person makes an innocent misrepresentation where an honestly held but false representation is made in order to induce the representee to enter into a bargain. In such cases, there is a lack of culpability on the part of the representor; he or she is not fraudulent or even negligent by communicating an honestly held statement, notwithstanding the statement is false. For example: A is in negotiations with B in regards to the sale of his car. As far as A knows, the car has travelled 50,000 kms — this is what it states on the car odometer. When A purchased the car about a year ago, the car’s odometer read 40,000 kms. B, thinking he has found a good deal (a car with low kms), enters into a contract to buy the car from A. Soon after, B’s mechanic informs B that he has found evidence of the odometer having been tampered with. The tampering occurred prior to A purchasing the vehicle and without A’s knowledge. A has made a misrepresentation. He provided B with a false statement of fact upon which B relied. However, A held the honest belief that the car had been driven 50,000 kms; A was unaware of the fact that the odometer had been tampered with at some point prior to his purchase of the vehicle. A’s misrepresentation was an innocent misrepresentation.
[5.69]
It is possible to rescind a contract which was entered into on the basis of an innocent misrepresentation. The bars to rescission apply. Where a party elects to avoid a contract, the intention must be communicated to the other party. Excessive delay in communicating avoidance of the contract may prevent a court from deeming the contract as inequitable. What is unique to innocent misrepresentation is that a representee cannot claim damages for loss suffered. Unlike the representor of a fraudulent or negligent statement, the maker of an [page 232] innocent misrepresentation lacks culpability. This can leave victims of this form of misinformation without adequate redress.
[5.70]
Legislation enacted in South Australia and the Australian Capital Territory may provide statutory relief in some instances of innocent misrepresentation.34 The legislation confers upon victims of misrepresentation a right to damages.35 This includes instances of innocent misrepresentation. Notably, the statute also provides a defence where the representor proves he or she had reasonable grounds to believe, and did believe, the representation to be true.36 The onus is upon the defendant to establish the defence. Where this onus is not discharged, a victim of innocent misrepresentation is entitled to damages. An example of such an instance is the case of Phoenix Security Pty Ltd v Papas Transport Eng Pty Ltd [2000] SADC 61. It is also important to note that the South Australian legislation provides a court with discretion to award damages in lieu of rescission of a contract where it considers it to be just and equitable to do so.37
Figure 5.1: Summary of remedies for misrepresentation
[page 233]
Duress [5.71]
There is a famous scene at the beginning of Francis Ford Coppola’s timeless award-winning film The Godfather (1972) in which Vito Corleone, the ‘Don’ (head) of a New York crime family, is having a discussion with his godson, Johnny Fontane. Johnny laments that he has been overlooked for an ideal role in a movie, at which point Vito indicates that he will ensure the studio owner offers the role to Johnny. Johnny states that it is too late as all the contracts have been signed and filming is about to commence, to which Vito famously replies: ‘I’ll make him an offer he can’t refuse.’ Vito dispatches his adviser to speak to the studio manager, who is unmoved. Vito retaliates by placing the severed head of the studio owner’s prized stallion in his bed while he is sleeping. Johnny is later offered the role.
[5.72]
This is one of the most well-known examples of duress in movie history and an appropriate example to begin our discussion. Duress describes any form of illegitimate pressure applied by one party as a means of inducing the other party to enter into a contract. In business, parties attempt to coerce one another all the time. Where this is in the nature of persuasive sales talk, it is acceptable. So too is vigorous negotiation in protection of individual interests. Standard form contracts contain terms as decided by one of the parties alone and are typically presented on a ‘take it or leave it’ basis. Though this might seem unfair, it is a legitimate form of commercial pressure. In other situations, however, the pressure exerted by one party upon the other transgresses acceptable limits and becomes illegal. The doctrine of duress is the means by which this point is defined. It is focussed more upon how the pressure affects quality of the assent or consent of the weaker party, rather than the conduct of the stronger party.38
[5.73]
In Universe Tankships Inc of Monrovia v International Transport Workers’ Federation [1983] 1 AC 366 (Universe Tankships), Lord Scarman expressed what has become a commonly cited formulation of the duress doctrine: ‘The authorities … reveal two elements in the wrong of duress: (1) pressure amounting to compulsion of the will of the victim; and (2) the illegitimacy of the pressure exerted.’39 Let us consider each of these elements in further detail.
Pressure amounting to compulsion of the will [5.74]
This element of the duress doctrine determines whether the victim’s will was so overborne that it was impaired or inhibited when the contract was entered into. If it were, the victim’s consent is said to have been vitiated and the transaction is rendered voidable.40 In other words, we are considering the result of the pressure, [page 234] not the pressure itself. The telling sign will often be the victim
submitting through the realisation ‘that there is no practical choice open to [them]’, as opposed to any question of a ‘lack of will to submit’.41 That is, the will of a party will be more readily said to have been overborne where they had no realistic option other than to succumb, as opposed to a situation where they simply caved in to the other party’s demands in the face of alternatives. As McHugh JA remarked in Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40 at 45–6: ‘A person who is the subject of duress usually knows only too well what he is doing. But he chooses to submit to the demand or pressure rather than take an alternative course of action.’ [5.75]
The Privy Council in Pao On v Lau Yiu Long [1980] AC 614 at 635 provided some guidance for determining whether there was pressure which amounted to compulsion of the party’s will: In determining whether there was a coercion of will such that there was no true consent, it is material to inquire whether the person alleged to have been coerced did or did not protest; whether, at the time he was allegedly coerced into making the contract, he did or did not have an alternative course open to him such as an adequate legal remedy; whether he was independently advised; and whether after entering the contract he took steps to avoid it. All these matters are … relevant in determining whether he acted voluntarily or not.
[5.76]
Importantly, the pressure exerted upon the victim need not be the sole reason for that party entering into the contract in question; it need only be a reason. Once it is established that the pressure exerted on the plaintiff was illegitimate, the onus lies on the defendant to prove that it made no contribution to the plaintiff entering into the contract.42
[5.77]
So the first element of the duress doctrine enquires whether the victim’s will was actually overborne by the other party’s pressure, or whether he or she just made a choice in circumstances where he or she could have decided otherwise. The second element of the duress doctrine then necessitates an evaluation as to the nature of the pressure exerted upon the victim to determine whether it was illegitimate.
Illegitimacy of the pressure exerted [5.78]
As mentioned earlier, it is important to appreciate that commercial parties often exert pressure upon one another in practice. Indeed, this kind of commercial pressure has been described as ‘one of the most precious features of economic liberty’ and a ‘permissible (even necessary) operation of the market economy’.43 [page 235] It is a normal incident of economic behaviour and the fact parties are occasionally cornered does not in itself mean that they have been the victims of duress. As was stated in Barton v Armstrong [1973] 2 NSWLR 598; [1976] AC 104 at 121: [I]n life, including the life of commerce and finance, many acts are done under pressure, sometimes overwhelming pressure, so that one can say that the actor had no choice but to act. Absence of choice in this sense does not negate consent in law: for this the pressure must be one of a kind which the law does not regard as legitimate.
[5.79]
The second element of the duress doctrine considers the nature of the pressure exerted upon the victim by the stronger party. If it is shown to have been illegitimate and a reason for the plaintiff’s will having been compelled, then the contract will be voidable. In Universe Tankships Lord Scarman (at 401) identified two matters to be considered here: (1) the nature of the pressure (which will often, but not always, be decisive); and (2) the nature of the demand which the pressure is applied to support. Clearly a threat to commit an unlawful act, such as violence against the weaker party, would be sufficient to constitute illegitimate pressure. Even a lawful threat, however, may amount to duress. Blackmail, for example, is often a demand supported by a threat to do what is lawful, such as to report criminal activity to the police.44 This scenario involves a lawful threat accompanied by an illegitimate demand. The task for the alleged blackmailer, therefore, is to justify the demand as opposed to the threat.
[5.80]
As Lord Scarman noted (at 401) in Universe Tankships, the courts must ultimately examine the nature of the demand and the pressure applied to support it in determining whether it was illegitimate. Unlawful threats or threats which otherwise amount to unconscionable conduct will amount to illegitimate pressure,45 as will behaviours which can more generally be classified as improper or indecent.46 The overarching question to be considered is whether the party exerting the pressure upon the weaker party should be permitted to benefit from the transaction.
[5.81]
We will now consider three established types or categories of duress: (1) duress of the person; (2) duress of goods; and (3) economic duress. It is important to note beforehand that this list is not closed.
Duress of the person [5.82]
Duress of the person concerns the actual or threatened violence to, or imprisonment of, an individual. Where a party enters into a contract under threat of violence or [page 236] imprisonment from another, or where such acts are committed against the party being coerced, the contract may be voidable at the victim’s option.
Barton v Armstrong [1976] AC 104 Brief facts: Alexander Barton entered into a contract with Alexander Armstrong, a fellow shareholder in a company, to purchase Armstrong’s interest in that company. Barton sought to have the agreement set aside on the basis that he had entered into it as a consequence of Armstrong’s threats to murder him.
However, there was also evidence as to significant financial reasons prompting Barton to enter into the contract. Issue: Could the contract be set aside on the basis of duress of the person, even though there were several possible reasons for Barton entering into the contract? Conclusion: The Privy Council held that the contract was voidable on the basis of duress. It was not necessary for Armstrong’s threat to be the reason prompting Barton to enter into the contract; it needed only to be a reason. The onus was on Armstrong to prove that his threat did not contribute to Barton’s decision to proceed with the share purchase agreement, but he could not do so.
[5.83]
Incredibly, in contemporary commerce, outrageous threats are still made against parties as a means of inducing them to enter into contracts which typically favour the coercive party. Thankfully, these incidents are very uncommon and for the most part are restricted to illegitimate commercial behaviour which is well-policed by the regulatory and law enforcement authorities.
Duress of goods [5.84]
Duress of goods concerns the actual or threatened detention, damage or destruction of another’s goods without lawful justification. Where a party threatens to withhold, damage or destroy another party’s goods (or actually does any of these things) unless the latter agrees to enter into some contractual agreement with the former, the contract may be voidable at the victim’s option.
Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298 Brief facts: Helicopter Charter sent one of its helicopters to
Hawker Pacific for repainting. Helicopter Charter was dissatisfied with the outcome and requested rectification. The parties agreed to a revised price and the [page 237] rectification work was completed; however, Helicopter Charter remained unhappy. The helicopter was returned for further work. When representatives from Helicopter Charter went to collect the helicopter once again they were presented with a document from Hawker Pacific confirming Helicopter Charter’s liability to pay the $4300 account and absolving Hawker Pacific from any further liability. Helicopter Charter urgently required the helicopter for charter work the same day, and the representatives signed the document on the belief that Hawker Pacific would not release the helicopter unless they did so. Although no threat to this effect was actually made, the surrounding circumstances were sufficient to warrant the representatives’ belief. Helicopter Charter later refused to pay the outstanding account and sued Hawker Pacific for compensation for their faulty workmanship. Helicopter Charter argued that it signed the document presented on collection under duress and that the disclaimer therefore did not protect Hawker Pacific from liability. Issue: Could the contract be set aside on the basis of duress of goods? Conclusion: Although no explicit threats to detain the helicopter were made by Hawker Pacific, it was implied from the circumstances that they would not release the vehicle until Helicopter Charter agreed to pay the money claimed and indemnify them from any further liability. This amounted to duress of goods, rendering the agreement voidable.
[5.85]
As will be discussed in Chapter 9, withholding performance as a
means of redressing an alleged wrong committed during a contractual relationship is a common method of alternative dispute resolution. For example, imagine you pay a company $1000 to design and create a website for your business. The company does so and sends you the invoice for payment; however, the menu links do not work. The simple response here would be to notify the company of the error and withhold payment until the point that the error is rectified. In the majority of cases, any entity in the position of this company will simply apologise and fix the problem before ensuring it is working satisfactorily, at which point you will then facilitate payment of the invoice. This is not duress, as you have a legitimate basis for withholding performance (payment) and you can barely be said to have applied unlawful pressure in doing so. [5.86]
Importantly, just because a party detains or otherwise deals with your property in an unauthorised manner, this does not automatically amount to duress of goods. For example, if you take your car to a mechanic for repairs, and you fail to pay or come to an agreement as to an acceptable financial arrangement, the mechanic may detain the vehicle until such time as you pay in full or in accordance with a payment plan. The mechanic has a legal right to payment and may obtain what [page 238] is known as a worker’s lien on your car, which entitles the mechanic (creditor) to sell the vehicle and recover the debt owed to them from you.47 This dispenses with any right to raise a claim of duress of goods because the mechanic had a legal right to withhold your property. In the same way, a vendor who has not been paid for goods sold retains a lien over those goods until the purchase price is paid, as does an accountant over their client’s books until their service fees are paid. Liens can also be obtained over real property (land or buildings) to secure payment of monies owing for services rendered to that property.
[5.87]
There are various statutes and common law rules in operation within the Australian jurisdictions which pertain to this form of possessory right. For present purposes, it need only be acknowledged that not every detention of goods will amount to duress.
Economic duress [5.88]
This is probably one of the most common forms of duress in business. Economic duress describes any form of illegitimate pressure applied by one party upon another in which the latter’s economic interests are threatened unless a contract is entered into or, more commonly, an existing contract between the parties is renegotiated on terms more favourable to the party applying the illegitimate pressure. This is a difficult concept to apply in practice owing to the nature of commerce: as was discussed earlier in the chapter, some measure of coercion and pressure is common — if not expected — in business, which is premised on bargained-for exchanges. The challenge for the courts is to establish what amounts to a legitimate application of pressure and what crosses the line and constitutes economic duress.
[5.89]
The process of renegotiation ordinarily attracts enquiries as to the process by which an agreement to amend an existing contract is made. It is important to determine if an agreement to modify was reached by free and willing discussion between the parties, or illegitimate pressure.
North Ocean Shipping Company Ltd v Hyundai Construction Co Ltd [1979] 1 QB 705 Brief facts: The defendant shipbuilding company, Hyundai, agreed to construct a tanker for the plaintiff company, North Ocean, at a fixed price in US dollars. Payment of the contract price was to be made in five instalments. After the first instalment was paid, there was a 10 per cent devaluation of
[page 239] the US dollar. Hyundai subsequently demanded a 10 per cent increase in the contract price and refused to continue with construction unless North Ocean agreed. North Ocean required the tanker to be constructed on time as they had secured a lucrative charter contract following the scheduled completion date and therefore agreed to Hyundai’s request so as to maintain amicable relations between the parties. In return, Hyundai increased its letter of credit (security for repayment of instalments upon default). After the final instalment was paid and the tanker was delivered, North Ocean sought to recover the additional monies paid on the basis that the agreement to pay an additional 10 per cent was the product of economic duress. This claim was brought nine months after completion. Issue: Was North Ocean’s agreement to pay Hyundai an additional 10 per cent voidable on the basis of economic duress? Conclusion: The contract was voidable on the basis of economic duress. Hyundai’s threat to withhold construction without North Ocean agreeing to the increase in contract price amounted to illegitimate pressure which compelled North Ocean to accede to the demand. However, North Ocean’s significant nine month delay in seeking legal relief following completion of the tanker amounted to an implied affirmation of the contract renegotiation. Accordingly, North Ocean was disentitled from being able to seek rescission of the agreement.
Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40 Brief facts: Andrew Hillbrink was a director of two companies which were relocated within New South Wales. Hillbrink subsequently sold his home to move closer to the new location.
The proceeds of the sale were held by Westpac, which was owed debts by the two companies. Westpac sought to secure the debts of these companies and refused to release the proceeds of the sale of Hillbrink’s home until Crescendo Management executed certain security documents in favour of Westpac. One of these documents included a mortgage. Crescendo executed the documents, after which it sought to have the mortgage set aside on the grounds of economic duress. Issue: Was Crescendo’s agreement to execute the security documents in favour of Westpac voidable on the basis of economic duress? Conclusion: The New South Wales Court of Appeal held that, while Westpac did act unlawfully by withholding the house sale proceeds, and [page 240] that this conduct amounted to economic duress, the pressure applied to Crescendo played no part in its decision to execute the mortgage. The evidence suggested that this occurred prior to Westpac’s substantial threats, and that Hillbrink was nonetheless eager to ease the pressure upon him to make provision for his companies’ debts and ensure their continued operations. Accordingly, there was no operative economic duress.
[5.90]
Again, in cases of alleged economic duress, it is essential to establish whether a party’s will has been overborne by the pressure applied by the other party, and to determine the legitimacy of that pressure. Crescendo emphasises the supremacy of the second element (illegitimacy of the pressure) over the first (overbearing of the will). It is not enough for a party to bow under pressure: that pressure must be so far beyond the bounds of what is legally acceptable that it becomes duress.
Undue influence [5.91]
The doctrine of undue influence derives from equity’s understanding that the relationship between the parties to a contract can sometimes be exploited by one of the parties where there exists a disparity in control and power. Accordingly, where a party is induced to enter into a contract through the conduct of the stronger party in circumstances where the relationship between the parties has been improperly manipulated, the contract may be set aside.
[5.92]
Generally speaking there are two categories of undue influence: actual undue influence and presumed undue influence. The basic difference between the two is that presumed undue influence is deemed to arise by virtue of the recognised category of relationship subsisting between the parties, whereas actual undue influence must be proven to have been exerted in circumstances where the relationship between the parties was not within one of the recognised categories. So the courts assume that one party has exercised influence over the other in cases of presumed undue influence. Conversely, in cases of actual undue influence, it must be proven that such influence was exercised.
[5.93]
The doctrine of undue influence is conceptually similar to the doctrine of unconscionability, which is considered later in the chapter. Both doctrines are concerned with setting aside transactions which, if enforced, would offend good conscience. However, undue influence evaluates the quality of the consent of the weaker party, as opposed to the exploitative conduct of the stronger party (which is the domain of unconscionable conduct).48 [page 241]
Actual undue influence [5.94]
Where no special relationship between the parties to a contract exists,
a party seeking to escape the contract on the basis of undue influence must prove that the defendant exerted undue influence upon them to enter into the transaction. That is, the plaintiff must demonstrate that the defendant made unconscientious use of some special capacity or opportunity which affected the plaintiff’s free will or judgement, notwithstanding that the parties were not in a particular type of relationship in which such behaviour is presumed (as is the case with presumed undue influence). In Johnson v Buttress (1936) 56 CLR 113 at 134, Dixon J explained: The source of power to practise such a domination may be found in no antecedent relation but in a particular situation, or in the deliberate contrivance of the party. If this be so, facts must be proved showing that the transaction was the outcome of such an actual influence over the mind of the [plaintiff] that it cannot be considered his free act. [5.95]
It is rare for cases to fall into the category of actual undue influence mainly because most situations of influence being exerted occur in the context of one of the recognised categories of relationship in which undue influence is presumed to exist (to be discussed later in the chapter). Moreover, where illegitimate pressure is applied to enforce or obtain a contractual right, the doctrines of duress and unconscionability may apply. Nonetheless, cases have been decided on the basis of actual undue influence. The following case is a useful example:
Williams v Bayley (1866) LR 1 HL 200 Brief facts: William Bayley forged his father’s signature upon a series of promissory notes and tended these to the bank. When the bank discovered the forgery, it arranged a meeting with Bayley and his father, James. In the meeting the bank indicated that it would be forced to press charges against Bayley unless another satisfactory arrangement was made. Imprisonment for Bayley was said to be a likely outcome. Bayley’s father agreed to take out an equitable mortgage over his property as security for the monies loaned to the son. He then sought to escape the mortgage on the basis of undue influence.
Issue: Could the mortgage agreement be set aside on the basis of undue influence? Conclusion: The court held in favour of the father. Although the parties, that is, the bank and James Bayley were not in a particular type of relationship in which undue influence could be presumed, it was established on the facts [page 242] that the bank had exerted pressure on him to take out the mortgage so as to protect his son. Owing to the circumstances, he had not acted freely and voluntarily such that the mortgage could be set aside.
[5.96]
In this case, undue influence was not presumed because the parties were not within a recognised category of relationship in which undue influence could be presumed. Instead, undue influence was proven on the evidence to have been exerted on the plaintiff by the defendant, making this a case of actual undue influence.
Presumed undue influence [5.97]
In the far more common case of presumed undue influence, the plaintiff need only establish that a particular relationship of influence existed between the parties. If the plaintiff is successful in this endeavour, the courts will assume that undue influence was exerted and the defendant must then prove that there was no such undue influence. So with actual undue influence, the burden of proof lies with the plaintiff, whereas with presumed undue influence it lies with the defendant.
[5.98]
There are many commonly accepted categories or classes of relationship in which undue influence is presumed. These include:
parent (or any responsible person in the parent’s position) and child; doctor and patient; solicitor and client; religious adviser and devotee; guardian and ward; and trustee and beneficiary. [5.99]
This list is certainly not closed and further categories may well be developed in time. The following case demonstrates how the presumption of undue influence arises in relationships of religious adviser and devotee.
Hartigan v International Society for Krishna Consciousness Inc [2002] NSWSC 810 Brief facts: The plaintiff, Mrs Hartigan, was a member of a religious group known as the Krishna Consciousness Movement (KCM). She made a gift of her farm (with residential property) to the defendant corporation. [page 243] The corporation held property for the KCM. Mrs Hartigan had a young family and no other place to live; however, she felt compelled to dispose of her farm due to a misunderstanding of the religious teachings of the KCM. She mistakenly believed that she was required to dispense with all worldly possessions and considerations, when this was not the case. Mrs Hartigan subsequently sought equitable remedies against the KCM. Issue: Was Mrs Hartigan’s gift of her farm procured by the undue influence of the KCM?
Conclusion: Mrs Hartigan was successful. This was a case in which undue influence was presumed by virtue of the relationship between the parties (religious adviser/organisation and devotee). Although the KCM did not deliberately exploit the influence it held over Mrs Hartigan so as to obtain any benefits, it could not rebut the presumption of influence that automatically arose by virtue of its relationship with her. It could not be established that Mrs Hartigan was not acting under undue influence in making a substantial gift which appeared to go beyond mere generosity or charity. Accordingly, the gift was set aside. [5.100] In other cases, undue influence may be presumed where a relationship
does not fit into one of the accepted categories or classes (discussed above) but is still characterised by aspects of dominance, dependency, or vested trust or confidence. The following leading case demonstrates this point.
Johnson v Buttress (1936) 56 CLR 113 Brief facts: John Buttress was an elderly man who was illiterate, lacked experience in business affairs, and was of below-average intelligence. He was also heavily dependent upon others for advice and assistance. The defendant, Mary Johnson, was a good family friend who provided such advice and assistance, particularly after Buttress’ wife passed away. To demonstrate his gratitude and affection, Buttress gave his cottage and land to Johnson. The transaction was completed at the offices of Johnson’s lawyers, although Buttress did not receive any independent advice. Three years later, Buttress passed away and his son (and executor of his estate) challenged the transaction on the basis of undue influence. Issue: Was Buttress’ gift of his cottage and land procured by the undue influence of Johnson?
Conclusion: The court held in favour of the plaintiff. The evidence demonstrated that his father had come to strongly depend upon and trust [page 244] in Mary Johnson, such that the antecedent relationship was clearly one in which Johnson held a position of ascendancy over Buttress. Although the relationship did not fall under one of the accepted categories or classes of presumed undue influence, it was nonetheless held to be one in which undue influence was presumed because of the facts and circumstances. Buttress’ gift was thus presumed to have been made as a result of this influence, and Johnson could not rebut the presumption. Accordingly, the transaction was set aside. Per Dixon J (at 138): I think that when the circumstances of the case are considered with the character and capacity of Buttress they lead to the conclusion that an antecedent relation of influence existed which throws upon Mrs Johnson the burden of justifying the transfer by showing that it was the result of the free exercise of the donor’s independent will. This, in my opinion, she has quite failed to do.
Transaction need not be disadvantageous [5.101]
It is not necessary for a transaction to be disadvantageous to the plaintiff in order to support a claim of undue influence; however, this will be a relevant consideration when the courts assess the legitimacy of a transaction.49 Where a plaintiff is manifestly disadvantaged through a contractual transaction, this may serve as evidence that the transaction was the product of undue influence and weigh against rebuttal of any presumption in this regard.
Rebutting the presumption of undue influence
[5.102] Once the plaintiff has established a case of actual or presumed undue
influence, the defendant must seek to rebut the presumption in order to avoid having the relevant transaction set aside. That is, it must be shown that the plaintiff knew and understood what he or she was doing, and that they were acting independently of the defendant’s influence. Several factors are taken into account by the courts in order to make this determination. Two of the major factors are: 1.
whether the plaintiff received sound independent advice which satisfactorily explains the content, nature and effect of relevant documentation and addresses the propriety of the transaction; and
2.
whether the transaction is sensible, fair and reasonable and that the plaintiff is fully aware of his or her actions notwithstanding that the transaction significantly disadvantages them. [page 245]
[5.103] Where
a defendant can establish that the plaintiff was properly advised as to the transaction they entered into and/or that they were fully conscious of the fact they might be strongly disadvantaged by that transaction, the presumption of undue influence will likely be rebutted. If the defendant fails to rebut the presumption, the transaction may be set aside.
Relief [5.104] As with the doctrine of duress, the principal form of relief available to
victims of undue influence is rescission of the contract in question. In some cases equitable compensation, potentially extending to an account of profits, may be ordered.50
Rule in Yerkey v Jones
[5.105] In Yerkey v Jones (1939) 63 CLR 649, the High Court of Australia
recognised a unique principle which protects a wife who guarantees her husband’s debts without herself obtaining any direct benefit from the transaction, and where her entry into the guarantee was without proper understanding or was procured by pressure. In that case, Dixon J noted (at 678) that the relationship of husband to wife is not one in which a presumption of undue influence arises; however, his Honour acknowledged that in cases of a guarantee being provided by a wife in favour of her husband, a specific rule may operate to allow the wife to have the transaction set aside in certain circumstances. This rule has come to be known as the wives’ special equity and was explained in the following terms (at 683): [I]f a married woman’s consent to become a surety for her husband’s debt is procured by the husband and without understanding its effect in essential respects she executed an instrument of suretyship which the creditor accepts without dealing directly with her personally, she has a prima-facie right to have it set aside. [5.106] This rule also applies where the wife understood the transaction but
her consent was procured via the undue influence of her husband.51 It is therefore often said as having two ‘limbs’: (1) the husband has exerted undue influence upon his wife; or (2) the wife was not properly informed of the surety transaction and its risks. [5.107] Garcia v National Australia Bank Ltd (1998) 194 CLR 395; 155 ALR 614
provides a modern example of the wives’ special equity in action. The plaintiff, Mrs Garcia, and her husband executed a mortgage over their matrimonial home in favour of the defendant bank so as to secure loans made to them both. The mortgage secured both the money owed to the bank as well as any monies owing pursuant to any future guarantees given. Mrs Garcia signed four guarantees pertaining to [page 246] loans made by the bank to her husband’s gold exchange business. The Garcias subsequently separated then filed for divorce. Mrs Garcia successfully sought to have the mortgage and guarantees set aside on
the basis of the wives’ special equity. The High Court unequivocally endorsed the wives’ special equity. In their majority judgment, Gaudron, McHugh, Gummow and Hayne JJ (at CLR 408–9) explained the theoretical basis and correct operation of the rule: The principles applied in Yerkey v Jones do not depend upon the creditor having, at the time the guarantee is taken, notice of some unconscionable dealing between the husband as borrower and the wife as surety. Yerkey v Jones begins with the recognition that the surety is a volunteer: a person who obtained no financial benefit from the transaction, performance of the obligations of which she agreed to guarantee. It holds … that to enforce that voluntary transaction against her when in fact she did not bring a free will to its execution would be unconscionable. It holds further … that to enforce it against her if it later emerges that she did not understand the purport and effect of the transaction of suretyship would be unconscionable (even though she is a willing party to it) if the lender took no steps itself to explain its purport and effect to her or did not reasonably believe that its purport and effect had been explained to her by a competent, independent and disinterested stranger. And what makes it unconscionable to enforce it … is the combination of circumstances that: (a) in fact the surety did not understand the purport and effect of the transaction; (b) the transaction was voluntary (in the sense that the surety obtained no gain from the contract the performance of which was guaranteed); (c) the lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet (d) the lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her. [5.108] In sum, a wife may be able to have a transaction (in which she is a
volunteer52 who has guaranteed her husband’s debt(s)) set aside where either: her consent is procured by the undue influence of her husband, such that she does not execute the guarantee with free will (first limb); or where, notwithstanding she has done so freely, she has failed to understand the effect and nature of the transaction [page 247] and the lender has neither taken steps to inform her in this regard nor held a reasonable belief that she understood what she was doing (second limb).
[5.109] In contemporary times, lending institutions are very careful to ensure
that wives who seek to guarantee their husbands’ debts are competently and independently advised. Many lenders (creditors) now also require parties to provide a solicitor’s certificate certifying the provision of such advice, and arrange to meet personally with the surety (wife) in the absence of the debtor (husband) and deal with them directly rather than through the debtor. The Guarantor’s Acknowledgement is another method which is used sporadically. This is a statutory declaration signed by the surety and verifying that they have understood the nature of the transaction into which they are entering and their attendant obligations. These Acknowledgements provide another means of ensuring that creditors can meet their obligations to adequately inform the surety and avoid the application of the wives’ special equity. [5.110]
In recent times the special equity has been extended to other relationships including de factos,53 fiancés,54 and even an elderly parent and child.55 Some courts have even contemplated the equity encompassing relationships between siblings and in-laws,56 or situations where a husband guarantees his wife’s debts.57 There are also some decisions which purport to modify the special equity so as to apply to non-familial relationships, such as mere friendships.58 The need for lending institutions to exercise vigilance in all transactions involving the security of debts is therefore clearly critical.
Unconscionable conduct [5.111]
At common law there is no relief for a party who has made a ‘bad’ deal and entered into an agreement which is simply unfair. However, equity will intervene and render a contract voidable at the election of the innocent party where it can be shown that one of the parties to the contract acted unconscionably. While unfair conduct may encompass a power differential between the parties to an agreement, unconscionable conduct involves one party (the stronger party) taking advantage of the other party’s (the weaker party) particular vulnerability. It involves exploitation of a power differential. Where
this occurs, parties lack the required consensus ad idem and their mutual consent is vitiated. [page 248] [5.112]
The seminal Australian case which demonstrates the operation of the doctrine of unconscionable conduct is Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; 46 ALR 402.
Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; 46 ALR 402 Brief facts: The defendants were elderly migrants who had poor comprehension of the English language and little experience in commercial dealings. They signed a mortgage and guarantee in favour of the Commercial Bank to secure an overdraft granted to a land development company owned by their son. The defendant’s believed their son’s company to be in good financial standing. The bank knew this was not the case but did not disclose this fact to the Amadios. The son’s company had often exceeded its overdraft limit. The bank had selectively dishonoured cheques to give the appearance that the son’s company was not in bad financial standing. The Amadios were incorrectly told that they were being asked to guarantee $50,000 for six months. When the son’s company collapsed, the bank made demands on the guarantee. The defendants applied to have the mortgage set aside on the grounds that the bank acted unconscionably. Issue: Did the doctrine of unconscionable conduct apply to render the contract between the Amadios and the Commercial Bank voidable? Conclusion: The High Court held that the bank acted unconscionably. The special disabilities which the Amadios were
under — including advanced age, language barrier, lack of commercial acumen, and inadequate understanding of the documents presented to them — were sufficiently evident to the bank. The bank could not demonstrate that the transaction was fair and reasonable given the manner in which the Amadios’ consent was obtained. The contract was set aside.
[5.113]
Importantly, the High Court confirmed that the doctrine of unconscionable conduct would operate where three criteria could be established: 1.
the weaker party was under a special disability in comparison with the stronger party;
2.
the stronger party was aware of the special disability; and
3.
the stronger party took advantage of the weaker party’s special disability to obtain a benefit in circumstances where the transaction was not fair, just and reasonable. Let us consider each of the three criteria in turn. [page 249]
Elements of unconscionable conduct Weaker party was under a special disability [5.114]
In order to understand this element and thus apply it correctly, we need to consider the meaning of ‘special disability’. This can only be determined by looking at the relationship between the parties. A party will be under a special disability where the nature of the relationship gives rise to a susceptibility for the weaker party to be controlled or influenced. The case of Blomley v Ryan (1956) 99 CLR 362 provides us with useful guidance as to the sorts of factors which may constitute a special disability. Circumstances which may place a party under a
special disability include but are not limited to: … poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-à-vis the other.59 [5.115]
The disabling factor becomes ‘special’ where it is one which ‘seriously affects the ability of the innocent party to make a judgement as to his own best interest’.60 In Amadio there were several factors which established that the defendants were under a special disability, including, their ages; their lack of comprehension of the English language; lack of experience in commercial dealings; lack of explanation of the document which they were signing; and the lack of explanation as to the true financial position of the son’s company.
[5.116]
It is not necessary for the stronger party to have created the special disability. This principle was established in Louth v Diprose (1992) 175 CLR 621; 110 ALR 1. In this case the plaintiff, infatuated with the defendant, gave a substantial sum of money for the purchase of a house for occupation by the defendant and her children from a former marriage. The plaintiff then sought to escape the contract. The High Court held that the plaintiff’s emotional dependence on the defendant, a fact she was aware of, placed the defendant in a position of power over the plaintiff. The nature of the relationship between the parties gave rise to the plaintiff’s special disability. Where the first element can be established, a plaintiff is next required to show that the defendant had knowledge of the weaker party’s vulnerability. [page 250]
Stronger party was aware (or should have been aware) of the special disability [5.117]
The party who is in a position of power vis-à-vis the other party must have an awareness of the special disability. Actual knowledge quite
clearly constitutes awareness. However, wilful ignorance of the disabling factor or circumstance will also meet the definition of awareness for the purposes of the doctrine.61 Accordingly, a defendant who ‘shuts their eyes’ to the obvious vulnerability (where that person ought to have reasonably been aware of the plaintiff’s special disability) will be understood as possessing constructive knowledge of the factor or circumstance which renders the other party susceptible to control or influence. This position is succinctly stated by Mason J in Amadio (at CLR 467): [I]f A having actual knowledge that B occupies a situation of special disadvantage in relation to an intended transaction, so that B cannot make a judgment as to what is in his own interests, takes unfair advantage of his (A’s) superior bargaining power or position by entering into that transaction, his conduct in so doing is unconscionable. And if, instead of having actual knowledge of that situation, A is aware of the possibility that that situation may exist or is aware of facts that would raise that possibility in the mind of any reasonable person, the result will be the same. [5.118]
Once knowledge of the weaker party’s special disability has been established, a rebuttable presumption that the innocent party has been taken advantage of exists. As such, the onus shifts to the defendant to show that the transaction was fair, just and reasonable. One way of rebutting the presumption is to demonstrate that the weaker party was referred to an independent adviser. Thus, where the special disability relates to a party’s lack of understanding, obtaining independent advice may negate this vulnerability.
Stronger party took advantage of the special disability [5.119]
Where the above presumption is not displaced, the third criterion will be established. Parties who enter into a bargain founded on an exploitation of a power differential lack genuine agreement. In Amadio, ‘the circumstances required that the respondents be acquainted with the true financial position of the company and thereby enabled to make an informed decision’.62 The bank was not able to provide evidence that the transaction was fair or reasonable, or
indeed that the defendants received independent advice. Thus, the presumption was not displaced; the bank exploited the Amadios’ special disabilities to secure [page 251] the guarantee. Similarly, in Louth v Diprose, the defendant exploited the power differential between herself and the plaintiff when she accepted the sum of money for the purchase of the house. Stated differently, the defendant, aware of the plaintiff’s special disability, took advantage of the plaintiff’s emotional dependence on her to obtain a benefit: occupation of the house purchased by the plaintiff.
Relief [5.120] As enunciated by Deane J in Amadio (at CLR 480): Relief against unconscionable dealing is a purely equitable remedy. The concept underlying the jurisdiction to grant the relief is that equity intervenes to prevent the stronger party to an unconscionable dealing acting against equity and good conscience by attempting to enforce, or retain the benefit of, that dealing. [5.121]
Where a contract is declared voidable, the weaker party may elect to have the contract rescinded. A party who elects to avoid the agreement, must communicate this intention to the other party. As relief is discretionary, excessive delay in communicating avoidance of the contract may prevent a court from rendering the agreement inequitable.
[5.122] The effect of rescission is to restore the parties to the positions they
occupied prior to the contract. A plaintiff must be aware of the bars to rescission. As is the case for mistake, misrepresentation, duress and undue influence, a plaintiff may lose the right to rescind where a third party gains good title to the subject matter of the voidable contract, or where the innocent party acts in a manner which affirms the contract. A more detailed discussion of rescission is provided in Chapter 8.
Statute [5.123] Statute plays an important role in regulating unconscionable conduct
in relation to consumer transactions. Sections 20 and 21 of the Australian Consumer Law prohibit different forms of unconscionable conduct. Both provisions are discussed in detail in Chapter 6. Briefly, s 20 operates within the context of the ‘unwritten law’. The provision applies where a claimant can establish a basis for relief through existing equitable principles. Section 21 relates specifically to the supply and purchase of goods and services. The definition of unconscionable conduct is much broader under this provision. A claimant does not need to establish a basis for relief under equitable or common law principles. The courts may have regard to a range of factors outlined in s 22, which may be indicative of an imbalance of power between consumers and businesses. __________________ 1 2
3
4 5 6 7 8 9 10 11 12 13 14 15 16
Latin term meaning ‘matter ceased to exist’. Sale of Goods Act 1954 (ACT) s 11; Sale of Goods Act 1923 (NSW) s 11; Sale of Goods Act (NT) s 10; Sale of Goods Act 1896 (Qld) s 6; Sale of Goods Act 1895 (SA) s 6; Sale of Goods Act 1958 (Vic) s 11; Sale of Goods Act 1895 (WA) s 9. Note, the party relying on a misinformation may have an action in misrepresentation (discussed at [5.43]–[5.70]) or misleading or deceptive conduct (discussed at [6.5], specifically [6.55]–[6.70]). Svanosio v McNamara (1956) 96 CLR 186. Competition and Consumer Act 2010 (Cth) Sch 2. See further Chapter 6. ACL s 56. ACL s 54. ACL s 55. See, for example, Sale of Goods Act 1895 (SA) ss 13 (goods shall match their description) and 14(a) (goods must be fit for their disclosed purpose). A may be able to bring an action for innocent misrepresentation or under statute, that is, Australian Consumer Law. Misrepresentation is discussed at [5.43]–[5.70]. The remedy of rectification is discussed in greater detail in Chapter 8. Pukallus v Cameron (1982) 180 CLR 447; 43 ALR 243; Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407. Riverplate Properties Ltd v Paul [1975] Ch 133. See also Clambake Pty Ltd v Tipperary Projects Pty Ltd (No 3) [2009] WASC 52. Taylor and Johnson (1983) 151 CLR 422 at 433; 45 ALR 265. Above. Deputy Federal Commissioner of Taxation (NSW) v Chamberlain (1990) 26 FCR 221; 93 ALR 729;
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
Smith v Smith [2004] NSWSC 663; Moobi Pty Ltd v Les Gunn Properties Pty Ltd [2008] NSWSC 719. However, in XCB Pty Ltd v Creative Brands Pty Ltd [2005] VSC 424 Whelan J (at [10]) held that something more than failure to correct was required. Luong v Du [2013] VSC 723 at [107]. Above at [117]. Section 18 of the ACL concerning ‘misleading or deceptive conduct’ is discussed in Chapter 6. Note, the making of false or misleading representations with respect to goods/services or land is also prohibited by ss 29 and 30 of the ACL respectively. For an extended discussion as to what conduct falls outside the scope of the ACL, see Chapter 6. Edgington v Fitzmaurice (1885) 29 Ch D 459. Smith v Hughes (1871) LR 6 QB 597; W Scott Fell & Co Ltd v Lloyd (1906) 4 CLR 572. For an extended discussion of puffery, see Chapter 6. Insurance contracts are in a unique category of contracts (uberrimae fidei) to which the doctrine of ‘good faith’ applies: Insurance Contracts Act 1984 (Cth) s 13. ‘Good faith’ has been explained at [4.130]–[4.135]. With v O’Flanagan [1936] 1 Ch 575. Competition and Consumer Act 2010 (Cth) Sch 2, s 54. Food Standards Australia New Zealand Act 1991 (Cth). See specifically, Australia New Zealand Food Standards Code. Henville v Walker (2001) 206 CLR 459; 182 ALR 37; Gould v Vaggelas (1985) 157 CLR 215; 62 ALR 527. Attwood v Small (1838) 6 Cl & Fin 232; 7 ER 684. Holmes v Jones (1907) 4 CLR 1692. Derry v Peek (1889) 14 App Cas 337. On affirmation, see Chapter 7. Lord Atkin stated (at 580): ‘You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour.’ Misrepresentations Act 1974 (SA); Civil Law (Wrongs) Act 2002 (ACT). Misrepresentations Act 1974 (SA) s 7(1); Civil Law (Wrongs) Act 2002 (ACT) s 174(2). Misrepresentations Act 1974 (SA) s 7(2); Civil Law (Wrongs) Act 2002 (ACT) s 174(3). Misrepresentations Act 1974 (SA) s 7(3). Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 474; 46 ALR 402 (Amadio). [1983] AC 366 at 400. Above. Above. (1988) 19 NSWLR 40 at 46. Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50 at 106. [1983] AC 366 at 401. See also R v Attorney-General for England and Wales [2003] UKPC 22 at [16]. (1988) 19 NSWLR 40 at 46. Westpac Banking Corporation v Cockerill (1998) 152 ALR 267 at 289. See, for example, Worker’s Liens Act 1893 (SA) s 41. Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 474; 46 ALR 402.
49 50 51 52
53 54 55 56 57 58 59 60 61 62
Baburin v Baburin [1990] 2 Qd R 101 at 109. See Chapter 8. Yerkey v Jones (1939) 63 CLR 649 at 684. A wife will be deemed a ‘volunteer’ in this context where she does not gain a direct or immediate benefit from the transaction; incidental benefit accruing to the wife or her family will not render the transaction involuntary: State Bank of New South Wales v Chia (2000) 50 NSWLR 587 at 601. The prospect of some speculative or modest benefit moving to the wife will not suffice: Agripay Pty Ltd v Byrne [2011] 2 Qd R 501; [2011] QCA 85 at [11]. Liu v Adamson [2004] NSW ConvR 56-074. Barbaro v Millington [2007] ACTCA 1. Burke v State Bank of New South Wales (1995) 37 NSWLR 53; State Bank of New South Wales v Layoun [2001] NSWSC 198; McIvor v Westpac Banking Corporation [2012] QSC 404. Alderton v Prudential Assurance Co Ltd (1993) 41 FCR 435; Equuscorp Pty Ltd v Worts [2000] VSC 179. Commonwealth Bank of Australia v Longo [2001] VSC 191. Challenge Bank Ltd v Pandya (1993) 60 SASR 330; ANZ Banking Group Ltd v Alirezai [2004] QCA 6. (1956) 99 CLR 362 at 405. (1983) 151 CLR 447 at 462; 46 ALR 402. Owen & Gutch v Homan (1853) 4 HL Cas 997; 10 ER 752. (1983) 151 CLR 447 at 469; 46 ALR 402.
[page 253]
CHAPTER 6
Statutory Regulation of Contracts
Key Ideas By the end of this chapter you should be able to identify: ▶
Australian Consumer Law
▶
misleading or deceptive conduct
▶
unconscionable conduct
▶
unfair contract terms
▶
unfair business practices
▶
consumer guarantees
▶
other forms of statutory regulation of contracts
▶
reporting a breach of the ACL
[page 254]
Introduction [6.1]
Contract law is primarily founded upon common law principles. However, the means by which contracts are created and enforced, as well as the content of such agreements, are also regulated by a variety of statutes at both Commonwealth and state/territory level.
