8 june 2014 blo1105 – business law 1 welcome to business law

April 18, 2023 BLO1105 – Business Law 1

BLO1105 – Business Law

Welcome to Business Law

LECTURERSCITY FLINDERS

Adv Andy Schmulow

(Subject coordinator)

Dr Daud Hassan

(Senior Lecturer: Victoria Law School)

FOOTSCRAY PARKMr Gerry Box

(Co-author: Parker and Box)

04/18/23 BLO1105 – Business Law 2


Contact Details: Andy Schmulow

Flinders Street Campus

Room 1030 Phone 9919 1483

Email [email protected]

Contact Details: Dr Daud Hassan

Queen Street Campus

Room 1.05 Phone 9919 1857



Contact Details: Gerry Box

Footscray Park Campus

Room 32.42 Phone 9919 8275




Subject Outline An Introduction to the Australian Legal

System. A detailed study of the Law of Contract.

All Business Graduates and their advisers should have a sound understanding of

Contract Law principles.


Assessment SummaryCheck Subject Guide p. 2. This is definitive and serves as a contract between you and the University.

NOTE: TUTORIAL PARTICIPATION IS

COMPULSORY AND YOU MAY NOT MISS MORE THAN TWO (2)

TUTORIALS. IF YOU DO YOU AUTOMATICALLY FAIL


Tutorials

Tutorial attendance and participation.

Your attendance at and your level of participation in Tutorial discussions will be

monitored and recorded by your Tutor.

At the end of semester, you will be allocated a mark out of a possible 10%.

WHAT HAPPENS IF YOU MISS MORE THAN 2?


AssignmentYou are required to submit during your

scheduled tutorial in the week commencing Monday 27th April, 2009 a written

assignment or research essay of 2,000 – 2,500 words on the topic in the Student

manual for Semester 1, p. 17.

NOT SEMESTER 2 TOPIC p. 18.

You will receive a mark out of a possible 25.


Final Examination

The final examination is a 3 hour exam, and is “Open Book”

You may take into the exam any written or printed materials, and use them to assist in

answering the questions, which are problem-based. Marks are out of a possible

60%


Teaching Method

Two hours of lectures each week. Check timetable details of lectures Tutorials.

You must also attend One tutorial of one hour’s duration each week.

TUTORIALS ARE COMPULSORY YOU MAY NOT MISS MORE THAN TWO

(2). IF YOU DO YOU AUTMOTAICALLY FAIL


Materials

Student Manual.The “Business Law Students Manual” is an

essential requirement for students. Cost is about $12 or from E Reserve or WebCT .

It is available at the Bookshop, and contains the Subject Outline, Syllabus details,

Tutorial programs and other materials, including past exam papers.


Materials (Continued)

Textbooks.The officially prescribed texts are “An

Introduction to the Law of Contract” by Stephen Graw, 5th ed., and “Business Law for Business Students”, Parker & Box,2nd

Ed., in VU bookshop for $98.88 as a package. If bought individually, Graw is about $72.10 and Parker & Box is about

$41.58


Materials (Continued)

“How to Study Business Law”

Crosling & Murphy, Butterworths.

Lecture Notes Summary.

Available at VU Library on Electronic (“E”) Reserve, or from the Faculty website. PowerPoint slides are available on the

WebCT website.


Student Support Programs

The Teaching and Learning Unit conducts various programs during the semester to

assist students with assignment preparation and examination preparation.

Details of these classes will be announced in lectures at the appropriate times.


Australian Legal System

Some knowledge is assumed.

Week 1 & 2 Lectures will overview this area, focusing on: -

The evolution of Australian Law The sources of law The “common law” The “doctrine of precedent”


Australian Legal System

Law reporting systems The “adversary system” Federal system of government State & Federal Court structures The Commonwealth Constitution Legislation and how to interpret it.


Evolution of Australian Law

Following “settlement” by the English in 1788, the English “common law” model

was imposed in Australia.

As a penal colony, martial law prevailed.

English law then applied from early 19th Century until late in the 20th Century

Many English concepts survive today.


Evolution of Australian Law

Australian law gradually developed its own “flavour” as an offshoot of English law

Finally, we severed our ties with English law, but only recently.

Result is a system heavily based on English law, but now completely independent of it.

Processes and precedents still apply today


Sources of Law in Australia

Primary Sources Legislation, and Precedent

Secondary Sources Commercial Custom Legal textbooks and journals Law Reform Commission Reports


Primary Sources of Law

Legislation comprises Acts of Parliament (“Statutes”), Statutory Rules & Regulations, and other “Delegated Legislation”.