Australian Consumer Law [6.2]
The Competition and Consumer Act 2010 (Cth) (CCA) is the principal piece of national legislation concerned with enhancing the welfare of Australians through the promotion of competition and fair trading, and consumer protection.1 The CCA rebranded the Trade Practices Act 1974 (Cth) (TPA) and consolidated numerous other Acts and consumer protection regimes that previously operated across the Australian jurisdictions to provide a single national consumer law.2 The new Australian Consumer Law (ACL), which applies uniformly across all states and territories,3 is contained within Sch 2 of the CCA.4
[6.3]
The Australian Competition and Consumer Commission (ACCC) is the principal statutory regulator of the ACL. The ACCC promotes competition and fair trade in markets so as to benefit consumers, businesses and the broader community. It is also responsible for regulating national infrastructure services. As stated on its website, the ACCC’s primary responsibility is ‘to ensure that individuals and businesses comply with Australian competition, fair trading, and consumer protection laws — in particular the Competition and Consumer Act 2010’.5 The ACCC thus has an inherent interest in the commercial activity of Australian businesses and consumers and is concerned with ensuring that such [page 255]
activity complies with the relevant laws that govern commerce and contractual exchanges. [6.4]
There are many statutes which affect the formation, content, performance, enforcement and termination of contracts. The ACL is perhaps the most significant statutory regime in this regard; it regulates a broad range of behaviours and practices in commerce. The most significant provisions in the context of contract law are as follows: Part 2-1, which prohibits misleading or deceptive conduct in trade or commerce; Part 2-2, which prohibits unconscionable conduct in trade or commerce; Part 2-3, which regulates unfair terms in consumer contracts; Part 3-1, which prohibits various forms of unfair business practices; and Part 3-2, which contains the consumer guarantees regime. Each of these provisions will be considered in turn.
Misleading or deceptive conduct under the ACL [6.5]
Section 18(1) of the ACL provides: A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
[6.6]
This provision is frequently the subject of litigation by virtue of its broad scope and the simplicity of its language. It does not create a cause of action but rather establishes a statutory standard of conduct.6 Establishing whether the provision has been breached involves defining the three major concepts referred to in its wording: ‘person’, ‘trade or commerce’ and ‘misleading or deceptive conduct’. We will
now consider each of these concepts in isolation.
Who is a ‘person’? [6.7]
Pursuant to s 131(1) of the CCA, the ACL applies to the conduct of corporations. A ‘corporation’ is defined in s 4 of the CCA as meaning a body corporate which is: a foreign corporation; a trading or financial corporation formed within the limits of Australia; incorporated in a Territory; or the holding company of a body corporate of a kind described. The term ‘person’ is not defined in the ACL and so the question becomes whether a corporation counts as a ‘person’ for the purposes of s 18. The Explanatory Memorandum to the Trade Practices Amendment (Australian Consumer Law) Act (No 2) (Cth) explains that the provisions of the [page 256] ACL apply to all persons, whether individuals or bodies corporate.7 Moreover, s 2C of the Acts Interpretation Act 1901 (Cth) provides that the term ‘person’ is to be interpreted as including ‘a body politic or corporate as well as an individual’, which complements the traditional common law position.
[6.8]
Section 6 of the CCA extends the operation of the ACL to persons who are not corporations in certain circumstances, and the application legislation (Fair Trading Acts) in each state and territory also allows the provisions of the ACL to extend to the trading or commercial activities of natural persons. The cumulative effect of this complex network of statutory and common law principles is that the term ‘person’ in s 18 of the ACL includes both natural persons and corporations.
What is ‘trade or commerce’?
[6.9]
[6.10]
Misleading or deceptive must occur in trade or commerce in order to be caught by the statutory prohibition contained in s 18. The term is not defined in useful terms in the CCA or ACL, both of which merely describe it as including trade or commerce within Australia or between Australia and places outside of the country. The ACL further defines trade or commerce as including ‘any business or professional activity (whether or not carried on for profit)’. It has therefore been left to the courts to determine the meaning of ‘trade or commerce’. Previously the High Court of Australia (interpreting the now defunct Trade Practices Act) favoured a wide view of the concept, but a more restrictive approach was taken in Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594; 92 ALR 193 (Nelson) and appears to hold sway. In that case, it was emphasised that the conduct in question must clearly be in the nature of trading or commercial business, and not merely incidental to such activities. In Nelson the plaintiff, a construction worker, was seriously injured when he fell through the grate of an air-conditioning shaft while performing work for his employer. The plaintiff was instructed to remove the grate by his foreman, who also indicated to him that the grate was firmly secured. This statement was untrue and the plaintiff alleged this amounted to misleading or deceptive conduct in contravention of TPA s 52 (now ACL s 18). A majority of the High Court found in favour of the defendant employer on the basis that his erroneous comment was not actually made ‘in trade or commerce’. The court acknowledged that there were two potential interpretations of this term: one broad, one narrow. As to the broad view, the court stated (at CLR 602–3): The phrase ‘in trade or commerce’ in s 52 [of the former TPA, now s 18 of the ACL] has a restrictive operation. It qualifies the prohibition against engaging in conduct of the specified kind. As a matter of
[page 257] language, a prohibition against engaging in conduct ‘in trade or commerce’ can be construed as encompassing conduct in the course of the myriad of activities which are not, of their nature, of a trading or commercial character but which are
undertaken in the course of, or as incidental to, the carrying on of an overall trading or commercial business. If the words ‘in trade or commerce’ in s 52 are construed in that sense, the provisions of the section would extend, for example, to a case where the misleading or deceptive conduct was a failure by a driver to give the correct handsignal when driving a truck in the course of a corporation’s haulage business. It would also extend to a case, such as the present, where the alleged misleading or deceptive conduct consisted of the giving of inaccurate information by one employee to another in the course of carrying on the building activities of a commercial builder. [6.11]
The court then recognised the narrower view that could be taken (at CLR 603): Alternatively, the reference to conduct ‘in trade or commerce’ in s 52 [ACL s 18] can be construed as referring only to conduct which is itself an aspect or element of activities or transactions which, of their nature, bear a trading or commercial character. So construed, to borrow and adapt words used by Dixon J in a different context in Bank of NSW v The Commonwealth, the words ‘in trade or commerce’ refer to ‘the central conception’ of trade or commerce and not to the ‘immense field of activities’ in which corporations may engage in the course of, or for the purposes of, carrying on some overall trading or commercial business.
[6.12]
The court favoured the narrower view and held that the foreman’s statement was merely a private, internal communication between employees made during the course of their ordinary working activities; it was not in trade or commerce but rather was incidental to, or in connection with, that trade or commerce. The court stated (at CLR 603–4): [ACL s 18] was not intended to impose, by a side-wind, an overlay of Commonwealth law upon every field of legislative control into which a corporation might stray for the purposes of, or in connection with, carrying on its trading or commercial activities. What the section is concerned with is the conduct of a corporation towards persons, be they consumers or not, with whom it (or those whose interests it represents or is seeking to promote) has or may have dealings in the course of those activities or transactions which, of their nature, bear a trading or commercial character. Such conduct includes, of course, promotional activities in relation to, or for the purposes of, the supply of goods or services to actual or potential consumers, be they identified persons or merely an unidentifiable section of the
[page 258] public. In some areas, the dividing line between what is and what is not conduct ‘in trade or commerce’ may be less clear and may require the identification of what
imports a trading or commercial character to an activity which is not, without more, of that character. [6.13]
In sum, conduct which is allegedly misleading or deceptive must be integral to the allegedly culpable person’s trading or commercial activities in order to qualify for the purposes of ACL s 18. For example, statements made in the course of negotiating purely personal or private transactions such as the sale of a private residence will not suffice.8 Similarly, conduct by an employer vis-à-vis its employee will only be ‘in trade or commerce’ where this conduct is not merely incidental (as in Nelson) but is rather in the nature of some significant trading or commercial dealing between the parties such as the negotiation and creation of a new employment contract.9 On the other hand, the provision of professional advice has been held to be ‘in trade or commerce’.10
[6.14]
The courts have regarded commercial statements made in the public sphere, such as media commentary or remarks made as part of an advertising campaign, as occurring in trade or commerce where such statements have been made so as to advance or protect the commercial interests of the exhibitor or publisher.11 In Noone, Director of Consumer Affairs Victoria v Operation Smile (Australia) Inc (2012) 38 VR 569, for example, the Victorian Supreme Court of Appeal held that the defendant, a complementary medicine centre specialising in the treatment of cancer, had engaged in misleading or deceptive conduct in trade or commerce by making representations through its website as to the efficacy of its treatments. The representations implied that the defendant’s diagnostic processes were better able to assess a patient’s cancer than the processes employed by expert medical practitioners. This was a marketing tool designed specifically to entice patients and was therefore central to the defendant’s business as a provider of paid complementary medical services. As such, the defendant’s conduct was held to have occurred in trade or commerce.
[6.15]
As this case makes quite clear, a breach of s 18 may occur online as well as offline. The ACL is applicable to all platforms. There are a range of online advertising channels that businesses can use through
mechanisms including ‘AdSense’, ‘AdWords’ banner ads, pop-up ads and other types of advertisements. [page 259]
When is conduct ‘misleading or deceptive’? [6.16]
The difficulty of identifying the forms of conduct which might be considered ‘misleading or deceptive’ is compounded by the fact that the terms misleading and deceptive do not mean the same thing. As Lockhart J explained in Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 39 FCR 546 at 554–5; 79 ALR 83 (Henjo): The Compact Edition of the Oxford English Dictionary (1987) defines the word ‘mislead’ in its transitive sense as ‘to lead astray in action or conduct; to lead into error; to cause to err’. ‘Deceive’ is defined as ‘to ensnare; to take unawares by craft or guile; to overcome, overreach, get the better of by trickery; to beguile or betray into mischief or sins; to mislead’. … The two words, ‘misleading’ and ‘deceptive’, are plainly not synonymous. That is not to say that each word may not catch some of the same conduct and that there may not be some degree of overlap. ‘Mislead’ does not necessarily involve an element of intent and it is a word of wider reach than ‘deceive’. However, it is difficult, in my opinion, to read the word ‘deceive’ in s 52 [ACL s 18] other than as involving some degree of moral turpitude as it does in ordinary English usage. Trickery, craft and guile, though not essential elements of liability, are typically at the heart of this second element of the statutory provision directed to the protection of the public from unfair trading practices.
[6.17]
Thus, it might be said that misleading conduct might well be inadvertent whereas deceptive conduct could be said to require an aspect of intent (discussed further at [6.18] and [6.22]–[6.24]).12 However, as was noted in Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 199; 42 ALR 1, the conduct in question must be analysed holistically in the full context of the circumstances in which it occurred; individual acts or words alone should not be selected and considered in isolation. The critical issue is the effect of the allegedly misleading or deceptive conduct, considered as a whole, upon the relevant audience. In this regard, the authorities do provide some guidance. In Demagogue v Ramensky
(1992) 39 FCR 31 at 41; 110 ALR 602, Black CJ stated: [C]onsistently with regard to the natural meaning of the terms of s 52 [ACL s 18], the question is whether in the light of all relevant circumstances constituted by acts, omissions, statements or silence, there has been conduct which is or is likely to be misleading or deceptive. Conduct answering that description may not always involve misrepresentation.
[page 260] [6.18]
Clearly, then, from a natural reading of s 18, conduct need not actually lead into or cause error but must merely be capable of doing so in order to amount to misleading or deceptive conduct. This means that intention is not actually necessary. One who has ‘acted honestly and reasonably may therefore nevertheless be rendered liable’ where that person’s conduct has led (or has the potential to lead) another into error in trade or commerce.13 That being said, where a party has acted in total innocence in circumstances where they cannot fundamentally be regarded as having engaged in misleading or deceptive conduct, they may escape liability. The example of a person who merely passes on information which is misleading or deceptive without themselves being the source of the information or believing in its truth or falsity was given in Yorke v Lucas (1985) 158 CLR 661 at 666; 61 ALR 307.14 The culpability of a party is perhaps most relevant when we come to consider specific categories of misleading or deceptive conduct later in the chapter.
[6.19]
Importantly, the fact that conduct may cause confusion among a particular class of persons does not mean that it is misleading or deceptive within the meaning of ACL s 18. In McWilliam’s Wines Pty Ltd v McDonald’s System of Australia Pty Ltd (1980) 49 FLR 455; 33 ALR 394, well-known fast food retailer McDonald’s alleged that McWilliam’s Wines, a wine producer, engaged in misleading or deceptive conduct by branding one of its wine varieties as the ‘Big Mac’. This was the name of one of McDonald’s most famous burgers, and McDonald’s alleged its use for the wine would mislead consumers into believing that McWilliam’s enjoyed some commercial
sponsorship or endorsement from McDonald’s. McDonald’s succeeded at first instance in obtaining an injunction preventing McWilliam’s from continuing to use the name. [6.20]
The Full Federal Court then allowed McWilliam’s appeal and held that, while it was possible that consumers might be confused and suspect that there was a connection between the two companies and their products, this would not suffice for the purposes of TPA s 52 (ACL s 18). Conduct which causes mere confusion, and which makes consumers consider such possibilities (on the basis of their own erroneous assumptions) but not actually be led into error, is not itself misleading or deceptive. Per Smithers J (at FLR 466): It is difficult to think that conduct is truly misleading or deceptive if it tells the truth and is such that if it is observed by persons who have no false ideas concerning extraneous matters nobody will be misled.
[page 261] And that is the case with this advertisement. A person not under the influence of erroneous ideas such as those discussed above may well be surprised to see the words ‘Big Mac’ being used for a wine pack, he may wonder whether McWilliam’s was entitled to use them, he may wonder whether McWilliam’s had to get permission to use them. But he cannot proceed from wonder to conclusion or even to probability on those matters. He will never be more than at most, in the state described by the learned trial judge in his basic finding in this case, namely confused as to whether there was or was not a business connexion between McWilliam’s and McDonald’s. Such a person is not misled. [6.21]
It is also essential that the alleged defendant’s conduct be shown to have caused the plaintiff to have been misled or deceived. Where a plaintiff’s reaction to the defendant’s conduct is extreme or fanciful, and the conduct would not be misleading or deceptive but for this unreasonable response of the plaintiff, this will not trigger the application of ACL s 18.15 This is because such a response cannot be attributed to the ordinary or reasonable members of the identified class (which we will discuss shortly). As mentioned earlier, the courts must consider all relevant facts and circumstances so as to establish whether the defendant’s conduct actually did mislead or deceive the
plaintiff, or was capable of doing so.
Objective test [6.22]
Determining whether particular conduct is misleading or deceptive requires an objective analysis of all relevant facts and circumstances; it is a question of fact for the courts to answer.16 For this reason, as was stated in Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 at 202 (Taco Bell), evidence that a person has formed an erroneous conclusion on the basis of said conduct is a persuasive but not a decisive consideration. This does not, in itself, conclusively establish that the conduct misled or deceived, or was capable of doing so.
[6.23]
Taco Bell demonstrates application of the objective test with particular clarity. ‘Taco Bell’ was the name of a Sydney restaurant which had been operating for numerous years. A fast-food chain of restaurants of the same name had been operating in the United States. When the United States company opened up Taco Bell restaurants in Sydney, the Australian company sought an injunction to prevent the United States competitor from using the name ‘Taco Bell’ on the basis that consumers were likely to think that the United States Taco Bell restaurant was associated with the Sydney Taco Bell restaurant. [page 262]
[6.24]
In making its assessment as to whether or not the conduct was misleading or deceptive, the court applied an objective test. A detailed exposition of this is provided for in the judgment. Simply stated, the objective test can be expressed in the following way: is the conduct likely to mislead or deceive members of the group of persons to whom the conduct was directed? Thus, the question for the court in Taco Bell was: is the use of the name Taco Bell likely to mislead or deceive members of the general public in Sydney to think that the United States Taco Bell was the same as the Sydney Taco Bell? The court held
that the United States company had breached s 52 of the TPA (now ACL s 18) and granted an injunction preventing the United States competitor from operating a restaurant in the Sydney metropolitan area under the name ‘Taco Bell’ or any other similar name likely to mislead or deceive customers.
Identifying the audience [6.25]
To establish whether conduct is misleading or deceptive it is necessary to consider the likely effects of this conduct upon the audience at which the conduct is directed. To this end, the courts draw a practical distinction between conduct directed to the public at large and conduct occurring in dealings between individuals.17 Once the relevant section or sections of the public (by reference to whom the question of whether conduct is, or is likely to be, misleading or deceptive falls to be tested) is identified, the matter must then be considered by reference to all those who fall into that class including: … the astute and the gullible, the intelligent and the not so intelligent, the welleducated as well as the poorly educated, men and women of various ages pursuing a variety of vocations.18
Conduct directed at the general public [6.26]
Conduct may be directed at the general public through a variety of means. Print or digital advertisements are perhaps the most common example. When the conduct in question is not directed at particular individuals but rather the public at large, the courts endorse the approach expressed in Campomar (at CLR 85): Where the persons in question are not identified individuals to whom a particular misrepresentation has been made or from whom a relevant fact, circumstance or proposal was withheld, but are members of a class to which the conduct in question was directed in a general sense, it is necessary to isolate by some criterion a representative member of that class.
[page 263]
[6.27]
Effectively, according to the High Court in Campomar, the courts must construct a hypothetical ‘ordinary’ or ‘reasonable’ person from the general populace. This may sometimes be difficult, as shown in the following scenario: A sportswear company markets a new pair of running shoes which are said to ‘increase maximum running speed by up to 15%’. Scientific evidence refuting this claim comes to light and a rival sportswear company alleges that the manufacturer of the running shoes has engaged in misleading or deceptive conduct in trade or commerce.
[6.28]
Who is the relevant class here? On the one hand it might be said to be general consumers; on the other it might be retailers in sportswear with intimate knowledge of the capabilities of particular types of athletic footwear. Retailers would likely know more about what running shoes can do than your average consumer. It is possible that sub-classes may be identified within the general public and that the allegedly misleading or deceptive conduct will need to be tested against each of these groups.19 Knowledge, experience and opinions will naturally differ vastly among people; however, the ordinary or reasonable person is the means by which the objective views of the general public are measured.
Conduct directed at individuals [6.29]
Where the allegedly misleading or deceptive conduct is directed towards particular individuals, the courts must establish whether those specific individuals were misled or deceived (or capable of being so).20 Again, all relevant facts and circumstances must be considered, including the information each party held, the nature of their dealings, their characteristics, and commercial acumen.21
Classes of misleading or deceptive conduct
Silence [6.30]
In some circumstances, staying silent and not disclosing particular information may amount to misleading or deceptive conduct. This seems somewhat anomalous seeing as silence is not a form of affirmative conduct, but for the purposes of ACL s 18 it can render the party withholding the relevant information [page 264] liable. The relevant test is one of reasonable expectation, as was explained in Demagogue v Ramensky (1992) 39 FCR 31 at 41; 110 ALR 608: [C]onsistently with regard to the natural meaning of the terms of s 52 [ACL s 18], the question is whether in the light of all relevant circumstances constituted by acts, omissions, statements or silence, there has been conduct which is or is likely to be misleading or deceptive. Conduct answering that description may not always involve misrepresentation. … unless the circumstances are such as to give rise to the reasonable expectation that if some relevant fact exists it would be disclosed, it is difficult to see how mere silence could support the inference that the fact does not exist.
[6.31]
Whether a reasonable expectation of disclosure of particular information arises in a given situation is a matter of context and must be determined with due consideration to the ordinary incidents and character of commercial behaviour.22
[6.32]
A common situation in business where silence may mislead or deceive is in the process of pre-contractual negotiations. Where a party fails to disclose information in the formation stage of a contract, it may create a false impression in the other party. The question then becomes whether the party withholding the information was obliged to speak. In this regard Gleeson CJ stated in Lam v Ausintel Investments Australia Pty Ltd (1989) 97 FLR 458 at 475: Where parties are dealing at arms’ length in a commercial situation in which they have conflicting interests it will often be the case that one party will be aware of information which, if known to the other, would or might cause that other party to take a different negotiating stance. This does not in itself impose any obligation on
the first party to bring the information to the attention of the other party, and failure to do so would not, without more, ordinarily be regarded as dishonesty or even sharp practice. It would normally only be if there were an obligation of full disclosure that a different result would follow. That could occur, for example, by reason of some feature of the relationship between the parties, or because previous communications between them gave rise to a duty to add to or correct earlier information. [6.33]
As his Honour noted, the very nature of the bargaining process means that commercial parties often keep their cards close to their chest. The High Court in Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357; 270 ALR 204 expressed similar views. French CJ and Kiefel J confirmed (at CLR 371) that TPA s 52 (ACL s 18) ‘does not require a party to [page 265] commercial negotiations to volunteer information which will be of assistance to the decision-making of the other party’. By extension, the withholding party is not obligated to disclose information so as to avoid the other party carelessly disregarding its own interests, especially whether that party is of equal bargaining power and competence. Information might well be important to the other party, and they might well have preferred to have known that information, but this alone does not render the withholding party’s silence misleading or deceptive for the purposes of ACL s 18.
[6.34]
However, the bargaining process cannot be seen as a ‘licence to deceive’.23 Where the facts establish that a reasonable expectation of disclosure arose and the information was not divulged, the withholding party may be found to have contravened ACL s 18. Again, this very much depends upon the context and is a matter of degree in each individual case. Some case examples will serve to demonstrate this point.
EK Nominees Pty Ltd v Woolworths Ltd [2006] NSWSC 1172
Brief facts: The defendant, Woolworths, contemplated establishing a new supermarket in Auburn, New South Wales. After negotiations regarding its preferred site in Queen St broke down, Woolworths turned its attention to another site in Auburn Rd. This site was owned by the plaintiff, developers EK Nominees. EK Nominees was aware of Woolworths’ previous negotiations regarding the Queen St site and sought assurance that its interest in the Auburn Rd site was genuine. In April 1998, Woolworths wrote to EK Nominees providing written assurance that it was ‘genuinely pursuing’ the Auburn Rd site. Woolworths made an offer to take a lease at the site subject to board approval and execution of the formal lease documents. Nonetheless, Woolworths clearly expected EK Nominees to commit itself to the project. EK Nominees commenced obtaining the relevant council approvals and undertaking some minor works on the site while the lease was being negotiated. Meanwhile, at the same time, Woolworths commenced secret negotiations with the owners of the Queen St site. In 2002, Woolworths indicated it would not be proceeding with the Auburn Rd site. EK Nominees claimed that Woolworths had engaged in misleading or deceptive conduct by failing to disclose its clandestine negotiations with the Queen St site owners. Woolworths argued that it was not reasonable to expect it to inform EK Nominees of other commercial negotiations in which alternative opportunities were being considered. [page 266] Issue: Had Woolworths engaged in misleading or deceptive conduct by failing to inform EK Nominees about its concurrent discussions with the Queen St site owners? Conclusion: Woolworths had engaged in misleading or deceptive conduct. This was not ‘merely a case in which the parties were negotiating with a view to entering into an agreement for a lease’. EK Nominees had spent, and continued to
spend, substantial sums of money in order to satisfy Woolworths’ and the development conditions, and to progress the project as quickly as possible. It did so with Woolworths’ knowledge and encouragement (at [137]): In that context, EK Nominees could reasonably have expected that if a new proposal arose in relation to the Queen Street site, it would be told about it, or at least, it would be told that Woolworths may have to reconsider whether to proceed with the Auburn Road site.
Woolworths was therefore liable to compensate EK Nominees for the latter’s wasted expenditure on the project.
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546; 79 ALR 83 Brief facts: Henjo Investments was the owner of a Sydney restaurant known as ‘The New York Deli’. The restaurant had a licence to hold a maximum of 84 patrons; however, the orientation of tables and chairs within was changed and the restaurant was made to fit 128 patrons. The restaurant was then advertised for sale as being able to seat ‘about 120’ people. Collins Marrickville sought to purchase the restaurant and engaged a solicitor to perform the necessary checks to ensure all council by-laws and licensing requirements were complied with. The solicitor failed to do so, such that the restaurant’s true capacity went undiscovered. Collins Marrickville entered into a contract with Henjo Investments for the purchase of the restaurant, after which it learnt of the true capacity of The New York Deli. Collins Marrickville alleged that Henjo Investments had engaged in misleading or deceptive conduct contrary to ACL s 18. Issue: Had Henjo Investments engaged in misleading or deceptive conduct by failing to inform Collins Marrickville of the true licensed capacity of the restaurant?
[page 267] Conclusion: The Full Court of the Federal Court held that Henjo Investments had engaged in misleading or deceptive conduct by failing to disclose the restaurant’s licensed capacity to Collins Marrickville prior to sale. Henjo was well aware of the serious limitations upon the restaurant’s lawful seating capacity at time of sale, which vitally affected the business, its goodwill, takings and profitability. Henjo cultivated Collins’ understanding that the restaurant’s licence restrictions were not as restrictive as they actually were. It did not matter that Collins should have made their own enquiries to discover the truth.
[6.35]
In the following case, a reasonable expectation of disclosure was deemed not to have arisen and the withholding party’s silence was therefore not misleading or deceptive.
General Newspapers Pty Ltd v Telstra Corporation (1993) 45 FCR 164; 117 ALR 629 Brief facts: General Newspapers contacted Telstra, the publisher of various telephone directories, expressing its interest in tendering for the printing work for these directories once the current contracts (held by other companies) expired. General Newspapers were not informed either that the printing contracts would not be put out for tender or that the possibility of this occurring was being considered. Nonetheless, General Newspapers were interviewed and their offices were inspected before they were added to a list of potential tenderers. Telstra then held discussions with its current printers and decided to renew their printing contracts instead. General Newspapers argued that Telstra had engaged in misleading or deceptive conduct by not disclosing the fact that it was negotiating with the parties currently holding the printing contracts.
Issue: Had Telstra engaged in misleading or deceptive conduct by failing to disclose to General Newspapers that it was negotiating with the companies holding the current printing contracts? Conclusion: The Full Federal Court held that Telstra had not engaged in misleading or deceptive conduct. The negotiations that took place between Telstra and General Newspapers were typical arms’ length commercial negotiations which did not require full disclosure at all times. The fact that Telstra was negotiating with other companies was a confidential matter and it did not in any way suggest that tenders would actually be called or that General Newspapers would be kept abreast of developments in the negotiation process. Accordingly, there was no reasonable expectation of disclosure.
[page 268] [6.36]
An important question when considering silence as a category of misleading or deceptive conduct is whether the act of remaining silence must be deliberate. Section 2(2) of the ACL implies that a party must intentionally withhold information in order to amount to misleading or deceptive conduct. The relevant portions of this provision provide as follows: (2) In this Schedule: … (b) a reference to conduct, when that expression is used as a noun … is a reference to the doing or of the refusing to do any act …; (c) a reference to refusing to do an act includes a reference to: (i) refraining (otherwise than inadvertently) from doing that act …
[6.37]
The use of the expressions ‘refuse’, ‘refrain’ and ‘otherwise than inadvertently’ in this provision suggests that silence must be intentional before it will amount to misleading or deceptive conduct under s 18. This was the conclusion reached in Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 77 and Costa Vraca Pty Ltd v Berrigan Weed & Pest Control Pty Ltd (1998) 155 ALR 714. However, other more recent authorities have suggested that silence need not be deliberate in order to be actionable. In CCP Australian Airships Ltd v Primus Telecommunications Pty Ltd (2005) ATPR 42-042; [2004] VSCA 232, the Victorian Supreme Court of Appeal stated that the misleading or deceptive quality of remaining silent inheres in the non-disclosure of information and not in any refusal to provide it, such that silence does not have to be deliberate. The Full Court of the Western Australian Supreme Court agreed in Owston Nominees No 2 Pty Ltd v Clambake Pty Ltd (2011) 248 FLR 193; [2011] WASCA 76, as did the Supreme Court of the Australian Capital Territory most recently in Clarkson Williams Partners Pty Ltd v Vaughan [2016] ACTCA 1. The matter remains unresolved and will likely remain in a state of uncertainty until the High Court conclusively addresses the point.
Representations as to future matters [6.38]
In commerce, parties frequently make representations as to future matters with one another and, on occasion, such representations do not eventuate. Consider, for example, a transaction in which a clothing store is sold by one party to another. Prior to the sale contract being signed, the vendor indicates that the store’s profits are expected to be significantly high. On this basis, the purchaser proceeds with the sale but the profits fall well short of those expected. Another example would be a proposed residence which is assigned to have certain luxury facilities and features and is sold on this promise but ultimately does not have such things. The mere fact that a representation as to future conduct or events does not come to pass does not automatically make it misleading or deceptive. However, such a statement may mature into misleading or deceptive conduct
[page 269] in limited circumstances. Section 4 of the ACL is instructive in this regard. It provides: (1) If: (a) a person makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act); and (b) the person does not have reasonable grounds for making the representation; the representation is taken, for the purposes of this Schedule, to be misleading. [6.39]
Accordingly, where a party makes a representation with respect to any future matter but lacks any reasonable grounds for doing so, the representation will be regarded as misleading or deceptive for the purposes of ACL s 18. Pursuant to s 4(2), the party (or other person) making the representation is taken not to have had any reasonable grounds for making the representation unless evidence is adduced to the contrary. In other words, the default position from the outset is that the party making the representation as to a future matter lacks any reasonable grounds for doing so, and that party must provide evidence that they held such reasonable grounds. If they can do so, the court must then determine on the balance of probabilities whether the representor actually did have reasonable grounds.
[6.40]
This position is clarified further by s 4(3), which confirms that the mere production of evidence as to the representor having held reasonable grounds is not in itself enough to displace the presumption: the courts must decide this. It also confirms that there is no onus of proof on any of the parties; rather, the representor may produce evidence and therefore task the courts with deciding whether such reasonable grounds were held (under s 4(1)). Importantly, genuine or honest belief in what is being said does not suffice to establish ‘reasonable grounds’; the courts will instead consider all
relevant facts and circumstances including the conduct of the parties and the conditions surrounding the making of the representation.24
Opinions [6.41]
A statement of opinion or belief may also amount to misleading or deceptive conduct under ACL s 18. In itself, an incorrect opinion does not establish that the person expressing it did not hold it or lacked substantial foundation.25 In order to amount to misleading or deceptive conduct, it must be shown that the alleged opinion or belief expressed was instead a statement of fact. The distinction is difficult but was explained by Hill J in Tobacco Institute of Australia [page 270] Ltd v Australian Federation of Consumer Organisations Inc (1992) 38 FCR 1 at 47; 111 ALR 61: [A] statement will most usually be seen as a statement of fact if it is one which can be measured against an objective criterion. Thus, generally, where no objective criterion exists, so that of necessity what is said must depend upon judgment or opinion, the statement will be seen not as a statement of fact but as one of opinion.
[6.42]
As was emphasised in Australian Securities and Investments Commission v Fortescue Metals Group Ltd (2011) 190 FCR 364 at 405– 6; 274 ALR 731, it is important to analyse the language used as well as the context in which the opinion or belief is expressed to establish whether it would be ordinarily and reasonably understood as a statement of fact rather than a general opinion. If the party expressing the erroneous opinion or belief is recklessly indifferent to the truth and they have not made serious attempts to ascertain the truth of their statement, the courts will treat the statement as being made dishonestly.26
[6.43]
Where the party expressing the opinion purports or appears to have some professional expertise, knowledge or experience, an erroneous statement of opinion may more readily be regarded as misleading or
deceptive for the purposes of ACL s 18. For example, in RAIA Insurance Brokers Ltd v FAI General Insurance Co Ltd (1993) 41 FCR 164; 112 ALR 511, RAIA promoted a professional indemnity insurance policy for architects which was in direct competition with a policy provided by FAI. RAIA undertook an appraisal of FAI’s rival policy and criticised it heavily, identifying particular areas of concern as to legal and functional efficacy, and describing it as ‘illusory’. A document of its findings was produced and circulated to a number of RAIA’s clients. FAI contended that RAIA had engaged in misleading or deceptive conduct by offering erroneous and unfounded opinions as to its policy. RAIA contended that the appraisal document merely expressed its opinion and would have been read and understood in this manner by the clients who read it. [6.44]
The Federal Court held that RAIA had engaged in misleading or deceptive conduct. Although its evaluation of the policy was an expression of opinion, RAIA held itself out to be an expert in the field and the language of the appraisal document strongly implied that the opinion was impartially and sensibly constructed when in fact it was heavily biased. As Beaumont and Spender JJ remarked (at FCR 175): In our opinion, it is appropriate to infer, in these circumstances, a representation that, in expressing the opinions it did, RAIA had acted on a rational basis, especially when the opinions expressed purport to deal with the actual operation, in practical terms, of the
[page 271] provisions of the FAI policy. That is to say, the statements made in the appraisal were not merely opinions; implicit in them … was a representation that the opinions had been grounded on a rational foundation by reason of the superior knowledge and expertise of RAIA as professional insurance brokers. [6.45]
Thus, in practice, an erroneous statement of opinion or belief may more readily constitute misleading or deceptive conduct where it is provided by a party professing to hold some special expertise, knowledge or experience. The rationale is that a reasonable person would more likely be misled or deceived if an opinion or belief were
expressed by such an ‘expert’ as opposed to an unqualified or inexperienced layperson.
Puffery [6.46]
Companies often make bold or exaggerated statements or claims as a means of marketing their products and services. In Chapter 2 we were introduced to the concept of puffs, which is the label attributed to such hyperbolic ‘sales talk’. Often these claims are not meant to be taken literally but rather to engage with consumers and encourage them to contract with the business in question. In General Newspapers Pty Ltd v Telstra Corporation (1993) 45 FCR 164; 117 ALR 629, Davies and Einfeld JJ noted (at FCR 178) that a certain degree of ‘puffing’ or exaggeration is to be expected in the ordinary course of commercial dealings. Indeed, the public is ‘accustomed to the puffing of products in advertising’.27 As such, puffery must be of a sufficiently misleading or deceptive character in order to contravene the prohibition in ACL s 18. Again, all facts and circumstances are relevant to making this determination and must be considered against the backdrop of ordinary commercial practices and behaviours.
[6.47]
Of course this assessment is inherently difficult given the character of commercial puffery. As Beazley J noted in Sabre Corporation Pty Ltd v Laboratories Pharm-A-Care Pty Ltd (1995) 31 IPR 445 at 453: Of their nature, statements which are puffing must be statements of opinion and not statements of fact. Statements which are puffs or which are exaggerated are not misleading or deceptive. However, there is often a fine line between what is puffing, what might merely cause uncertainty, and what is misleading or deceptive. These are matters of evaluation in respect of which responses may differ.
[6.48]
As examples, many restaurants often claim to serve the ‘best steak in town’ (maybe even the world!) Others claim to be the ‘most trusted’ builders in the nation. Such statements are clearly marketing statements founded squarely upon the subjective views of those establishments. In contrast, consider the class action [page 272]
launched by a group of consumers against Red Bull GmbH, the manufacturers of energy drink ‘Red Bull’, in 2014. The lawsuit centred on GmbH’s slogan for this product: ‘Red Bull gives you wings’, which was often incorporated into television advertisements depicting cartoon persons consuming the drink and performing superhuman feats such as flying. In the statement of claim, the plaintiffs alleged that the defendants were: … prey[ing] upon consumers by promising that, among other things, ‘Red Bull gives you wings’ by providing a mixture of ingredients that, when ingested, significantly improve a consumer’s physiological and mental performance beyond what a simple cup of coffee or caffeine pill would do for a consumer’s physiological and mental performance.28 [6.49]
It was further alleged that the scientific evidence GmbH relied upon in defence of its claims as to Red Bull’s performance-improving qualities was tenuous at best and that this therefore went beyond mere puffery and amounted to misleading and deceptive conduct. The case was eventually settled out of court, with GmbH agreeing to pay a total of US $13 million into a compensation fund for consumers privy to the class action. While the matter was never decided by a court, this case demonstrates the manner in which a company’s purported puff may potentially become capable of leading consumers into error. It also highlights the importance of ensuring that statements made as part of an advertising campaign are placed in context so as to avoid misleading or deceiving the reasonable consumer.
[6.50]
Comparative advertising, in which a company compares its products to those of a rival company as a means of emphasising the superiority of its own products, is another example of conduct akin to puffery which can potentially become misleading or deceptive and contravene ACL s 18. On the one hand, when providing consumers with accurate hard facts about competing products, comparative advertising actually assists consumers to make better informed choices and therefore promotes more effective competition.29
[6.51]
On the other hand, where a company draws unbalanced or inaccurate comparisons between its products and a rival’s which may mislead or deceive consumers, ACL s 18 may be violated. This occurred in Re
Hoover (Australia) Pty Ltd v Email Ltd (1991) 104 ALR 369, where Email Ltd generated a promotional video showing one of its washing machine models and one of the plaintiff’s models washing a two kilogram lead weight, which was described as equating to a normal wash including such things as ‘a couple of towels, a few shirts and pillow cases’. The plaintiff’s model machine moved and vibrated significantly [page 273] in the video and it argued that the video footage ‘falsely suggested to the viewer to be illustrative of what occurs when the Hoover machine contains an “out-of-balance” load of washing’ and that this was out of the ordinary and not how the machine would normally perform with a regular load of washing. The Federal Court agreed and held that Email Ltd had engaged in misleading or deceptive conduct contrary to TPA s 52 (ACL s 18). The comparison was unfair, and consumers were not provided with accurate information as to the true impact upon the plaintiff’s machine of washing the lead weight as opposed to regular clothing and linen. [6.52]
Though not puffery as such, plainly inaccurate claims as to a product’s efficacy will also amount to misleading or deceptive conduct. In Australian Competition and Consumer Commission v Reckitt Benckiser (Australia) Pty Ltd (No 4) [2015] FCA 1408, the manufacturer of various varieties of pain relief medication ‘Nurofen’ was held to have contravened s 18 by stating on the packaging of each variety that they could target specific forms of pain (back pain, period pain etc) when in fact they contained the same type and quantity of active ingredients and were no more or less effective than each other in treating any of the symptoms shown on their packaging.
[6.53]
Importantly, puffery need not occur in conventional advertising to be actionable under ACL s 18. In Byers v Dorotea Pty Ltd (1986) 69 ALR 715, a vendor of an off-the-plan residential unit represented that it and the other surrounding units in the complex would be ‘bigger and
better’ than those in another nearby building. The brochure for the proposed unit complex stated that it would include superior views and facilities to those of the other building. These claims were inaccurate. This was said to amount to misleading or deceptive conduct on the basis that the statement conveyed a clear and wrong impression that the new unit complex would be on a markedly grander scale, which is what prompted the applicants to proceed with the purchase. In other words, the vendor’s comments went beyond mere puffery and were intended to directly incentivise the sale of the unit.
Promises [6.54]
A contractual promise which is not honoured may in specific circumstances amount to misleading or deceptive conduct. To understand how, we must examine s 2(2)(a) of the ACL which provides as follows: (2) In this Schedule: (a) a reference to engaging in conduct is a reference to doing or refusing to do any act, including: (i) the making of, or the giving effect to a provision of, a contract or arrangement; or (ii) the arriving at, or the giving effect to a provision of, an understanding; or (iii) the requiring of the giving of, or the giving of, a covenant. [page 274]
[6.55]
It is clear from the references to ‘contracts’ and ‘covenants’ in this provision that a misleading contractual promise may be actionable under ACL s 18. Of course a promise can be about a current state of affairs or a future state of affairs. For example, promising that a computer for sale is free from any viruses or defects is a statement as to a current state of affairs. Where such a statement is inaccurate and
embodied as a provision of a contract, this may amount to misleading or deceptive conduct under statute.30 [6.56]
Alternatively, a contractual promise as to a future state of affairs may also be misleading or deceptive where it is not honoured. For example, a bidder at an auction making a successful bid on a property and who has no subsequent desire to proceed with the contract of sale might be deemed to have breached s 18.31 The making of the bid is a representation that the promisor (bidder) has a present intention to make good on the promise to buy the property in the near future if successful, or that they have the means to do so. ‘If such a representation is made when no intention or means to make it good exists, the representation may be misleading or deceptive.’32
Statements which are literally ‘true’ but give a false impression [6.57]
Another advertising strategy which can amount to misleading or deceptive conduct involves making statements which are literally true but give a reasonable consumer a false overall impression. Henderson v Pioneer Homes Pty Ltd (1980) ATPR 40-159 illustrates the kind of behaviour which falls within this category of misleading or deceptive conduct. In this case, the defendant placed a newspaper advertisement for a house and land package. The advertisement included a statement of a low weekly repayment rate. This was represented in large font so as to easily capture the consumer’s attention. Another statement, indicating that the low repayment rate applied only for one year after which the repayment rate would revert to a much higher commercial rate, was also represented, albeit in significantly smaller font. The court held that the overall impression created by the advertisement through the use of varying font sizes amounted to misleading conduct, even though the advertisement contained all the correct information. As such, representing a literal truth may breach s 18 where the overall impression of the statement, as perceived by the reasonable consumer, is misleading or deceptive.
[6.58]
A recent example of this kind of misleading or deceptive conduct is
the case Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd (2014) 317 ALR 73; [2014] FCA 634. The conduct involved claims by Coles that certain bakery items were ‘Baked today. Sold today’ and ‘Freshly [page 275] baked in-store’. The items were indeed ‘finished’ in the ovens of Coles; however, the products were actually prepared and partially baked in other locations and then transported to Coles stores to be baked before sale. In April 2015, the Federal Court held that Coles had engaged in misleading or deceptive conduct. Although the statements were literally true — the bakery items were placed in Coles ovens on the day of sale — a reasonable consumer would interpret such representations to mean that the bakery items were also prepared on the premises of Coles the same day. As items were prepared offsite (including interstate and overseas locations), the overall effect of the claims were misleading; they gave consumers the wrong impression about the bakery items.
Exclusion clauses and disclaimers [6.59]
The inclusion of an exclusion clause in a contract will not immunise a party against s 18 of the ACL: they may still be held to have engaged in misleading or deceptive conduct despite their efforts to avoid this possibility.33 Similarly, clauses which purport to assert that a party was not induced to enter into a contract on the basis of the other party’s misleading or deceptive conduct will similarly be ineffective to shield against the application of ACL s 18.34 For example, some contracts contain a term which seeks to preclude a party from relying upon a contractual representation. The following clause was incorporated into a lease agreement between the parties in Oraka Pty Ltd v Leda Holdings Ltd (1997) ATPR 41-558: No representation, promise, warranty or undertaking (including,
without limitation, representations as to the suitability of the Premises for any particular purpose or the profitability of any business conducted or to be conducted from the Premises) has been made to me/us by any person or entity in connection with the Premises or the Lease except those set out above or those confirmed below.
[6.60]
The court held that the inclusion of such a clause could not oust the application of ACL s 18. It was stated (at 43,717): It cannot be thought that the very agreement that was obtained by a misrepresentation can be made good by incorporating in it a further misrepresentation falsely asserting that it was not procured by the means which were in fact employed. The agreement that so seeks to sustain itself was obtained by a misrepresentation, and no verbal magic of an added clause can change that.
[page 276] [6.61]
Disclaimers, however, have been treated somewhat differently by the courts. There is authority which suggests that an appropriate contractual disclaimer may allow a party to escape liability for an alleged contravention of ACL s 18. Hutchence v South Sea Bubble Company Pty Ltd (1986) 64 ALR 330 is one such case in which the court acknowledged the accuracy of this position but added that such cases were likely to be rare (at 338): There are occasions upon which the effect of otherwise misleading or deceptive conduct may be neutralised by an appropriate disclaimer … But such cases are likely to be comparatively rare and to be confined to situations in which the court is able to reach satisfaction — the onus resting on the party relying upon the disclaimer — that the disclaimer is likely to be seen and understood by all those — leaving aside isolated exceptions — who would otherwise be misled before they act in relation to the relevant transaction.
[6.62]
In that case, the defendants manufactured unauthorised tee-shirts bearing images of Australian rock band INXS. The shirts were sold at a stall advertised as selling ‘bootleg’ (unofficial) merchandise, and the tag attached to each contained a disclaimer to the effect that the shirts had not been, and might not be, authorised by INXS. The court held
that the signs and labels did not constitute an effective disclaimer in the circumstances and that the products were still likely to convey the representation to the reasonable consumer that the products were endorsed or approved by the band. As such, the defendants had engaged in misleading or deceptive conduct.
Relief [6.63]
As was discussed in Chapter 5, the traditional remedy for misrepresentation at common law is rescission. There are limited opportunities to pursue compensatory and other remedies. In contrast, a breach of s 18 of the ACL gives rise to a far broader range of remedies for the injured party. These include orders for damages (s 236), injunctions (s 232), orders to vary and/or invalidate the relevant contract in whole or in part (s 243), and any other orders the court sees fit. In practice, misrepresentation at common law and misleading and deceptive conduct under ACL s 18 are often pleaded together as alternatives by injured parties, and proof of one will normally assist the case for the other.
[6.64]
So as to demonstrate how ACL s 18 applies in practice, consider the following scenario:
Hypothetical Brief facts: A is a vegan chef. He owns a very small restaurant ‘A’s V-Food’ in Adelaide. Recently, he has created a new range of winter dishes to add to his existing vegan menu. To promote his new recipes and hopefully attract [page 277] new customers to his business, he placed a large sign in the restaurant window promoting his new winter vegan dishes as ‘the best vegan food in Adelaide’. He also writes on the sign that his dishes are made with ‘all fresh ingredients’. B, the owner of
the restaurant next door, is rather annoyed about the sign. She has several vegan dishes on her menu. B accuses A of misleading customers, because she knows that A uses tinned capsicum, mushrooms, corn and tomatoes in his dishes. A’s response is that even if the vegetables are from a tin, they are fresh from the tin. B has now threatened legal action under s 18 of the ACL. Issue: Has A engaged in misleading or deceptive conduct?
[6.65]
To arrive at a plausible conclusion, it is necessary to consider whether each of the elements which comprise s 18 are established on the facts. To that effect, we need to ask whether A is ‘a person’ for the purposes of s 18. Given the broad understanding of who ‘a person’ is for this provision, it is clear that A, a small business owner, falls within the scope of ‘a person’ (recall that ‘a person’ includes individuals and businesses). Establishing this element is uncontentious.
[6.66]
Next, it must be shown that A’s conduct occurred in ‘trade or commerce’. As we have seen, conduct in ‘trade or commerce’ must not be incidental to the carrying on of a business or commercial activity; it must, in itself, have a trading or commercial nature. On the facts, A’s conduct involving the placement of the sign containing the statements, which was designed to promote the restaurant and attract new customers, in the window constitutes conduct in ‘trade or commerce’. Increasing revenue though business promotion lies at the very heart of business activity. This element is also established.
[6.67]
The final aspect of s 18 turns on showing that particular conduct a person is capable of leading a consumer into error. Let us consider each of the statements in turn.
[6.68]
First: ‘best vegan food in Adelaide’. While B is likely to claim this statement is misleading, A is likely to argue that this statement is a mere puff; an exaggerated statement of opinion most people would regard as meaningless. The statement is similar to a statement considered in the case of Procter & Gamble Australia Pty Ltd v Energizer Pty Ltd [2011] FCA 1347 (Procter & Gamble). The dispute
related to an advertising campaign which claimed that the Hydro 5 shaver was ‘the best shave’. The court held that a reasonable consumer would not regard this statement as one capable of assessment or qualification. Rather it was mere puffery. A’s argument is supported by the reasoning in Procter & Gamble. A court is likely to conclude that A has not breached s 18 in relation to his statement ‘best vegan food in Adelaide’. [6.69]
Second: ‘all fresh ingredients’. Here too, B is likely to claim A has breached s 18 on the basis that this claim is misleading or deceptive and may seek an injunction [page 278] under ACL s 232. If ordered, this would require A to remove the sign containing the statements from his restaurant window. B is likely to argue that consumers are being led to believe A uses market fresh produce in his dishes, when actually, he is using tinned vegetables. A would argue that the statement reflects a truth: his ingredients are in fact fresh as none of the ingredients he uses in his dishes have expired. The ingredients are fresh, despite coming from a tin; this is the literal truth.
[6.70]
To determine whether or not the statement is misleading or deceptive, a court would apply an objective test premised on the Taco Bell formulation: is the statement outlined on the sign in A’s restaurant window likely to mislead or deceive vegan consumers in Adelaide? The potential misconception centres on the meaning of ‘fresh’ ingredients. If interpreted literally, reference to ‘fresh’ ingredients could denote that this restaurant uses ingredients that have not yet passed their expiry date. Alternatively, reference to the term ‘fresh’ ingredients on a sign promoting dishes in a vegan restaurant could signify that the restaurant uses market fresh produce in the sense of ingredients/vegetables which are not preserved. The question then becomes: which of the two meanings is the more sensible in the context? A court is more likely to regard the latter non-literal meaning
as the more reasonable. This meaning accords with what is likely to be the general social understanding of the expression ‘fresh ingredients’. It follows that A’s statement is misleading — it may be literally true but gives a false overall impression. Customers are likely to believe A uses market fresh produce in his dishes, which he does not. As such, A is likely to have breached s 18.
Unconscionable conduct under the ACL [6.71]
In Chapter 5 we learnt of the equitable concept of unconscionability and how the doctrine was founded upon specific common law principles. The ACL provides a corresponding statutory regime which prohibits parties from engaging in unconscionable conduct in trade or commerce.35 The relevant provisions, contained in ss 20–22, replaced the similar provisions contained in ss 51AA–51AC of the former TPA. In the case of financial services or products, however, the ACL does not apply.36 Instead, ss 12CA–12CC of the Australian Securities and Investments Commission Act 2001 (Cth) replicate ACL ss 20–22.
Section 20 unconscionability [6.72]
Section 20(1) of the ACL provides: A person must not, in trade or commerce, engage in conduct that is unconscionable, within the meaning of the unwritten law from time to time.
[page 279] [6.73]
Pursuant to s 20(2), s 20 does not apply to conduct prohibited by s 21. That provision applies to transactions involving the actual or potential supply or acquisition or goods or services, other than those involving a listed public company. It is therefore essential to determine whether conduct should be examined under s 20 or s 21.
The practical distinction between the two provisions will become clearer when the scope of ‘unconscionable conduct’ covered by each is considered. The phrase ‘unwritten law’ in s 20 refers to judge-made law, incorporating all of the relevant rules and principles of both the common law and equity, and excluding any statutory definitions of the same.
What is ‘unconscionable conduct’ within the meaning of s 20? [6.74]
Section 20 defines unconscionable conduct within the context of the ‘unwritten law’. Two views might be taken as to what this actually means. On the one hand, this could simply mean that s 20 captures the equitable concept of unconscionable conduct as recognised by the High Court in Commercial Bank of Australia v Amadio (1983) 151 CLR 447; 46 ALR 402 (Amadio).37 On the other hand, it could conceivably extend to include other equitable doctrines also comprising part of the ‘unwritten law’ of Australia, such as duress, undue influence, estoppel, misrepresentation, unilateral mistake, and relief against forfeiture and penalties. In Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd (2003) 214 CLR 51; 197 ALR 153 the High Court, citing the language of the Explanatory Memorandum to TPA s 51AA (precursor to ACL s 20), lent support to the view that this provision was limited to the specific established categories of ‘unconscionable conduct’ recognised within the unwritten law38 (such as those described above).39
[6.75]
The Federal Court in Australian Competition and Consumer Commission v Samton Holdings Pty Ltd (2001) 117 FCR 301 expressed similar views, noting (at 319) that s 20: … requires identification of conduct able to be characterised as unconscionable in a sense known to the unwritten law. In the context of that law as it presently stands, unconscionable conduct is that which supports the grant of relief on the principles set out in specific equitable doctrines.
[6.76]
In the same case, the Federal Court (at 317–18) outlined the many ways in which the language of ‘unconscionable conduct’ has been used in
the case law before [page 280] describing five instances in which equity will intervene to remedy behaviours described as being ‘unconscionable’: Under the rubric of unconscionable conduct, equity will: (i)
Set aside a contract or disposition resulting from the knowing exploitation by one party of the special disadvantage of another. The special disadvantage may be constitutional, deriving from age, illness, poverty, inexperience or lack of education — Commercial Bank of Australia Ltd v Amadio. Or it may be situational, deriving from particular features of a relationship between actors in the transaction such as the emotional dependence of one on the other — Louth v Diprose; Bridgewater v Leahy (1998) 194 CLR 457; 158 ALR 66.
(ii) Set aside as against third parties a transaction entered into as the result of the defective comprehension by a party to the transaction, the influence of another and the want of any independent explanation to the complaining party — Garcia v National Australia Bank Ltd (1988) 194 CLR 395; 155 ALR 614. (iii) Prevent a party from exercising a legal right in a way that involves unconscionable departure from a representation relied upon by another to his or her detriment — Waltons Stores (Interstate) Ltd v Maher; Commonwealth v Verwayen. (iv) Relieve against forfeiture and penalty — Legione v Hateley; Stern v McArthur. (v) Rescind contracts entered into under the influence of unilateral mistake — Taylor v Johnson.
[6.77]
The court added (at 319) that ‘equitable doctrine does not presently provide a remedy against conduct simply on the basis that it is unfair in the opinion of a judge’ and ‘cannot be applied to unconscionable conduct at large’. This narrower approach was more recently endorsed in Optus Networks Ltd v Telstra Corporation Ltd (No 3) [2009] FCA 728 and ostensibly in Hampton v BHP Billiton Minerals Pty Ltd (No 2) [2012] WASC 285. Accordingly, the current position appears to be that only behaviours falling within one of the accepted equitable classifications or categories of ‘unconscionable conduct’ will be caught by s 20. The most commonly pleaded category is the equitable doctrine of unconscionability established in Amadio, which we examined in Chapter 5.
ACCC v C G Berbatis Holdings Pty Ltd (2003) 214 CLR 51; 197 ALR 153 Brief facts: Berbatis was the co-owner of a shopping centre in Perth. Mr and Mrs Roberts leased a shop in the centre and, along with other tenants, commenced legal proceedings against Berbatis with respect to certain [page 281] charges levied under the terms of their leases. The Roberts sought to sell their shop so as to care for their ill daughter and knew that if they could negotiate a new assignable lease term this would assist them in doing so. When a prospective buyer indicated interest, the Roberts requested a renewal from Berbatis. Berbatis agreed to renew the Roberts’ lease if they withdrew their legal claim against the company. The Roberts hesitantly agreed. The ACCC subsequently commenced an action against Berbatis alleging it had engaged in unconscionable conduct under TPA s 51AA (now ACL s 20) by requiring the Roberts to withdraw from their pending legal proceedings as a condition of the grant of a new lease.
Issue: Had Berbatis engaged in unconscionable conduct within the meaning of TPA s 51AA (ACL s 20)? Conclusion: The trial judge considered that the Roberts were under a ‘special disadvantage’ not by virtue of their personal characteristics (as in Amadio) but due to the circumstances in which they were placed and this effect upon their judgement. The Full Federal Court reversed this finding, and the appeal to the High Court was dismissed. The High Court recognised that TPA s 51AA (ACL s 20) encapsulated the equitable concept of unconscionability established in Amadio and that the case ultimately proceeded upon this category of unconscionable conduct. However, Berbatis had not acted unconscionably within the meaning of TPA s 51AA (ACL s 20). The Roberts were experienced in business and had the benefit of legal advice. They were naturally at a disadvantage in their commercial negotiations with Berbatis; however, there was nothing ‘special’ about this which elevated it to the level of a ‘disability’ as understood in equity. As Gleeson CJ remarked (at CLR 65): Good conscience did not require the lessors to permit the lessees to isolate the issue of the lease from the issue of the claims. It is an everyday occurrence in negotiations for settlement of legal disputes that, as a term of a settlement, one party will be required to abandon claims which may or may not be related to the principal matter in issue.
Section 21 Unconscionability [6.78]
Section 21(1) of the ACL provides: A person must not, in trade or commerce, in connection with: (a) the supply or possible supply of goods or services to a person (other than a listed public company); or [page 282]
(b) the acquisition or possible acquisition of goods or services from a person (other than a listed public company); engage in conduct that is, in all the circumstances, unconscionable. [6.79]
Unlike s 20, s 21 is restricted to transactions relating to the actual or possible supply or acquisition of goods or services, other than those involving a listed public company. Pursuant to s 2(1), the term ‘listed public company’ has the meaning given by s 995-1 of the Income Tax Assessment Act 1997 (Cth), which broadly defines listed public companies as being those which offer shares on an approved stock exchange. Large publicly listed companies are frequently involved with the supply and acquisition of goods and services in any economy. However, these companies typically have their own teams of accountants, legal advisers and other professionals and also have access to greater resources. As such, it is barely conceivable that they would fall victim to unconscionable conduct, hence their exclusion from the ambit of ACL s 21.
What is ‘unconscionable conduct’ within the meaning of s 21? Interpretative guidance [6.80]
Unlike s 20, s 21 is not limited to the meaning of unconscionable conduct as understood in the unwritten law. This is confirmed by s 21(4)(a). It is therefore clear that the concept of unconscionable conduct with which s 21 is concerned is capable of evolving autonomously and will not be restrained by the more limited equitable understanding of unconscionability under the unwritten law. Other subsections in s 21 also provide further interpretative guidance. It is clarified through s 21(2) that s 21(1) does not apply to situations where a party is merely instituting legal proceedings or referring a dispute or claim to arbitration in relation to the supply or acquisition of goods or services. Section 21(3) further states that the courts must not have regard to any circumstances which were not reasonably foreseeable at
the time of the alleged contravention of s 21(1), but they may have regard to conduct engaged in (or circumstances existing) before the commencement of s 21. [6.81]
Importantly, s 21(4)(b) confirms that this section ‘is capable of applying to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged by the conduct or behaviour’. Unconscionable conduct may therefore be demonstrated through a series of incidents, as opposed to an incident in isolation. Finally, s 21(4)(c) provides that, where a contract is involved, the courts can consider its terms and the manner in, and extent to which, it is carried out. [page 283]
Section 22 factors [6.82]
Section 22 of the ACL provides a non-exhaustive and lengthy list of factors to which the court may have regard in determining whether a party has breached s 21.40 These factors include: the relative strengths of the bargaining positions of the supplier and the customer (s 22(1)(a)); whether the customer was able to understand any documents relating to the supply or possible supply of the goods or services (s 22(1)(c)); whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the customer by the supplier (s 22(1) (d)); the amount for which, and the circumstances under which, the customer could have acquired identical or equivalent goods or services from a person other than the supplier (s 22(1)(e)); the requirements of any applicable industry code (s 22(1)(g)); the extent to which the supplier unreasonably failed to disclose to
the customer any intended conduct that might affect the customer’s interests (s 22(1)(i)(i)); where a contract for goods or services exists between the parties, the supplier’s willingness to negotiate the terms of the contract with the customer, the terms of the contract, and the conduct of the parties in complying with those terms (s 22(1)(j)); and the extent to which the supplier and the customer acted in good faith (s 22(1)(l)). [6.83]
While these factors certainly help in establishing any violations of s 21, they are not conclusive. Complicating matters, there is a distinct disharmony within the authorities as to the meaning of the term ‘unconscionable’ within the context of the statutory framework. The term has been variously described as referring to serious misconduct which is clearly unfair or unreasonable,41 or which demonstrates an obvious lack of regard for conscience and which is ‘irreconcilable with what is right or reasonable’.42 It has also been suggested that statutory unconscionability involves the intentional violation of community standards and [page 284] the tenets of public policy. In Director of Consumer Affairs Victoria v Scully (2013) 303 ALR 168 at 186, for example, Santamaria JA stated: [T]he intentional breach or reckless disregard of certain norms or standards amounts to statutory unconscionability. Those norms or standards must be more than those that happen to be personal to the court or tribunal charged with the responsibility of deciding whether conduct is unconscionable. Certainly, they will include norms of honesty and fair dealing and norms which exclude exploitation and deception. Some such norms and standards may be detected in the principles of public policy immanent in legislation such as the Competition and Consumer Act and the Australian Consumer Law.
[6.84]
Similarly, the Full Federal Court in Australian Competition and Consumer Commission v Lux Distributors [2013] FCAFC 90 at [23] noted that the court’s task is to evaluate the facts of a given case ‘by reference to a normative standard of conscience’ and that this
standard is ‘permeated with accepted and acceptable community values’. The consumer law framework was said to clearly reflect the recognised societal values and expectations of honesty and fairness in dealing free from deception or unfair pressure. More recently, the same court stated in Paciocco v Australia and New Zealand Banking Group Ltd (2015) 321 ALR 584; [2015] FCAFC 50 at [296]: The working through of what a modern Australian commercial, business or trade conscience contains and requires, in both consumer and business contexts, will take its inspiration and formative direction from the nation’s legal heritage in Equity and the common law, and from modern social and commercial legal values identified by Australian Parliaments and courts. The evaluation of conduct [contravening the ACL] … does not involve personal intuitive assertion. It is an evaluation which must be reasoned and enunciated by reference to the values and norms recognised by the text, structure and context of the legislation, and made against an assessment of all connected circumstances. The evaluation includes a recognition of the deep and abiding requirement of honesty in behaviour; a rejection of trickery or sharp practice; fairness when dealing with consumers; the central importance of the faithful performance of bargains and promises freely made; the protection of those whose vulnerability as to the protection of their own interests places them in a position that calls for a just legal system to respond for their protection, especially from those who would victimise, predate or take advantage; a recognition that inequality of bargaining power can (but not always) be used in
[page 285] a way that is contrary to fair dealing or conscience; the importance of a reasonable degree of certainty in commercial transactions; the reversibility of enrichments unjustly received; the importance of behaviour in a business and consumer context that exhibits good faith and fair dealing; and the conduct of an equitable and certain judicial system that is not a harbour for idiosyncratic or personal moral judgment and exercise of power and discretion based thereon. [6.85]
While it is clear that the factors in s 22 must be considered with due regard to the principles described above, there is no straightforward method. In practice, the courts typically adopt a holistic view of the relevant facts and circumstances when examining the allegedly unconscionable conduct in question. The indicia in s 22 are normally considered cumulatively, with particularly pertinent factors often being discussed in isolation. It is implicit in the language of the cases
that the various common law understandings of the notion of ‘unconscionable conduct’ simultaneously inform this evaluative process.
ACCC v Lux Distributors Pty Ltd [2013] FCAFC 90 Brief facts: The respondent company employed a sales tactic whereby its representatives would contact potential customers by phone and recite a scripted conversation in which they offered to perform a ‘free maintenance check’ on the customer’s vacuum cleaner. In fact, this offer was merely a ruse to gain entry into the homes of those potential customers. After the maintenance check was performed, the sales representative would then persuade the customer to purchase a new Lux vacuum cleaner. On three occasions, three elderly women were coerced into purchasing new vacuum cleaners. The ACCC investigated this sales technique before bringing an action against Lux claiming it amounted to unconscionable conduct for the purposes of ACL s 21. Issue: Had Lux engaged in unconscionable conduct under ACL s 21? Conclusion: The Full Court of the Australian Federal Court allowed the appeal and held in favour of the ACCC. Lux had engaged in unconscionable conduct under s 21, this being an instance of trade or commerce in connection with the supply of goods or services to a person. The sales representatives used deception, as opposed to persuasive discussion and bargaining, to gain entry to customers’ homes and accomplish sales. The fact that the representatives gained entry to the potential customers’ homes generated a notable imbalance of bargaining strength between the parties. While no explicit mention of the s 22 factors was made, consideration of these is implicit in the court’s findings.
[page 286]
Relief [6.86]
A broad range of remedies is available under the ACL for parties affected by unconscionable conduct. This range is far broader than that available under the equitable doctrine of unconscionability which forms part of the common law. The principal remedies are: damages (s 236); other compensatory orders (s 237); other pecuniary penalties (s 224); injunctions (s 232); non-punitive orders, such as orders to perform some community service or to establish compliance training programs (s 246); adverse publicity orders (s 247); orders disqualifying a person from managing a corporation (s 248); and any other orders the court considers appropriate, that is, orders to vary a contract, refund money, return property, or provide particular goods or services to the injured party (s 243).
Unfair terms in consumer contracts [6.87]
Part 2-3 of the ACL contains a set of provisions specifically regulating unfair contract terms (UCT) in standard form contracts. The UCT law was based primarily on the Unfair Terms in Consumer Contracts Regulations 1999 (UK) and Pt 2B of the Fair Trading Act 1999 (Vic). The UCT law is also mirrored in the Australian Securities and Investments Commission Act 2001 (Cth).43 This regulatory regime was the product of the Productivity Commission’s Review of Australia’s Consumer Policy Framework44 and is significant in providing a means for the courts to assess the substantive fairness of
terms within standard form contracts. [6.88]
In line with classical contract theory, influenced heavily by the principle of ‘freedom of contract’, the courts have traditionally avoided interfering with the contractual bargaining process. The theory places a premium upon party autonomy and, subsequently, subscribes to the view that the law should give force to freely-made promises and avoid scrutinising contractual agreements embodying those [page 287] promises. Standard form contracts, however, are paradoxical: they are typically presented by businesses to consumers on a ‘take it or leave it’ basis.45 Consumers rarely have opportunity to appraise or negotiate any terms within such contracts and so they appear to run contrary to the ideal of contractual ‘freedom’. This generates enormous potential for abuse of the subsequent power imbalance.
[6.89]
Together with these ethical concerns, standard form contracts give rise to economic concerns: consumers often do not read typically long and complex contracts and may therefore erroneously ignore the potential risks. The Productivity Commission’s Review recognised both the ethical and economic concerns surrounding the use of standard form contracts and considered that the benefits of a fairer market offset the costs of implementation of, and compliance with, the UCT law.46 We will now examine the current UCT law and how it applies.
Effect of a finding that a term is ‘unfair’ [6.90]
It is useful at the outset to identify what happens if a term within a standard form contract is determined to be unfair. Section 23(1) of the ACL provides that a term of a consumer contract will be void if the term is unfair and the contract is a standard form contract. Section 23(2), however, states that the contract will continue to bind the
parties if it is capable of operating without the unfair term.
Limitation to ‘consumer contracts’ [6.91]
By its wording, s 23(1) is limited in application to consumer contracts. These are defined in s 23(3) as meaning contracts for a supply of goods or services, or a sale or grant of an interest in land, to an individual whose acquisition of those goods, services or interest is ‘wholly or predominantly for personal, domestic or household use or consumption’. The terms ‘goods’, ‘services’, and ‘interest’ (in relation to land) are defined in s 2 of the ACL. Standard form contracts concerning financial products or services are regulated under the mirror UCT provisions within the Australian Securities and Investments Commission Act 2001 (Cth). For our purposes, only the UCT regime contained within the ACL is considered.
[6.92]
The definition of ‘consumer’ for the purposes of the UCT law is narrower than the broader general definition within the ACL; it was specifically refined to ensure it applied solely to transactions between businesses and consumers, and not between businesses (except in respect of sole traders). [page 288]
Definition of ‘standard form contract’ [6.93]
Section 23(1)(b) of the ACL states that the UCT law only applies to consumer contracts that can be classified as standard form contracts. This term is not defined within the ACL. Instead, s 27(1) of the ACL creates a rebuttable presumption that a contract is a standard form contract if it is alleged to be so by one of the parties. This presumption will be rebutted only where another party to the proceedings proves otherwise. The presumption recognises that the claimant will usually only have evidence of the existence of their own contract and that the respondent is best placed to bring evidence
regarding the nature of the contracts it uses and its business dealings with other parties.47 [6.94]
The court may take a variety of matters into account when determining if a contract is a standard form contract. A nonexhaustive list of such matters is outlined in s 27(2): (2) In determining whether a contract is a standard form contract, a court may take into account such matters as it thinks relevant, but must take into account the following: (a) whether one of the parties has all or most of the bargaining power relating to the transaction; (b) whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties; (c) whether another party was, in effect, required either to accept or reject the terms of the contract (other than the terms referred to in section 26(1)) in the form in which they were presented; (d) whether another party was given an effective opportunity to negotiate the terms of the contract that were not the terms referred to in section 26(1); (e) whether the terms of the contract (other than the terms referred to in section 26(1)) take into account the specific characteristics of another party or the particular transaction; (f) any other matter prescribed by the regulations.
[6.95]
Section 26(1), which is referred to several times in this provision, provides that s 23 does not apply to a term of a consumer contract to the extent that the term defines the main subject matter of the contract, sets the upfront price payable under the contract, or is a term required, or expressly permitted, by a law of the Commonwealth, a state or a territory. These terms, by nature, are not typically negotiable
in any contract, hence their exclusion in the assessment of standard form contracts. Section 28 also states that the UCT law does not apply to certain other types of contract, including shipping contracts and the constitutions of companies, managed investment schemes and other types of bodies. [page 289] [6.96]
As mentioned earlier, standard form contracts are often presented to consumers on a ‘take it or leave it’ basis. While they are economically efficient in that they save parties engaging in lengthy negotiations (thereby lowering transaction costs), they create a distinct imbalance of power by allowing businesses to draft all of the contract terms and skew them in their favour. It is therefore important for the courts to have guidance in establishing whether a term in a standard form contract is ‘unfair’. This guidance is provided for in s 24, which we will consider shortly.
Small business contracts [6.97]
Pursuant to the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Cth), the UCT law will now extend to protect small businesses, as well as consumers. Unfair terms in standard form small business contracts will be void in the same way that they are in standard form consumer contracts. A fourth subsection will be inserted into s 23, reading as follows: (4) A contract is a small business contract if: (a) the contract is for a supply of goods or services, or a sale or grant of an interest in land; and (b) at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
(c) either of the following applies: (i) the upfront price payable under the contract does not exceed $300,000; (ii) the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000. [6.98]
For the purposes of s 4(b), casual employees are not counted unless they are employed by the business on a regular and systemic basis.
[6.99]
This amendment recognises that small businesses are vulnerable to unfair terms in standard form contracts in much the same way that consumers are, and that they are less likely to have ‘robust risk management policies’ or ‘in-house legal expertise’ to assist them in addressing risks arising from transactions founded upon standard form contracts.48 This has flow-on effects in that small businesses may reject contractual opportunities owing to this lack of confidence or certainty, which means they miss out on market opportunities and the ability to contribute to the broader economy. The UCT law provides small businesses (as it does with consumers) with additional support. The new provisions will come into effect on 13 November 2016: a year and one day after the date the Bill received the Royal Assent (12 November 2015). [page 290]
When is a term ‘unfair’? [6.100] Section
24(1) of the UCT law provides the relevant test for establishing whether a term in a standard form contract is ‘unfair’. It provides: (1) A term of a consumer contract is unfair if: (a) it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
(b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and (c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on. Each of the three elements of this test will be considered in more detail.
Significant imbalance in rights and obligations of the parties [6.101]
Section 24(1)(a) stipulates that a term within a standard form contract must cause a significant imbalance in the rights and obligations of the parties. A significant imbalance may arise where the term in question is ‘so weighted in favour of the supplier as to tilt the parties’ rights and obligations under the contract significantly in [its] favour’.49 For example, where a term grants a beneficial option, discretion or power to a supplier, or imposes a disadvantageous burden, risk or duty on a consumer, s 24(1)(a) may more readily be satisfied. Unfortunately there is no single test to apply. A useful approach might be to assess the impact of the term on the parties’ rights and obligations by comparing the effect of the contract with the term to its effect without it.50 It might also be necessary to consider:51 … the effect of the inclusion of the term on the substance or core of the transaction; whether if it were drawn to his attention the consumer would be likely to be surprised by it; whether the term is a standard term, not merely in similar nonnegotiable consumer contracts, but in commercial contracts freely negotiated between parties acting on level terms and at arms’ length; and whether, in such cases, the party adversely affected by the inclusion of the term or his lawyer might reasonably be expected to object to its inclusion and press for its deletion.
[6.102] Some case examples help to elucidate the types of terms which the
courts regard as causing a significant imbalance under s 24(1)(a). In Director of Consumer Affairs v AAPT Ltd (Civil Claims) [2006] VCAT 1493, several of the terms of AAPT’s mobile phone service contracts were found to be ‘unfair’ within the meaning
[page 291] of the now repealed Fair Trading Act 1999 (Vic) (partly upon which the UCT law was based). Clause 1.3 permitted AAPT to unilaterally vary the contractual terms at any time for any cause. Clause 9.2 rendered customers liable for all charges incurred during periods of suspended service unless AAPT determined otherwise in its sole discretion. Clause 10 also allowed AAPT to terminate the agreement for any breach whatsoever, however trivial or inadvertent. These terms were clearly broadly drawn and one-sided in their operation, such that they significantly affected the balance between the rights and obligations of the parties. Accordingly, they were determined to be unfair. [6.103] Another
relevant case is Director of Consumer Affairs Victoria v Trainstation Health Clubs Pty Ltd (Civil Claims) [2008] VCAT 2092 (Trainstation), also decided under the defunct Fair Trading Act 1999 (Vic). The Trainstation Health Clubs gym membership agreement contained a number of clauses which the Victorian Civil and Administrative Tribunal determined were unfair. Three such clauses were as follows: Clause 5 — Refunds Refunds, other than the rectification of an error made by the Operator, will only be given at the discretion of the Operator. Clause 9 — Default Payment The Customer acknowledges that in the event of more than three missed or overdue payments within the minimum term the full outstanding balance — including late payment fees, bank and legal fees — for the remainder of the minimum term shall, at the sole discretion of the Operator, be immediately due in full, and the Operator shall be entitled to terminate the contract forthwith without notice to the Customer. The Customer authorizes payment of the full outstanding balance (including late payment
fees) under this clause by Direct Debit from the Customer’s bank account or by charge to the Customer’s credit card. Clause 11 — Provision of Service Change of location of the Club within 12 kms, or change of name of the Club, or change of name of the Operator, or change of ownership of the Operator, or change of ownership of the Club, does not absolve the Customer, in any way at all, from honouring the terms of this Contract.
[6.104] Clause 5 was said to be inconsistent with the consumer’s legal rights
to terminate and seek damages where the gym failed to supply its services in accordance with the conditions and warranties implied by statute. It also deterred them from pursuing the enforcement of those rights, and had the effect of penalising the consumer (but not the gym) for breach or termination of the agreement. If the clause was only meant to cover situations where the consumer had no grounds to seek termination, it should have been clearly expressed in this way. [page 292] [6.105] Clause 9 was unfair because, among other reasons, it did not allow for
the situation where a consumer’s payment was missed or fell overdue for reasons beyond their control or which were entirely justified. There was also no basis for including legal fees as part of the outstanding balance calculated at the point of termination, and the gym was ultimately empowered to terminate without providing a reasonable opportunity to the consumer to remedy the breach. The fact that the gym would incur potentially high costs for enforcing debts owed to them (which might ultimately result in price increases for members) did not militate against the conclusion that the term was otherwise unfair. [6.106] The
purported unfairness of cl 11 was strongly disputed by Trainstation Health Clubs. The tribunal held that this term was unfair
because it effectively allowed the gym to change locations and move a significant distance from the original location while requiring members to continue to honour the conditions of their membership. Given the importance of a gym’s location to a prospective member’s decision to join, such members would not expect such a term to be contained within the membership agreement. While the gym argued that businesses frequently relocate and it was plausible that the gym might move closer to the affected members, it was still skewed heavily in the gym’s favour and caused significant disadvantage to the members. Accordingly, it was unfair and invalid.
Not reasonably necessary to protect legitimate interests of the business [6.107] Once
a significant imbalance in the rights and obligations of the parties has been established under ACL s 24(1)(a), it must then be shown that the term in question is not reasonably necessary to protect the legitimate interests of the business: ACL s 24(1)(b). Section 24(4) provides that a term of a consumer contract ‘is presumed not to be reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, unless that party proves otherwise’. The onus thus rests upon the business to prove that the term is reasonably necessary to protect its legitimate interests. The sort of evidence which might be tendered in this regard includes evidence as to the nature of a business and the goods and/or services it provides, business structures and costs, industry-specific practices, or unique risks that require the term in question so as to militate against the effects of those risks if they eventuate.
[6.108] The
Trainstation case (considered at [6.103]) is again a useful example considering the ‘legitimate interests’ criterion in s 24(1)(b). Recall that cl 11 of the Trainstation Health Clubs gym membership agreement bound members to honour the terms of the agreement even where the club relocated up to 12 kms from its original location. The Victorian Civil and Administrative Tribunal considered the gym’s argument that businesses were often required to move and that no
lessee could guarantee the continuation of a lease in perpetuity. [page 293] It would therefore produce considerable difficulties if an individual fitness centre operator were required to adhere to a particular geographical boundary. However, the tribunal opined that the gym could protect its legitimate interests in more reasonable ways, such as charging higher fees in return for a guarantee that the location would not change, or leasing premises on a short-term lease to provide the opportunity to move business locations without losing the benefit of its contracts.52 [6.109] Conversely, in the same case, cl 17(f) and (l) of the gym membership
agreement — which respectively provided that the Rules and Regulations governing use of the gym were subject to occasional change at the sole discretion of Trainstation, and that group fitness classes could be added, cancelled or altered at any time without notice — were not unfair because such terms directly concerned the services offered by the gym and were essential for efficient and safe running of the facility. Moreover, requiring the gym to provide members with notice of changes to the Rules and Regulations and provide each with opportunity to withdraw each time would be extremely expensive and impractical given over 1200 members subscribed to the gym.53
Would cause detriment to a party if applied or relied on [6.110]
Having established that a term causes a significant imbalance in the rights and obligations of the parties (s 24(1)(a)), and demonstrated that it is not reasonably necessary to protect the legitimate interests of the business seeking to rely upon the term (s 24(1)(b)), it must finally be shown that the term would cause detriment (whether financial or otherwise) to one of the contractual parties if it were to be applied or relied upon. It will typically be the consumer who suffers detriment as
a consequence of a business relying upon a particular term. To again refer to the Trainstation case, the Victorian Civil and Administrative Tribunal considered that cl 17 of the gym’s membership contract — while creating a significant imbalance in the rights and obligations of the parties — was both reasonably necessary to protect the gym’s interests and would not actually cause a detriment to the gym’s members, despite arguments to the contrary. If a gym were not able to promptly amend its Rules and Regulations and the services it provided as required, its operational costs would rise significantly and flow to the consumer by way of membership price increases, resulting in a detriment to the consumer.54 Indeed, the term operated to the advantage of the gym members by allowing management to refine its services, operating hours and the like to offer the most desired and worthwhile services to those members. [page 294]
Matters to take into account in determining the ‘unfairness’ of a term [6.111]
Section 24(2) of the UCT law outlines two matters which the court must take into account in order to determine whether a term of a consumer contract is unfair. This subsection provides: (2) In determining whether a term of a consumer contract is unfair under subsection (1), a court may take into account such matters as it thinks relevant, but must take into account the following: (a) the extent to which the term is transparent; (b) the contract as a whole.
[6.112]
Section 24(3) elaborates on the meaning of ‘transparent’ in this provision: (3) A term is transparent if the term is:
(a) expressed in reasonably plain language; and (b) legible; and (c) presented clearly; and (d) readily available to any party affected by the term. [6.113]
These provisions have important practical implications for businesses. In line with a modern legal and commercial emphasis upon plain English drafting in contracts, for a term to be transparent its language must be reasonably plain. This means ensuring that the terms of the contract are easily comprehensible to a layperson and avoiding, as far as possible, the use of complex legal terminology. Where such terminology is used, it may be prudent to define intricate concepts or terms, or provide examples within the agreement. Simple and clear expression is obviously essential in this regard, as is the need to highlight any onerous or unusual terms for the benefit of the consumer.
[6.114]
It is also critical that the terms are legible in the sense that the size and style of font used in the contract are appropriate, and that inconspicuous ‘small print’ is avoided. This ties in with the requirement that the terms be clearly presented. Presumably, then, a layout which can be easily navigated and which facilitates comprehension is crucial. This would extend to the manner in which the terms are structured and may well also involve a consideration of the amount of white space surrounding the words within the documented agreement and the usage (if any) of headings or other signposting methods.
[6.115]
Finally, ready availability requires that the standard form consumer contract in question be accessible to the party to be bound by the relevant term at or before the time that the contract is entered into. This complements the common law rule that a party must have notice of the terms of a contract before those terms can be assented to and bind that party.
[page 295]
Examples of unfair terms [6.116]
Section 25(1) of the UCT law provides a useful list of examples of unfair terms: (1) Without limiting section 24, the following are examples of the kinds of terms of a consumer contract that may be unfair: (a) a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract; (b) a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract; (c) a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract; (d) a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract; (e) a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract; (f) a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract; (g) a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;
(h) a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning; (i)
a term that limits, or has the effect of limiting, one party’s vicarious liability for its agents;
(j) a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent; (k) a term that limits, or has the effect of limiting, one party’s right to sue another party; (l)
a term that limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract;
(m) a term that imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract; (n) a term of a kind, or a term that has an effect of a kind, prescribed by the regulations. [6.117]
It is important to remember that s 24(1) of the ACL prescribes the test of an ‘unfair’ term and that this list is merely for illustrative purposes to assist in this determination. It is equally important that the term in question also be considered in the context of the contract as a whole. Clauses which ostensibly [page 296] appear ‘unfair’ may in fact be perfectly defensible when read in the context of the entire agreement and not in isolation.
Relief
[6.118]
Section 250 of the ACL states that the courts may, on application of a party to a consumer contract or following an application from the regulator (ACCC or ASIC), declare a term of a standard form consumer contract to be ‘unfair’. Where such a finding is made, the term is void. Where a business has used a term that is declared unfair, a number of remedies are available to the ACCC/ASIC and the consumer. The relevant party may seek, and the courts may order, any one of the following: an injunction (s 232); a compensatory order (s 237); an order to redress loss or damage suffered by non-party consumers (s 239); or any other orders the court thinks are appropriate (s 243). Orders under s 243 may include, for example, variations to the contract, provision of goods/services to the injured party, refunds of money and returns of property.
Other unfair business practices [6.119]
The ACL prohibits a number of other unfair business practices which are sometimes utilised in commerce. We will briefly consider some of these practices here.
False or misleading representations about goods or services (s 29) [6.120] Section 29 of the ACL prohibits a person, in trade or commerce, in
connection with the supply or possible supply (or promotion) of goods or services, from making various types of false or misleading representations. For example, a person cannot make a false or misleading representation that goods (s 29(1)(a)) or services (s 29(1) (b)) are of a particular standard, quality or value, or with respect to the price of goods or services (s 29(1)(i)). Similarly, making a false or
misleading representation purporting to be a testimonial (s 29(1)(e)) or that goods or services have particular sponsorships, approvals, uses or benefits (s 29(1)(g)) is also forbidden. Making misleading or deceptive representations as to the origin of goods (s 29(1)(k)), the need for goods or services (s 29(1)(l)), [page 297] and the availability of facilities for the repair of goods or spare parts of goods (s 29(1)(j)) may also render the representor liable.
False or misleading representations about land (s 30) [6.121]
Pursuant to s 30 of the ACL, a person must not, in trade or commerce, in connection with the sale or grant, or the possible sale or grant, of an interest in land or in connection with the promotion by any means of the sale or grant of an interest in land make false or misleading representations. For example, making a false or misleading representation that the representor has a particular sponsorship, approval or affiliation (s 30(1)(a)) or with respect to the price (s 30(1) (c)), location (s 30(1)(d)), characteristics (s 30(1)(e)) or capable uses (s 30(1)(f)) of the land is prohibited.
Misleading conduct relating to employment (s 31) [6.122] Section
31 of the ACL is relatively short and states simply that a person must not, ‘in relation to employment that is to be, or may be, offered by the person or by another person, engage in conduct that is liable to mislead persons seeking the employment’ as to: (a) the availability, nature, terms or conditions of the employment; or (b) any other matter relating to the employment. This provision is primarily
designed to prevent businesses advertising jobs that do not exist, or training or development courses which are of negligible benefit to the prospective employee or job-seeker.
Unfair practices concerning offering rebates, gifts and prizes (s 32) [6.123] Section 32 forbids the offering of rebates, gifts, prizes or other free
items where it is not intended to provide these, or not intended to provide them as offered. This relates to the supply or promotion of goods or services, and the sale or grant of an interest in land (or promotion of the same). Companies often offer such gifts and prizes as a means of enticing consumers to purchase their products or services. This is perfectly legitimate; however, there is potential for abuse where such gimmicks are used as a tool of deception.
Misleading conduct as to the nature of goods and services (ss 33–34) [6.124] Pursuant to ss 33 and 34, persons must not engage in misleading
conduct that is liable to mislead the public as to the nature, characteristics, suitability or quantity of any goods or services, respectively. [page 298]
Bait advertising (s 35) [6.125] Bait advertising is a notorious practice in commerce which is strictly
prohibited by s 35 of the ACL. The ACCC website defines bait advertising in the following terms: Bait advertising takes place when an advertisement promotes certain (usually ‘sale’ prices) on products that are not available or available only in very limited quantities.
It is not misleading if the business is upfront in a highly visible, clear and specific manner about the particular product ‘on sale’ being in short supply or on sale for a limited time.55 [6.126] Bait advertising is effective because it presents an irresistible bargain
for consumers, who are unknowingly being deceived as to the availability of certain sale products. Under s 35(1)(a), a person must not, in trade or commerce, advertise goods or services for supply at a specified price if there are reasonable grounds for believing that the person will not be able to offer those goods or services at that price for a period that is, and in quantities that are, reasonable. Whether reasonable grounds exist must be determined with regard to the nature of the market in which the person carries on business, and the nature of the advertisement. Section 35(1)(b) further stipulates that the person must have been aware, or ought reasonably to have been aware, of those grounds. In 2011 the ACCC issued infringement notices to six Harvey Norman franchisees for bait advertising. An advertisement in the electrical retailer’s catalogues advertised a particular Kodak camera which the franchisees did not actually stock. [6.127] Companies
should be wary of their ability to stock reasonable quantities of advertised stock, or their capacity to undertake advertised services. An honest disclaimer as to any limitations in this regard should be prominently displayed in a transparent and unequivocal manner to avoid any potential liability. For example, clearly stating that ‘only 500 units are available’ or that a service is available ‘for one week only to eligible customers’ will lend support to the view that customers were not being illegitimately ‘baited’.
Wrongly accepting payment (s 36) [6.128] Section 36 broadly prohibits instances of persons accepting payments
in circumstances where they should not do so. For example, accepting ‘payment or other consideration for goods or services’ when you do not actually intend to supply those goods or services at the time of acceptance, will contravene s 36(1). Even if the intention to supply the goods or services is present, where those goods or services are
‘materially different’ from those for which the payment was [page 299] made, this will violate s 36(2). Goods or services purchased must be provided within the period specified or, where no period is specified, within a reasonable time: s 36(4). Wrongful acceptance of payments often occurs in the context of mail order transactions and so s 36 provides additional protections to consumers purchasing goods or services via such means.
Unsolicited cards (s 39) [6.129] Section 39 prohibits the unsolicited (uninvited) distribution of credit
and debit cards (outside of those requested in writing or as a replacement, renewal or substitution for an existing card). Some lending institutions dispatch credit cards to unwitting consumers, who are then tempted into agreeing to the terms of use affecting those cards and facilitating transactions through them. This provision was specifically designed to prevent this practice, given the potential for consumer entrapment and Australia’s extremely high credit card consumption rate. Similar provisions are contained within s 12DL(2) of the Australian Securities and Investments Commission Act 2001 (Cth).
Unsolicited goods or services (ss 40–42) [6.130] Some suppliers send goods or provide services to consumers without
being requested to do so by those consumers and later demand payment for those goods or services. For example, a publisher may post new books to a consumer, then invoice the consumer for those books. Alternatively, a person may request a mechanic to fix the brakes on their car for $350 but be invoiced $700 on collection for other services performed, such as replacement of worn tyres. Such
goods or services are defined in ACL s 2(1) as being ‘unsolicited’ by virtue of the fact they were made without any request of the recipient. This cunning and dishonest tactic has caught many a consumer out and so protections now exist to render it unlawful. [6.131]
Section 40 prohibits a person from asserting a right to payment from another person for unsolicited goods or services, unless the person has reasonable cause to believe that they have a right to payment. Section 41 states that a person is not obligated to pay for unsolicited goods supplied to them, nor liable for any loss or damage to the goods other than that caused by the recipient. Some exceptions are stated in this provision. Section 42 provides a similar protection to s 41 and states that a person supplied with unsolicited services is not liable to make payment either for those services or for any loss or damage as a result of the supply.
Unauthorised entries or advertisements (s 43) [6.132] Section
43 provides that a person must not claim payment from another person for placing, in a publication, an entry or advertisement relating to the other person or their profession, business, trade or occupation. The only exception is where the [page 300] person claiming the payment knows, or had reasonable cause to believe, that the other person authorised the placing of the entry or advertisement. This tactic sometimes features in consumer scams and is yet another form of inertia selling, which relies upon the consumer’s reluctance or inability to indicate their objection to making payment for the goods or services in question. In Trade Practices Commission v Quality Publications Pty Ltd (1990) ATPR 40-991, for example, the defendant company was the publisher for an organisation known as the International Police Association, which published diaries and the like for members. The defendant telephoned and sought payments
from members of the Victorian Police Force for magazine advertisements it falsely claimed were officially endorsed by, and distributed throughout, the Force. The defendant was convicted for asserting a right to payment of these unsolicited advertisements under TPA s 64(2A) (now ACL s 43).
Pyramid schemes (ss 44–46) [6.133] A ‘pyramid scheme’ is a unique business model for selling goods or
services. Unlike other legitimate multilevel marketing systems, it derives income from participant recruitment, rather than the actual sale of those products or services. A promoter at the top of the ‘pyramid’ offers new participants the chance to join the scheme in return for a payment. In return, those participants are permitted to sell the product or service on offer and invited to recruit new participants to the scheme in the same manner they themselves were recruited. The participants are then promised a share of the money obtained from each additional person that they recruit. The exponential progression of the scheme is represented as a pyramid, with the original promoter at the top and subsequent layers of new participants beneath it. Such schemes are often unsustainable due to rapid market saturation and eventually collapse, with many (if not most) participants being unable to profit. As was explained in Australian Communications Network Pty Ltd v Australian Competition and Consumer Commission (2005) 146 FCR 413; (2006) 224 ALR 344 at 353, a pyramid scheme: … is an arrangement whereby one is induced to buy upon the representation that he can not only regain his purchase price, but also earn profit by selling the same program to the public. It thus involves the purchase of the right to sell the same right to sell. A pyramid type practice is similar to a chain letter operation. Such a program is inherently deceptive for the seemingly endless chain must come to a halt inasmuch as growth cannot be perpetual and the market becomes saturated by the number of participants … Thus many participants are mathematically barred from ever recouping their original investments, let alone making profits.56
[page 301]
[6.134] Identifying characteristics of pyramid schemes are outlined in ACL s
45. Participation in pyramid schemes is forbidden pursuant to s 44 of the ACL. Section 46 prescribes matters to which the courts must have regard in determining whether a marketing scheme is in fact an illegitimate pyramid scheme. Both civil and criminal penalties may apply for contravention of s 44; these are outlined in ss 164 and 224.
Pricing practices (ss 47–48) [6.135] Section 47 prohibits ‘multiple pricing’, which occurs when goods are
supplied with more than one displayed price and the supply takes place for a price that is not the lower or lowest of the displayed prices. Some exceptions apply as in the case of catalogue advertisements affected by geographical limitations, or where the ‘original’ price is wholly obscured by another price or representation. Where a product has multiple displayed prices, this can cause confusion and sometimes hostility if the vendor refuses to sell the product at the lowest of the prices. The vendor is naturally welcome to withdraw the product from sale altogether in the event of a pricing error;57 however, if the product is offered for sale then it must be sold at the lowest price. [6.136] Section 48 is concerned with ‘partial’ or ‘component’ pricing, which is
where a business states the partial price for goods or services ‘of a kind ordinarily acquired for personal, domestic or household use or consumption’ without stating the actual full price. For example, stating the price of a new sewing machine ordered online but failing to stipulate the postage and handling fees would be an example of partial pricing as it relates only to the product itself and not associated charges that will increase the overall price of purchase. While a business is not required to include the delivery costs in the total price for the goods (s 48(2)), they must do so if they are aware at the time of making the representation as to price of the minimum charge for delivery: s 48(3). Partial or component pricing is a common commercial practice and is not necessarily unscrupulous; if anything, it is clever marketing as it captures consumer attention by advertising
the attractive base price for a particular good or service. It is only ever an issue where the total price payable for those goods or services is manifestly unclear or incapable of calculation at the time of purchase.
Referral selling (s 49) [6.137] Referral
selling describes the practice of a supplier inducing a consumer to acquire goods or services by promising that, after the contract is made, the consumer will receive some rebate, commission or other benefit in return for assisting the [page 302] supplier in the recruitment of new customers. The practice is forbidden pursuant to s 49. The inclusion of the words ‘after the contract for the acquisition of the goods or services is made’ in this provision is important because it affects the supplier’s liability in these circumstances: any promises of the kind described made after the contract has been concluded are perfectly legitimate. For example, some businesses such as banks, real estate agencies and health clubs offer rewards or discounts for customers who refer people to those businesses after they have contracted with them (provided those people actually end up contracting with the business).
[6.138] On the other hand, where the promise is made as an inducement to
enter into the contract, s 49 will come into play. The rationale is that the original purchaser is not guaranteed to receive the promised benefits because the relevant contingency (that is, successful referral of new contracting customers) may never actually eventuate. It is therefore improper for a business to use such vague and illusory promises to induce customers to enter into a contract with them. In Australian Competition and Consumer Commission v Giraffe World Australia Pty Ltd (No 2) (1999) 95 FCR 302; 166 ALR 74, the defendant was convicted of breaching s 49 for representing to prospective purchasers of its ‘negative ion’ health mats that they would receive
commissions for successfully introducing new customers to the scheme. [6.139] In
contrast, the Federal Court in Australian Competition and Consumer Commission v Lyoness Australia Pty Ltd [2015] FCA 1129 considered that the defendant’s business model did not involve referral selling. Lyoness Australia’s loyalty shopping program did allow existing members to claim financial benefits for referring prospective new members; however, entitlement to those benefits was occasioned not by the referral but from the pursuit of shopping activity by that new member and other members introduced to the program by that new member. A “‘relevant, sufficient or material connection or relationship” between the giving of the names [of potential new members] and the receipt of the benefit’ could not be made out.58 Penalties for engaging in referral selling are outlined in ss 167 and 224 of the ACL.
Harassment and coercion (s 50) [6.140] Section 50 provides that a person must not use ‘physical force, or
undue harassment or coercion’, in connection with: (a) the supply or possible supply of goods or services; or (b) the payment for goods or services; or (c) the sale or grant, or the possible sale or grant, of an interest in land; or (d) the payment for an interest in land. This provision is important, for example, in limiting the extent to which telemarketers or door-to-door salespersons can attempt to persuade or coerce a potential customer into contracting with a particular business. It also [page 303] places limitations upon the extent to which, for example, a supplier, creditor or debt-collection agency can demand payment from debtors. Sometimes such tactics go too far and border on harassment. They may even result in physical confrontation. It goes without saying that
such behaviours are patently unfair, immoral and unacceptable. The perpetrators of such behaviours would simultaneously be exposing themselves to further civil and criminal liability. The reasonableness of the defendant’s conduct must be considered in determining whether or not the consumer was harassed or coerced to the point that they had no freedom to act. [6.141]
In Australian Securities and Investments Commission v McCaskey (2000) 104 FCR 8; 183 ALR 159, the defendant — an employee of a debt-collection company called Cash Return Mercantile Pty Ltd — was convicted for breaches of TPA s 60 (now ACL s 50). McCaskey made excessive numbers of calls to debtors, aggressively threatened and abused them, misinformed debtors about debt recovery procedures and the consequences of default, lied about associations and friendships with the police, and publicly humiliated debtors. Both to foster and preserve a reputation of integrity and fair-dealing and to avoid potential liability under ACL s 50, commercial parties should be wary of the tactics they employ when seeking to enforce their contractual rights. Penalties for engaging in harassment and coercion are outlined in ss 168 and 224 of the ACL.
Consumer guarantees [6.142] The Consumer Guarantees Law (CGL), contained in Pt 3–2 of the ACL,
applies to contracts for the supply of goods and services to consumers. It provides a series of consumer guarantees relating to minimum standards of quality as well as rights of repair, replacement, refund and compensation. These guarantees operate as statutory rights, the breach of which is subject to the penalties prescribed in the ACL. The CGL recognises that suppliers are often far more knowledgeable as to the nature and quality of the goods and services they offer to consumers. The rights mandated by the CGL provide consumers with appropriate remedies where purchased goods or services turn out to be defective or faulty.
Who is a ‘consumer’ for the purposes of the CGL? [6.143] The term ‘consumer’ is defined in numerous ways within the ACL. In
the context of the CGL, s 3(1) of the ACL provides that a person is taken to have acquired particular goods as a consumer only if: the amount paid or payable for the goods did not exceed $40,000; or the goods ‘were of a kind ordinarily acquired for personal, domestic or household use or consumption’; or [page 304] ‘the goods consisted of a vehicle or trailer acquired for use principally in the transport of goods on public roads’. [6.144] Determining
whether goods are of a kind ordinarily acquired for personal, domestic or household use or consumption will normally be straightforward: things such as a washing machine, television, garden hose, vacuum cleaner or lamp will clearly satisfy this definition. In other cases it is not so clear. The assessment is an objective one made ‘by reference to the nature, quality and adaptation of the goods in the class or genus in question’ with regard to ‘the design, marketing, pricing and potential uses of the type of goods’.59 Such things as an airseeder,60 large office photocopier,61 and egg incubator62 are clearly not intended for personal, domestic or household use or consumption and will not be covered by the CGL. Section 3(2) further provides that s 3(1) does not apply if the goods were acquired for the purpose of being resold, or to be used or transformed in some commercial production, repair or manufacturing process.
[6.145] Pursuant to s 3(3) of the ACL, a person is taken to have acquired
particular services as a consumer only if: the amount paid or payable for the services did not exceed $40,000;
or the services ‘were of a kind ordinarily acquired for personal, domestic or household use or consumption’.
Exclusions [6.146] The guarantees within the CGL pertaining to services do not apply to
financial products or services: ACL s 131A. Instead, these are regulated under the Australian Securities and Investments Commission Act 2001 (Cth). The guarantees as to services also do not apply to certain services, such as contracts for transportation or storage of goods (ACL s 63(a)), contracts of insurance (ACL s 63(b)), and contracts for professional services by a qualified architect or engineer (ACL s 61(4)).
Statutory guarantees relating to goods [6.147] By virtue of the CGL, a supplier of goods guarantees that:
they have the right to dispose of the goods (s 51); the consumer has the right to enjoy undisturbed possession of the goods (s 52); [page 305] the goods are free from any undisclosed securities, charges or encumbrances (s 53); the goods will be of acceptable quality (s 54); the goods will be fit for any disclosed purpose (s 55); the goods will conform to their description where they are sold by description (s 56); if goods are sold by sample or demonstration model, the goods will
correspond to the sample or demonstration model in quality, state or condition (s 57); they will take reasonable action to ensure that facilities for the repair of the goods, and parts for the goods, are reasonably available for a reasonable period after the goods are supplied (s 58); and they will comply with any express warranties provided (s 59). [6.148] The guarantees in ss 54–59 do not apply where the relevant goods are
sold by auction. So much is stated in each provision. ‘Sale by auction’ is defined in s 2 and in terms commensurate with the common understanding of this sale method (that is, conducted by an auctioneer with bids accepted until one such bid is deemed to be the highest attainable and accepted).
Guarantees as to acceptable quality and fitness for purpose (ss 54–55) [6.149] The consumer guarantees as to goods being of acceptable quality and
fit for their disclosed purpose(s) have been described as forming ‘the heart of the consumer guarantees regime’.63 They are also two of the more commonly disputed provisions of the CGL. As such, we consider in slightly more depth the available remedies for consumers who purchase goods that fall short of the prescribed standards. [6.150] Pursuant to ACL s 54(2), goods are of ‘acceptable quality’ if they are:
(a) fit for all purposes for which goods of that kind are commonly supplied; and (b) acceptable in appearance and finish; and (c) free from defects; and (d) safe; and (e) durable; as a reasonable consumer fully acquainted with the state and
condition of the goods (including any hidden defects of the goods), would regard as acceptable having regard to the matters in subs (3). [page 306] [6.151]
Those matters in s 54(3) are: (a) the nature of the goods; and (b) the price of the goods (if relevant); and (c) any statements made about the goods on any packaging or label on the goods; and (d) any representation made about the goods by the supplier or manufacturer of the goods; and (e) any other relevant circumstances relating to the supply of the goods.
[6.152] Where
defects have been specifically drawn to the consumer’s attention (s 54(4)), or where the goods become defective as a result of the consumer’s actions and abnormal use (s 54(6)), the goods will not fail to be of acceptable quality. Similarly, the goods will not fall short of this statutory standard where the consumer examines the goods beforehand and ought reasonably to have detected any shortfalls in acceptable quality: s 54(7).
[6.153] Importantly,
just because a good is not ‘perfect’, this does not necessarily mean that it is of unacceptable quality for the purposes of ACL s 54. The following case aptly demonstrates this point:
Paisley v Aitchison t/as Dean Cars (Civil Claims) [2012] VCAT 1483 Brief facts: Paul Paisley purchased a motor vehicle from the respondent, a dealership, for $12,500 inclusive of stamp duty and
transfer fees. The car was eight years old and had travelled almost 80,000 kms. Paisley subsequently argued that the vehicle was defective because its battery went flat shortly after purchase, the fuel gauge was inaccurate, it leaked oil, and one of the windscreen wiper blades was faulty. Paisley also complained that car mats were not provided and that the vehicle’s fuel tank was nearly empty. The respondent remedied all defects at its own cost but Paisley nevertheless sought rescission of the contract and a full refund, citing a breach of ACL s 54. Issue: Had Paisley’s consumer guarantee as to goods being of acceptable quality (ACL s 54) been breached? Conclusion: The Victorian Civil and Administrative Tribunal held in favour of the respondent. Neither the lack of petrol nor the absence of floor mats in the vehicle was a ‘defect’. The flat battery, inaccurate fuel gauge, oil leak, and faulty windscreen wiper blade were not ‘major failures’ which would have allowed Paisley to seek remedies and, in any event, those issues with the vehicle identified by Paisley were remedied by the respondent at no charge.
[page 307] [6.154] Where a consumer discloses the purpose for which goods are sought,
or where the supplier describes goods as being suitable for such a purpose, demonstrated unfitness for that purpose will breach the guarantee contained in s 55:
Cary Boyd v Agrison Pty Ltd (Civil) [2014] VMC 23 Brief facts: Cary Boyd, a slashing contractor, contacted the defendant company regarding the purchase of a new tractor.
Boyd disclosed to Agrison that he sought a vehicle capable of travelling long distances on open roads. Agrison sent Boyd a brochure and a quote for a particular model tractor. After testdriving the tractor, Boyd agreed to purchase it for $28,360. Upon delivery, Boyd noticed that the tractor was a 2011 (not 2012) model. It was also leaking oil, fitted with rusty chains and lacking a handbook. The tractor bounced uncontrollably during use and its maximum speed was far lower than as described by Agrison. The low speed was a particular concern given the distances Boyd travelled. Boyd brought a claim for, among other things, breach of ACL s 55. Issue: Was the tractor unfit for Boyd’s disclosed purpose of travelling at a sufficiently high speed on open roads? Conclusion: The Victorian Magistrates Court held in favour of Boyd. Boyd disclosed to Agrison the purpose for which he required the tractor, namely to drive considerable distances for his employment. The speed of the tractor was critical to this purpose and Boyd was told incorrectly that the tractor was capable of obtaining a top speed that it was not. As such, it was not fit for the disclosed purpose made known to Agrison by Boyd. [6.155] Importantly, the s 55 guarantee as to fitness for disclosed purpose will
not apply if the circumstances show that the consumer did not rely on, or that it was unreasonable for them to rely on, the skill or judgment of the person to whom the consumer’s purpose was disclosed: s 55(3).
Statutory guarantees relating to services [6.156] By virtue of the CGL, a supplier of services guarantees that:
the services will be rendered with due care and skill (s 60); the services, and any product resulting from the services, will be
reasonably fit for the purpose(s) disclosed to the supplier by the consumer (s 61); and the services will be supplied within a reasonable time (s 62). [6.157] It clearly falls to be determined on the facts of each individual case
whether services have been rendered with due care and skill and within a reasonable time, [page 308] and whether those services were reasonably fit for any disclosed purposes. In Read v Neerey [1979] VR 47, for example, a car manufacturer who incorrectly repaired the wiring in the plaintiff’s motor vehicle causing it to move autonomously and suffer damage was deemed to have breached the obligation to exercise due care and skill. Similarly, the respondent in Foster v Rahman t/as Smarty Web Solutions [2014] NSWCATCD 17 was held to have lacked the requisite skill to develop a website in accordance with the plaintiff’s specifications. [6.158] In Crawford v Mayne Nickless Ltd (1992) ASC 56–144, the defendant
company was deemed to have breached the guarantee of fitness for purpose after the burglar alarm system it installed for the applicant was shown not to work and to be easily bypassed by selective wire cutting. A final example is TLK Transport Pty Ltd v Thornthwaite Pty Ltd [2014] NSWCATCD 147, where the respondent undertook repairs on the applicant’s truck over a period of several weeks. This protracted period of time was deemed to be unreasonable for the purposes of s 62.
Remedies for breach of a consumer guarantee [6.159] The
remedies available to a consumer for breach of a consumer guarantee are outlined in Pt 5–4 of the ACL and depend upon the nature of the supplier’s non-compliance. Consumers may take action
for a supplier’s failure to comply with a statutory guarantee (other than those specified in ss 58–59): s 259(1). The failure to comply with the consumer guarantee must first be classified as either a major failure or a minor failure in order to determine appropriate remedies.
Major failure [6.160] A failure to comply with a consumer guarantee with respect to goods
is a ‘major failure’ if: the goods would not have been acquired by a reasonable consumer fully acquainted with the nature and extent of the failure (s 260(a)); or the goods depart in one or more significant respects from their descriptions or any sample or demonstration models used to sell the goods (s 260(b)); or the goods are unfit for their normal or disclosed purpose, and cannot be easily remedied to make them so within a reasonable time (s 260(c) and (d)); or the goods are not of acceptable quality because they are unsafe (s 260(e)). [6.161]
A similar definition with respect to major failure to comply with consumer guarantees in the context of services is outlined in s 268. If the failure is a major [page 309] failure or cannot be remedied, s 259 stipulates three potential options for the consumer: 1.
notify the supplier that the goods have been rejected, along with the reasons for doing so (s 259(3)(a)); or
2.
seek compensation from the supplier for any reduction in the
value of the goods below the price paid or payable by the consumer (s 259(3)(b)); or 3.
seek compensation from the supplier for any loss or damage suffered by the consumer because of the failure to comply with the guarantee if it was reasonably foreseeable that the consumer would suffer such loss or damage as a result of such a failure (s 259(4)).
[6.162] For a major failure to comply with consumer guarantees with respect
to services, the consumer may terminate the contract for the supply of the services or seek compensation from the supplier for any reduction in the value of the services below the price paid or payable by the consumer for the services: s 267(3). [6.163] Rejection of goods is not possible in certain circumstances, such as
where the goods have been lost, destroyed or disposed of by the consumer, or the relevant rejection period (typically a ‘reasonable time’) has ended: s 262. Where goods are rejected by the consumer under s 259 they must be returned to the supplier wherever possible, at which point the supplier must provide a refund or replacement: s 263.
Minor failure [6.164] If
a failure to comply with a consumer guarantee with respect to goods or services is not a ‘major failure’, then it is a minor failure. If the failure is a minor failure and can be remedied, the consumer may request rectification within a reasonable time: ss 259(2)(a) and 267(2) (a). In the case of goods, if the supplier refuses to comply or does not do so within a reasonable time, the consumer may rectify the damage and recover the reasonable costs of doing so from the supplier, or reject the goods: s 259(2)(b). The supplier can also choose to provide a repair, replacement or a refund: s 261. Again, damages for any loss or damage suffered by the consumer due to the supplier’s failure to comply with a consumer guarantee can be recovered from the supplier provided the loss or damage was reasonable foreseeable: s
259(4).
Exclusion of consumer guarantees [6.165] Any contractual term which does or purports to exclude, restrict or
modify any of the consumer guarantees within the ACL is void: s 64. Suppliers have certain rights to limit liability for failure to comply with guarantees under s 64A where the [page 310] goods or services in question are not of a kind ordinarily acquired for personal, domestic or household use or consumption.
Other statutes [6.166] There are a number of other statutes which regulate various aspects of
contractual relations. These include: Sale of Goods Acts These concern contracts and conditions pertaining to the sale of goods, the rights of parties to these contracts, and transfers of title to goods; Frustrated Contracts Acts Current in New South Wales, South Australia and Victoria (at time of writing), these are concerned with the apportionment of the costs of frustration between the contractual parties; Contracts with Minors Acts These concern contracts made by or with persons under the legal age of capacity; Insurance Contracts Act 1984 (Cth) This concerns contracts of insurance including particular terms, party relations, claims, and disclosures; and National Consumer Credit Protection Act 2009 (Cth) This
concerns licensing of credit providers, responsible lending, and consumer protections.
Reporting a breach of the ACL [6.167] The
ACCC Infocentre records a range of data for research and reporting purposes. Data published in the ACCC and Australian Energy Regulator (AER) Annual Report 2014–15 indicates that 260,343 complaints were received by the ACCC during the 2014–15 period. Most matters are resolved administratively. There were 584 matters investigated, of which 100 advanced to in-depth investigation stage. Only 27 matters were litigated. Notably, the highest number of complaints related to alleged breaches of ACL s 18, which pertains to misleading or deceptive conduct.64
[6.168] It
is always advisable to attempt to resolve any problems with a business informally at first instance. Self-help can very often remedy issues that have arisen. For example, a defective good can easily be replaced or the money paid for it refunded if it is returned to the supplier. Most suppliers will happily do so without question; not only because this is giving effect to your legal rights under the CGL, but because it is an example of good business practice which fosters positive relations with consumers. The ACCC advises speaking directly [page 311] with the relevant salesperson or manager to resolve any issues and, where this fails, writing a letter or email of complaint to the business.65
[6.169] There are various consumer protection agencies in each state and
territory which can provide primary support and advice with respect to commercial and consumer affairs, and also entertain and act upon complaints with respect to consumer laws. The relevant bodies are
outlined in Table 6.1 below: Table 6.1: Consumer protection agencies Jurisdiction Responsible Organisation Australian Capital Territory ACT Office of Fair Trading New South Wales NSW Fair Trading Northern Territory NT Consumer Affairs Queensland Office of Fair Trading Queensland South Australia Consumer and Business Services Tasmania Tasmanian Consumer Affairs & Fair Trading Victoria Consumer Affairs Victoria Western Australia WA Department of Commerce [6.170] General enquiries regarding consumer or small business rights and
obligations, and formal complaints with respect to breaches of the Australian Consumer Law, can also be directed to the Australian Competition and Consumer Commission (ACCC). Full contact details, including online enquiry or complaint forms, can be obtained from the Commission’s website: . The site also provides avenues for persons to report a scam or unsafe product and to make product safety enquiries. The Commission has local offices in Adelaide, Brisbane, Canberra, Darwin, Hobart, Melbourne, Perth, Sydney and Townsville, the contact details of which are also contained on the website and in most directories. [6.171]
There are also a large number of other helpful agencies which can provide advice and support with respect to consumer law matters. For example, industry ombudsmen, consumer protection agencies, dispute resolution tribunals, and other regulators and government agencies can provide more specific assistance with particular issues. Full details of these can be found at .
__________________ 1 2
3
4 5 6 7 8 9 10 11 12 13 14
15 16 17 18 19
20
Competition and Consumer Act 2010 (Cth) s 2. This followed recommendations contained within the Productivity Commission’s Review of Australia’s Consumer Policy Framework, Report No 45, 30 April 2008. It was submitted that Australia’s existing consumer policy framework was inefficient, inconsistent and incapable of adaptation to rapidly changing consumer markets. It was also said to be costly to administer and to provide inadequate redress mechanisms for consumers. The chief recommendation of the Productivity Commission, therefore, was to introduce ‘a single generic consumer law applying across Australia, based on the consumer provisions in the Trade Practices Act (TPA), modified to address gaps in its coverage and scope’: Vol 1 at p 2. Fair Trading (Australian Consumer Law) Act 1992 (ACT) s 7; Fair Trading Act 1987 (NSW) s 32; Consumer Affairs and Fair Trading Act 1990 (NT) s 27; Fair Trading Act 1989 (Qld) s 16; Fair Trading Act 1987 (SA) s 14; Australian Consumer Law (Tasmania) Act 2010 (Tas) s 6; Australian Consumer Law and Fair Trading Act 2012 (Vic) s 8; Fair Trading Act 2010 (WA) s 19. Section 130 of the CCA stipulates that ‘Australian Consumer Law’ means Sch 2 as applied under Subdiv A of Div 2 of Pt XI. See . Brown v Jam Factory Pty Ltd (1981) 53 FLR 340 at 348. Explanatory Memorandum, Trade Practices Amendment (Australian Consumer Law) Act (No 2), [3.9]. O’Brien v Smolonogov (1983) 53 ALR 107. The situation may differ if the vendor engages a real estate agent: Argy v Blunts & Lane Real Estate Pty Ltd (1990) 26 FCR 112; 94 ALR 719. (1990) 169 CLR 594; 92 ALR 193; Paddison v Downer EDI Engineering Power Pty Ltd (2010) 11 DCLR (NSW) 48; [2010] NSWDC 131. Bond Corporation Pty Ltd v Thiess Contractors Pty Ltd (1987) 14 FCR 215; 71 ALR 615. Tobacco Institute of Australia Ltd v Australian Federation of Consumer Organisations (1992) 38 FCR 1; 111 ALR 61. See Bridge Stockbrokers Ltd v Bridges (1985) 57 ALR 401 at 415. (1982) 149 CLR 191 at 197; 42 ALR 1. See also Google Inc v Australian Competition and Consumer Commission (2013) 249 CLR 435; 294 ALR 404, where the High Court held that Google did not mislead or deceive users of its search engine website by allowing advertisers to bid for priority on particular key words so as to affect the order of displayed search results. It was said that ordinary reasonable users of the site would know that the advertisements produced in response to a search query (and their placement on Google’s search results) were paid for and that Google was merely a conduit. Campomar Sociedad Limitada v Nike International Ltd (2000) 202 CLR 45 at 86–7; 169 ALR 677 (Campomar). (1982) 42 ALR 177 at 202; Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 at 625; 212 ALR 357; Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 at 341–2; 257 ALR 610. Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 at 319; 257 ALR 610. (1982) 42 ALR 177 at 202. Apotex Pty Ltd (formerly GenRx Pty Ltd) v Les Laboratoires Servier (No 2) (2008) 77 IPR 1; Australian Competition and Consumer Commission v Jewellery Group Pty Limited (2012) 293 ALR 335; Australian Competition and Consumer Commission v AGL South Australia Pty Ltd [2014] FCA 1369. Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 at 605–6; 212 ALR 357.
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
(2004) 218 CLR 592; 212 ALR 357. Nagy v Masters Dairy Ltd (1996) 150 ALR 273 at 291. Poseidon Ltd v Adelaide Petroleum NL (1991) 105 ALR 25 at 26. Cummings v Rundle (1993) 41 FCR 559; 113 ALR 285. Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82; 55 ALR 25. Batemyn v Slatyer (1987) 71 ALR 553 at 559. See also Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5) [2012] FCA 1200 at [2436]; Blackman v Gant [2010] VSC 109 at [15]. Stuart Alexander & Co (Interstate) Pty Ltd v Blenders Pty Ltd (1981) 37 ALR 161; 53 FLR 307 at 311. Careathers et al v Red Bull GmbH, Class Action Complaint (16 January 2013), United States District Court — Southern District of New York, p 2. Gillette Australia Pty Ltd v Energizer Australia Pty Ltd (2002) 193 ALR 629 at 634. Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 42 FCR 470 at 505; 114 ALR 355. Futuretronics Pty Ltd v Gadzhis [1992] 2 VR 217. Body Bronze International Pty Ltd v Fehcorp Pty Ltd (2011) 34 VR 536 at 547; 282 ALR 571. (1988) 39 FCR 546 at 561; 79 ALR 83. Clark Equipment Australia Ltd v Covcat Pty Ltd (1987) 71 ALR 367 at 371. The term ‘trade or commerce’ was defined earlier in the chapter when misleading or deceptive conduct was considered. Australian Consumer Law s 131A. See Chapter 5. (2003) 214 CLR 51 at 62, 71–2; 197 ALR 153. Gummow and Hayne JJ left open the question of ‘which particular manifestations of equity’s concern with unconscientious or unconscionable conduct are reached by s 51AA’ (ACL s 20): see CLR 72–4. Section 22(1) pertains to the supply or possible supply of goods or services between a supplier and a customer, while s 22(2) pertains to the acquisition or possible acquisition of goods or services between an acquirer and a supplier. The lists of factors in both s 22(1) and (2) are identical. For illustrative purposes, only the s 22(1) factors will be discussed. Cameron v Qantas Airways Ltd (1995) 55 FCR 147 at 179; Australian Competition and Consumer Commission v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253 at 264; 178 ALR 304. Australian Competition and Consumer Commission v Allphones Retail Pty Ltd (No 2) (2009) 253 ALR 324 at 347 (Allphones). Part 2, Div 2, Subdiv BA. Report No 45, 30 April 2008. George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] QB 284; 1 All ER 108. Productivity Commission, Review of Australia’s Consumer Policy Framework, Report No 45, 30 April 2008, p 403. Explanatory Memorandum, Trade Practices Amendment (Australian Consumer Law) Act (No 2), [5.73]. Explanatory Memorandum, Trade Practices Amendment (Australian Consumer Law) Act (No 2), [1.2]–[1.7]. Swain similarly notes that small businesses ‘may often have no better negotiating strength or resources than consumers’: W Swain, ‘Codification of Contract Law: Some Lessons
49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65
from History’ (2013) 31(1) University of Queensland Law Journal 39 at 45. Director General of Fair Trading v First National Bank plc [2002] 1 AC 481 at 494; [2001] UKHL 52. [2002] 1 AC 481 at 505; [2001] UKHL 52. Above. [2008] VCAT 2092 at [132], [139]. Above at [124]. Above at [120]. See . The Full Court of the Australian Federal Court was quoting the Superior Court of New Jersey in the American case of Kugler v Koskot Interplanetary Inc 293 A 2d 682 (1972). Explanatory Memorandum, Trade Practices Amendment (Australian Consumer Law) Act (No 2), [6.343]. [2015] FCA 1129 at [84]. Bunnings Group Ltd v Laminex Group Ltd (2006) 153 FCR 479; 230 ALR 269 at 286-7. Jillawara Grazing Co v John Shearer Ltd (1984) ATPR 40-441. Four Square Stores (Qld) Ltd v ABE Copiers Pty Ltd (1981) ATPR 40-232. Crago v Multiquip Pty Ltd (1998) ATPR 41-620. A Bruce, Consumer Protection Law in Australia, 2nd ed, LexisNexis Butterworths, Australia, 2014, p 244. Australian Competition and Consumer Commission and Australian Energy Regulator, Annual Report 2014–2015, pp 117-18. On self-help, see Chapter 9.
[page 313]
CHAPTER 7
Termination of a Contract
Key Ideas By the end of this chapter, you should be able to identify: ▶
termination of contracts – by performance – by agreement – by operation of contractual term – by operation of law – by frustration – for breach of contract – for repudiation
[page 314]
Introduction [7.1]
To this point we have discussed the formation, validity, varieties, and terms of a contract; now we must consider how a contract can be discharged and cease to exist. Termination (or discharge) describes the process of a contract coming to an end. Termination can occur by operation of the law or through the actions of the parties. In this chapter, we consider the various ways in which a contract can be terminated.
Termination by performance [7.2]
The most conventional way by which a contract is terminated is through performance. This occurs when the parties to the contract perform their respective obligations (as specified in the terms) and the bargain is carried out, at which point the contract naturally expires. Only strict and complete compliance with the terms will constitute adequate performance, otherwise the party will be in breach.1 There are, however, certain exceptions to this rule, including: divisible contracts; de minimis rule; substantial performance; acceptance of partial performance; and obstruction of performance.
[7.3]
In each case, the performance rendered need not be entirely complete in order for the defaulting party to obtain payment for it. We will consider each of these exceptions in turn.
Entire and divisible contracts [7.4]
Sometimes the required extent of performance justifying termination may vary in accordance with the nature of the obligations expressed
in the contract. Where a contract can be classified as divisible (or severable), a party will be entitled to claim payment in circumstances where the contract has not been completely performed. To understand this principle we need to distinguish between entire and divisible contracts. An entire contract is one which must be wholly performed in order to entitle a party to claim payment for that performance. A divisible or severable contract is one which is divided into discrete parts; completion of a part entitles a party to claim payment for the performance of that part. [page 315] [7.5]
Whether a contract, or a particular obligation within a contract, is entire or divisible depends upon the presumed intentions of the parties and the particular circumstances of each case.2 Contracts which stipulate a single lump sum payable on completion of performance is a persuasive but not conclusive indication that the agreement is entire. Likewise, contracts which are segmented and allow for services or payments to be rendered at particular intervals are more likely to be construed as divisible. It is important to determine the level of performance required to discharge a contract, as this will affect a party’s entitlements. The following case aptly demonstrates this importance.
Cutter v Powell (1795) 6 TR 320; 101 ER 573 Brief facts: Cutter entered into a contract as a seaman aboard the vessel Governor Parry for a voyage from Jamaica to England. The contract provided that Cutter would be paid the sum of 30 guineas ‘provided he proceeds, continues and does his duty as second mate’. Around seven weeks into the voyage, Cutter died. When Cutter’s wife sought to recover the wages her husband was due to be paid, the ship’s captain refused to pay. Cutter’s wife then commenced legal proceedings to recover the money.
Issue: Was Cutter’s partial performance of the contract sufficient to justify payment? Could Cutter’s wife recover her husband’s wages from the ship’s captain? Conclusion: The court held in favour of Powell. This was an entire contract which meant that Cutter’s partial performance (in travelling only a portion of the journey) was insufficient to warrant payment of his wages. Only if the contract was performed completely would payment of the wages have been due to Cutter.
[7.6]
If the contract in Cutter v Powell was divisible, that is, if it provided that Cutter would be paid a certain amount per week of the voyage, this would likely have made the contract a divisible one and permitted Cutter’s wife to recover the wages due to him for the weeks he had actually worked on the ship.
[7.7]
A common example of a divisible contract is one for the sale of goods by instalment, where a party purchases goods from a supplier in certain allotments. Where any one allotment is not delivered, this will not disentitle the supplier from obtaining payment for the allotments that were correctly dispatched. Similarly, many building contracts and the obligations they impose on the parties are also divisible. Payments are made in accordance with the various stages of construction [page 316] that are completed. For example levelling the land, laying the foundation, erecting the frame, constructing the walls, erecting the roof, and adding fixtures and fittings are just some of the stages of the development process. Should the builder default, they will still be entitled to obtain payment for the stage(s) of the project that they have completed.
[7.8]
The case of Steele v Tardiani (1946) 72 CLR 386 is a useful illustration.
The plaintiffs were employed by the defendant to cut timber to specific lengths and widths. Under the terms of the agreement, the plaintiffs would be paid at the rate of eight shillings per ton of wood, although no required quantity was specified. The plaintiffs cut approximately 1500 tons of wood, the majority of which was not to the specified dimensions. The defendant subsequently refused to pay for the work the plaintiffs had performed. The plaintiffs then sued to recover compensation for their work. The High Court held that the contract was not an entire one but was in fact ‘infinitely divisible’, and that the plaintiffs were entitled to recover the contract price with respect to the lengths of wood they cut to the specified measurements.3 In other words, this was not an entire contract under which the plaintiffs could only recover their remuneration if every single piece of wood was cut to the specified lengths; rather, it was a divisible contract which meant for every portion of wood cut to the specified lengths, the plaintiffs could obtain a proportionate payment. Their partial performance was still valuable, and so entire performance was not required.
De minimis rule [7.9]
There is a Latin expression ‘de minimis non curat lex’, which means ‘the law does not concern itself with insignificant matters’. The crux of this principle is that the slightest or most trivial or negligible of contractual breaches will be overlooked and will not disentitle a party from claiming the full worth of their performance. Consider the following scenarios: A is a company which orders $50,000 worth of stationery from B, a supplier, for its new city office. The order comprises of several hundred items of stock, including paper, pens, diaries and the like. B dispatches A’s order in a timely manner but mistakenly leaves behind one box of pens (worth $2). Upon arrival at A’s office, A refuses to accept delivery and pay for the goods.
[page 317] B advertises her prized show car for sale at a vintage car exhibition. A sees B’s car and instantly loves it, offering B the sum of $100,000 for the car. B has had several expressions of interest and significant offers; however, A’s is by far the most lucrative. B agrees to A’s offer and the parties sign a contract of sale. One of the terms of the contract is that B will personally deliver the car to A at 9:00am the next day. B arrives at A’s house at 9:02am, at which point A refuses to proceed with the sale.
[7.10]
Each of these contracts is clearly an entire contract, with particular goods (a car in Scenario 2 and stationery items in Scenario 1) being purchased for a lump sum in the one discrete transaction. Would it be fair, in either of these scenarios, for A to seek termination of the contract and deny B’s right to payment for the goods? Technically B has breached the contract in each scenario: the car was delivered late in Scenario 2 and an incomplete order was dispatched in Scenario 1. However, the car was delivered late by a mere two minutes (Scenario 2) and the stationery order was 99.996 per cent correct with a mere $2 item missing from the $50,000 worth ordered (Scenario 1). These breaches are both petty and insignificant and it would be manifestly unreasonable to allow the agreement to be discharged over something so small. The de minimis rule would operate to prevent A in each case from seeking to terminate the contract and disentitling B from their right to payment.
[7.11]
In commerce it is accepted that there will occasionally be ‘microscopic deviations’ from the terms of a contract which the parties, and therefore lawyers, will overlook.4 Whether such a minor failure or insignificant defect in performance will be excused under the de minimis rule is a question of fact. Essentially, it depends upon: … a consideration of the nature and extent of the breach and the nature and scope of the term breached, having regard to the presumed intention of the parties based on the proper construction of the contract.5
Substantial performance [7.12]
Where a party has not completely performed their obligations under a contract but has substantially done so, and this breach is not insignificant enough to trigger the application of the de minimis principle, the defaulting party may still [page 318] be able to enforce their contractual rights and obtain payment for their substantial performance. The rationale is that the innocent party still receives substantially that which they contracted for, with any deficiencies requiring rectification being offset by an award of damages in favour of the innocent party.
[7.13]
Determining whether a contract has been substantially performed is a matter of construction; the courts will consider a number of factors including the nature of both the performance rendered and the defects in that performance. Fundamentally, it is essential to assess whether the contract has been performed to a sufficient extent (with trivial deficiencies) or whether it falls short of entitling the defaulting party to payment for that performance. The two following cases highlight both ends of this spectrum.
Hoenig v Isaacs [1952] 2 All ER 176 Brief facts: The defendant, Isaacs, engaged Hoenig, an interior decorator and furniture designer, to decorate and furnish his flat. The stated price for the work was £750, payable in instalments as the work proceeded with the balance being due upon completion. Progress payments totalling £400 were made. When the work was complete, Isaacs refused to pay the balance, alleging that Hoenig’s work was defective. The cost of remedying the defects was assessed at approximately £55. Isaacs contended that the contract was an entire one and that it was not fully
performed as agreed, such that Hoenig was not entitled to any payment for his services. Hoenig sued to recover the balance of money owing to him. Issue: Did the doctrine of substantial performance apply, entitling Hoenig to claim payment for his imperfect performance? Conclusion: The court held in favour of Hoenig. Although Hoenig’s work was not perfect, he had not abandoned bur rather substantially performed his contractual obligations and the defects could be easily remedied. Hoenig was therefore entitled to claim the contract price minus the cost of rectification.
[7.14]
In this case, the extent of the defective performance was not significant and the cost of remedying the defective performance was minimal when compared to the contract price. Moreover, Hoenig had not abandoned his obligations altogether, which would have disentitled him to claim payment for substantial performance. Had he abandoned the obligation altogether, he would have been restricted to making a claim in quantum meruit.6 As such, the doctrine of substantial [page 319] performance could apply. In the following case, however, the converse was true and so the opposite conclusion was reached.
Bolton v Mahadeva [1972] 2 All ER 1322 Brief facts: The defendant, Mahadeva, engaged Bolton to install a central heating system and perform some other works in his home for £560. The system was defective in that it did not adequately heat Mahadeva’s home and emitted offensive fumes.
The cost of remedying these defects was approximately £174. Mahadeva refused to pay the contract price for the work and Bolton sued to recover the same. Issue: Did the doctrine of substantial performance apply, entitling Bolton to claim payment for his imperfect performance? Conclusion: The court held in favour of Mahadeva. There had been no substantial performance in this case taking into account the nature of the defects and the proportion between the cost of rectifying the defects and the contract price. This was an entire contract, and the requisite performance to justify payment was successful installation of a functional hot water system. This did not occur, and the doctrine of substantial performance did not apply, meaning Bolton could not claim any part of the agreed price for his work.
[7.15]
In sum, where the performance is not excessively defective and the costs of rectification are not disproportionately high when compared to the overall contract, the doctrine of substantial performance may apply. In Hoenig v Isaacs, the defects in the plaintiff’s performance were only minor and the costs of remedying them were low (seven per cent of the contract price). In Bolton v Mahadeva, the defects in the plaintiff’s performance were significant and the costs of remedying them were considerably high (31 per cent of the contract price).
[7.16]
The principle of substantial performance does not appear to sit comfortably alongside the concept of termination for failure of a contingent condition, which is explored at [7.46]. This right to terminate arises from a party’s failure to adhere exactly to a condition specified within the contract. The common law appears to assume that the doctrine of substantial performance can apply to an entire obligation under a contract,7 though this would appear to produce a theoretical inconsistency. As the court observed in Cutter v Powell, an entire obligation is one which must be precisely performed otherwise the party in breach cannot claim the contractual price of its fulfilment.
[page 320]
Acceptance of partial performance [7.17]
Where a party’s performance of their contractual obligations has been defective and not exactly as required under the agreement, and the aggrieved party freely accepts this partial performance, the party in breach may be entitled to make a restitutionary claim for reasonable remuneration for the services they have rendered. In other words, even though a contract has not been strictly and completely complied with, where the aggrieved party freely and willingly agrees to accept this partial performance, the party in breach will be able to claim payment for this performance. In these circumstances, a new contract to pay the revised value of the performance is inferred from the act of free acceptance.
[7.18]
What is important is that the aggrieved party exercise a voluntary choice to accept or decline the partial performance. If the party allegedly accepting the partial performance had no feasible option but to do so, this exception to the general rule (requiring strict and complete performance with the terms of the contract) will not apply.
Sumpter v Hedges [1898] 1 QB 673 Brief facts: The plaintiff, a builder, was engaged by the defendant to construct two houses and other structures upon the defendant’s land in return for a lump sum of £565. The builder partially completed the work before running out of money and abandoning the project. The value of the plaintiff’s partially completed work was approximately £333. The defendant finished the buildings himself using materials left on site by the plaintiff. The plaintiff sued to recover reasonable remuneration for the work performed under the restitutionary principle of quantum meruit (‘the amount deserved’) on the basis that the defendant had freely accepted this work.
Issue: Was the plaintiff entitled to reasonable remuneration for his partial performance on the basis that the defendant had freely accepted his work? Conclusion: The court held that the plaintiff could not claim reasonable remuneration for his work on a quantum meruit as the defendant had no feasible choice but to accept the defective performance; this acceptance was not free, but forced. Having to keep an unfinished building on his land would have been a great inconvenience for the defendant, so he had no real choice but to finish it. It was not possible to infer a new agreement to pay for the plaintiff’s work on a quantum meruit as there had been no free acceptance. The plaintiff could only recover reasonable remuneration for the materials that the defendant used to finish the work, as these were freely accepted by the defendant when they could have been rejected.
[page 321] [7.19]
The issue of ‘free acceptance’ causes difficulty in some cases where it is not clear that the aggrieved party has had a reasonable opportunity or viable choice to reject the partial performance. In Steele v Tardiani (discussed at [7.8]), for example, the High Court held that the defendant had not freely accepted the non-compliant wood cut by the plaintiffs as such, as they had no practical choice but to use and sell it; the alternative was to let it rot on the ground. However, there was evidence that the defendant had allowed the plaintiffs to continue cutting and splitting timber to incorrect dimensions. The defendant accepted the benefit of the partial performance of the plaintiffs and did not ask them to meet the contractual specifications prior to leaving their employment. As such, the plaintiffs were entitled to recover reasonable remuneration for their work on a quantum meruit basis.
Obstruction of performance [7.20]
It is an established principle of Australian contract law that in every contract there is an implied duty of cooperation whereby each party agrees to do all things necessary on their part to enable the other party to enjoy the fruits or benefits of the contract.8 Where a party inhibits their counterpart’s efforts to complete their contractual obligations, it would logically seem unjust for the law to allow them to argue that the contract has been breached (which permits them to terminate) and deny the other party’s claim to remuneration.
[7.21]
This denial can be justified on a number of bases. For example, preventing the other party from performing would likely count as an act of repudiation in that the preventing party will have clearly demonstrated an unwillingness to proceed with the contract and therefore acted in a manner substantially inconsistent with their obligations.9 Alternatively, the preventing party might be barred from terminating on the basis that, at the time of the breach (which they themselves facilitated), they were not ready and willing to perform their own obligations as required.10 Prevention of the other party’s performance, and subsequent termination, would almost certainly contravene the implied duties of good faith11 and cooperation in performance,12 or amount to an unconscientious or unconscionable termination warranting a grant of relief for the party who has been prevented from performing.13 [page 322]
[7.22]
An example of a party obstructing the other party’s performance is Grieve v Enge [2006] QCA 213, where the vendor of a residential property in Queensland refused the purchaser’s financier access to the property in order to generate a valuation in support of the purchaser’s loan application. As a consequence, the purchaser was not able to obtain the requisite finance by the specified date. The purchasers successfully sought an order for specific performance of the sale contract. Similarly, in Park v Brothers (2005) 222 ALR 421, the
purchasers of a rice farm were entitled under the sale contract to take early occupation of the land for farming work, subject to approval of locations by the vendor. Prior to any approvals being given, the vendor ejected the purchasers from the land and banned any further access. The court held that this behaviour was unreasonable as there was no legitimate basis for refusing to entertain applications for approval of locations. The vendor therefore could not rely upon the purchasers’ failure to obtain approvals as a reason for refusing to proceed with the sale contract. In both of these cases, one party prevented the other party from satisfying a contingent condition, which we will discuss later in the chapter. [7.23]
In cases such as these, the aggrieved party having been prevented from performing their contractual obligations, either a contractual or a restitutionary claim could be made in respect of any money paid or goods/services provided by the aggrieved party. In other words, the party whose performance has been wrongly obstructed would still be able to seek compensation for their services; they would either sue for breach of contract and claim damages, or alternatively make a restitutionary claim for reasonable remuneration.14 Consider the following example: A engages B to do some electrical work on her newlyconstructed office building. B is given keys to the premises and allowed to access the property at will under the work contract. Two weeks into the job, A changes the locks on the doors to the building, denying B access. B has expensive power tools in the building and has performed a significant amount of work, most of which he has not yet been paid for.
[7.24]
In this scenario, A has clearly breached the contract by refusing B access to the building. A has also obstructed B’s performance, such that he has not completely performed his obligations. B would be entitled to seek contractual or restitutionary remedies so as to claim remuneration under the contract for the services he had performed to the point of being locked out.
[7.25]
Similarly, where a party is not ‘prevented’ from performing their obligations as such but rather is told by the other party after commencing performance that the [page 323] obligation was no longer necessary, this effectively inhibits the performing party from claiming the benefits of the contract. The party who attempted performance will not be disentitled from claiming payment under the contract. This situation occurred in Planche v Colburn (1831) 8 Bing 14; 131 ER 305. There the defendants commenced publication of a periodical called ‘The Juvenile Library’ and commissioned the defendant to write a volume on ‘costume and ancient armour’. The contract price for this work was £100. At a point when a substantial portion of the volume had been written, the defendants informed the plaintiff that they were abandoning the publication due to poor sales. They further informed him that his work was not required and that they would not be paying him for his services. The plaintiff sued on a quantum meruit to recover reasonable remuneration for his work.
[7.26]
The court held in favour of the plaintiff. Through their abandonment of the periodical, the defendants had prevented the plaintiff from being able to complete his contractual obligations and claim remuneration for his authorship. It was unreasonable for the plaintiff to lose the fruit of his labour where this was due to the actions of the defendants. Accordingly, he was entitled to reasonable remuneration on a quantum meruit basis. The plaintiff was awarded £50 for the work he had completed.
[7.27]
To summarise the principles explored so far with respect to termination by performance, where a contract is terminated on the basis of incomplete performance, the defaulting party can recover compensation where:
A discrete part of a divisible contract has been performed. The performance was only incomplete by virtue of some trivial or insignificant defect (de minimis rule). A contractual obligation has been substantially performed. The aggrieved party has freely accepted the breaching party’s partial performance. They have not obstructed the other party’s performance and sought to terminate on the basis of breach of the other party’s obligations.
Termination by agreement [7.28]
A contract can be terminated through the agreement of the parties. This agreement can manifest itself in a number of situations. The original contract can itself confer express powers of termination, or such a right can otherwise be implied into the contract. Alternatively, the original contract can be terminated by a subsequent agreement (express or implied) or by abandonment. Each of these concepts will be considered in turn. [page 324]
Termination under original contract Express power to terminate [7.29]
Many commercial contracts include an express term prescribing the time, and manner through which, the contract can be brought to an end. Fixed-term employment contracts and residential leases are two common examples: each type of contract has a fixed duration and permits the employer or lessor to terminate the agreement at a specified date or upon the employee’s or lessee’s violation of particular obligations.
[7.30]
[7.31]
In some cases, where a specific procedure to facilitate termination is stipulated in the contract (such as a notice or form requirement), a failure to follow that procedure has been held to bar the noncompliant party from terminating the agreement.15 In contemporary times, however, the courts do not favour such a narrow approach and so it is unlikely that trivial instances of non-compliance will deny a party’s right to terminate.16 It is still best business practice to adhere to such procedures to avoid any potential legal disputes. The contract may contain a term stipulating that it will terminate on the occurrence or failure of a particular event; these are known as contingent conditions.17 Alternatively, one of the parties may have a discretionary power to terminate the contract at any time; this is known as ‘termination at will’. Ostensibly, such broad contractual powers are not without qualification and the courts may require such powers to be exercised reasonably or in good faith.18 In Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 (discussed in Chapter 4 at [4.132]), for example, the construction contract between the parties conferred numerous powers upon the principal in the event of the contractor’s default. One such power was the right to terminate the agreement where the contractor could not ‘show cause’ to the principal’s ‘satisfaction’ why this power should not be exercised. The Supreme Court of New South Wales held that the principal was bound to exercise this discretionary power reasonably, impartially and upon accurate information. [page 325]
Implied power to terminate [7.32]
On occasion, a contract will not specify whether or not it will terminate under specific circumstances. A good example of this is where the contract is silent as to its precise duration. When this is the case, the courts typically imply a term vesting the power to terminate the agreement at will in one or both parties. As McHugh J explained in Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14
NSWLR 438 at 443: When the question arises whether a commercial agreement for an indefinite period may be terminated, the answer depends upon whether the agreement contains an implied term to that effect. The existence of the term is a matter of construction. But the question of construction does not depend only upon a textual examination of the words or writings of the parties. It also involves consideration of the subject matter of the agreement, the circumstances in which it was made, and the provisions to which the parties have or have not agreed. [7.33]
An implied power to terminate a contract of indefinite duration would be implied in fact on the basis of the BP Refinery principles outlined in Chapter 4. To avoid any uncertainty, commercial parties would be best advised to clearly define the duration of the agreement (for example, by identifying the circumstances in which the parties’ obligations will be discharged).
Termination under subsequent agreement Express agreement [7.34]
The parties to a contract may enter into a subsequent agreement so as to terminate the original contract. In such a case, the normal rules pertaining to contract formation (explored in Chapter 2) apply. This is because any agreement to amend or discharge a contract ultimately involves the creation of another contract and it is sometimes difficult to tell whether the parties actually intended to vary the original agreement or terminate it completely. As stated in Commissioner of Taxation of the Commonwealth of Australia v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520 at 533-4; 172 ALR 346 (Sara Lee): When the parties to an existing contract enter into a further contract by which they vary the original contract, then, by hypothesis, they have made two contracts. For one reason or another, it may be material to determine whether the effect of the second contract is to bring an end to the first contract and replace it with the second, or whether the effect is to leave the first contract standing, subject to the alteration. For example, something may turn upon the place, or the time, or the form, of the contract, and it may therefore be necessary to decide whether the original contract subsists.
[page 326] [7.35]
The pertinent factor is the intentions of the parties as disclosed by the later agreement.19
Executory contracts [7.36]
Where both parties have executory (outstanding) obligations and expressly agree to end the contract, there is no issue as all elements of contract formation will be satisfied: the parties will have reached agreement to terminate, there will be no doubt as to their commercial intent, and the terms of such an agreement will clearly be certain. The consideration for this arrangement would subsist in each party agreeing to discharge the other of any outstanding obligations. The termination can be effected through oral agreement, even where the original contract was required to be in writing.20
Executed contracts [7.37]
Issues often arise, however, where one party has performed their obligations under the contract which is sought to be terminated and the other party has not. The non-performing party thus has executory obligations, which presents a problem because they cannot satisfy the consideration requirement (the performing party is relinquishing the non-performing party from outstanding obligations, but the nonperforming party cannot do the same as their counterpart has already completed their obligations).
[7.38]
To get around this hurdle, the parties could reduce their agreement to terminate the contract into a deed and do away with the need for consideration: see [2.98]. Alternatively, the non-performing party could offer fresh consideration in return for the other party’s release. Such an arrangement is known as an accord and satisfaction, which was succinctly defined by Scrutton LJ in British Russian Gazette and Trade Outlook Ltd v Associated Newspapers, Ltd [1933] 2 KB 616 at 643–4:
[An] accord and satisfaction is the purchase of a release from an obligation whether arising under contract or tort by means of any valuable consideration, not being the actual performance of the obligation itself. The accord is the agreement by which the obligation is discharged. The satisfaction is the consideration which makes the agreement operative. [7.39]
The essence of this arrangement is the acceptance by the plaintiff (that is, the performing party) of something in place of his or her cause of action.21 In the context of terminating a partially-complete contract, the accord and satisfaction therefore allows the nonperforming party to be relieved of their outstanding obligations and any associated legal liability. Typically the non-performing party [page 327] will offer a token sum of money or perform some other less arduous task to give effect to the accord and satisfaction.
Implied agreement [7.40]
As the High Court explained in Sara Lee (see [4.156]), it is sometimes the case that the effect of a subsequent agreement upon the original contract is unclear. Where there is an express agreement of the kind we have just discussed, there can be little confusion. Alternatively, where the intended effect of a subsequent agreement is not explicitly stipulated, it may effect a variation to the original contract, or potentially even rescind and replace the original contract (known as a novation). As discussed in Chapter 2,22 the question of whether a contract has been varied or replaced altogether will often turn upon all relevant facts and circumstances including ‘the place, or the time, or the form, of the [renegotiated] contract’.23 If the subsequent agreement is wholly inconsistent with the original contract, it is far more plausible that the parties intended to facilitate a novation. Alternatively, where the subsequent agreement is incapable of operating as an independent contract, it is more likely that the parties sought to merely vary the terms of the original contract. Concut Pty
Ltd v Worrell (2000) 176 ALR 693 (discussed at [2.103]) is a useful illustration of this analysis. There it was held that the subsequent agreement was intended to supplement, not replace, the original oral contract of employment.
Abandonment [7.41]
A contract will be discharged where the circumstances imply that it has been abandoned by the parties. Evidence that neither party intended for the contract to be further performed is sufficient to demonstrate its abandonment or abrogation. This occurred in DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423; 19 ALR 223 (DTR Nominees). There the two parties to a contract for the sale of land sought to terminate the agreement on the basis of the other’s breach. After approximately five months of inactivity, Mona Homes commenced legal proceedings seeking a declaration that it had validly rescinded the agreement. DTR Nominees subsequently did the same. The High Court held that neither of the termination notices issued by the parties was effective and that the sale contract remained alive until the point that the legal proceedings commenced. By that stage, an objective analysis of the circumstances confirmed that neither party considered the contract to be on foot.
[7.42]
Of course mere silence or delay does not in itself indicate that a contract has been abandoned.24 A significant and excessive amount of time must pass before it can be assumed that a contract is abandoned. Even then, it is essential that the inactivity produce a ‘clear inference that one party does not wish to proceed [page 328] with the contract and the other party [consents] to that situation’.25 In commerce, particularly in large-scale transactions, it is not uncommon for parties to take sometimes considerable lengths of time to accomplish the aims of a contract. Often delays are simply the product of poor communication skills and not symptomatic of any desire to
abandon the agreement. Parties should be sure to maintain open communications with their contractual counterparts to ensure that there are no fundamental misunderstandings as to their intentions.
Waiver [7.43]
As we will see when we come to discuss termination by operation of contingent conditions (see [7.46]), it is possible for a contractual party to agree to waive a contingent condition which operates in their favour. In this situation the waiving party will be barred from terminating the contract for the non-fulfilment of the relevant condition. The question of whether the doctrine of waiver operates as a general restriction upon the right to terminate a contract, however, is far less certain. For example, where a breach occurs, is it possible for the innocent party to ‘waive’ its right to terminate where they decide to overlook the breach? In Pacific Brands Sports & Leisure Pty Ltd v Underworks Pty Ltd (2006) 149 FCR 395 at 421, the Federal Court of Australia remarked: To the extent that waiver has an independent province — and this is a matter of some contest in Australian law … the best that probably can be said is that it applies to those circumstances in which the law recognises a voluntary or intentional relinquishment or renunciation of a known right, claim or privilege.
[7.44]
The issue is that these functions are often aptly performed or characterised by other more established doctrines such as election (discussed at [7.110]) and estoppel (discussed at [4.158]–[4.163]). Consequently, ‘waiver’ is often deemed to be synonymous with these other doctrines. As the Queensland Court of Appeal explained in Kostopoulos v GE Commercial Finance Australia Pty Ltd [2005] QCA 311 at [36]–[37]: If one party to the contract chooses to act in a manner inconsistent with the exercise of a contractual right, then that will usually amount to an election to abandon that right. Alternatively, if one party communicates to another party to the contract that it will not be exercising one of its contractual rights, and the other party orders its affairs accordingly, then an estoppel may arise.
[7.45]
Where a party opts not to terminate a contract following the other party’s breach, it might be argued that they have accordingly ‘waived’
their right to do so. In such cases, however, a more practical analysis would suggest that the innocent [page 329] party has merely affirmed the contract and elected not to terminate.26 Moreover, the suggestion that contractual rights can be permanently waived would appear to conflict with authority which suggests that waiver can only effect temporary — not permanent — changes to a contract.27 It is therefore highly unclear as to whether a contractual right to terminate can be ‘waived’ by inference from the circumstances. However, it is certainly possible for a contractual party to lose the right to terminate where an appropriate election is made, or where the breaching party can raise an estoppel claim.
Termination by operation of contractual term Contingent conditions [7.46]
Termination can occur by operation of a contractual term. In one sense, this is merely an example of termination by agreement in that the parties have agreed to include a particular term in their agreement which can bring about discharge. On the other hand, it is useful to have a separate analysis of specific kinds of terms which stipulate that contractual performance is entirely conditional upon the occurrence of a specified event which may or may not occur. These are commonly known as contingent conditions. The use of the term ‘condition’ here is misleading as it does not refer to the kind of term which, if breached, gives the aggrieved party the right to terminate.28 Rather, it refers to the conditional nature of the term: if the specified contingency does not occur, then the parties will not be bound to perform.
[7.47]
Contingent conditions are normally categorised as either a condition
precedent or condition subsequent. We will now consider both types.
Condition precedent [7.48]
A condition precedent is a term which prescribes an event which must occur before the parties are bound to perform their contractual obligations. If the event does not occur, the contract terminates. A common example of a condition precedent is a ‘finance clause’ in a contract for the purchase of a property such as this: [page 330]
This Agreement is conditional upon the Buyer obtaining approval of a loan for the Purchase Price of the Property from the Lender by the Finance Date. The Buyer must take all reasonable steps to obtain approval.
[7.49]
So in this case the relevant contingency is the buyer obtaining finance to pay the purchase price. If they fail to do so, the vendor is not bound to proceed with the sale (and the buyer is naturally not obliged to press ahead with the purchase — they would not have the money!). However, where the relevant contingency expressed in a condition precedent does not eventuate due to the other party’s deliberate interference or obstruction, that party’s right to terminate will be lost.29 So in the given example, if the buyer was unable to obtain a loan from the lender because the vendor purposely withheld important financial documents which the buyer had left at the vendor’s home during negotiations, the vendor would not be able to rely upon the buyer’s failure to obtain finance and satisfy the condition precedent in order to terminate the contract. In such situations, the innocent party is deemed to have performed and the specified event may be assumed to have occurred.30
Condition subsequent [7.50]
A condition subsequent is one which immediately binds the parties to perform but abrogates this requirement upon the occurrence of a specified event. In other words, once the event stipulated in the condition subsequent occurs, the contract no longer binds the parties and is accordingly terminated. It is perhaps more accurate to say that one or both of the parties becomes entitled to terminate the agreement, as opposed to saying that the contract automatically ends, though the result is ultimately the same. A common example of a condition subsequent is a clause in a contract for the sale of particular goods that they will match their description and be suitable for their specified purposes, otherwise the buyer will be entitled to return the product for a full refund. Consider this clause:
Faulty or damaged goods If the product is found to be faulty or damaged, and the fault or damage was not caused by the buyer, the product may be returned to the vendor within 30 days of purchase for a full refund of the purchase price. The product must be in original condition and repackaged with all attachments and components.
[page 331] [7.51]
In this particular scenario, the buyer would also enjoy a number of statutory guarantees with respect to the quality of the goods.31 So the contingency specified in this sale contract (that is, the condition subsequent) is the product becoming faulty or incurring damage within 30 days of purchase. If this event occurs, the buyer is no longer obliged to perform their contractual obligation, that is, pay for the product.
Interpretation [7.52]
In most cases it will be objectively clear whether or not the contingency in question has occurred. In situations where the contingency is dependent upon a subjective assessment, however, it is not always clear. For example, some contracts stipulate that a party’s obligation can only be satisfied upon the ‘approval’, ‘satisfaction’ or the like of the other party. Recall from Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 (see [4.132]) that the contractor was obligated to ‘show cause’ to the principal’s ‘satisfaction’ as to why the contract should not be terminated following the contractor’s repudiation. That case, and indeed other authorities,32 suggests that such decisions must be made honestly and reasonably, though the law is not entirely settled on this point.
[7.53]
Where the contingent condition in question concerns only a specific obligation, the non-fulfilment of the condition will not affect the validity of the remainder of the contract. The parties will simply not be bound to perform the particular obligation. If, however, the contingency affects the entirety of the contract, it will be voidable at the option of one or both of the parties.
Waiver [7.54]
A contingent condition may be waived, in which case the contract cannot be terminated for non-fulfilment of that condition. The legal rule is that a party may waive compliance with a contingent condition where it is for their benefit.33 In Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 566; 41 ALR 444, the High Court held that a contractual provision stipulating that a sale of land was conditional upon the purchasers selling their property was solely for the purchasers’ benefit and could be waived by them. This provision ultimately protected them from exposure to greater financial liability.
Force majeure clauses
[7.55]
Particularly in longer-term commercial contracts, it is not uncommon for parties to include provisions accounting for specific contingencies which may arise and which would otherwise threaten to frustrate the contract.34 The premise of [page 332] the doctrine of frustration is a radical alteration in the state of affairs necessary for performance which was not contemplated at the time of contracting. Thus, making provision for such events through a force majeure clause demonstrates this contemplation and allows the parties to have strategies in place for allocating particularly anomalous risks when they eventuate. The force majeure clause obtains its name from the Old French and Latin languages and literally translates as ‘superior force’. An example of a force majeure clause is as follows:
14. Force majeure 14.1 If either party to this Agreement is prevented in the performance of any obligations required under this Agreement by reason of events beyond their reasonable control, including but not limited to: 14.1.1 acts of God (fire, flood, earthquake, tidal wave, drought, explosion, lightning strike, severe weather, or other natural disasters); 14.1.2 war hostilities, insurrection or invasion; 14.1.3 riots or labour strikes; 14.1.4 acts or threats of terrorism; 14.1.5 chemical or radioactive contamination; 14.1.6 change in the law; 14.1.7 major and prolonged failure of computer, telephone or electricity service; 14.1.8 or other such events
then performance of those obligations will be excused for the period of the delay. 14.2 If the delay referred to in 14.1 persists for a period exceeding three months, or the event causing the delay is incapable of being remedied by the non-performing party, the Agreement may be terminated at the option of the parties. Neither party will incur liability (other than for outstanding payment obligations) to the other party for any loss or damage caused by the delay event.
[7.56]
Ultimately, the particular language of the force majeure clause will determine if and when the contract in question is suspended or terminated, as well as the consequences of any such suspension or termination. In the given example, which is most common in practice, where the delay exceeds the stated period of time or the nonperforming party is not able to remedy the event causing the delay, the contract is capable of being terminated, at which point each party is liable for its [page 333] own losses caused by the force majeure event. If the contract is merely suspended, the obligations of the parties survive and will revive upon the force majeure event ending within the specified period of time, or once it is remedied by the non-performing party.
Termination by operation of law Bankruptcy [7.57]
Pursuant to s 58 of the Bankruptcy Act 1966 (Cth), where a contractual party declares bankruptcy, all property of the party (whether presently held or acquired after the bankruptcy proceedings) vests with the Official Trustee in Bankruptcy or a registered trustee. Given that
contracts invariably concern property in the way of money, goods, services, real property, intangible rights etc, this legislation also makes specific reference to how contracts to which the bankrupt is privy are to be handled. Section 133 of the Act provides that the trustee may disclaim contracts concerning the bankrupt’s property with leave of the court. The court may then make any orders it deems fit, including the apportionment of damages for non-performance to parties who had contracted with the bankrupt. Thus, this is a good example of how the law may operate to terminate a contract.
Death or permanent incapacity [7.58]
The death or permanent incapacity of a party is also an example of a potentially frustrating event.35 The party’s personal estate transfers to his or her legal personal representatives (or, where the party dies intestate, that is, without a will, to any other parties specified by the Public Trustee or other relevant government entity under the laws of the jurisdiction in question). Where a party’s involvement is critical to the performance of the contract, such as an employment arrangement, their death or permanent incapacity will typically operate to frustrate the contract.36 This then discharges the parties of all future rights and obligations, though accrued rights and obligations will survive.
[7.59]
In other instances, however, a contract will be enforceable against the executors/administrators of a deceased or permanently incapacitated party.37 So, for example, in a contract for the delivery of goods, if the original party who was the designated courier passes away and the goods are delivered by that party’s executors, the executors can seek payment of the contract price. Similarly, the purchaser can commence legal action against the deceased’s estate if the contract (delivery of the goods) is not carried out. [page 334]
[7.60]
The pivotal difference between when a contract will be frustrated by
the death or permanent incapacity of a party and when it will remain enforceable depends upon the nature of the obligations that were imposed upon the deceased or permanently incapacitated party. If the contract necessarily depended upon the continued existence of the deceased/incapacitated party, then it will end upon their death or incapacity. If the contract either provided for such contingencies or impliedly permits scope for the contractual obligations to be assigned to another party, the contract will survive the death or incapacity.
Force majeure clauses [7.61]
We examined force majeure clauses at [7.55]. These clauses in themselves can facilitate termination of the contract through their language. Much will obviously turn upon the events specified in the clause. Where any such events occur, the law gives effect to the force majeure clause and permits the parties to either suspend performance or terminate the contract, in accordance with its provisions. In a similar fashion, the doctrine of frustration (discussed at [7.63]) can operate to render a contract void upon the occurrence of events which were not actually contemplated at the time of contracting and which radically alter the state of affairs necessary for performance. This is yet another example of the law itself causing a contract to be terminated.
Illegality [7.62]
In Chapter 3 we discussed the doctrine of illegality and how a change in the law can sometimes render a contract illegal and void. Where, for example, legislation expressly prohibits the creation or performance of a particular type of contract, it will automatically be terminated. Similarly, public policy may weigh against the enforcement of a contract and render it invalid. In either case, the contract is brought to an end by operation of the law.
Termination by frustration Overview [7.63]
The doctrine of frustration operates to terminate a contract where a supervening event renders performance of parties’ contractual obligations radically different from that envisaged by the parties at the time of contracting. Where a contract is frustrated, parties are relieved of their future obligations (obligations which have not yet accrued). However, rights and obligations which accrued prior to the supervening event remain enforceable.
[7.64]
Until the 19th century, courts did not embrace the notion of relieving parties of future contractual liabilities by operation of law. Courts maintained the view that [page 335] parties should provide for contingencies when negotiating the terms of their agreement; anything not provided for by the parties themselves would not be countenanced by the courts. A renowned example of this rather inflexible view can be seen in the case of Paradine v Jane (1647) 82 ER 897.
Paradine v Jane (1647) 82 ER 897 Brief facts: The defendant, Jane, rented a property from the plaintiff for an agreed rent. Jane was evicted from the property by an invading army. Having been dispossessed by the enemy army, Jane stopped paying rent to Paradine. Issue: Was Jane liable to Paradine notwithstanding the supervening event, that is, the invasion of an enemy army which deprived Jane of the use of the property?
Conclusion: Jane was liable for the rent. The court held that contractual liability is ‘absolute’. Jane should have negotiated a term capable of relieving him of the contractual obligation to pay the agreed rent where events outside his control prevented use of the land.
[7.65]
The law has evolved significantly since the decision of Paradine v Jane. As we will see, it is very likely that the case would be decided differently today.
Modern day test for frustration [7.66]
The decision of David Contractors Ltd v Fareham Urban District Council [1956] AC 696 offered an expression of the modern day doctrine of frustration which was approved by the High Court of Australia in Codelfa Construction Pty Ltd v State Railway Authority of New South Wales (1982) 149 CLR 337 at 377; 41 ALR 367 (Codelfa). Frustration occurs whenever the law recognizes 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.
[7.67]
It is useful to break down this test into four main elements. The presence of these elements automatically terminates a contract by frustration. 1.
the occurrence of a supervening (new) event;
2.
the new event was not caused by the parties to the contract;
3.
the new event radically alters the circumstances of performance of the parties’ contractual obligations; and [page 336]
4.
the parties have not expressly provided for the consequences of such an event in the contract.
Let us consider these elements in more detail.
Occurrence of a supervening or ‘new’ event [7.68]
What could constitute a supervening or new event? It is difficult to describe this in a finite way. The new event may take the form of a natural disaster.38 Equally, it may be the enactment of a law.39 Essentially, a supervening event is the catalyst which causes contract performance to be radically different to that originally envisaged by the parties. It is not the nature of the supervening event which is critical to the operation of the doctrine of frustration but rather the effect of this event.
No causal link between parties’ actions and the supervening event [7.69]
The second aspect limits the application of the doctrine of frustration. Parties must not have caused the supervening event; they must not be culpable.40
Radical alteration to the circumstances of performance [7.70]
The third element lies at the heart of the doctrine of frustration test — a new event must radically alter the circumstances of performance of parties’ contractual obligations. This threshold is clearly met in instances where a supervening event renders performance impossible. In all other situations an assessment as to whether performance under the new circumstances is radically different from the way performance was originally envisaged will need to be made. This involves consideration of the obligations as per the agreement and the effect of
the supervening event in light of all the circumstances. [7.71]
Performance may not be radically different where it is simply more onerous.41 Equally, mere delay may not affect performance in a fundamental way.42 Parties must take into account the commercial nature of the contract, estimated time of delay43 and the length of time remaining under the contract.44 Where strikes are the cause of delay, parties must wait to see how long the strike is likely to last and consider the anticipated delay in light of the contract as a whole.45 [page 337]
Contract does not provide for the event [7.72]
This element limits the operation of frustration. Parties may include a force majeure clause which expressly provides how an event such as fire, flood or war (which may frustrate a contract by operation of law) affects the obligations of the contracting parties.46 A contract will not be terminated by frustration where parties specifically provide for contingencies in their agreement.
Categories of frustration [7.73]
The next section provides some examples of cases where contracts have been declared frustrated. It is useful to consider these cases in light of their contexts. Five categories are considered below:
Physical impossibility due to destruction of subject matter [7.74]
Cases which fall into this category involve instances where, without fault of the parties, the subject matter of the contract has been destroyed. An illustrative case on this point is Taylor v Caldwell (1863) 3 B & S 826. Here, a contract for the hire of a music hall was frustrated
when the hall burned down. Clearly, the hall was essential to contractual performance. Its destruction made it impossible to perform as originally envisaged by the parties.
Futility [7.75]
A contract may be terminated by frustration where, although performance of the parties’ contractual obligations is still possible, it would be futile to carry out performance. Where the purpose of the contract becomes non-attainable as a result of a new event, performance is something radically different than that agreed upon at the time of contracting. Henry v Krell [1902] 2 KB 740 provides us with an example. The plaintiff hired a room from Krell for two days for the purpose of observing the coronation procession of Edward VII. The coronation was postponed unexpectedly. The plaintiff claimed rent notwithstanding the fact that the date of the coronation procession was changed. The court held that the cancellation frustrated the contract; the purpose of the contract could not be achieved.
Change in the law/illegality [7.76]
A change in the law may render performance of parties’ contractual obligations something radically different to that envisaged at the time of bargaining. A case example is Lindsay-Owen v Associated Dairies [2000] NSWSC 1095. It was held that legislation passed in the New South Wales State Parliament abolishing subsidisation of drinking milk frustrated the contract between the parties. [page 338] Declarations of war which render trade with the enemy illegal may also frustrate a contract. The case of Esposito v Bowden (1857) 7 EB & BI 763 provides a useful example. Bowden leased a ship to carry goods. He contracted with Esposito to load the goods onto the ship at
a Russian port. When war broke out between England and Russia it became illegal to trade with the declared enemy. The court held that the contract was frustrated.
Death or incapacity of a party [7.77]
In relation to contracts for personal services (where the personal skills of one of the parties is central to the agreement), death or incapacity may frustrate a contract. It may be impossible to perform the agreement as contemplated by the parties at the time of contracting. Where one of the parties suffers from an illness, it becomes important to consider the nature of the contract, the nature of the illness, and the probable duration of the illness. As noted in Chapman v Taylor [2004] NSWCA 456 at [30]: It is not correct to say that a temporary injury is not sufficient to frustrate a contract of employment: it may or may not be, depending on whether it would make performance of the contract radically different from that promised.
Where the effect of the illness renders performance something radically different, the contract may be frustrated.
State of affairs radically changes performance [7.78]
Sometimes a change in circumstances, which lie outside of the control of the parties, can affect performance of the contract in a profound way; a new state of affairs may frustrate a contract. The seminal case which provides an illustrative example of frustration in this context is Codelfa. The brief facts are outlined below:
Codelfa Construction Pty Ltd v State Railway Authority of New South Wales (1982) 149 CLR 337; 41 ALR 367 Brief facts: Codelfa entered into a contract with the New South Wales State Rail Authority to excavate two single track tunnels
from Edgecliff to Bondi Junction. The work was to be completed in a fixed period of time. The parties agreed that Codelfa would carry out work on a three-shift continuous basis six days a week, without restriction on Sundays. The work was very noisy and dirty. Residents obtained an injunction which restrained Codelfa from working as agreed under the contract. Codelfa was ordered to limit its work to two shifts a day for six days a week, with no work on Sundays. The injunction made it impossible for Codelfa to complete the work in time. [page 339] Issue: Was the contract frustrated by virtue of the injunction, which significantly changed the circumstances in which Codelfa could carry out the construction work? Conclusion: The contract was frustrated. As the High Court stated (at CLR 363): ‘Performance by means of a two shift operation, necessitated by the grant of the injunctions, was fundamentally different from that contemplated by the contract.’ The change in circumstances rendered performance of the contract something radically different from that which was undertaken by the contract.
Effect of frustration at common law [7.79]
Where a contract is terminated by frustration, the contract is discharged automatically; the parties do not need to elect to terminate by frustration. Parties are discharged of all future obligations from the date of the frustrating event. Only pre-existing rights and obligations accruing prior to the frustrating event are enforceable. Simply stated, this means losses lie where they fall. Consider the hypothetical example below:
Hypothetical Brief facts: A was preparing for a week-long art exhibition featuring his extensive collection of paintings inspired by his travels in the Austrian mountains. He approached B, the owner of the ‘EuroArt’ (a large South Australia gallery featuring European inspired art), to negotiate the hire of the gallery for an exhibition. The concluded contract between A and B required A to pay a $35,000 hiring fee at the end of the exhibition. After the second night of the exhibition, lightning struck the gallery. The gallery building and all of A’s paintings were destroyed in a fierce fire. The parties did not include a force majeure clause in their contract and clearly did not cause the fire. B claims A is liable for the $35,000 hiring fee. Issue: Is the contract frustrated? Is A obliged to pay B the $35,000 hiring fee? Conclusion: Destruction of the hall relieves A and B of their future obligations. At common law, A is not obliged to pay the $35,000 fee. The obligation to pay the $35,000 hiring fee was not payable until the end of the week; the obligation had not accrued when the fire frustrated the contract.
[page 340] [7.80]
In instances where there has been a total failure of consideration, restitution may be available.47 For example, a deposit paid prior to a supervening event may be recoverable where the party who has paid the deposit has not received anything in return. This was the case in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32. Here, the plaintiff paid a deposit for the supply and installation of textile machinery prior to the outbreak of war. When war broke out, the contract could not be performed. Since the plaintiff had received no benefit at the time of the frustrating event, Fibrosa was entitled to
recover the deposit paid.
Effect of frustration under statute [7.81]
The common law consequences of frustration can, in some circumstances, be inequitable. In response, three Australian states have modified the common law position. In Victoria, the Australian Consumer Law and Fair Trading Act 2012 (Vic) allows expenses incurred before frustration to be recovered.48 Moreover, a court may allow amounts paid or payable to be recovered,49 and parties may be ordered to pay an amount for valuable benefits obtained.50 In New South Wales, the Frustrated Contracts Act 1978 (NSW) adjusts the rights of the parties where a contract has been frustrated.51 In South Australia, the Frustrated Contracts Act 1988 (SA) uses an equitable approach to make an ‘adjustment between the parties so that no party is unfairly advantaged or disadvantaged in the consequences of frustration’.52 The Act provides a statutory framework for calculating distribution of the risks and benefits following contract termination.53 In addition, a court is given discretionary power to make adjustment in any manner which delivers a more equitable outcome for parties.54
[7.82]
Let us return to the hypothetical example (see [7.79]) and consider whether the effect of frustration would be different under the Frustrated Contracts Act 1988 (SA).
[7.83]
Note that statute will not apply in relation to all contracts. For example, the legislation enacted in all three states excludes contracts for the carriage of goods by sea, charterparties and insurance contracts.55 [page 341]
Hypothetical
Reminder: At common law, A is not obliged to pay the $35,000 fee. Conclusion under statute: Section 7 of the Frustrated Contracts Act 1988 (SA) assigns a court-wide power to adjust any losses between the parties so that no party is unfairly advantaged or disadvantaged in consequence of the frustration. In this scenario, a court is likely to find it equitable that A pays B for the two days he was able to occupy the hall. It is likely that A will be required to pay B $10,000 for the two days he had his paintings on display ($35,000 ÷ 7 days × 2 days A occupied the hall).
Termination for breach of contract Overview [7.84]
A breach of contract entitles the innocent party, that is, the party not in breach, to compensation in the form of damages.56 However, not every breach entitles an aggrieved party to terminate the contract at common law. The right to terminate depends upon the classification of the term breached. A term may be recognised as being either a condition, an intermediate (or ‘innominate’) term, or a warranty. Only breach of a condition or a serious breach of an intermediate term will entitle an innocent party to both termination and damages. An overview of the typology of terms and remedies flowing from a breach of each type of term is provided in Table 7.1 below: Table 7.1: Typology of terms and remedies flowing from breach of each term Type of Term Nature of Remedies for Breach Breach of Term Condition Any breach Termination of the contract + Damages Serious breach Termination of the contract + Damages Intermediate term
Warranty
Minor breach Any breach
Damages only Damages only [page 342]
Condition [7.85]
A condition is an essential term of a contract; a term which goes to the heart of the agreement. Breach of a term classified as a condition enables the innocent party to elect to terminate the agreement and claim damages.
[7.86]
A term will be recognised as a condition where: the parties have expressly provided for a term to be treated as a condition; a term is an essential term of a contract (viewed objectively); or statute implies a condition into a contract.
Express provision by the parties [7.87]
The clearest way parties to an agreement can convey their intentions regarding the treatment of a particular term is by expressly providing that a specific term be treated as a condition in the contract. This signifies the parties’ mutual agreement as to the remedial consequences which flow from a breach of that term. For example, contracts may stipulate ‘time is to be of the essence of the contract’.57 A clause such as this denotes that the parties have contracted on the basis that time requirements are essential or fundamental to contract performance; the term is a condition of the contract. Non-compliance with the term gives rise to the right to terminate.
[7.88]
Alternatively, parties may explicitly provide that breach of certain, or even all, terms entitles the innocent party to terminate the agreement.
For instance, ‘a party has the right to terminate in the case of any breach of a term of this contract’. Courts will normally regard such a provision as a statement of the parties’ intention and give effect to the term, allowing the aggrieved party to discharge the contract.58 Ultimately, an express provision regarding the treatment of a term removes doubt as to whether parties can terminate an agreement where one of the parties does not comply strictly with that particular term. [7.89]
Sometimes parties enter into an agreement where terms are labelled ‘conditions’, that is, ‘conditions of sale’.59 This does not necessarily mean that those terms are conditions in the legal sense.60 The word ‘condition’ may be referring to the terms of the agreement generally and, as such, termination of the contract is a question of construction in light of the particular circumstances. [page 343]
Condition is an essential term [7.90]
In some instances, parties may not expressly classify terms of the contract and, as such, it may not be readily apparent whether or not a breach of a particular term entitles the innocent party to discharge the agreement. The status of a term depends on how it is construed in light of a range of factors including the importance of the term, the way in which the term is expressed, character of the breach, and the adequacy of damages as compensation.
Importance of the term [7.91]
A term will be regarded as a condition where the term is essential to the agreement and goes to the heart or root of the contract. The inherent essentiality of a term can be found by considering the importance of the term in light of the contract as a whole. The case of Tramways Advertising Pty Ltd v Luna Park Ltd (1938) NSW 38 SR (NSW) 632 at 641–2 (Tramways) provides a useful test:
The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, 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 or substantial performance of the promise … and this ought to have been apparent to the promisor. [7.92]
Thus, for a term to be construed as a condition, it must be of such importance to the promisee that he or she would not have entered into the contract but for strict or substantial compliance with the term.61 Consider the following hypothetical scenario:
Hypothetical Brief facts: A is a dance instructor. She has decided to start her own ballroom dancing academy. As A is a famous reality TV star, she has a large number of people who want to commence their dance tuition as soon as possible. The hall she has built is complete but for the installation of the flooring. A is very particular as to the type of wood she requires for the academy’s ballroom surface as traction and shock absorption are important for ballroom dancing purposes. She contacts B, a flooring supplier, and decides on an ‘oak wood floor with attached double-padded spring underlay’. This is the only flooring offered by B which accommodates A’s specific needs: traction and shock absorption. A enters into a contract with B. She pays $30,000 for the flooring to be delivered and installed the following day. [page 344] On the date of delivery and installation, B remembers that he changed suppliers some time ago and therefore no longer stocks the particular type of wood A ordered. B instructs the stockroom staff to load up a ‘very similar looking pine wood variety with single-padded spring underlay’. It has less traction than the oak wood and is less shock absorbent. The wood is transported and installed. Once installation is complete, A inspects the ballroom.
She immediately notices from the feel of the wood that it is a different variety. A contacts B and is furious to learn that a different wood to that agreed upon was used. She wants nothing more to do with B and demands to be compensated. Issue: Can A terminate the agreement with B? (Assume the parties have not classified the term ‘oak wood floor with attached double-padded spring underlay’ in the contract.) Conclusion: A is entitled to elect to terminate the contract with B if the term ‘oak wood floor with attached double-padded spring underlay’ is a condition of the contract. If we apply the ‘essentiality’ test as per Tramways, we would ask: would A have entered into the contract with B but for installation of an oak wood floor with attached double-padded spring underlay? A ordered this flooring because she required a non-slippery surface with superior shock absorption features for the ballroom. Oak wood with attached double-padded spring underlay was the only kind of flooring offered by B suited to A’s specific needs. As such, it is unlikely that A would have entered into the agreement on the basis that a different type of floor be delivered and installed; the type of wood is central to the contract. It is highly likely that the term is a condition which entitles A to elect to terminate the contract and claim damages.
Language used [7.93]
It may also be useful to consider the language used to describe the term. Sometimes the words used by the parties reflect the significance of the term. For example, Latham CJ in Tramways Advertising v Luna Park (1938) 61 CLR 286 at 30262 noted: ‘the words “we guarantee” are particularly suited, in a contract drawn by laymen, to emphasize the importance of the clause which they introduce.’ Let us refer back to the previous hypothetical example: [page 345]
Assume that the contract between A and B provided a clause such as ‘we guarantee delivery and installation of flooring tailored to suit your specific needs’. Use of the word ‘guarantee’ denotes that the type of wood B will deliver and install will be tailored to suit the needs of the contracting party. The variety of wood most suitable for a ballroom dancing hall (requiring good traction and shock absorption to support the dance activity) is ‘oak wood floor with attached double-padded spring underlay’ as agreed between A and B. Simply stated, insertion of the clause provides an assurance that B will provide A with the most suitable type of wood for her hall. The language used in the contract supports an interpretation that the term is of great significance to the contract; the term is a condition.
Character of the breach [7.94]
Where the expected consequences of a breach of a particular term (as envisaged at the time of contracting) are likely to deprive an innocent party of substantially the whole benefit of the contract, the term is likely to be recognised as a condition of the contract. Let us consider once more the hypothetical example between A and B: The expected consequence of B’s failure to deliver and install an ‘oak wood floor with attached double-padded spring underlay’ is that A’s hall will be fitted with a wood inappropriate for ballroom dancing purposes. A required non-slippery flooring which provides ballroom dancers with appropriate shock absorption. Breach of the term is likely to deprive A substantially of the whole benefit under the contract since any other wood is unlikely to have the same important features, that is, traction and shock absorption.
[7.95]
In Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962]
2 QB 26 (Hongkong Fir Shipping), discussed below at [7.102], a term in a charterparty agreement requiring a ship to be seaworthy was held not to be a condition in light of the fact that such a stipulation was capable of being breached by the slightest or most trivial of things such as a nail missing from one of the ship’s timbers: at 62. The stipulation as to seaworthiness could ‘be broken by the presence of trivial defects easily and rapidly remediable as well as by defects which must inevitably result in a total loss of the vessel’: at 71. [7.96]
A person who hires a ship missing a nail in one of its timbers is not substantially deprived of the benefit of a seaworthy ship. On the other hand, as in our hypothetical scenario above, B’s failure to deliver and install the correct flooring for A’s dancing ballroom denies A of the entire benefit of the arrangement. Such a stipulation can only be breached in a fairly discrete manner; namely, delivery and installation of a type of wood other than that expressly specified in the contract. [page 346]
Adequacy of damages [7.97]
An objective assessment as to whether a term is a condition may also, in some instances, require deliberation as to whether damages alone would serve as an adequate remedy. As noted in Oaktech Pty Ltd v Legion Heights Pty Ltd (t/as A M Machinery) [2008] VSCA 145 at [20]: ‘the adequacy of damages may be an indication that a term was not intended by the parties to be a condition.’ The finding is entirely dependent on the facts of each particular case. If damages provide adequate compensation, a court is less likely to construe the term breached as a condition of the contract.63 In relation to the hypothetical scenario above: Damages are unlikely to be an adequate remedy for A since A will only want to contract with a party who is able to install appropriate flooring and would not likely want B to attempt
rectification. Moreover, given that B does not stock any other appropriate or comparable varieties, damages are unlikely to suffice. It is highly likely that the term will be construed as a condition. Thus, A will have the right to elect to terminate the contract with B and, in addition, B will have to compensate A for loss suffered as a result of the breach of the term.
Previous judicial determinations [7.98]
Where a given term has previously been judicially classified, it is likely that subsequent courts will endorse that classification. This approach reflects the notion of stare decisis64 and is designed to promote certainty in the field of contract law.
Condition implied by statute [7.99]
Certain terms are recognised as conditions under statute. For example, Sale of Goods legislation and the Australian Consumer Law (ACL) include provisions which deem specific terms to be conditions. For instance, s 13 of the Sale of Goods Act 1895 (SA) stipulates that goods shall match their description while s 14(a) specifies that goods must be fit for their disclosed purpose. Implied conditions provided for in the ACL include, for example, that: goods supplied and services provided sold by description must match their description;65 goods supplied and services provided must be of acceptable quality;66 and goods supplied and services provided must be fit for any disclosed purpose.67 Where a term is an implied condition, statutory remedies are available.68 [page 347]
Intermediate term [7.100] An intermediate term, sometimes also referred to as an innominate
term, is a relatively new addition to the typology of terms. As its label suggests, an intermediate term reflects a term which lies somewhere in between a condition and a warranty. As such, it has been recognised as bringing ‘greater flexibility to the law of contract’.69 The novel aspect of an intermediate term relates to its ability to be breached in a major or in a minor way; the actual and foreseeable consequences of a breach of such a term (as expected at the time of contracting) may be serious or trivial depending on the severity of the breach at the time it occurs. The gravity of breach determines the remedies available. [7.101]
A fundamental breach of an intermediate term entitles the innocent party to elect to terminate the contract and claim damages; these are the same remedies available for breach of a condition. Where an intermediate term is breached in a minor or non-essential way, the innocent party is not entitled to elect to terminate the contract, but may claim compensation in the form of damages; this is the same remedy available for breach of a warranty.
[7.102] The English courts recognised intermediate terms in Hongkong Fir
Shipping.
Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 Brief facts: The plaintiff was the owner of a ship, the Hongkong Fir. The plaintiff contracted with the defendant under a charterparty (contract for the hire of a ship) for a period of 24 months. The contract contained a seaworthiness clause stipulating that the ship was ‘in every way fitted for ordinary cargo service’. The engine room staff were incompetent and the machinery was very old. Several months of sailing were lost due to engine trouble. Kawasaki served a notice of termination of the contract. Issue: Could Kawasaki terminate the agreement? This right depended upon the classification of the seaworthiness clause.
Conclusion: The court held (at 71) that the seaworthiness term was an intermediate term as it was capable of being breached ‘by the presence of trivial defects easily and rapidly remediable as well as by defects which must inevitably result in total loss of the vessel’. Where, at the time of the breach, the innocent party is substantially deprived of the benefit of the contract, the breach will be a serious one. On the facts, the incompetence of the engine room staff and the delays incurred as a result of mechanical trouble [page 348] did not deprive Kawasaki of the substantial benefit of the contract. The court had regard to numerous factors including the fact that the defendants were able to charter the ship for 17 out of the 24 month period; no expense had been spared in attending to the mechanical problems; and incompetent staff members were replaced. In light of all the circumstances, the gravity of the breach was not a serious breach of an intermediate term. Kawasaki was not entitled to terminate the contract and could claim damages only. [7.103] The case was seminal in that it formally recognised the existence of
intermediate terms and provided judicial guidance as to when a breach would be regarded as serious. To make an assessment as to whether the innocent party would be deprived of substantially the whole benefit of the contract, the actual and foreseeable consequences of the breach as measured at the time of the breach must be taken into account. This is a question of construction of the contract in light of the purpose of the contract and nature of the relationship between the parties. [7.104] The
Australian courts indicated approval of the Hongkong Fir Shipping decision, albeit in obiter, in Ankar Pty Ltd v National Westminster Finance (Aust) Ltd (1987) 162 CLR 549; 70 ALR 641.
Intermediate terms were recognised as part of Australian law by the High Court in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 241 ALR 88 (Koompahtoo). In this case, the parties entered into a joint venture agreement for an extensive land development project. Koompahtoo provided the land and Sanpine provided its financial expertise. The majority found the terms pertaining to Sanpine’s obligation to maintain the books of account in accordance with generally accepted accounting standards were capable of being breached in a major and a minor way. Sanpine breached this obligation, which became apparent upon Koompahtoo’s entry into administration. [7.105] After considering the gravity of the breach, the court held that the
financial affairs of the joint venture were not capable of being assessed; Sanpine had seriously breached its obligation to comply with generally accepted accounting standards. Specifically, Sanpine was ‘unable to provide [the administrator] (and was later unable to provide the trial judge) with proper joint venture books and accounts that would permit such assessment’.70 The breach went ‘to the root of the contract’.71 As such, it was held that: … as a matter of construction of the contract, it ought to be accepted that breaches of that order deprived Koompahtoo of a substantial part of the benefit for which it contracted.72
[page 349] [7.106] Koompahtoo has been applied in numerous cases since the judgment
was delivered. For instance, in Richard v Moore Stephens Adelaide Pty Ltd [2015] SASCFC 147 at [124], the court specifically noted that ‘the common law now recognises “intermediate” terms which operate as if they are essential terms in respect of sufficiently serious breaches and as if they are non-essential terms in respect of less serious breaches’.73 [7.107] The table below summarises the Australian position with respect to
intermediate terms:
Table 7.2: Intermediate terms When were The High Court recognised the concept of intermediate intermediate terms in Koompahtoo, which approved terms accepted as part of Australian and applied Hongkong Fir Shipping. law? How does one In assessing whether a term is an intermediate term classify a term as it is necessary to consider the actual and foreseeable being an consequences of a breach of the term in light of the intermediate contract as a whole (as expected at the time of term? contracting). If it is possible to breach the term in both a trivial and serious way, the term is likely to be an intermediate term. When will breach of an intermediate term entitle the aggrieved party to terminate the contract?
This will be determined upon a construction of the contract and primarily rests upon the gravity of the breach and the consequences at the time of the breach.
What test evinced in Koompahtoo is applied to determine whether a breach of an intermediate term is serious?
Does the breach deprive the aggrieved party of a substantial benefit for which it had contracted?
A serious breach, which can be described as ‘going to the root of the contract’, will entitle the aggrieved party to elect to terminate the contract and claim damages.
This is based on the test in Hongkong Fir Shipping: Does the breach deprive the aggrieved party of substantially the whole benefit of the contract?
[page 350]
Warranty [7.108] A
warranty is a minor or inessential term of a contract. Although breach of a warranty renders a contract something different to that
agreed to by the parties, the contract can still be performed in essentially the same way as contemplated by the parties at the time of bargaining.74 A term will be classified as a warranty where it is not possible to infringe the term in any way other than in an inessential manner. This assessment is a matter of construction. As discussed above, a range of factors including the importance of the term, the way in which the term is expressed, the character of the breach, and the adequacy of damages as compensation will be taken into account. Breach of a warranty entitles the innocent party to damages only; termination of the contract is not possible.
Termination — process and consequences [7.109] Termination for breach of contract is not ‘effected automatically’;75 the
contract does not simply cease to exist altogether. Rather, termination in this context refers to a process whereby parties are relieved of their obligations in relation to future performance at the election of the aggrieved party.76 The innocent party has to make a choice between two inconsistent legal rights: the right to affirm the contract (notwithstanding the breach) and keep the contract on foot; and the right to terminate for breach. This right does not need to be acted upon immediately following a breach but must be exercised within a reasonable time so as not to prejudice the party in breach.77 [7.110]
Once the innocent party has decided which course of action to take, the decision to affirm or terminate the agreement must be communicated to the other party. This choice is known as an election and was explained by Owen J in The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1; 225 FLR 1 at 772: The doctrine of election applies where a party to a legal relationship, confronted with a choice between alternative and inconsistent rights, elects to enjoy one right and surrender the other. In relation to a contract, an election occurs when the conduct of the party who is alleged to have affirmed the contract can only be consistent with the continued existence of the contract. … Conduct can only amount to an election when it is clear, unequivocal and inconsistent with the continuance of the contract.
[page 351] [7.111]
Once the innocent party has made an election and decided which course of action to take, the decision to affirm or terminate the agreement must be communicated to the other party in a clear and unequivocal manner by way of words or conduct.78 That being said, the aggrieved party is not required to personally inform the party in breach of his or her decision. It matters not whether it comes from them or a third party, provided the fact of election comes to the attention of the party in breach.79 In any event, it is good business practice for the aggrieved party to clearly communicate their choice to the party in breach. This will typically avoid later disputes as to what the aggrieved party actually intended.
[7.112]
Importantly, once an election is made, the choice is final and typically cannot be retracted.80 This rule has been adopted by the courts in the interests of certainty: the person affected is entitled to know where they stand and the person electing should not have the opportunity of changing their mind and subjecting the party in breach to conflicting obligations.
[7.113]
If a party elects to terminate, the termination takes effect from the time the innocent party elects to discharge the agreement.
Damages [7.114]
Breach of any term of a contract — condition, intermediate term or warranty — entitles the aggrieved party to damages. Damages will be nominal (a token amount) unless the innocent party can prove that they have sustained a loss as a result of the breach. The premise of damages is to place the innocent party into the position they would have been in had the contract been performed as agreed; that is, had the contract not been breached.81 Damages are sometimes referred to as compensation and are discussed in detail in Chapter 8.
Termination by repudiation Repudiation [7.115]
The concept of repudiation was enunciated by Gibbs CJ in Shevill v Builders Licensing Board (1982) 149 CLR 620 at 625–64; 2 ALR 305: A contract may be repudiated if one party renounces his liabilities under it — if he evinces an intention no longer to be bound by the
[page 352] contract … or shows that he intends to fulfil the contract only in a manner substantially inconsistent with his obligations and not in any other way. [7.116]
Simply stated, a contract can be repudiated where one party is unwilling or unable to perform either the whole of the contract or a fundamental aspect of the contract, which deprives the aggrieved party of substantially the whole benefit under the contract. In effect, repudiation is a ‘rejection’ of the contract. Repudiation is sometimes referred to as renunciation.82
Unwilling or unable to perform [7.117]
How does a court assess whether or not a party has ‘evinced an intention to no longer be legally bound’ by a contract? Establishing a party’s state of mind is a difficult task. For this reason, a party’s intention will be inferred based on an objective assessment as to whether they were unwilling or unable to perform so as to deprive the innocent party of substantially the whole benefit of the contract. The objective test enquires: would a reasonable person consider that the non-performing party had repudiated his or her obligations so as to deprive the other party of substantially the whole benefit under the contract? This will always depend upon the facts of each particular case in light of all the circumstances. A party’s subjective intention is irrelevant.83 An unwillingness or inability to perform can be
demonstrated by words or conduct by way of a single act or multiple acts considered collectively. [7.118]
An act may comprise of a single oral or written communication. For example, A may expressly communicate to B that he cannot continue contract performance: ‘I am unable to continue providing building services as per our agreement.’ Alternatively, a party may repudiate a contract by performing in a manner inconsistent with the obligations owing under the agreement. Conduct includes ‘inaction’, that is, refraining from doing an act. For instance, a landowner who denies the contracted builder access to the premises under construction by, for example, locking the access gate or doors to the building, demonstrates the owner’s unwillingness to perform an essential obligation.84 Providing access to the site is clearly fundamental to performance of the contract.
[7.119]
Penola Trading Co Pty Ltd v Sunny Springs Pty Ltd [2009] VSCA 161 provides a useful example where the plaintiff’s inaction (refraining from carrying out an act) amounted to repudiation. The parties contracted in regards to the sale of a hotel with gambling facilities. The agreement required that Penola obtain the necessary gaming licences. Penola did not do so. This inaction constituted an unwillingness [page 353] to continue with a fundamental component of the contract — Penola had repudiated the contract. It is important to note that mere delay of performance will not generally constitute repudiation. Delay will amount to repudiation only where the delay substantially deprives the promisee from the benefit of the promise.85 The delay must be of such length that the only reasonable inference to be drawn from the inaction is that the party is unwilling or unable to perform.
[7.120] Multiple
acts (each in themselves not amounting to fundamental breaches) may constitute repudiation for a fundamental breach when
viewed collectively. A relevant case example on this point is Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17; 57 ALR 609. Here, the lessee failed to pay rent, failed to open the premises on time, obstructed access to the premises, caused damage to the drains, and sublet the premises without consent. The court found that these breaches, considered altogether, amounted to serious repudiation of the contract. Collectively, the breaches constituted a fundamental breach justifying termination of the contract.
Acting on an erroneous interpretation of the contract [7.121]
Where one of the parties interprets their rights and obligations incorrectly and acts on an erroneous construction of the contract, he or she could be demonstrating an unwillingness or inability to perform the contract as per its terms.86 A court may be willing to infer repudiation on the basis that the promisor evinces ‘an intention to perform the contract only in a manner substantially inconsistent with its terms’.87 A crucial factor a court will take into account when making an objective assessment as to a party’s intentions in this context is whether the party asserting an incorrect view of the contract holds this view honestly. The case of DTR Nominees provides valuable insight on this point. The majority held: No doubt there are cases in which a party, by insisting on an incorrect interpretation of a contract, evinces an intention that he will not perform the contract according to its terms. But there are other cases in which a party, though asserting a wrong view of a contract because he believes it to be correct, is willing to perform the contract according to its tenor. He may be willing to recognize his heresy once the true doctrine is enunciated or he may be willing to accept an authoritative exposition of the correct interpretation.
[7.122] This
suggests that an aggrieved party should not be too hasty in terminating a contract for repudiation in instances where the party relying on an incorrect [page 354]
interpretation of the contract may act in accordance with the terms once he or she has been alerted to the correct interpretation. As such, it becomes necessary for an aggrieved party to take reasonable steps to inform the mistaken party of ‘the error of its ways or indeed to give it any opportunity to reconsider its position in the light of an assertion of the correct interpretation’.88 An aggrieved party who does not take such reasonable steps to clarify any misunderstandings before terminating a contract for repudiation risks becoming liable for wrongful termination of the contract, which may also amount to repudiation on their part.
Fundamental breach [7.123] Where
a party breaches a condition or an intermediate term in a serious way, the breach may be repudiatory. This occurred in the case of Associated Newspapers Ltd v Bancks (1951) 83 CLR 322. Here, the plaintiff’s failure to comply with an essential term of the contract, namely, placing the defendant’s cartoon on the front page of the comic section of the plaintiff’s newspaper, amounted to a breach of a condition and demonstrated an unwillingness to be bound by the contract.89 In such instances, there is an overlap of rights to terminate conferred upon an aggrieved party. From a practical point of view, this means that where a contract has been breached in a fundamental way, courts rarely need to consider whether the breach is also repudiatory.
Anticipatory breach [7.124] An anticipatory breach involves one party indicating their intention
not to perform their side of the bargain before contract performance falls due. As such, anticipatory breach constitutes repudiation. A party may communicate their intention not to perform by words or conduct. The communication of the intended breach must be unequivocally clear. A promisee may accept repudiation and elect to terminate the contract before performance falls due provided that the breach is sufficiently serious so as to substantially deprive the promisee of the
whole benefit of the contract.90 Where this cannot be established, only damages may be claimed.
Termination [7.125] As is the case for termination for breach, an aggrieved party must
elect to terminate the contract for repudiation.91 In effect, the innocent party must communicate ‘acceptance’ of the other party’s repudiation in an unequivocal manner by words [page 355] or conduct. Where an aggrieved party decides to keep the contract on foot, that is, does not accept the other party’s repudiation, he or she must remain willing and able to perform as per the contract. Both parties will then remain bound by their contractual obligations. [7.126] Where
an innocent party elects to terminate for repudiation and communicates this to the other party, he or she cannot subsequently change his or her mind.92 Parties will be relieved of all future obligations; however, rights or obligations already accrued are not affected.93 Some terms provided for by the parties will continue to operate post-termination. These are known as secondary or procedural obligations. Examples include confidentiality clauses and restraint of trade clauses.94 Such terms may be enforceable after a contract has been terminated unless enforcement is contrary to public policy.
__________________ 1 2 3 4 5
Re Moore & Co Ltd and Landauer & Co [1949] 2 All ER 193; [1921] 2 KB 519; Bellgrove v Eldridge (1954) 90 CLR 613 at 617; Highmist Pty Ltd v Tricare Ltd [2005] QCA 357 at [41]. Hoenig v Isaacs [1952] 2 All ER 176. (1946) 72 CLR 386 at 401. Arcos Ltd v E A Ronaasen & Son [1933] AC 470 at 479–80. Attorney-General of Botswana v Aussie Diamond Products Pty Ltd (No 3) [2010] WASC 141 at [214].
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
Quantum meruit is Latin for ‘the amount deserved’ and describes a doctrine which permits recovery of a reasonable sum for services performed or for materials rendered under a contract which has only been partly performed. See [7.17]–[7.19] and [7.25]–[7.26]. For a greater discussion of the doctrine of quantum meruit, see Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221; 69 ALR 577. See, for example, Phillips v Ellinson Brothers Pty Ltd (1941) 65 CLR 221. Mackay v Dick (1881) 6 App Cas 251 at 263; Butt v McDonald (1896) 7 QLJ 68 at 70–1; Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 607; 26 ALR 567. Shevill v Builders Licensing Board (1982) 149 CLR 620 at 625; 42 ALR 305. On repudiation, see [7.115]–[7.116]. See Lantry v Tomule Pty Ltd (2007) 12 BPR 23,727; [2007] NSWSC 81 at [81]. See further at [7.31], and Chapter 4 at [4.130]–[4.135]. Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 566; 41 ALR 444. See Legione v Hateley (1983) 152 CLR 406; 46 ALR 1; Stern v McArthur (1988) 165 CLR 489; 81 ALR 463; Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315; 201 ALR 359; Kayserian Nominees (No 1) Pty Ltd v JR Garner Pty Ltd [2008] NSWSC 803. Sopov v Kane Constructions Pty Ltd (No 2) (2009) 24 VR 510. See, for example, Lintel Pines Pty Ltd v Nixon [1991] 1 VR 287; Metropolitan Transit Authority v Waverley Transit Pty Ltd [1991] 1 VR 181. See, for example, Pan Foods Co Importers & Distributors Pty Ltd v Australia and New Zealand Banking Group Ltd (2000) 170 ALR 579; Duffy Bros Fruit Market (Campbelltown) Pty Ltd v Gumland Property Holdings Pty Ltd [2007] NSWCA 7. Discussed further on at [7.46]–[7.53]. In New South Wales Rifle Association Inc v Commonwealth of Australia (2012) 266 FLR 13 at 55, it was stated that the duty to act fairly and in good faith will ordinarily be satisfied where the party exercising the contractual power acts reasonably in all the circumstances. On the implied duty of good faith, see [4.130]–[4.135]. Tallerman & Co Pty Ltd v Nathan’s Merchandise (Victoria) Pty Ltd (1957) 98 CLR 93 at 144. British & Benningtons Ltd v North West Cachar Tea Co [1923] AC 48. See further Chapter 4 at [4.156]. McDermott v Black (1940) 63 CLR 161. See [2.103]. See also Chapter 4 at [4.156]. (2000) 201 CLR 520 at 533; 172 ALR 346. Fitzgerald v Masters (1956) 95 CLR 420. CGM Investments v Chelliah (2003) 196 ALR 548 at 555. Agricultural and Rural Finance v Gardiner (2008) 238 CLR 570 at 597; 251 ALR 322. See, for example, Phillips v Ellinson Bros Pty Ltd (1941) 65 CLR 221 at 243–4; Holland v Wiltshire (1954) 90 CLR 409 at 420–1; Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444 at 458–9; 9 ALR 309; Badat v DTZ Australia (WA) Pty Ltd [2008] WASCA 83 at [54]. Cf Agricultural and Rural Finance v Gardiner (2008) 238 CLR 570 at 620; 251 ALR 322. See also Chapter 4 at [4.171]–[4.176]. See [7.84]. Gange v Sullivan (1966) 116 CLR 418 at 441–2; Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 566; 41 ALR 444. Mackay v Dick (1881) 6 App Cas 251; Peter Turnbull & Co Pty Ltd v Mundus Training Co
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
Australasia Pty Ltd (1954) 90 CLR 235. See Chapter 6. See, for example, Meehan v Jones (1982) 149 CLR 571 at 589; 42 ALR 463. Gange v Sullivan (1966) 116 CLR 418; Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537; 41 ALR 444. On frustration, see [7.63]. See [7.77]. Lobb v Vasey Housing Auxiliary (War Widows Guild) [1963] VR 239; Groser v Equity Trustees Ltd [2008] VSC 163. Laybutt v Amoco (Australia) Pty Ltd (1974) 132 CLR 57; 4 ALR 482. Wong Lai Ying v Chinachem Investment Co Ltd (1979) 13 BLR 86. Lindsay-Owen v Associated Dairies [2000] NSWSC 1095. Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524. Ocean Tramp Tankers Corp v V-O Soufracht [1964] 2 CB 226. Kodros Shipping Corp of Monrovia v Empresa Cubana de Fletes [1983] 1 AC 736. Bank Line Ltd v Arthur Capel and Co [1919] AC 435. National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675. Pioneer Shipping v BTP Tioxide (The Nema) [1982] AC 397; Caltex Oil v Howard Smith Industries [1973] NSWLR 89. See [7.55]. Restitution is discussed in Chapter 8. Australian Consumer Law and Fair Trading Act 2012 (Vic) s 36. Above s 37. Above s 38. Frustrated Contracts Act 1988 (NSW) Pt 3. Frustrated Contracts Act 1988 (SA) s 7(1). Above s 7(2). Above s 7(4). Frustrated Contracts Act 1988 (NSW) s 6(1) and (2); Frustrated Contracts Act 1988 (SA) s 4(2); Australian Consumer Law and Fair Trading Act 2012 (Vic) s 35(3). Damages will be nominal or token amount unless the innocent party can prove they have suffered loss. See Robinson v Harman (1848) 1 EX 850; Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; 253 ALR 1. Damages are discussed in more detail in Chapter 8. See, for example, Foran v Wright (1989) 168 CLR 385; 88 ALR 413. However, where the innocent party claims damages for loss of bargain (loss of profit), they must show that they were entitled to terminate for the breach under common law. See Shevill v Builders Licensing Board (1982) 149 CLR 620; 42 ALR 305. This commonly occurs in relation to standard form contracts. L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235; Amann Aviation Pty Ltd v Commonwealth (1990) 22 FCR 527; 92 ALR 601. See also Associated Newspapers Ltd v Bancks (1951) 83 CLR 322; (1978) 138 CLR 423; 19 ALR 223. This was the High Court appeal case from Tramways (originally heard in the Supreme Court of New South Wales). The High Court confirmed the test of essentiality established in the trial
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 92 93
94
case. Shevill v Builders Licensing Board (1982) 149 CLR 620; 42 ALR 305; Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549; 70 ALR 641. See [1.56]. ACL s 56. ACL s 54 ACL s 55. See, for example, how the ACL remedies breach of implied conditions — Chapter 6 ‘major failure’. (1987) 162 CLR 549 at 562; 70 ALR 641. (2007) 241 ALR 88 at 147. Above. Above. See also National Australia Bank Ltd v Rice [2015] VSC 10. Bettini v Gye (1876) 1 QBD 183. Highfield Property Investments Pty Ltd v Commercial & Residential Developments (SA) Pty Ltd [2012] SASC 165 at [277]. Obligations which have been partially performed or those which have not yet accrued are unenforceable from the point of termination. The right to terminate may be lost where the innocent party affirms the contract or otherwise causes the other party prejudicial delay. Sargent v ASL Developments Ltd (1974) 131 CLR 634; 4 ALR 257. Majik Markets Pty Ltd v S & M Motor Repairs Pty Ltd (No 1) (1987) 10 NSWLR 49 at 54; Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313 at [155]; C&P Syndicate Pty Ltd v Reddy [2013] NSWSC 643 at [157]. (1974) 131 CLR 634 at 656; 4 ALR 257. Robinson v Harman (1848) 1 Exch 850. See, for example, Associated Newspapers Ltd v Bancks (1951) 83 CLR 322. Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623; 85 ALR 183. Carr v JA Berriman (1953) 89 CLR 327. (1989) 166 CLR 623; 85 ALR 183. Dainford v Smith (1985) 155 CLR 342; 58 ALR 285. Above at CLR 365. (1978) 138 CLR 423 at 432; 19 ALR 223; D&R Constructions (Aust) Pty Ltd v Wesiak [2016] NSWCATAP 38. (1951) 83 CLR 322 at 339 approving Mersey Steel and Iron Co Ltd v Naylor, Benzon & Co (1884) 9 App Cas 434. Foran v Wight (1989) 168 CLR 385; 88 ALR 413. An exception is where future performance is impossible. Newbon v City Mutual Life Assurance Society Ltd (1935) 52 CLR 723. For example, building contracts commonly provide for progress payments or instalments of price for different stages of construction. A right to progress payments for work substantially complete survives termination. See, for example, Hanneybel v Uniflex (Australia) Pty Ltd [2002] WASCA 349.
[page 357]
CHAPTER 8
Remedies
Key Ideas By the end of this chapter, you should be able to identify: ▶
common law remedies – damages ■ causation ■ contributory negligence ■ remoteness ■ mitigation ■ calculating damages – liquidated damages and penalties – deposits – actions for debt – rescission
▶
equitable remedies – rectification – specific performance order
– – – ▶
injunction restitution account of profits
equitable damages under statute
[page 358]
Introduction [8.1]
In this chapter we consider the various remedies available to parties when a contract has (or is foreshadowed to) come to an end. These remedies are divided into two broad classes: common law remedies, which are primarily concerned with compensating a plaintiff for their loss through an award of damages, and equitable remedies, which are generally broader and often serve to ‘fill the gaps’ left by the common law.1 Whereas the common law is largely limited to compensating injured parties with money, equity can go much further and compel parties to honour contractual obligations, prevent them from violating those obligations, and even force them to relinquish goods or money.
Common law remedies Damages [8.2]
Breach of any term of a contract entitles an aggrieved party to claim damages for loss suffered. The premise of damages is to place an innocent party into the position they would have been in had the contract been performed and not breached.2 As such, damages in contract are compensatory3 not punitive.4
[8.3]
Damages are regarded a secondary obligation of a contract — upon entering into a legally binding agreement, parties assume a responsibility to pay damages in the event of a breach of a contractual obligation. The primary obligation of the parties is, of course, to properly perform their obligations. A breach of contract gives rise to a cause of action, and this entitles the aggrieved party to claim damages. Note, where no actual loss is suffered, an aggrieved party may only seek nominal damages; a token amount awarded in recognition of the breach.5 Thus, an innocent party must prove that he or she suffered actual loss. As stated in Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; 104 ALR 1 at CLR 118 (Amann): A plaintiff bears the onus of establishing the extent of his loss or injury on the balance of probabilities. To satisfy the requirements of that rule, a plaintiff must, if he is to recover more than a nominal amount in such an action, affirmatively establish assessable damage, that is to say, loss or injury which is capable of being measured in monetary terms.
[8.4]
Additionally, a plaintiff must demonstrate that the loss was caused by the breach (causation rule) and that the losses suffered were not too remote (remoteness rule). The principles of causation and remoteness are considered below. [page 359]
Causation [8.5]
Simply stated, the rule in relation to causation is that a plaintiff must prove a causal connection between the breach of a contractual obligation and the loss suffered.6 The causation rule functions to limit a plaintiff’s claim to compensation. The question to ask is the following: but for the breach, would the plaintiff have suffered the loss complained of? For example: A is expecting B to deliver five crates of fresh strawberries on Saturday morning. A has already paid for the strawberries; they are the primary ingredient in the ‘Strawberries and Cream Cups’
she plans to serve at her Strawberries and Cream Food Truck at the local school fete on Saturday. A has already paid for a permit to trade at the school fete. B breaks the agreement and fails to deliver the strawberries for which A has paid. As a result, A is left ‘out of pocket’ since she already paid for the strawberries. She also had to pay for the fete permit in advance. Without the strawberries she cannot make any profit at the fete (it is unlikely she would sell the servings of cream without the strawberries!). A must establish a causal link between B’s breach and her loss. But for B’s breach of his contractual obligation to deliver the strawberries, A would not have suffered loss as she would have produce to sell at her Strawberries and Cream Food Truck. There is a clear causal connection; causation is established on the facts.
[8.6]
The application of the ‘but for’ test is referenced in Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 at 315 (Alexander): The test of causation poses the question whether the plaintiff’s loss would not have been suffered but for the defendants’ default. The question is to be answered by applying that test in a practical common sense way.
This suggests that the ‘but for’ test is not ‘the exclusive test for causation’7 and allows for a value judgment to be made in light of the particular circumstances based on a ‘commonsense approach’.8 This position was enunciated by Lord Salmon in Alphacell Ltd v Woodward [1972] AC 824. His Lordship noted (at 847) that the question of causation is ‘essentially a practical question of fact which can best be answered by ordinary common sense rather than by abstract metaphysical [page 360] theory’.9 It is also important to note that the breach upon which a
claim is based need not be the sole cause; it must, however, be a cause of the loss.10
Contributory negligence and causation [8.7]
Statute provides that where a plaintiff has contributed to his or her own contractual loss (in the sense that they have been contributorily negligent) and that breach was ‘concurrent and coextensive with a duty of care in tort’, damages will be apportioned accordingly.11 The case of O’Meara v Dominican Fathers (2004) 153 ACTR 1 is a useful example on this point. The plaintiff was injured falling off a balustrade on the defendant’s property. The defendant owed the plaintiff a duty of care in tort. In addition, there was an implied term in contract that the premises would be safe. The plaintiff was affected by alcohol when she fell off the balustrade and therefore contributed to her injury. Specifically, the court noted (at 35): The appellant’s manoeuvre in seeking to sit on the balustrade with a large fall behind it, in clothes which made the manoeuvre even more awkward and difficult than usual for a person of her height, and whilst affected by alcohol, was, and should have been recognised by her as, dangerous. On the other hand, the respondent had, in effect, invited students to congregate in the area by the provision of tables and seats but had taken no steps to warn or guard against such a manoeuvre although it knew or ought to have known that it was likely that some students might attempt it.
The court held that the defendant was liable. However, damages were reduced by 50 per cent, the court finding that the plaintiff contributed to the injuries she sustained.
Intervening acts/events and causation [8.8]
Where an intervening act or event is sufficiently significant to break the causal connection between breach of a contractual obligation and loss suffered, a claim for damages cannot be substantiated. It is important to note that where a defendant is under a contractual obligation to protect against the kind of intervening act which occurred, the intervention will not displace the defendant’s responsibility for the loss caused by it.12
[page 361]
Remoteness [8.9]
Similarly to causation, the remoteness rule also functions to limit a plaintiff’s claim to compensation. Simply stated, a plaintiff must demonstrate that the loss suffered was not too remote: the loss must be sufficiently connected to the breach. Essentially, this means loss must be of a kind which is reasonably foreseeable. The case of Hadley v Baxendale (1854) 9 Exch 341 provides authoritative guidance on this point. Specifically, Baron Alderman held (at 354–5): Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, that is, according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach.
[8.10]
[8.11]
This formulation of the remoteness rule can be expressed as the two ‘limbs’ of Hadley v Baxendale. Losses will not be too remote where losses claimed fall into either one of the two categories/limbs: 1.
Losses occurring in the ordinary course of things, where losses are reasonably foreseeable as a result of the breach of the contractual obligation. Such losses are sometimes referred to as ‘direct losses’.13
2.
Losses occurring as a result of special circumstances known to the parties at the time of contracting. Knowledge of the special circumstances brings a loss which would otherwise be regarded as too remote into the realm of a relevantly foreseeable loss. Stated differently, losses falling within the scope of the second limb of Hadley v Baxendale include those losses the parties contemplated at the time of contracting.
Losses occurring in the ordinary course of things amount to the kinds of loss which one could reasonably expect to flow from a breach of a contractual obligation. Let us refer back to the hypothetical example
(at [8.5]): Natural or foreseeable losses consequential to B’s failure to deliver the five crates of strawberries to A would include money spent on the strawberries (which were not delivered) and A’s loss of profit (revenue generated from selling ‘Strawberries and Cream Cups’ from her food truck at the school fete). These losses are natural consequences stemming from B’s breach; they have occurred in the usual course of things as a result of the breach and thus fall within the first limb of Hadley v Baxendale.
[page 362] [8.12]
Those losses which are not natural consequences of the breach but which may reasonably be supposed were in the contemplation of the parties at the time of contracting may be claimed under the second limb of Hadley v Baxendale.14 Lord Asquith explained the position succinctly in Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 at 538: Where knowledge of special circumstances is relied on as enhancing the damage recoverable that knowledge must have been brought home to the defendant at the time of the contract and in such circumstances that the defendant impliedly undertook to bear any special loss referable to a breach in those special circumstances.
[8.13]
The facts of the case are presented below.
Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 Brief facts: The plaintiff, carrying on a laundry and dry cleaning business, contracted the defendant to fit a new boiler. The defendant knew that the plaintiff proposed to put the boiler to immediate use. There was a delay in delivery and installation.
Unbeknown to the defendant, the delay caused the plaintiff to miss out on the opportunity to enter into lucrative government contracts relating to the dying of fabrics. Issue: Could Victoria Laundry claim loss of the profits associated with the lucrative government contracts? Conclusion: No. The plaintiff could recover damages for loss of ordinary business profits arising from delay in delivery of the boiler (losses occurring naturally as a result of the breach of contract), but could not claim damages for loss of the profits that would have arisen from the lucrative government contracts. Those losses were too remote; the defendant had no knowledge of the prospect of government contracts or that the boiler was necessary to carry out those contracts. Thus, knowledge of special circumstances must be communicated before or at the time of contracting for such losses to fall within the second limb of Hadley v Baxendale. Let us consider once again the example (at [8.5]): would loss associated with the cost of the permit (paid for in advance) fall within the second limb or would this loss be too remote? [page 363]
It is unlikely that B will be liable for the permit fee paid by A. Unless the resale of the strawberries at a location requiring a permit was known to B at the time of contracting, the permit fee is likely to be considered a loss falling outside of either of the Hadley v Baxendale limbs. The question to ask: would B reasonably have concluded that the loss in question was ‘on the cards’? On the facts, the money spent on the school fete permit was not communicated to B. It is likely to be considered too remote.
[8.14]
In commercial practice, parties typically stress the importance of their counterpart’s timely and proper performance during negotiations and at the time of entry into a formal agreement. This is prudent as it serves to put the other party on notice that, if they breach the contract, the aggrieved party will suffer losses which might otherwise have been unforeseeable — being of a kind not reasonably contemplated.
Delay [8.15]
Losses arising from delay present an interesting problem. On the one hand, you could argue that losses brought about by a party’s delayed performance are losses occurring in the ‘ordinary course of things’ (falling into the first limb of Hadley v Baxendale). On the other hand, it might be plainly unforeseeable to the delaying party that the innocent party would suffer losses from the delay. The losses could also be of a kind which would not normally be regarded as an ordinary consequence of delay. The general legal position appears to be that losses arising from an unjustified delay must be in the contemplation of the parties in order to be legitimately claimed.15 This is essentially a restatement of the rule that losses howsoever incurred must not be too remote and that, if they are extraordinary types of losses, they must be in the contemplation of the parties at the time of contracting in order to be claimed in damages.
Mitigation [8.16]
So far we have discussed two limitations to claiming damages, namely, causation (the breach must be a cause of the loss sustained) and remoteness (damages must not be too remote). In addition, a plaintiff is under a duty to mitigate losses sustained as a result of the breach of contract. This means that a plaintiff must take reasonable steps to limit the losses flowing from the breach. The onus of proving that a plaintiff acted unreasonably lies with the defendant; this may be argued as part of a defence to the claim.
[8.17]
What action or inaction falls within the scope of acting reasonably or unreasonably is a question of fact and can only be answered in light of the particular circumstances of each case. Costly, risky or extravagant measures to mitigate [page 364] loss do not constitute ‘reasonable steps’.16 As noted in Regional Development Australia Murraylands and Riverland Inc v Smith [2015] SASCFC 160 at [139]: [I]t is important to bear in mind that mitigation does not require a party to do what is unreasonable — plaintiffs are not required to do things that present serious risks to their interests. They are not required to take unreasonable steps to mitigate their loss.
[8.18]
The threshold of what is reasonable in the circumstances is not high.17 In Banco de Portugal v Waterlow and Sons Ltd [1932] UKHL 1; [1932] AC 452, Lord McMillan stated (at AC 456): Where the sufferer from a breach of contract finds himself in consequence of that breach placed in the position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. It is often easy after an emergency has passed to criticise the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency. The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures and he will not be held disentitled to recover the costs of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken.
[8.19]
Let us think about steps which are likely to be deemed ‘reasonable’ in relation to our hypothetical example (at [8.5]): A is under a duty to mitigate her loss resulting from B’s breach of contract, that is, his failure to deliver the strawberries already paid for. A may, in her pursuit of limiting loss, purchase strawberries from another party — perhaps a fruit store — so that she has produce to sell from her food truck at the school fete. A
court is likely to consider purchasing replacement strawberries a reasonable step in limiting her loss of profits.
[8.20]
If a defendant can establish that a plaintiff acted unreasonably, this will restrict the amount a plaintiff can claim in compensation. Notably, a plaintiff can recover additional losses incurred as a result of taking reasonable steps to avoid loss.18 [page 365] Consider the following illustrative example based around our hypothetical strawberry scenario (at [8.5]): Let us assume that B delivers to A the crates of strawberries she has paid for. However, B is late in delivering the produce. The delay has meant that the strawberries have not been refrigerated/stored at the optimum temperature, which has resulted in the strawberries appearing limp, dehydrated and unappetising. In their current condition, they would not be fit for sale at the school fete. As such, A has had to purchase a special ‘fruit revival’ spray which rehydrates and glosses the fruit and produces an almost instantaneous juicy appearance. A paid $200 for the spray. The $200 paid for the spray is an additional loss A incurred while taking reasonable steps to avoid the loss of not being able to sell any strawberries (Strawberries and Cream Cups) at the school fete. A will be able to recoup this additional loss.
Calculating damages [8.21]
Prima facie, damages in contract are assessed at the date of the
breach.19 Simply stated, the point of breach reflects the point of loss. Therefore, losses will be assessed based on events which have occurred, or reasonably could be expected to occur, as at the date of breach. Notably, market rates prevailing at that point in time will be relevant when calculating damages. [8.22]
There are some circumstances which give rise to an exception to this general principle. For instance, a court may consider an alternative, more appropriate point in time to calculate loss where the assessment of damages at the point of breach would cause an injustice.20 One such circumstance could occur where goods have not been delivered as per the contract and the aggrieved party finds themselves without a market for purchasing substitute goods. In this instance, a court may reference an alternative date for calculating damages; one considered reasonable in light of the market conditions. Note also, a court is likely to refer to the date of performance rather than the date of breach when assessing damages for anticipatory breach of contract (as the breach has not yet occurred).
[8.23]
Generally speaking, damages are awarded on a ‘once and for all’ basis by way of a lump sum payment.21 The same general rule applies under tort law. Thus, a plaintiff will only be able to recoup an additional award of damages if there [page 366] is another cause of action or continuing breach of contract.22 There are various types of losses recognised by the courts when calculating damages, including expectation losses, reliance losses, and nonpecuniary losses such as mental distress, disappointment or injured feelings. Punitive or exemplary damages are not awarded for breach of contract even where the breach was malicious.23
Expectation damages [8.24]
Expectation losses compensate a plaintiff for those benefits
(gains/profits) he or she reasonably expected to obtain had the contract been performed. Consequently, expectation damages are equivalent to the value of the difference between what has been performed and what should have been performed as per the contract. Using our hypothetical example (at [8.5]): Let us assume B delivered five crates of strawberries to A half of which were of an inferior quality (very small and unripe). A will have to sell those strawberries at the school fete at a discounted price — half of her 200 ‘Strawberries and Cream Cups’ will only be sold at $2 rather than $5 each. This breach by B will enable A to claim expectation damages to compensate her for the difference in value amounting to $300 (100 × $5 = $500 for the ripe strawberry cups and 100 × $2 = $200 for the unripe/small strawberry cups: difference in value is $300).
[8.25]
Where a contract has been terminated, expectation damages may amount to the contract price, that is, the price promised under the contract. Sometimes this will include the amount expended to replace what was promised under the contract. Let us assume B has failed to deliver A’s strawberries on the date of delivery, a Saturday morning. Payment was to be made upon delivery. A needs to find another strawberry seller to buy from so that she has produce to sell from her Strawberries and Cream Food Truck later in the day. She buys the strawberries from C, a seller trading on a Saturday, at a price amounting to $100 more than she would have paid B had B not breached the contract. A’s expectation damages for B’s breach amounts to $100. A’s expected benefit of her contract with B was having strawberries to sell from her food truck. She now has them, albeit from C and for $100 more.
[8.26]
Stated most simply, a plaintiff seeks compensation for the expected
benefit. In line with this approach, a plaintiff may be entitled to claim for loss of an opportunity [page 367] or chance as part of expectation damages. The chance may be regarded as something of ‘value’ which would have been gained had the contract been performed. The Full Court of the South Australian Supreme Court has described this in the following way: ‘The loss of a chance to make a gain is a detriment that can be valued in monetary terms for the purposes of an award of damages.’24 [8.27]
Courts have awarded damages for loss of chance in relation to a lost commercial opportunity,25 loss of opportunity to benefit from a game show,26 loss of chance to win prizes in horse racing,27 and the loss of a chance to bring legal proceedings.28 A plaintiff must show that, based on the balance of probabilities, the chance had value.29 An award will be adjusted based on the probability of the opportunity eventuating. The High Court in Amann recognised that a lost commercial advantage or opportunity amounted to a compensable loss, even though there was a less than 50 per cent likelihood that the commercial advantage would actually be realised. The lower the probability of the opportunity being realised, the lower the award of damages.
[8.28]
Where building work performed does not comply with specifications (that is, the building has defects) a plaintiff may be compensated most practicably where the measure of damages is based on the cost of rectification or cost of ‘cure’. However, the cost of the cure must be both reasonable and necessary to conform to the contract and will include consequential losses suffered by the breach.30 What is reasonable and necessary will always depend upon the facts of the particular case at hand and is therefore a question of fact.31
Reliance damages
[8.29]
Reliance damages are compensation for the costs expended in reliance of contract performance. It may be useful to think of this loss as wasted expenditure. Usually, there is no need for a plaintiff to have a separate claim for reliance damages as such losses are often subsumed within expectation damages; the contract price will normally include both the cost of performance (costs incurred in performing the contractual obligations) and the net profit (expected gain after expenses). Let us consider a new scenario which illustrates this point clearly. [page 368]
A is a builder contracted to build B’s house. The value of the contract to A is $200,000 (contract price). It costs $100,000 in materials to build the house. B breaches the contract when he refuses to pay for the house. A’s reliance loss is the $100,000 A expended building B’s house. However, in this scenario, there is no need for A to claim reliance damages. A’s costs incurred in building the house would be subsumed as expectation damages, that is, loss of bargain damages (costs incurred plus net profit).
[8.30]
However, sometimes a plaintiff may not have expected to make a profit or it may not be possible to predict net profit. In such cases, reliance damages may be recoverable. A case which illustrates this point is Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; 104 ALR 1.
Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; 104 ALR 1 Brief facts: The Commonwealth Government entered into a contract with Amann Aviation (Amann) for Amann to provide coastal security by way of aerial surveillance of Australia’s
northern coastline for a period of three years. The defendant incurred considerable costs preparing for its contractual obligations. On the date the contract commenced, Amann was not ready to perform its obligations following which the government provided a notice of termination. Procedures for termination were not complied with and, as such, the plaintiff wrongfully terminated the contract with Amann. Amann treated the wrongful termination as repudiation of the contract and elected to terminate the contract. The contract was not highly profitable as more than three years were required to recoup the costs associated with fitting out the aircraft. Thus, Amann sued for reliance losses in the amount of $5.5 million claimed as costs associated with setting up aerial surveillance. Issue: Was Amann entitled to reliance damages? Conclusion: The High Court awarded Amann reliance damages. Amann was entitled to be placed in the same position they would have been in had the contract been performed. As it was not possible to predict Amann’s net profit, reliance damages were awarded. On this point the High Court noted (at CLR 81): If the performance of a contract would have resulted in a plaintiff, while not making a profit, nevertheless recovering costs incurred in the course of performing contractual
[page 369] obligations, then that plaintiff is entitled to recover damages in an amount equal to those costs in accordance with Robinson v Harman, as those costs would have been recovered had the contract been fully performed. Similarly, where it is not possible for a plaintiff to demonstrate whether or to what extent the performance of a contract would have resulted in a profit for the plaintiff, it will be open to a plaintiff to recoup expenses incurred, damages in such a case being described as reliance damages or damages for wasted expenditure.
Note, once Amann had demonstrated that the costs incurred were reasonably incurred, the onus that this was unlikely to
occur had the contract been performed shifted to the Commonwealth. The plaintiff did not discharge this onus.
Non-pecuniary losses [8.31]
Damages in contract are not generally awarded for non-pecuniary losses such as mental distress, disappointment or injured feelings caused by breach of contract. Such losses are, prima facie, considered too remote and fall outside of the scope of the rule in Hadley v Baxendale. There is, however, an exception to the general principle: non-pecuniary damages may be awarded where the essence of the contract is the provision of enjoyment.32 A useful example is a contractual arrangement for a holiday on board a cruise ship, the object of which is enjoyment and relaxation. Breach of a term the contract — perhaps the cruise ship is unsafe and passengers have to be rescued mid-journey — will entitle a plaintiff to claim an award of damages, including an amount for disappointment or mental distress.33 On this point, Mason CJ noted in Baltic Shipping Co v Dillon (1993) 176 CLR 344 at 365; 111 ALR 289: [D]amages for disappointment and distress are not recoverable unless they proceed from physical inconvenience caused by the breach or unless the contract is one the object of which is to provide enjoyment, relaxation or freedom from molestation.
[8.32]
Similarly, damages for loss of reputation are not generally recoverable under an award of damages in contract; this is the domain of tort law (specifically the tort of defamation). Exceptions to the rule may apply where a plaintiff’s business reputation has been injured as a result of a breach of a term of the contract [page 370] intended to protect the aggrieved party’s business reputation,34 or where a plaintiff has suffered a loss of opportunity to enhance their reputation.35
Liquidated damages and penalties [8.33]
It is quite common today for parties to include a liquidated or agreed damages clause in their contracts. These clauses stipulate a predetermined amount payable from the defendant to the plaintiff in the event of specific breaches of the agreement. The High Court noted in AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 at 193; 68 ALR 185 that such clauses make ‘for greater certainty by allowing the parties to determine more precisely their rights and liabilities consequent upon breach or termination’. If the defendant breaches the contract, the plaintiff is entitled to sue to enforce the liquidated damages clause and recover the specified sum as a debt.36 Liquidated damages clauses are therefore quite practical in that they stipulate the amount to be paid upon breach and save a plaintiff having to sue for general damages, which is both a costly and time-consuming exercise. Moreover, the plaintiff need not establish loss in order to claim the sum stipulated in a liquidated damages clause, nor rely upon the courts to quantify the payable damages.
[8.34]
An example of a common form of liquidated damages clause is as follows: In the event that Builder does not achieve Practical Completion of the Property by the date specified in this Agreement, and the delay is not excused under any provision of this Agreement, Builder will pay Customer the sum of $100 per day for each calendar day during which completion of the Property is delayed beyond the specified Practical Completion date.
[8.35]
This clause comes from a contract between a building company and a customer who has engaged the company to construct a property for them. The effect of this clause is that, should the company not achieve practical completion of the property by the specified date within the agreement, the company agrees (that is, freely assumes the obligation) to pay the customer the sum of $100 for each calendar day
after that date that it takes to accomplish practical completion. As we will see, a number of rules affect the validity of such clauses. [page 371] [8.36]
Terms requiring the payment of a deposit (discussed at [8.41]) are also commonly used in commerce. The typical stipulation is that a failure to pay the balance of the purchase price will result in forfeiture of the deposit.
Penalty clauses [8.37]
Liquidated damages clauses are legally valid and enforceable. On the other hand, penalty clauses are not. A penalty clause is essentially a clause that stipulates a sum payable on breach of contract which is ‘extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach’.37 It follows that a liquidated damages clause must represent a genuine pre-estimate of the loss likely to be caused by a breach of the contract.38 This assessment must be completed at the time of entry into the contract, not at the point of its breach: It is the prospective assessment of compensation commensurable with the interest of the [plaintiff] protected by the bargain. This is different from working out what damage can be proved from a particular breach after the event.39
[8.38]
In other words, the clause must be compensatory, not penal; it must be designed to offset the plaintiff’s predicted losses likely to flow from the defendant’s breach, not to deter either party from breaching the agreement (which is the essence of a penalty).40 The rule against penalties incorporates both common law and equitable principles, which makes its placement in this chapter difficult. However, without proof that a liquidated damages clause is a penalty, the ordinary common law rules pertaining to the interpretation and enforcement of contractual provisions apply.
[8.39]
The onus rests upon the party resisting the enforcement of the clause in question to prove that it is a penalty as opposed to a liquidated damages clause.41
Distinguishing liquidated damages clauses from penalties [8.40]
The question of whether a sum stipulated in a contract to be payable upon breach is a liquidated damages clause or a penalty is one of construction, taking into account the terms of the particular contract and surrounding circumstances at the [page 372] time of making the contract (not at the time of breach).42 Other relevant factors that the courts will consider include the origins of the clause and the nature of the relationship between the parties in undertaking this assessment,43 as well as the means (if any) used in the calculation of the stipulated sum.44 The ultimate question is whether, at the time the contract was entered into, the amount of agreed damages was calculated so as to represent a genuine preestimate of the loss likely to be caused by a breach of the contract.
Deposits [8.41]
A deposit is a sum payable as a first instalment towards the purchase of an item or as a pledge under contract, with the balance being payable at a later date. Ultimately, a deposit serves two purposes: it signifies the purchaser’s commitment and provides security for performance, and it amounts to a part-payment of the purchase price.45 Often there will be a clause within the contract to the effect that if the purchaser fails to perform, that is, complete the transaction the deposit is forfeited. Given that the party seeking the deposit has discretion to stipulate the sum to be paid, there is potential for abuse and a purported deposit may in fact be a penalty.
[8.42]
Deposits are not typically treated as amounting to penalties, even where the amount may not be a genuine pre-estimate of loss and in spite of the fact the amount is forfeited upon the defendant’s breach. However, where a deposit term can be classified as a penalty, the courts may on application by the plaintiff grant equitable (restitutionary) relief46 and order the payee to return the money, less any amount shown to have been suffered through the plaintiff’s noncompletion.47
[8.43]
The traditional amount for a deposit which can be validly retained is 10 per cent of the purchase price.48 Where the amount sought to be retained exceeds 10 per cent, it may therefore be regarded as excessive and penal in nature. However, where the [page 373] party seeking to retain the deposit can establish that the amount is justified in the circumstances, it may be forfeitable. In Coates v Sarich [1964] WAR 2, for example, the plaintiff purchased a small farm from the defendant for £5500. A deposit of £1500 (just under 30 per cent of the purchase price) was requested, with the balance of the purchase price payable over 16 years. After taking possession and paying two instalments, the purchaser abandoned the property and allowed it to fall into disrepair before refusing to make any further payments. The vendor terminated the sale contract, a provision of which stated that the property would be repossessed and the purchaser’s deposit forfeited upon rescission.
[8.44]
The purchaser claimed that the term permitting the vendor to retain the deposit was a penalty. The court disagreed, however, taking into account that the purchaser was permitted to take possession of the property without having paid the full purchase price, the balance of which was payable over a considerable number of years. The higher deposit was therefore a fair reflection of this generous arrangement. As Wolff CJ stated (at 6–7): In the case of a sale on extended terms, as the sale to the appellant was, the parties
when fixing the deposit might be expected to fix a larger sum than would be reserved on a cash sale. In the instant case the parties would have regard to risk which the vendor was taking in entrusting his property to the purchaser for such a long period of time. Besides the element of financial risk (personal to the purchaser), there can be the risk of disease, bad seasons, poor management, poor production results and economic depression, all of which may adversely affect the vendor’s position: all factors which make it difficult if not impossible to forecast the vendor’s position at that indefinite point in time when he may exercise his right to rescind, and so a higher deposit is justified. [8.45]
Ultimately the ‘question of whether a payment, although described as a deposit under the contract, is intended to possess the normal incident of a deposit depends upon the proper construction of the contract’.49 All surrounding circumstances should be taken into account. As a guiding principle, equity will operate to provide relief against forfeiture of a deposit where (1) the amount sought to be forfeited is entirely disproportionate to the damage suffered and (2) it would be unconscionable for the seller to retain the deposit.50
What if a liquidated damages clause is insufficient? [8.46]
In rare cases, a plaintiff may seek to establish that the liquidated damages clause is actually grossly insufficient to fully compensate them for the losses they have [page 374] incurred through the defendant’s breach. There is some case law suggesting that, providing the contract does not in any way exclude the plaintiff’s right to claim damages, they may do so notwithstanding the inclusion of a liquidated damages clause in the agreement.51 On the other hand, numerous authorities have stipulated that a plaintiff cannot readily ignore a liquidated damages clause where the amount they could have recovered in damages exceeds the amount stipulated in the clause, and that they will typically be bound irrespective of the discrepancy.52
[8.47]
Perhaps the most accurate and logical approach is to begin with the assumption that the plaintiff is bound to recover the amount they have stipulated in the liquidated damages clause before measuring this sum against that of the plaintiff’s actual loss. Where there is a gross lack of proportion between the two, the courts may choose to exercise discretion and permit the plaintiff to sue for the greater amount of damages.
What happens if a clause is found to be a penalty? [8.48]
If a clause is deemed to be a penalty, then it is invalid and unenforceable. This does not mean, however, that the party seeking to rely upon the clause cannot obtain compensation for the losses they have incurred as a consequence of the plaintiff’s breach. They will still be entitled to enforce the clause to the extent of their actual loss.53 Alternatively, the plaintiff may apply and obtain damages in such an amount as reflects their actual loss.54 There is some judicial disagreement as to whether or not a plaintiff can recover more than the amount stipulated in the penalty clause as a sum of damages.55
Does the penalties doctrine apply only to contractual breaches? [8.49]
Since the High Court’s landmark decision in Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 (Andrews), it is clear that under Australian law, the penalties doctrine is not limited to instances of breach of contract; it may also apply to clauses which require the payment of a predetermined sum of money on the occurrence of certain events. In Andrews, for example, the High Court held that certain fee provisions in ANZ bank’s customer contracts (including dishonour, late payment, and over limit fees) were not precluded from being classified as penalties. This was despite the fact that these fees were not charged by the bank upon a customer’s breach of contract, or upon the occurrence of an event which
[page 375] the customer was obligated to avoid (it was open to customers to overdraw their accounts or credit limits and voluntarily incur the applicable fees). The application of the penalties doctrine was previously understood to be conditioned on contractual breach. Following Andrews, it is now clear that the doctrine is not so limited.
Actions for debt [8.50]
A plaintiff may bring an action in debt against a defendant where the plaintiff has performed a contractual obligation to which the payment of a sum of money relates and the defendant has not paid the sum (debt). An action for debt is an alternative to bringing a claim for damages for breach of contract. There are a couple of notable points of distinction between the alternate claims relating to (a) the onus of proof and (b) the duty to mitigate.
Onus of proof [8.51]
Whereas the onus of proof lies with a plaintiff in relation to a claim for damages (the plaintiff must prove loss resulting from a breach of contract), it lies with a defendant in an action for debt (the defendant must prove that he or she has paid the debt). An action for debt may be a practicable option where, for example: A has delivered 1 tonne of cement to B but B has not paid for the cement. Here, A has performed the contract to which payment relates. B, however, has not performed his side of the bargain. In an action for debt, the onus falls upon B to prove the debt of $300 has been paid. Procedurally, this may be a simpler option for A than claiming an award for breach of contract which would require A to substantiate a claim for damages (onus of proof lies with the plaintiff).
[8.52]
Note, where payment on a specific date has been agreed to under the contract, failure to pay gives rise to an action for debt independently of whether the plaintiff has performed his or her contractual obligations.
Duty to mitigate [8.53]
Another difference between an action for debt and a claim for damages relates to a plaintiff’s duty to mitigate. As discussed above (at [8.16]–[8.20]), a plaintiff is under a duty to take reasonable steps to mitigate loss in the event of a breach of contract. This duty does not exist where a plaintiff commences an action for debt.56 Let us consider this point in relation to the above example (at [8.51]): [page 376]
B has failed to pay $300 for the cement delivered by A. If A decides to terminate the contract with B and claim damages for breach of contract, A will be under a duty to mitigate loss. However, A may, alternatively, decide to keep the contract on foot and recover the $300 by way of an action for debt — there will be no duty imposed on A to mitigate loss. This may be the more practicable option where parties have further contractual obligations under the contract.
[8.54]
Finally, a debt which has accrued prior to breach or frustration of a contract can be claimed regardless of the breach or frustrating event.57
Rescission [8.55]
Rescission is a right to have a contract set aside. It is a primary
remedy in instances where parties’ consent is vitiated on the basis of mistake, misrepresentation, duress, undue influence or unconscionable conduct.58 Recognised at both common law and in equity, contract rescission aims to restore parties, to the greatest extent possible, to the positions they occupied prior to contract formation. An aggrieved party who has the right to rescind a contract, must elect to take this course of action. The alternate action is to affirm and proceed with the contract. Where an innocent party chooses to rescind, he or she must communicate this to the other party by way of notice. Notice can be given verbally, in writing or can be implied from conduct. Note, where it is impossible to serve notice (for example, the defendant absconds) an innocent party must do all that is reasonable in the circumstances.59
Bars to rescission [8.56]
There are several bars to rescission. A plaintiff may lose the right to rescind a contract in the following circumstances: a)
The innocent party acts in a manner which affirms the contract, that is, in a way consistent with keeping the contract on foot Note, the innocent party must have knowledge of the right to rescind.60 Any act which communicates that the innocent party intends to proceed with the contract can constitute affirmation. Once a party elects to affirm a contract, that party cannot change their mind to rescind the contract at later point in time.
b)
The innocent party has not elected to rescind a contract in reasonable time What constitutes reasonable time is a question of fact to be decided [page 377] based on the particular circumstances. The length of time
between contract formation and discovery of the right to rescind will be a foremost consideration. Excessive delay in communicating avoidance of the contract may thwart a plaintiff’s right to rescind. c)
A third party gains good title to the subject matter It is useful to illustrate this point by way of an example: A contract between A and B (in relation to subject matter X) is declared voidable on the basis that A was mistaken as to B’s identity. A may elect to rescind the contract with B (B returns the car to A). Where, however, a third party (C) gains good title to X (by purchasing X from B in good faith) before A rescinds the contract, A will be barred from rescinding. The parties cannot be restored to their original positions here as X has been lawfully sold-on. To permit rescission would infringe upon C’s legal right to X.
Statutory rescission [8.57]
Legislation may provide an aggrieved party with a statutory right to rescission where a court declares a contract void. As discussed in Chapter 6, a court has broad powers under the Australian Consumer Law (ACL) to declare a term of a contract void where a contract contains unfair terms61 or where a contract excludes consumer guarantees.62 Note also, New South Wales has enacted the Contracts Review Act 1980 (NSW) which applies to contracts governing business sales and loan agreements. This legislation provides a court with discretion to declare a contract void where it finds the contract to be ‘unjust’ in the circumstances relating to the contract at the time it was made.63
Equitable remedies
Rectification [8.58]
Rectification is an equitable remedy through which the courts correct a contract which, owing to a mistake of the parties,64 fails to correctly reflect their true intentions.65 The purpose of the remedy is to ensure that a contractual document conforms to the actual agreement of the parties in situations where ‘their writing, [page 378] by common mistake (or, in limited circumstances, unilateral mistake) fails to express that agreement accurately’.66
[8.59]
In seeking to ensure that the written contract accurately represents the common intention of the parties, the doctrine of rectification obviously has difficulty applying to situations where only one of the parties was mistaken as to the content of the contract (and how this differs from their intentions). The courts will permit rectification in such instances of unilateral mistake where the non-mistaken party was aware of the other party’s misapprehension and took unconscientious advantage of the same.67
[8.60]
The remedy of rectification focuses upon the alleged discrepancy between how the agreement between the parties has been recorded in writing and the underlying substance of the agreement. It is only concerned with ‘those contracts which were intended by the parties to be wholly expressed in writing, or of those parts of the partly written contract which were intended to be expressed in writing’.68 What is being ‘rectified’ is not the terms of the contract but its physical form, that is, the document in which the agreement is recorded. Where the contract accurately records what the parties agreed, but where the parties were contracting under an actual mistake (to which the doctrine of mistake applies), the remedy of rectification will not be available.69 Similarly, in cases of ambiguity, or typographical or grammatical errors, the true meaning of the agreement can be deduced by applying rules of construction and rectification would be
an inappropriate and/or unnecessary remedy.70 [8.61]
In commerce, parties occasionally engage in verbal negotiations and informally come to agreement as to terms, only to incorrectly record those terms in writing. For example, consider this scenario: A negotiates with B to purchase B’s land. The land contains a farmhouse and various items of machinery scattered throughout. The parties verbally agree that the purchase price of $750,000 will be for the land and farmhouse only, and exclude the farming equipment upon the land. When the formal contract is drawn up and signed by the parties, however, the document mistakenly states that the sale price is for the land and all dwellings, fixtures and equipment upon the land.
[page 379] [8.62]
In this situation,71 equity recognises that it would be unconscientious for a party to attempt to enforce the contract inconsistently with what they know to be the common intention of the parties at the time that contract was entered into.72 Provided the major requirements are met, the doctrine can be invoked. We will now consider those requirements in turn.
Requirements [8.63]
There are several requirements which must be satisfied before the courts will order rectification of a contract. These are: 1.
The parties have a common intention which they verbally agree and subsequently record incorrectly in writing;73
2.
The party seeking rectification has ‘clear and convincing proof’ of this common intention (which allegedly is not reflected in the
written contract);74 and 3.
[8.64]
The term(s) which the parties seek to rectify must be capable of clear and certain expression in the sense that the words which are to be inserted or struck out must clearly convey the true intentions of the parties without rewriting the agreement.75
The second requirement imposes a high evidentiary threshold, particularly where lengthy and detailed negotiations have preceded the creation of a formal written (or partly written/oral) contract. This position is justified on the basis that it would otherwise be easy for a party dissatisfied with their bargain to claim that the contract is inaccurate, and the fact the parties have taken the trouble to formalise their agreement in a written contract objectively indicates that they intended for the contract to prevail over anything that was said but not written down.76
Specific performance [8.65]
A specific performance order is an equitable remedy which compels the execution of a contractual obligation. As we saw in Chapter 1, equity developed its own range of remedies in order to mitigate the rigour of the common law. The common [page 380] law’s answer to the breach of contractual promises was, and remains, to award damages to the aggrieved party to place them in the position they would have been in had those promises been correctly adhered to. In many cases, however, damages are not a suitable remedy given the particularly unique nature of the subject matter with which a contract is concerned. Where a party expressly or impliedly intimates that they do not plan to perform a contract in whole or in part, or does not in fact do so, the other party may be able to seek an order of specific performance.77
[8.66]
Like other equitable remedies, an order of specific performance is discretionary in that the courts decide whether a party will be entitled to such an order. Unlike common law damages, to which a party is entitled upon proof of contractual breach, a specific performance order is granted at the will of the judiciary. The courts consider a number of factors in determining whether or not to grant a specific performance order. These can be conveniently divided into fundamental and discretionary factors, each of which will be briefly discussed.
Fundamental factors [8.67]
[8.68]
Fundamental factors which the courts will take into account in determining whether to make an order of specific performance include: 1.
Sufficient consideration The contract must have been made for valuable consideration, otherwise specific performance will not be granted. It matters not if the agreement is incorporated into a deed so as to circumvent the consideration requirement;78 equity does not recognise the unique status of deeds nor assist those who are ‘volunteers’ (that is, those who have not contributed any consideration).
2.
Valid and enforceable contract The contract must be valid and enforceable in order for equity to intervene. An order of specific performance will not be made where it purports to enforce an obligation under a contract which is legally invalid (that is, where it is subject to rescission or is illegal).
3.
Inadequacy of common law damages Where common law damages are inadequate to remedy the wrong which the aggrieved party has suffered, an order of specific performance may be made. The courts will do so where this is the only means by which to attain ‘more perfect and complete justice’.79
The third of these fundamental factors, the inadequacy of common
law damages, is often the most decisive when the courts determine whether an order of specific performance will be granted. Obviously specific performance will not typically [page 381] be ordered where the aggrieved party was due to receive a mere sum of money from the other party; an award of damages would effectively amount to payment of the sum due and there would be no need to compel actual performance of the contractual obligation to pay.80
Contracts for sale of personalty [8.69]
When it comes to contracts for the sale of personalty (that is, tangible goods such as cars or intangible goods such as company shares), specific performance is not usually granted if an equivalent substitute for the good in question can be readily obtained from an alternative source.81 For example, the courts will not likely make an order of specific performance of a contract for the sale of a common motor vehicle which is wrongly sold to a third party. An award of damages equivalent to the market value of the vehicle could be awarded to the aggrieved party and this would allow them to purchase a similar vehicle on the open market. The amount awarded could be modified to account for associated expenses in sourcing a substitute, so that the aggrieved party is placed in the position they would have been in had the contract been performed.
[8.70]
Typically, an order of specific performance with respect to a contract for the sale of personalty will be granted where the goods in question are particularly unique, rare, or sentimentally valuable to the purchaser.82 This is because damages are clearly inadequate to remedy the loss which the aggrieved party is due to incur. The case of Dougan v Ley (1946) 71 CLR 142 is a good example of a situation in which an order of specific performance is preferable to an award of damages in order to obtain proper justice. There, Dougan agreed to sell his taxicab and operating licence to Ley before changing his mind
and refusing to proceed with the sale. Ley sought an order of specific performance, but Dougan resisted on the basis that Ley could obtain another taxicab and licence on the market and that damages would be adequate to remedy Ley’s loss. [8.71]
The High Court disagreed with Douglas and awarded specific performance. The court deemed this an appropriate situation in which to exercise its discretion on the basis that the number of taxi licences issues by the New South Wales Commissioner of Road Transport and Tramways was limited, and such licences were in high demand at the time. Moreover, the cost of the licence represented a significant portion of the overall contract price. It was therefore appropriate for an order of specific performance to be made compelling Dougan to complete the necessary sale and transfer documents. [page 382]
Contracts for sale of land (or interest in land) [8.72]
Specific performance is also typically regarded as preferable to an award of damages in contracts concerning the sale of land, or related interests in land such as leases. This is because each parcel of land is unique in terms of character and location, and therefore damages can never truly be a just substitute for the failure to convey the land in question.83 It matters not that the aggrieved party merely seeks to resell the land at a profit. In Pianta v National Finance & Trustees Ltd (1964) 180 CLR 146, National Finance sought to purchase a large plot of land in Perth from Mr and Mrs Pianta. A dispute arose as to whether a binding contract of sale between the parties was actually concluded, and National Finance commenced proceedings to enforce the sale through an order of specific performance. The High Court held that an order of specific performance was appropriate, notwithstanding National Finance’s ultimate plans to redevelop and resell the land for profit.
[8.73]
Some international authorities have challenged this approach. The
Canadian Supreme Court in Semelhago v Paramadevan [1996] 2 SCR 425, for example, noted the contemporary trend of mass-producing generic residential, business and industrial properties of similar appearance and qualities and observed that in modern times it is rare for properties to be so individually unique. It would therefore need to be shown that the property in question was so distinctive that no substitute would be readily available on the market and, therefore, that damages would be inadequate before an order of specific performance will be made. The tendency of the Australian courts appears to be more partial to granting specific performance in the case of land contracts, despite the obvious force in the views of the Canadian courts.
Contracts conferring benefits to third parties [8.74]
Contracts which confer benefits on third parties will typically be enforced through an order of specific performance.84 This is due to the common inadequacy of an award of damages in such situations. Owing to the doctrine of privity, a third party (C) will only be entitled to nominal damages where they suffer no tangible harm following a dishonoured promise under a contract between A and B (unless C can demonstrate that they were in a special relationship with A or B such as agency, trust or the like).85 This is a particularly unsatisfactory result in cases where the third party was entitled to receive something of particularly unique significance or value. [page 383]
Discretionary factors [8.75]
Discretionary factors which the courts may take into account in determining whether to make an order of specific performance include: 1.
Contracts for personal services The courts will very rarely grant specific performance where the contract in question is one
for personal services (that is, where it compels the defendant to maintain a cooperative personal relationship with the plaintiff in situations where relations between the parties have soured). Contracts for personal services include employment and apprenticeship contracts, sharefarming agreements, agency contracts and partnership agreements. In Lumley v Wagner (1852) 1 De G M & G 604; 42 ER 681, for example, an order of specific performance compelling the defendant to sing exclusively at the plaintiff’s theatre was denied on the basis that it would effectively enslave the defendant. Instead, an injunction preventing the defendant from singing at a rival theatre was granted: see further at [8.84]–[8.85]. 2.
Supervisory burden upon the court Specific performance will not be granted where such an order would require constant judicial supervision as a means of ensuring that the contract in question is fulfilled.86 Perhaps more accurately, orders which require a party to carry on some activity over an extended period of time and which accordingly attract the prospect of ‘repeated applications for rulings on compliance’ are discouraged by the courts.87
As an example, an application for an order of specific performance compelling a party to maintain their business in a leased premises would likely be denied on the basis that the courts would be required to continually ensure the party’s compliance with such an order.88 On the other hand, the courts would be more inclined to order specific performance enforcing a discrete, short-term obligation, such as a requirement to transfer goods to a party or complete legal documentation. This requires little to no superintendence and the obligation can be clearly defined. Ultimately: … account must be taken of the length of time over which performance may take place and the extent of difficulty that may arise in establishing whether the terms of the order have been complied with, and to weigh these matters against hardship that might be caused through a denial of relief.89
3.
Readiness and willingness to perform Where a party is not willing or able to perform a contractual obligation, or where they
have breached an essential [page 384] term of the contract (entitling the other party to terminate), the courts will be less inclined to make an order of specific performance.90 The theory here is that a party should not seek relief in equity where they themselves have acted improperly. This reflects the equitable maxim that one who seeks relief in equity must ‘come with clean hands’. Where a party has acted in an immoral or otherwise unconscionable manner, their application for a decree of specific performance may be denied.91 4.
Lack of mutuality The courts will not enforce a party’s contractual obligation through an order of specific performance unless it could also have done so for the other party.92 In other words, it must be possible for both parties to have obtained full relief and to have had each other’s obligations enforced. This would obviously not be the case where such an order would compel one of the parties to commit to a contract of personal services, or where one of the parties was a minor. In each such case, the courts will not order specific performance because it would be improper to do so and would violate the requirement of mutuality.
5.
Delay A party may be denied the right to seek equitable relief, such as an order of specific performance, where they have delayed their application for an unreasonable amount of time and this has prejudiced the other party.93 The party against whom an order of specific performance is sought can raise the equitable defence of laches, which may warrant a refusal on the part of the courts to grant relief. This defence reflects the equitable maxim that equity ‘will only aid the vigilant and not those who slumber or dawdle’. The courts will consider the applicant’s knowledge of the wrong in question, the length of their delay, and the unconscionable prejudice which might be caused to the other
party if the order of specific performance was granted.94 6.
Hardship Where an order of specific performance would cause undue hardship to the defendant, specific performance will not be ordered.95 If damages would adequately remedy the problem at hand and avoid causing hardship to the defendant, the courts will not entertain an application for specific performance. The courts will consider all relevant facts and circumstances in determining whether a sufficient hardship to the defendant arises on the facts. [page 385]
[8.76]
Failure to comply with a specific performance order exposes the disobedient party to a variety of judicial sanctions including fines, seizure of property and imprisonment.
Examples [8.77]
Consider the following scenarios and whether an order of specific performance would likely be granted in each:
Hypothetical 1 Brief facts: A purchases $5000 worth of equipment from B to establish a gym and health club. A pays upfront and awaits delivery, but B never actually delivers the goods. A seeks to compel B to deliver the equipment through an order of specific performance. Similar equipment can be obtained from the many local suppliers. A applies for a specific performance order. Likely outcome: Specific performance would not be granted. An award of damages in the amount of $5000 would adequately address the wrong which has occurred here and place A back in the position she would have been had B correctly delivered the goods. The goods in question can easily be obtained elsewhere
on the free market, so an award of damages at common law would be preferable to an equitable specific performance order.
Hypothetical 2 Brief facts: A enters into an agreement with B to purchase B’s home. The home is a quaint cottage which has uniquely ornate features and has special appeal to A. A has arranged all of her finances and now requires B to complete the conveyancing paperwork to transfer title to the property to her and conclude the transaction. B does not complete the paperwork and threatens to withdraw from the sale and put the property back on the open market. A quickly applies for a specific performance order. Likely outcome: Specific performance would likely be granted. Common law damages would be inadequate here as the subject matter is quite unique and the order would facilitate a discrete, ‘one-off’ transaction without imposing supervisory burdens upon the court. A has acted promptly and was clearly ready and willing to perform her contractual obligations. There is no conceivable hardship which would be imposed on B if he was forced to proceed with the sale.
[page 386]
Hypothetical 3 Brief facts: A contracts with B to buy a portion of shares in B’s company. After the purchase is made, B indicates that he wishes to sell the shares to an international supplier so as to strengthen ties between the companies. B tells A that he would be willing to offer her shares in one of his other companies instead. The
shares have great prospects of profiting strongly. B attempts to contact and negotiate with A, but A does not communicate with B for 10 months, after which A seeks an order of specific performance compelling B to sell her the original portion of shares. Likely outcome: This scenario is tricky, as there are several factors to consider. A has waited for 10 months before making contact with B, which represents a significant delay. B could then raise the defence of laches. B could also argue that compelling him to proceed with the sale of the original shares to A could cause hardship in that it jeopardises a valuable opportunity to strengthen commercial relations with another company, but the argument is not strong. Importantly, equivalent (and perhaps even more profitable) shares have been offered by B, and it is also possible that another portion of the original shares can be purchased, which would detract from the unique character of the portion which A seeks to buy. On balance, specific performance would not likely be granted.
Injunction [8.78]
Generally speaking, an injunction is an equitable remedy which prevents the performance of a particular act. It can therefore be contrasted with an order of specific performance, which compels performance. However, injunctions — rather confusingly — can also require performance of a party though this is less common. It is much more common for injunctions to be prohibitory (inhibiting particular conduct) rather than mandatory (mandating particular conduct). The distinction between specific performance orders and mandatory injunctions is not entirely clear and the law appears unsettled on this point. However, it would seem that specific performance orders compel performance of the entire contract, whereas mandatory injunctions compel compliance with a specific contractual term.
[8.79]
Injunctions are typically granted so as to restrain the breach of a contractual term or a promise that something will not be done (this is known as a ‘negative covenant’ or ‘negative obligation’).96 The negative obligation may be express or [page 387] implied, and it may even be expressed in positive language. Ultimately, what the courts seek to identify is some restriction within the contract prohibiting a party from performing a particular act. If they then seek to perform that act, the aggrieved party can apply for an injunction preventing them from doing so. Consider the following scenario: A, the manufacturer of a particular variety of sports energy drink, contracts with B, an advertising agency, to promote its product through a series of radio advertisements. Among the conditions of the contract are that the promotional period will last for one month and that B will refrain from advertising a similar drink manufactured by C (one of A’s rivals) for this period. During the promotional period, B receives a lucrative offer from C to advertise its product during the period. B figures it can always compensate A through an award of damages and accepts C’s offer, agreeing to simultaneously advertise its rival product. A seeks an injunction to prevent B from advertising C’s product during the promotional period.
[8.80]
In this scenario there is a firm argument that an injunction would be granted. There is an express condition in the contract to the effect that B will not advertise C’s products during the one-month promotional period. This is obviously a tactic designed to gain a stronger market share and maximise exposure and sales at the expense of a competitor; damages to compensate A for B’s breach would not accomplish this. The promotional period is for a relatively short
period of time, and the injunction would not prevent B from advertising the products of other competitors — it is only C that A has identified in the contract. [8.81]
As with specific performance orders, injunctions are discretionary remedies which means the court has the unfettered choice to grant or refuse an application. Where damages can be ascertained and will adequately address the wrong in question, an injunction will not be granted.97 Naturally, where the converse is true, the courts will be more inclined to grant an injunction.
[8.82]
Injunctions are not normally granted where there is no risk of the defendant’s wrongful conduct continuing, or where the injunction would effectively compel the defendant to do something which they would not be made to do through an order of specific performance (that is, commit to a contract involving personal services, requiring judicial supervision etc).98 [page 388]
Injunctions and employment contracts [8.83]
Controversy often arises when injunctions are sought to restrain parties seeking to breach a negative obligation contained within an employment contract. In Page One Records Ltd v Britton [1968] 1 WLR 157, for example, members of the pop group ‘The Troggs’ entered into a five-year management contract with Page One Records, under which the group undertook not to engage any other parties to manage them for the duration of the agreement. The group subsequently sought to appoint a third party to assume management responsibilities, prompting Page One Records to seek an injunction to prevent this occurring. The court refused to grant the injunction, as to do so would have amounted to a decree of specific performance of the group’s positive obligation within the contract to retain Page One Records as their manager. In other words, this would have created a contract for personal services, for which an order of specific performance is
seldom granted. [8.84]
In contrast, the court in Lumley v Wagner (discussed earlier at [8.75]) willingly granted an injunction to prevent the defendant, Johanna Wagner, from singing at a rival theatre. Wagner was hired by Lumley to sing opera at Her Majesty’s Theatre in London for a three-month period. Under the contract between the parties, Wagner was forbidden from ‘using her talents’ at any other theatre or in any other concert or performance without Lumley’s permission. Prior to the contract commencing, a rival opera manager, Gye, convinced Wagner to sing at his theatre, which would have breached the negative obligation in Wagner’s contract with Lumley not to perform for anyone else. Lumley sought both an order of specific performance to compel Wagner to fulfil her positive obligation to sing for him, as well as an injunction to restrain Wagner from singing for Gye.
[8.85]
The court refused to grant the application for a specific performance order as this would have enforced a contract of personal services and compelled Wagner to work exclusively for Lumley. An injunction restraining Wagner from singing at Gye’s theatre, on the other hand, merely gave force to the express negative obligation within Wagner’s contract with Lumley not to sing for anyone else.
Ancillary orders [8.86]
Two ancillary orders which are occasionally sought as remedies in contractual disputes are the Mareva injunction and Anton Piller order. Both orders are named after the seminal cases which examine them.99 Broadly speaking, a Mareva injunction is a freezing order which prevents a party to a legal dispute from displacing or disposing of assets which may be of relevance to the proceedings. [page 389] An Anton Piller order is one which authorises a party to search
premises and access and/or seize evidence for use in legal proceedings. [8.87]
In the 1991 legal drama Class Action, civil rights lawyer Jebediah Tucker Ward (played by Gene Hackman) initiates a class action lawsuit against Argon Motors, the manufacturer of a defective model of motor vehicle. Ward’s daughter Maggie, representing Argon Motors, discovers there is documentary evidence attesting to the vehicle’s latent defect. In this situation, it would clearly be in Jebediah’s interests to get a hold of the documents which help to prove his case. Jebediah could apply for a Mareva injunction preventing Argon Motors or their lawyers from hiding or destroying the report, while an Anton Piller order would allow Jebediah to search Argon Motor’s records for the report.
Restitution [8.88]
Restitution is a class of equitable remedy which is concerned with the concept of unjust enrichment. It allows a plaintiff to recover gains made by the defendant at the plaintiff’s expense. It is therefore different from common law damages which seek to compensate a plaintiff for losses flowing from the defendant’s breach of contract. Restitution instead takes aim at the defendant and reverses any gains they have made in circumstances where it is unjust for them to retain those gains. In other words, it is the defendant’s gain, not the plaintiff’s loss, which the law of restitution seeks to address.
[8.89]
A claim in restitution cannot be made for unjust enrichment where an existing valid and enforceable contract governs the rights or obligations which the claim seeks to enforce. An obligation to make restitution only arises where there is no valid agreement or where such agreement has been frustrated, avoided or is otherwise unenforceable.100
[8.90]
There are several different causes of action which fall under the banner of ‘restitution’. We will now examine some of the more common circumstances encountered in commerce in which a party
may seek restitution for money paid or services rendered.
Total failure of consideration [8.91]
Where a payment is made or services are rendered in return for some other consideration, and the consideration totally fails, the payment (or a reasonable sum of money in respect of services rendered) can be recovered through a restitutionary claim. A commonly disputed form of payment in commercial practice, which parties often seek to recover when a contractual relationship fails, [page 390] is deposits. A deposit is a sum payable as a first instalment towards the purchase of an item or as a security for entry into a contract, the balance being payable at a later date. Deposits are frequently made to secure the purchase of real estate or high-priced goods. So where a party pays money, that is, a deposit to another party (the payee), and the payee does not deliver on their contractual promise (for example, by failing to provide the subject matter secured by the money), the money paid can be recovered.
[8.92]
Similarly, services are often rendered by tradespeople but left unfinished or defective as a consequence of the contractual relationship between the parties breaking down. In this situation, where the contract in respect of which payment is made is severable101 and it is fair to do so, the law of restitution permits the tradespeople to recover a reasonable sum of money in respect of the work they have completed.
[8.93]
In order for any form of recovery in restitution to occur it must be established that there has been a total failure of consideration on the part of the payee.
Meaning of ‘total failure’
[8.94]
In the context of restitution, ‘consideration’ refers to the payee’s performance of their contractual obligation. This is a different meaning to that used in the context of contractual formation.102 So the term ‘total failure of consideration’ in the law of restitution refers to a situation where the payee has not performed their obligation at all, or where the very purpose of the payment being made has not been fulfilled. Where any substantial part of the benefit anticipated under the contract is performed, a restitutionary claim will not be available.103 In Baltic Shipping (see further [8.31] and [8.110]), the cruise ship on which Mrs Dillon was sailing sunk 10 days into its 14day voyage. The High Court refused to allow Mrs Dillon to recover any portion of the fare in restitution because she had received and enjoyed over 70 per cent of the cruise prior to the accident. The court stated (at CLR 378–9): [T]he promised consideration in the present case was … the provision of all that was involved in the promised pleasure cruise as a holiday experience. … In circumstances where Mrs Dillon accepted and enjoyed the major portion of the pleasure cruise, however, there was no complete failure of the consideration for which she paid the fare. The catastrophe of the shipwreck and its consequences undoubtedly outweighed the benefits of the first eight complete days. It did not, however, alter the fact that those benefits, which were of real value, had been provided, accepted and enjoyed.
[page 391] [8.95]
Where, however, the consideration in question is severable and the payment made (and sought to be recovered) can be attributed to a distinct part of the consideration, the payment for that party may be recovered. This occurred in Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516; 185 ALR 335. The plaintiffs were retailers of tobacco who purchased products from a wholesaler and later sought to recover the monies they had paid to the wholesaler in order to cover the statutory licence fee attaching to each sale. The licence fee charges were separately invoiced but included in the total price paid. When the legislation imposing the licence fee was declared unconstitutional by the High Court, the plaintiffs initiated legal proceedings. The defendants argued that there had been no total
failure of consideration (as the tobacco products to which they related had always been delivered) and that the payments were therefore not recoverable. The High Court held that the money paid for the licence fees was severable from the money paid for the tobacco products. Given that this money no longer actually contributed towards the satisfaction of the statutory requirement, this money could be recovered through restitution.
Money paid in error [8.96]
Where a party pays money to another by mistake, and the mistake can be regarded as having caused the payment to be made,104 the party may recover the money in restitution.105 The mistake is what makes the enrichment of the payee ‘unjust’ and attracts the application of restitution. There are, however, several exceptions which may reduce or entirely remove a plaintiff’s right to recover. These defences will be explored later in the chapter at [8.102]–[8.110].
Unenforceable contracts Illegal contracts [8.97]
In Chapter 3, we saw that contracts can sometimes be expressly or impliedly prohibited under statute, or otherwise deemed illegal by reference to considerations of public policy. In Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498; 186 ALR 12 it was stated (at CLR 540) that illegality may ‘provide a qualifying or vitiating factor which enlivens a restitutionary action’. As an example, where a party pays money to another party under a contract for a particular purpose and the payee misappropriates the funds for an illegal purpose, the innocent party may make a restitutionary claim to recover the money. Where the payee does not act improperly but the law nonetheless renders the contract illegal, this illegality may also found a defence against the payer’s restitutionary claim.106 The same goes with services which are rendered under a contract.
[page 392]
Frustrated contracts [8.98]
A contract which is frustrated is not void ab initio (from the beginning); only future obligations are discharged. Parties to a frustrated contract will often have invested considerable money and resources into the contract. Unless they can recover under the statutory schemes in some Australian jurisdictions,107 they must rely upon a claim in restitution to recover any money paid or the value of any services which they have rendered in pursuance of the contract.108
Generally unenforceable contracts [8.99]
In a similar vein, money paid or services rendered under a contract which is otherwise unenforceable — such as where it fails to comply with statutory requirements as to writing or form — may also be recovered.109 The courts will evaluate the enrichment enjoyed by the defendant and whether it would be unjust for them to retain the gains made, as well as the relevant rules pertaining to contractual enforceability.
[8.100] The law also appears to regard contracts which have been terminated
as ‘unenforceable’ in the general sense that the bargain has not been completed and therefore a party who has been unjustly enriched may be compelled to return any monies paid or provide reasonable compensation for any services rendered under the terminated contract. This is the basis of quantum meruit claims, which are fundamentally a species of restitution.110
Compulsion [8.101]
Where a party has been unlawfully compelled to confer particular benefits under a contract, restitution may prevent the party applying the illegitimate pressure from retaining those benefits. This branch of restitution overlaps significantly with the doctrine of duress explored
in Chapter 5. In the context of restitution, any form of coercive, extortive or forceful conduct directed towards a person, their property, or their legal rights will amount to ‘compulsion’ which the law remedies by forcing the errant party to repay the plaintiff.111
Defences to restitutionary claims Voluntariness [8.102] If a party voluntarily makes a payment in satisfaction of an honest
claim from the defendant, and accepts or refuses to contest the validity of the defendant’s [page 393] claim, the defendant may be able to resist any restitutionary claim.112 Where the payment is made negligently or without care, the payment will not be regarded as ‘voluntary’ in the sense that they could not be said to have made the payment irrespective of whether or not they are actually legally obligated to do so.113 This defence recognises that there is no injustice in allowing the defendant to retain benefits which the plaintiff has voluntarily conferred.
Good consideration [8.103] Where a party has mistakenly made a payment under a contract, they
may not be able to recover the payment where it is shown that the defendant provided good consideration for the payment.114 The recent case of Adrenaline Pty Ltd v Bathurst Regional Council (2015) 322 ALR 180 provides a useful example. In that case Adrenaline entered into a five-year agreement with Bathurst Regional Council to conduct motor racing events on the Mount Panorama Motor Racing Circuit each December in return for a yearly fee in the order of $250,000. Having staged two events at the circuit, Adrenaline sought to negotiate with the council with respect to the escalation of fees for this service and
the option to renew. It argued that the original agreement between the parties was non-compliant with the Local Government Act 1993 (NSW) because public notice of the fees charged had not been given. Moreover, the power to set those fees could not be delegated (as had occurred) and the council should have determined the fee itself. When negotiations broke down, Adrenaline commenced proceedings to recover the fees it had paid during the five-year term on the basis that it mistakenly paid the fees on the understanding that the council had executed a valid agreement. [8.104] The
New South Wales Court of Appeal refused Adrenaline’s restitutionary claim. The court held that Adrenaline had received good consideration in that it had staged its racing events each of the five years of the agreement and therefore received exactly what it had contracted for. It would have been manifestly unjust to require the council to refund the fees it had received for the use of its facilities. The court explained (at [84]): [Adrenaline] received precisely what it bargained for. True it is that at trial [Adrenaline] contended that council was in breach and that it had been misled, but these claims have fallen away. Indeed, [Adrenaline] prepared a budget which projected a profit despite the $250,000 fee it paid. It would create unjust enrichment were [Adrenaline] having enjoyed the benefit of the Mount Panorama
[page 394] circuit over 5 years to recover the fees it agreed to pay and did pay in order to secure that benefit. [8.105] Similarly in Ovidio Carrideo Nominees Pty Ltd v The Dog Depot Pty
Ltd [2006] VSCA 6, a tenant’s restitutionary claim to recover several years’ worth of rent monies paid to a landlord for possession of a property (where the landlord had not complied with a statutory requirement to provide a disclosure statement) was denied. The tenant argued that it had mistakenly paid rent to the landlord because it was not aware that under the Retail Tenancies Reform Act 1998 (Vic) it was not obliged to pay rent until the disclosure statement had been provided. The court held that the tenant had received good
consideration for the payments by way of exclusive use and occupation of the premises. The premises had been used by the tenant to conduct its business for the relevant period. As such, it would have been unjust to allow the tenant to recover the rent money paid. [8.106] Where
good consideration has been provided, the law again recognises that there is no injustice in allowing the defendant to retain the benefits they have gained. On the contrary, it would be unjust to force them to make full restitution for those benefits where they have in fact provided something valuable to the plaintiff in return for them. Such an offer must have been made in good faith; otherwise the defence will not apply.115
Change of position [8.107] Where a party (the defendant) acts to his or her detriment and in good
faith upon receipt or in expectation of a payment mistakenly made by the other party (the plaintiff), the defendant may raise the defence of change of position to avoid having to repay the money in restitution.116 It is important to emphasise that the requisite change in position may come in anticipation of, or following, the payment. Traditionally it was the legal position in Australia that the defendant’s position would be said to have changed where there had been some form of ‘expenditure or financial commitment which can be ascribed to the mistaken payment’ and which went beyond mere ordinary living expenses.117 In Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd (2014) 253 CLR 560, however, the High Court downplayed the importance of ‘expenditure or financial commitment’ and instead suggested that the detriment in question need not be precisely quantified in financial terms. Similarly in Pirina v Pirina Holdings Pty Ltd [2015] NSWSC 1899 at [60] it was stated that a mere ‘personal disadvantage’ may suffice as a ‘detriment’ for the purposes of the change of position defence. [page 395]
[8.108]
As with the defence of ‘good consideration’, the defence of ‘change of position’ recognises the inequity in compelling the defendant to make partial or full restitution in circumstances where it would be inequitable to do so. The injustice of the retention of the relevant money or benefit lies at the heart of this defence.118 Where a defendant is compelled to repay a mistaken payment in restitution, the extent of liability is measured by reference to the level of detriment incurred by the defendant. In other words, restitution will compel the defendant to repay the money but deduct the value of the detriment the defendant has suffered as a result of their change of position.
Illegality [8.109] As mentioned earlier in the chapter, the doctrine of illegality may
support a party’s restitutionary claim to recover money paid under an invalidated contract. In some situations, however, it may also found a defence to such claims and allow the payee to resist the payer’s claim. In Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498; 286 ALR 12, a lender which approved various loans to a group of investors under a scheme which did not comply with the Companies Code (NSW) was prevented from recovering the monies transferred. The Code required investment prospectuses to be registered. The purpose of the Code was to ensure that investors were properly informed as to potential investments and a restitutionary order would therefore have undermined the purpose of this legislative instrument. In other words, the fact that the contract was illegal allowed the borrowers to resist the lender’s claim to recover the money lent.
‘Double-dipping’ [8.110]
In Sopov v Kane Constructions Pty Ltd (No 2) (2009) 24 VR 510, the Victorian Court of Appeal confirmed (at 514-15) that a restitutionary claim can be made as an alternative to an action in contract. Of course an aggrieved party will not be permitted to ‘double-dip’ in these circumstances, that is, claim both an amount of damages at common law equivalent to the money lost and the original sum of money paid
through restitution. So in Baltic Shipping, Mrs Dillon obtained compensatory damages for Baltic’s breach of contract and for the disappointment and distress she incurred. However, she was not entitled to claim restitution of the full fare because she would effectively have been compensated twice. As Deane and Dawson JJ commented (at CLR 380): [T]he promisee, having received full compensation for non-performance of the promise, is not entitled to a refund of the price upon payment of which the performance of the promise was conditioned. Were it otherwise, the promisee ‘would have the equivalent’ of performance of the contractual promise ‘without having borne the expense’ which … she had agreed to pay for it.
[page 396]
Account of profits [8.111]
In England, it is possible for a party to make a claim for what is known as gains-based or disgorgement damages.119 Such a claim is commonly referred to as an ‘account of profits’. The basic premise of this remedy is that contractual breaches sometimes allow the noncompliant party to effectively ‘profit’ from their breach. For example, a retailer who obtains goods from a wholesaler but later refuses to pay for the goods may be able to sell them to consumers at an inflated retail price. The wholesaler is obviously out of pocket to the value of the goods delivered. An account of profits would compel the noncompliant party (the retailer) to pay the profits made as a sum of damages.
[8.112]
This remedy is not endorsed by the Australian courts. As Hill and Finkelstein JJ remarked in Hospitality Group Pty Ltd v Australian Rugby Union Ltd (2001) 110 FCR 157 at 196: [T]he position in Australia is that the loss recoverable for breach of contract is limited to that laid down in Robinson v Harman. That is, the aggrieved party is entitled only to compensation. If he has suffered no loss, he is not entitled to be compensated. In an appropriate case, the aggrieved party may be able to recover (by a claim in restitution) benefits that he has made available to the wrongdoer; for example, he may be able to recover the price paid under an incomplete contract or
recover possession of goods sold but not paid for. Presently, however, it would be inconsistent with the current principles laid down by the High Court to confer a windfall on a plaintiff under the guise of damages for breach of contract. [8.113]
The compensatory principle expressed in Robinson v Harman focuses upon the losses incurred by the plaintiff following the defendant’s breach, not upon the gains enjoyed by the defendant following that breach. The fact that the defendant has profited from their breach does not amount to a compensable loss for the innocent party.
Equitable damages under statute [8.114]
Legislative provisions in each Australian jurisdiction permit the courts to award ‘equitable damages’ in lieu of, or as an addition to, injunctions and specific [page 397] performance orders.120 As Paterson, Robertson and Duke note,121 such damages are often awarded in three types of situation: [F]irst, where specific performance or an injunction is refused on discretionary grounds; secondly, where it is more convenient to award damages rather than specific relief; and, thirdly, where it is necessary to award damages in addition to specific performance in order to compensate the plaintiff for some loss suffered as a result of the defendant’s breach.
[8.115]
The various defences to applications for orders of specific performance or an injunction may also operate to preclude a plaintiff from obtaining equitable damages. Again, as with all equitable remedies, it is entirely at the court’s discretion whether to award such damages or not.
__________________ 1 2 3 4
On equity’s role in mitigating the rigidity of the common law, see [1.25]–[1.27]. Robinson v Harman (1848) 1 Exch 850; Addis v Gramophone Co Ltd [1909] AC 488. Damages are commonly referred to as a measure of compensation given their restorative nature. Gray v Motor Accident Commission (1998) 196 CLR 1; 158 ALR 458; Ruxley Electronics and
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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
Construction Ltd v Forsyth [1996] AC 344. Luna Park NSW Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286. Reg Glass Pty Ltd v Rivers Locking Systems Pty Ltd (1968) 120 CLR 516. Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 at 315; Chappel v Hart (1998) 195 CLR 232; 156 ALR 517; North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd [2016] VSC 1. (1998) 195 CLR 232; 156 ALR 517. [1972] AC 824 at 847. Norton Australia Pty Ltd v Streets Ice Cream Pty Ltd (1968) 120 CLR 516. Civil Law Wrongs Act 2002 (ACT) s 102; Law Reform (Miscellaneous Provisions) Act 1965 (NSW) s 9; Law Reform (Miscellaneous Provisions) Act 1956 (NT) s 16; Law Reform Act 1995 (Qld) s 10; Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) s 7; Wrongs Act 1954 (Tas) s 4; Wrongs Act 1958 (Vic) s 26; Law Reform (Contributory Negligence and Tortfeasors’ Contribution) Act 1947 (WA) s 3A. Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 at 315, citing Koufos v C Czarkinow Ltd [1969] 1 AC 350. See, for example, Patersons Securities Ltd v Financial Ombudsman Service Ltd [2015] WASC 321. Vouzas v Bleake House Pty Ltd [2013] VSC 534. Walton v Illawarra [2011] NSWSC 1188 at [118]. Metal Fabrications Pty Ltd v Kelcey [1986] VR 507 at 513. Challenge Bank Ltd v VL Cooper and Associates Pty Ltd [1996] VicRp 14; [1996] 1 VR 220. Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452; Gwam Investments Pty Ltd v Outback Health Screenings Pty Ltd [2010] SASC 37. (1991) 174 CLR 64; 104 ALR 1. Johnson v Perez (1988) 166 CLR 351. Above. Larking v Great Western (Nepean) Gravel Ltd (1940) 64 CLR 221. Gray v Motor Accident Commission (1998) 196 CLR 1; 158 ALR 485. Molinara v Perre Bros Lock 4 Pty Ltd [2014] SASCFC 115 at [38]. (1991) 174 CLR 64; 104 ALR 1. Chaplin v Hicks [1911] 2 KB 786. Howe v Teefy (1927) 27 SR (NSW) 301. Johnson v Perez (1988) 166 CLR 351; 82 ALR 587; Molinara v Perre Bros Lock 4 Pty Ltd [2014] SASCFC 115. Sellars v Adelaide Petroleum NL (1994) 179 CLR 332; 120 ALR 16. Bellgrove v Eldridge (1954) 90 CLR 613 at 618. (1954) 90 CLR 613 at 619; (2009) 236 CLR 272 at 288; 253 ALR 1; see also Bruno Pisano v Georgia Dandris [2014] NSWSC 1070. Jarvis v Swans Tours Ltd [1973] 1 QB 233; Baltic Shipping Co v Dillon (1993) 176 CLR 344; 111 ALR 289; see also Wang v Yamamoto [2015] NSWSC 942; Kevin (As Public Officer of Wat Buddhalavarn Inc) v Phantha-oudomm [2016] NSWSC 305. Jarvis v Swans Tours Ltd [1973] 1 QB 233; Baltic Shipping Co v Dillon (1993) 176 CLR 344; 111 ALR 289. Flamingo Park Pty Ltd v Dolly Dolly Creation (1986) 65 ALR 500. See also Loyola v Cryeng Pty Ltd (No 2) [2012] FCAFC 98; Madden v Seafolly Pty Ltd [2014] FCAFC 30.
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
Herbert Clayton & Jack Waller Ltd v Oliver [1930] AC 209. See also Fitzpatrick v Garvey [2012] WADC 42. The courts may, in their discretion, grant restitutionary relief in appropriate circumstances: Boucaut Bay Co Ltd v Commonwealth (1927) 40 CLR 98 at 106–7. Restitution is discussed at [8.88]. Actions for debt are discussed at [8.50]. Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79 at 87; Grocon Constructions (Qld) Pty Ltd v Juniper Developer (No 2) Pty Ltd [2015] QCA 291 at [23]. Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79 at 86; O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 at 367–8, 399–400; AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 at 184–5, 190. Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199 at 242. Damages, on the other hand, are calculated by reference to the losses stemming from the breach. Lordsvale Finance Plc v Bank of Zambia [1996] QB 752 at 762. Multiplex Constructions Pty Ltd v Abgarus Pty Ltd (1992) 33 NSWLR 504 at 527. Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79 at 86–7; Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 at 662–3; Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199 at 233; Grocon Constructions (Qld) Pty Ltd v Juniper Developer (No 2) Pty Ltd [2015] QCA 291 at [22]. See also Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 at 218. (1986) 162 CLR 170 at 193; 68 ALR 185; Esanda Finance Corp Ltd v Plessnig (1989) 166 CLR 131 at 139, 141–2. See also Yarra Capital Group Pty Ltd v Sklash Pty Ltd [2006] VSCA 109. State of Tasmania v Leighton Contractors Pty Ltd [2005] TASSC 133 at [22]; Multiplex Constructions Pty Ltd v Abgarus Pty Ltd (1992) 33 NSWLR 504 at 510. See also De Francesch Builders Pty Ltd v Riley [2000] WASC 301. Bot v Ristevski [1981] VR 120 at 123. Restitution is discussed at [8.88]. NLS Pty Ltd v Hughes (1966) 120 CLR 583 at 588–9. Workers Trust and Merchant Bank Ltd v Dojap Investment Ltd [1993] AC 573 at 580; Manufacturers House Pty Ltd v Ashington No 147 Pty Ltd [2005] NSWSC 767 at [54]–[60]; Golden Oceans (NSW) Pty Ltd v Evewall Pty Ltd [2009] NSWSC 674 at [67]. Du Buisson Perrine v Chan [2016] WASCA 18 at [124]. Smyth v Jessep [1956] VLR 230 at 232. Silent Vector Pty Ltd v Squarcini [2008] WASC 246 at [63]. See, for example, Diestal v Stevenson [1906] 2 KB 345; Cellulose Acetate Silk Co Ltd v Widnes Foundry (1925) Ltd [1933] AC 20; J-Corp Pty Ltd v Mladenis [2009] WASCA 157 at [35]. Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199 at 218. W & J Investments Ltd v Bunting [1984] 1 NSWLR 331 at 335–6; Riggall v Thompson [2010] QCA 144 at [35]. (1986) 162 CLR 170 at 192; 68 ALR 185. White & Carter (Councils) Ltd v McGregor [1962] AC 413; [1961] 3 All ER 1178. See also Australian and New Zealand Banking Group Ltd v Liebmann [2010] NSWSC 545. In relation to contract frustration see, for example, Frustrated Contracts Act 1988 (SA) s 6(2)(b). See Chapter 5. Car & Universal Finance Co Ltd v Caldwell [1965] 1 QB 525. Coastal Estates v Melevende [1965] VR 433; Dr Gregory Moore v The National Mutual Life
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
Association of Australasia Ltd [2011] NSWSC 416. ACL s 23. ACL s 64. Contracts Review Act 1980 (NSW) s 7(1)(b). The doctrine of mistake is considered in Chapter 5. Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336; 1 ALR 169. Caringbah Business and Sports Club Limited v Caringbah Investments Pty Ltd [2015] NSWSC 724 at [170]. Riverplate Properties Ltd v Paul [1975] Ch 133; Leibler v Air New Zealand Ltd (No 2) [1999] 1 VR 1; Medsara Pty Ltd v Sande [2005] NSWCA 40. Green v AMP Life Ltd [2005] NSWSC 370 at [171]. Frederick E Rose (London) Ltd v William H Pim Junior & Co Ltd [1953] 2 QB 450; Pukallus v Cameron (1982) 180 CLR 447; 43 ALR 243. Scald Pty Ltd v Turner Developments Pty Ltd [2014] ACTSC 72 at [138]. The parol evidence rule (explored in Chapter 4) would ordinarily apply in this situation to exclude evidence of the pre-contractual verbal negotiations; however, one of the exceptions to the rule may apply to allow the evidence to be admitted. In any event, the equitable remedy of rectification may serve to achieve the same end upon the requisite threshold of proof being satisfied. Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603. Joscelyne v Nissen [1970] 2 QB 86. (1982) 180 CLR 447; 43 ALR 243. Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603. On certainty and completeness of contractual terms, see [2.135]–[2.168]. Waldorf Australia Pty Ltd v Elias Construction Group Pty Ltd [2010] NSWSC 164 at [14]; Scald Pty Ltd v Turner Developments Pty Ltd [2014] ACTSC 72 at [136]. Wolseley Investments Pty Ltd v Gillespie [2007] NSWCA 358 at [33]. See [2.98]. Dougan v Ley (1946) 71 CLR 142 at 150 per Dixon J. His Honour was quoting Lord Selborne in Wilson v Northampton and Banbury Junction Railway Co (1874) 9 Ch App 279 at 284. However, there is no absolute rule that specific performance will not be ordered to compel the performance of an obligation to pay money; if justice so requires in the circumstances, then such an order may be made: Beswick v Beswick [1968] AC 58 at 81. Dougan v Ley (1946) 71 CLR 142 at 150. Falcke v Gray (1859) 62 ER 250. (1946) 71 CLR 142 at 150. Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460; Beswick v Beswick [1968] AC 58; Trident v McNiece (1988) 165 CLR 107; 80 ALR 574. See Chapter 3. J C Williamson v Lukey & Mulholland (1931) 45 CLR 287 at 297–8. Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (No 3) (1998) 195 CLR 1 at 47; 153 ALR 643. Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1. cf Diagnostic XRay Services Pty Ltd v Jewel Food Stores Pty Ltd (2001) 4 VR 623. Sentinel Countrywide Retail Ltd v PC Emerald (Qld) Pty Ltd [2015] QSC 348 at [12].
90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112
113 114 115 116 117 118 119 120
121
Mehmet v Benson (1965) 113 CLR 295; Green v Sommerville (1979) 141 CLR 594; 27 ALR 351. Summers v Cocks (1927) 40 CLR 321. Hume v Munro (No 2) (1943) 67 CLR 461. Eads v Williams (1854) 43 ER 671; Fitzgerald v Masters (1956) 95 CLR 420. Crawley v Short (2009) 262 ALR 654 at 678. Slee v Warke (1949) 86 CLR 271. J C Williamson v Lukey & Mulholland (1931) 45 CLR 287 at 299. Bankstown City Council v Alamdo Holdings Pty Ltd (2005) 223 CLR 660 at 665; 221 ALR 1. See further [8.75]. See Mareva Compania Naviera SA v International Bulkcarriers SA (The Mareva) [1980] 1 All ER 213; Anton Piller KG v Manufacturing Processes Ltd [1976] Ch 55. Pavey & Matthews Pty Ltd v Paul (1986) 162 CLR 221 at 256; 69 ALR 577. See also Lumbers v W Cook Builders Pty Ltd (in liq) (2008) 232 CLR 635; 247 ALR 412. See [7.4]. See [2.64]. Baltic Shipping at CLR 350. The mistake must be one without which the payment would not have been made: Kelly v Solari (1841) 9 M & W 54 at 58; 152 ER 24 at 26; Marshall v Marshall [1999] 1 Qd R 173 at 178. David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 (David Securities). See below at [8.109]. See [7.81]–[7.83]. See, for example, Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32. (1986) 162 CLR 221; 69 ALR 577. See further at [8.88] and Chapter 7, in particular [7.14], [7.17]–[7.19] and [7.25]–[7.26]. Smith v William Charlick Ltd (1924) 34 CLR 38. Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424; David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353; Hookway v Racing Victoria Ltd (2005) 13 VR 444. Commercial Bank of Australia v Younis [1979] 1 NSWLR 444 at 450. David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353. Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548 at 580. David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 at 385. Above at 385-6. Ford v Perpetual Trustees Victoria (2009) 257 ALR 658 at 684. See, for example, Attorney-General v Blake [2001] AC 268. Supreme Court Act 1933 (ACT) s 34; Supreme Court Act 1970 (NSW) s 68; Supreme Court Act 1975 (NT) ss 14(1)(b), 62-63; Civil Proceedings Act 2011 (Qld) s 8; Supreme Court Act 1935 (SA) s 30; Supreme Court Civil Procedure Act 1932 (Tas) s 11(13); Supreme Court Act 1986 (Vic) s 38; Supreme Court Act 1935 (WA) s 25(10). J Paterson, A Robertson and A Duke, Principles of Australian Contract Law, 5th ed, Lawbook Co, Australia, 2016, p 603.
[page 399]
CHAPTER 9
Alternative Dispute Resolution
Key Ideas By the end of this chapter you should be able to identify: ▶
self-help
▶
mediation
▶
conciliation
▶
arbitration
▶
sources of support
[page 400]
Introduction [9.1]
Agreement is the essence of contract. Of course it should be plainly obvious by now that disputes sometimes arise when contractual parties do not see eye to eye on a given issue. It is often more costly, inconvenient and time-consuming to initiate legal proceedings so as to resolve a dispute than it is to attempt to do so informally using basic skills in negotiation, cooperation and problem-solving. In this chapter we consider the various alternative dispute resolution (ADR) mechanisms available to contractual parties which may quell any disagreements and serve either to keep the contract on foot or to ensure that it ends amicably and that all parties attain as beneficial a result as possible.
[9.2]
Alternative dispute resolution derives its name from the fact that it provides an alternative to formal legal action. Generally speaking it describes any informal process used to manage, resolve or determine disputes or to reach agreement through the assistance of a neutral third party.1 Such processes include mediation, conciliation and arbitration and normally occur outside of courts or tribunals. A related method, though one not strictly associated with traditional forms of ADR, is self-help. Each of these processes will be discussed in turn, with emphasis upon how they operate in the context of contractual relations.
Self-help [9.3]
Self-help is a term used to encompass a number of methods whereby a contractual party seeks to enforce their rights without resorting to formal legal processes. In this sense, all ADR methods might be described as forms of ‘self-help’. However, self-help is commonly understood in a more discrete sense as referring to methods which the parties employ themselves and do not (typically) involve referral to a third-party or other legal processes. Gergen explains: [T]he principal self-help remedy in contract is the power to withhold performance in response to breach. Often this power is exercised in tandem with the power to refuse
nonconforming performance. In addition, a party may threaten to withhold performance in order to extract concessions. The exercise of these powers is regulated after the fact by a dauntingly long list of rules that are scattered across the fields of contract, restitution, and equity. These rules determine when an actor has the power to withhold or refuse performance in response to breach, as well as the power to threaten to do so to extract concessions, and the legal consequences of an actor’s decision whether or not to exercise these powers.2
[page 401] [9.4]
Self-help is often an effective method of resolving issues that arise in a contractual relationship. It is commonly understood in commerce that parties will resort to such measures as withholding payment, delaying completion of work etc so as to ensure that they are being treated fairly and receiving what is rightfully theirs. Self-help has many advantages; for example, it avoids formal legal processes and commonly facilitates prompt and private resolution of what are generally petty issues or disagreements. Resort to litigation not only sours contractual relationships but can damage one’s reputation in business. Self-help also reinforces the notion of ‘freedom of contract’; the concept that parties are autonomous and capable of forming and administering contractual arrangements without governmental or judicial interference. By avoiding engagement with the courts, selfhelp can be viewed as encouraging the more effective allocation of resources and therefore enhancing the efficiency of the legal system. However, self-help can cause issues when improperly executed. For example, failing to perform your contractual obligations (even where you believe that you have the right to do so) can potentially amount to repudiation,3 which can render you liable to the party who is allegedly at fault! In a similar vein, attempts to address disagreements through self-help, that is, through refusing to make a payment or repossessing goods that have been delivered, can antagonise and damage the contractual relationship. Self-help is clearly ineffectual where parties are unwilling to rationally reason or compromise, or where they refuse to budge from their respective positions.
Tips for using self-help [9.5]
Be open and honest with the other party; make them aware of your grievance and give them an opportunity to explain their side of the story. It may well be that the other party’s defective or absent performance is due to reasons beyond their control. Be tactful when utilising self-help, that is, instead of saying ‘I’m not paying you the rest of the money until you fix the faulty lighting in the master bedroom’, change your language to make it sound more amicable: ‘I will happily forward the balance owing once the agreed rectifications on the faulty master bedroom lighting are completed.’ Be willing to offer assistance to the other party. Remember, the other party has an interest in ensuring the contract is correctly performed as well, so be flexible and work with them to accomplish the aims of the agreement. Be open-minded and willing to consider appropriate solutions to the problem at hand. With proper discussion, it is hard to envisage any difficulty that cannot be overcome internally. [page 402] As a businessperson, being willing to work through issues calmly and in a friendly, non-adversarial manner is conducive to business. The other party will appreciate your professionalism, which will not only preserve the relationship you have with them, but likely lead to recommendations/referrals from that party which will improve goodwill and potentially lead to further business.
Mediation [9.6]
It is very difficult to find a single definition of ‘mediation’ which accurately captures all aspects of this highly-important ADR process.
A leading definition describes mediation as: … the process by which the participants, together with the assistance of a natural person or persons, systematically isolate disputed issues in order to develop options, consider alternatives, and reach a consensual settlement that will accommodate their needs.4 [9.7]
A similar definition provided by the former National Alternative Dispute Resolution Advisory Council (NADRAC) reads: Mediation is a process in which the parties to a dispute, with the assistance of a dispute resolution practitioner (the mediator), identify the disputed issues, develop options, consider alternatives and endeavour to reach an agreement. The mediator has no advisory or determinative role in regard to the content of the dispute or the outcome of its resolution, but may advise on or determine the process of mediation whereby resolution is attempted. Mediation may be undertaken voluntarily, under a court order, or subject to an existing contractual agreement.5
[9.8]
In practice, mediation takes many different forms within individual jurisdictions; however, the key point of difference appears to be in the role of the mediator. For example, in process-oriented mediation the mediator does not require knowledge of the subject matter of the dispute and merely facilitates the development of an [page 403] appropriate solution based on what the parties think.6 The parties are there to persuade each other as to how the matter can be resolved. In substance-oriented mediation, on the other hand, the mediator is generally well-versed in the particular area of law or subject matter in dispute and invites the parties to attempt to persuade them through submissions so that appropriate recommendations can be suggested.7 Other models of mediation process also exist. Depending on the type of mediation involved, the proceedings will vary.
[9.9]
The Mediator Standards Board (MSB) is the entity responsible for mediator standards and accreditation in Australia. The MSB implements the National Mediator Accreditation System (NMAS). The NMAS Practice Standards describe the purpose of mediation as being to ‘maximise participants’ decision making’, with the chief goals
being to assist participants to make wise decisions and to clarify the terms of the agreement and/or future patterns of communication that meet the needs and interests of the participants and other affected parties.8 As the Practice Standards make clear, mediators do not evaluate or determine disputes. Typically they also refrain from providing formal advice; however, in some forms of mediation conference this is possible and expert information or advice can also be introduced where required. Ultimately, however, it is for the parties to reach a solution.
When is mediation appropriate? [9.10]
Mediation is a useful way of resolving contractual disputes without resorting to more formal legal processes such as court action. According to the Resolution Institute, up to 75 per cent of commercial disputes are settled through settlement procedures such as mediation.9 However, as Spencer notes,10 there are certain types of dispute which are not suited for mediation. These include those in which: one or both of the parties seeks publicity (common with environmental matters) or to establish a judicial precedent; one of both of the parties is reticent and does not wish to be personally involved in the dispute resolution process; and there is an obvious imbalance in power (financial, educational or otherwise) between the parties which might be better addressed by the courts. [page 404]
Where to find support [9.11]
Given that mediation is one of the most commonly engaged forms of ADR at the formative stage of a contractual dispute, and often
effective at resolving the majority of such disputes, we provide here some additional information with respect to specific sources of support that may help parties seeking to resolve disagreements. Throughout Australia there are many private law firms, individual legal practitioners and accredited mediators who can provide mediation support. These can be engaged at the parties’ own cost. However, community mediation services also operate in some jurisdictions although their service areas are limited. The focus of these services tends to be on general social or neighbourhood disputes, although some do provide more specific support in contractrelated areas. Table 9.1 outlines some of these services and what they can provide help with. Table 9.1: Mediation services Jurisdiction Organisation(s)
Australian Capital Territory New South Wales
Conflict Resolution Service
Northern Territory
Community Justice Centre
Queensland
Dispute Resolution Centres
Community Justice Centres
Type of Contractrelated Issues/Disputes for which Mediation Assistance Can Be Provided Commercial and small business issues, workplace disputes. Business and consumer issues (breach of contract, goods and services, business disputes, financial loans, sale of land, residential tenancies), work and employment issues. Financial disputes, disputes between members of a club or organisation. Workplace and commercial disputes,
South Australia
Mediation SA (through the South Australian Council of Community Legal Services)
property settlement disputes. Property and residential tenancy disputes.
[page 405] Jurisdiction Organisation(s)
Tasmania
Victoria
Western Australia
National
Type of Contractrelated Issues/Disputes for which Mediation Assistance Can Be Provided Legal Aid Commission of *Provides referrals to Tasmania* various community and private organisations to assist with mediating disputes. Dispute Settlement Centre Workplace disputes, of Victoria disagreements within committees, clubs or incorporated associations. Melbourne Commercial *Provides information Arbitration and Mediation regarding mediation Hub (MCAMH)* venues throughout Melbourne and can assist in organising mediation conferences. Legal Aid Western *Provides referrals to Australia* various community and private organisations to assist with mediating disputes. Resolution Institute* *Provides information and
National
Australian Disputes Centre*
assistance in the facilitation of mediation conferences. *Provides information and assistance in the facilitation of mediation conferences.
Conciliation [9.12]
From a conceptual point of view, conciliation is similar to mediation in that the process of dispute resolution is guided by a neutral third party. Both processes are less formal dispute management methods than litigation — both are ‘alternatives’ to court proceedings. The main aspect which distinguishes [page 406] conciliation from mediation relates to the role of the independent third party appointed to resolve a dispute between parties. Whereas a mediator facilitates the resolution process (the parties themselves find a workable solution), a conciliator has a more active role in resolving a dispute and may advise parties on how best they may move past the conflict. A conciliator may have particular expertise to better assist parties decide disputed facts and reach agreement. Although a conciliator may advise parties on the process and provide suggestions on how to achieve workable outcomes, he or she does not make a determinative decision which binds parties.
[9.13]
The description provided by NADRAC is the following: Conciliation is a process in which the parties to a dispute, with the assistance of a dispute resolution practitioner (the conciliator), identify the issues in dispute, develop options, consider alternatives and endeavour to reach an agreement. The conciliator may have an advisory role on the content of the dispute or the outcome of its resolution, but not a determinative role. The conciliator may advise on or determine the process of conciliation whereby resolution is attempted, and may
make suggestions for terms of settlement, give expert advice on likely settlement terms, and may actively encourage the participants to reach an agreement.11 [9.14]
Conciliation is a process which can be employed to resolve disputes between parties in conflict generally, but may be particularly useful in resolving commercial, industrial, workers compensation and family disputes. Notably, the Australian Human Rights Commission (AHRC), which has a statutory responsibility to hear and resolve discrimination complaints,12 may invite parties to a complaint (lodged with the Commission in writing) to participate in a conciliation process facilitated by the Commission (may be in person, video conference, documents only).13 If a complaint is not resolved, the matter may proceed to the Federal Court of Australia or the Federal Circuit Court of Australia for hearing. [page 407]
[9.15]
The states, too, provide for conciliation under state legislative frameworks governing anti-discrimination/equal opportunity.14 For example, the Equal Opportunity Act 1984 (SA) provides that where the Commissioner for Equal Opportunity is of the opinion that a complaint (lodged with the Equal Opportunity Commission of South Australia) may be resolved by conciliation, the Commissioner must take all reasonable steps to resolve the matter by way of a conciliation conference.15 Where a complaint is not resolved through conciliation the matter may be heard and determined by the Equal Opportunity Tribunal (public hearing).
Arbitration [9.16]
Arbitration is another form of alternative dispute resolution (ADR) which has a leading role to play in resolving commercial disputes between parties outside of the adversarial court system. It is a private determinative process whereby parties agree to have their dispute heard and decided by an arbitrator who is an independent third party
usually selected by the parties themselves16 by way of agreement in writing. The NADRAC described ‘arbitration’ in the following way: ‘Arbitration is a process in which the parties to a dispute present arguments and evidence to a dispute resolution practitioner (the arbitrator) who makes a determination.’17 [9.17]
In Australia, arbitration is governed by legislation: the Commercial Arbitration Acts. A suite of reforms to Australia’s domestic arbitration legislation, prompted in 2010, brought laws of the states and territories into line with international arbitration processes prescribed under United Nations Commission on International Trade Law (UNCITRAL) Model Law and unified arbitration law across Australian jurisdictions. Table 9.2 below provides an overview of the current uniform Acts in force in Australia. [page 408]
Current legislation governing arbitration [9.18]
Table 9.2: Current legislation governing arbitration Name of Act Jurisdiction Commercial Arbitration Act 1986 Australian Capital Territory Commercial Arbitration Act 2010 New South Wales Commercial Arbitration Act 2011 Northern Territory Commercial Arbitration Act 2013 Queensland Commercial Arbitration Act 2011 South Australia Commercial Arbitration Act 2011 Victoria Commercial Arbitration Act 2012 Western Australia [9.19]
Naming the Acts with specific reference to ‘commercial arbitration’ would seem to imply that the statute governs commercial arbitration exclusively. This is not the case. The legislation applies to arbitration of disputes generally. However, disagreements arising out of a
contractual relationship within a commercial, construction or industrial context commonly require resolution by means of arbitration. [9.20]
It is useful to highlight some of the key aspects of the legislation to better understand what arbitration entails. We will refer to South Australia’s Commercial Arbitration Act 2011 (SA) by way of example. Note, mirror provisions apply in all other Australian jurisdictions.18
Parties can agree to refer disputes to arbitration [9.21]
Commercial contracts commonly have a specific clause (an ‘arbitration clause’)19 which stipulates that disputes arising out of their contractual relationship are to be referred to and resolved by an arbitration tribunal.20 Where parties have not provided for arbitration in their contract, they may agree to refer a dispute to arbitration if and when a conflict arises. The parties’ agreement to have the [page 409] dispute heard by an arbitrator must be in writing.21 Notably, an email or other form of electronic communication may constitute written agreement.22
Arbitration tribunal [9.22]
An arbitration tribunal may comprise of any number of arbitrators as agreed between the parties and may comprise of only one nominated person.23 The arbitrator is usually a qualified person with a legal background and sound technical expertise.
Arbitral procedures
[9.23]
Arbitration is generally recognised as being a more formal method of dispute resolution than mediation or conciliation, primarily because adversarial procedures may be adopted (for example, parties may cross-examine witnesses) and arbitrators hand down an award (decision) according to law. Note, however, parties are free to agree on the procedures (they may be informal) assumed for the arbitral proceedings24 as long as they accord with basic principles of procedural fairness, that is, lack of bias; provision of an evidencebased decision; equal treatment of parties; equal opportunity for each party to be heard.25 The arbitration tribunal has the power to determine the admissibility, relevance, materiality and weight of any evidence.26 This equips the arbitration tribunal with flexible procedures. It may decide to hold oral hearings or conduct proceedings based solely on the provision of documents and other materials.27 Proceedings are confidential except where disclosure is mandated under law or where parties agree otherwise.28
[9.24]
A feature of the arbitration process, which aligns with a defining principle of alternative dispute resolution, is that parties may represent themselves or be represented by a person other than a legal practitioner.29 This can have a significant impact on costs related to the proceedings (arbitration may be substantially less expensive than litigation), making arbitration a more viable process than litigation for some parties. It is important for parties to note that they have a duty [page 410] to do all that is necessary to realise an expeditious arbitral proceeding; a party must not wilfully cause delay.30
Arbitrator may act as a mediator [9.25]
Interestingly, parties may agree that an arbitrator act as a mediator, conciliator or non-arbitral intermediary before or after the proceedings and where parties wish to discuss whether or not to
continue with proceedings.31 This is another example of the flexibility arbitration promotes. Communications between an arbitrator acting as a mediator and each of the parties must be treated as confidential unless otherwise agreed.32
Interim measures [9.26]
Legislation provides that, at the request of a party, an arbitral tribunal may grant interim measures (any temporary measure which may include an interim award) prior to the issuing of the final award.33 Statute provides a non-exclusive list of examples of the types of issues to which an interim order may relate.34 An interim measure is binding and enforceable by the court.35
Awards are final and binding [9.27]
The final award delivered by an arbitral tribunal must be decided by majority (where more than one arbitrator is appointed),36 be recorded in writing and state the reasons for the decision.37 The award is binding and enforceable by the court.38 Appeals against the award can be made on a question of law (not fact).39 The grounds for appeal are outlined in the legislation. Similarly, the grounds for having an award set aside are provided for in the Act.40 The handing down of a final award terminates arbitral proceedings.41 There are various other grounds for termination including withdrawal of a claim; parties agree to terminate; continuation of the proceedings becomes impossible; or the arbitral tribunal dismisses the claim.42 [page 411]
Key advantages of arbitration [9.28]
Notwithstanding the fact that arbitration processes are formalised within a legislative framework, this form of dispute resolution offers a
degree of procedural flexibility which places arbitration in a different realm to litigation in the courts. The parties themselves can largely determine who will comprise the arbitral tribunal and which procedures are best suited to resolve the matter (where they can agree). Key advantages include the private, confidential nature of the process and the avoidance of publicity; less formal procedures/processes which are more ‘user friendly’ than those adopted in adversarial court proceedings; lower costs than litigation attracts (no need for legal representation); more expedient resolution of disputes than litigation (no court waiting lists); and the opportunity to appoint a decision maker(s) who has sound technical expertise relevant to the nature of the dispute (a judge may not have technical expertise of such kind).
End note: international commercial arbitration [9.29]
The International Arbitration Act 1974 (Cth) governs international commercial arbitration. Amendments in 2010 brought the legislation in line with the United Nations Commission on International Trade Law (UNCITRAL) Model Law. The objectives of the Act include the following: (a) to facilitate international trade and commerce by encouraging the use of arbitration as a method of resolving disputes; and (b) to facilitate the use of arbitration agreements made in relation to international trade and commerce; and (c) to facilitate the recognition and enforcement of arbitral awards made in relation to international trade and commerce; and (d) to give effect to Australia’s obligations under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted in 1958 by the United Nations Conference on International Commercial Arbitration at its twenty-fourth meeting; and (e) to give effect to the UNCITRAL Model Law on International
Commercial Arbitration adopted by the United Nations Commission on International Trade Law on 21 June 1985 and amended by the United Nations Commission on International Trade Law on 7 July 2006; and (f) to give effect to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States signed by Australia on 24 March 1975.43 [page 412] [9.30]
Essentially, the legislation aims to foster arbitration as a dispute resolution process to be used within the international trade and commerce context, governs the use of such arbitration agreements and provides for the recognition and enforcement of foreign arbitration awards in domestic courts.44 The International Chamber of Commerce (ICC) International Court of Arbitration is a peak body for resolving international disputes by arbitration.45
Mandatory ADR [9.31]
It is also worth noting that in effect the various Court Rules in each Australian jurisdiction may also mandatorily prescribe ADR in some circumstances. For example, s 220(1) of the Supreme Court Civil Rules 2006 (SA) provides that a ‘Judge or Master may appoint a mediator in an action and refer the action or a particular issue arising in the action for mediation’. Section 221(1) further provides that the court ‘may, on its own initiative or on application by a party, appoint an arbitrator in an action and refer the action or a particular issue arising in the action for arbitration’. Similar provisions for various forms of alternative dispute resolution can be found in each set of Court Rules in each jurisdiction.
Sources which may assist parties
contemplating ADR [9.32]
Below is a list of general resources which may assist parties contemplating alternative dispute resolution: Australian Disputes Centre, .
Disputes Management,
2015,
Australian Government Attorney-General’s Department, Alternative Dispute Resolution, . ICC International Chamber .
of
Commerce,
Arbitration,
Melbourne Commercial Arbitration and Mediation Hub, Alternative Dispute Resolution, 2014, . Resolution Institute, Resolving .
a
Dispute,
2016,
__________________ 1 2 3 4
5
6 7 8 9 10 11
T Sourdin, Alternative Dispute Resolution, 4th ed, Thomson Reuters, Australia, 2012, p 3. M P Gergen, ‘A Theory of Self-Help Remedies in Contract’ (2009) 89 Boston University Law Review 1397 at 1398. See Chapter 7 at 7.115–7.116. H Astor and C Chinkin, Dispute Resolution in Australia, 2nd ed, LexisNexis, Australia, 2002, p 83 citing J Folberg and A Taylor, Mediation: A Comprehensive Guide to Resolving Conflict Without Litigation, Jossey Bass, San Francisco, 1984, p 7. National Alternative Dispute Resolution Advisory Council (NADRAC), Commonwealth Government, Dispute Resolution Terms, 2003, p 9,