For us as Victorians, this means both Australian and Victorian legislation


Primary Sources of Law

Precedent is “judge-made” law, as distinct from law enacted by Parliament.

It is law as pronounced by the courts when deciding cases over many years.

Legislation prevails over the common law.

Parliament has the final say as to what the law is in any area.


The Common Law

This term is used to describe A type of legal system.

(Contrast “common law” and “civil law” systems, for example)

The body of decisions made by courts over time that collectively comprise the “common law”. (Cf “Legislation”)


The Doctrine of Precedent

Inherited from the UK, it means that decisions of superior courts in a legal system (or “hierarchy”) are binding on inferior courts in the same hierarchy.

The Supreme Court of Victoria binds other Victorian Courts, because it is our (State) superior court.

The High Court of Australia binds all Australian Courts.


Advantages of Precedent

Properly applied, the courts become Consistent, Non-discriminatory and fair, and Predictable in their decisions

Some disadvantages apply.

There is a “safety valve” in the operation of the doctrine.


Law Reporting Systems

Vital to Precedent, the (printed) Law Reports recorded all significant legal judgments for future reference.They are very relevant to Contract Law, which is not “codified”.

CLR and VR are important to Victorians.

Meehan v Jones (1982) 149 CLR 571

Causer v Brown [1952] VLR 1


Useful Websites

Students should note two particular websites that are extremely helpful in tracking down Statutes and Cases.

All High Court cases and Acts can be found on http://www.austlii.edu.au

All recent Victorian cases and Acts can be found on http://www.dms.dpc.vic.gov.au

http://www.austlii.edu.au/

http://www.dms.dpc.vic.gov.au/


The Adversary System

All “common law” countries adopt the adversary system in conducting trials.

“Civil law” countries use the “inquisitorial” approach.

Differences include:- The role of the judge; Onus & burden of proof, and Some presumptions, eg “innocence”.


The Australian Constitution

This is the “charter” for operation of our “federal” system of government.

Adopted by a majority of people and States in 1900, it has operated since 1901 more or less unchanged.

Federal systems (cf. “unitary” systems) exist in many large countries, e.g., USA, Canada.


The Australian Constitution

This results in having two law-making authorities (Commonwealth

and State), and a division of law-making powers between the

two.Many complications arise from this, causing

conflicts between the two governments.The constitution enshrines the UK concept of the

“separation of powers”.


Federal System of Government

Every federation has the problem of two (competing) law-making authorities.

Unitary systems (the majority of countries) do not have this problem.

When confronted with a legal problem, we have to check both

Commonwealth (Australia-wide) laws, as well as State (Victoria-wide) laws


The State Court System

The State Courts are1. The Court of Appeal (the “Full Court”);

2. The Supreme Court

3. The County Court

4. The Magistrates Court.

5. Various Tribunals, including VCAT


The Federal Court System

The Federal Courts are1. The High Court of Australia

2. The Family Court

3. The Federal Court

4. The Federal Magistrates Court

The Federal & Family Courts, created in 1976, rank equally in importance.


Tribunals

Tribunals have succeeded becauseThey provide quick and easy accessThey are not as expensive as courtsThey are informal, andThey are very efficient.

Rapid growth reflects their popularity.


Statutory Interpretation

Interpreting Acts is now the main function of courts, rather than creating new law, which is now mostly done by parliament.

Problems include Human error in drafting Rapid technological change Changes in words and community standards


Common Law Rules (of interpretation)

The Courts developed three main Rules to assist in interpreting Acts:-

1. The Literal Rule,

2. The Golden Rule, and

3. The Mischief Rule.

Many “Maxims” (rules of lesser importance) were also developed by the Courts.


Statutory Rules (of interpretation)

Recently, (1984) Parliaments gave their own instructions to the Courts about this task.

They passed legislation to require the courts to use the “literal rule” when reading and applying statutes.

If that creates a problem, the courts then must use the “purposive approach”.


The “Purposive” Approach

If in doubt (as to what the words mean), the judge must ask

“What was the purpose of this Act?”, or “Why was this Act passed?”

The judge must then interpret and apply the Act to give effect to that purpose.


Different Branches of Law

One main division or distinction is between civil law and criminal law.

Civil law involves claims by one citizen against another in the litigation process.

Criminal law involves the prosecution of a citizen by the state (police) for a crime.


The Law of Tort

A “tort” is a civil wrong for which the remedy is an action for damages.

Examples of torts are negligence (the most common tort), defamation, nuisance,

trespass and deceit.


Contract Law

Contract law is the law concerning legally enforceable agreements. It is the

“cornerstone” of all of our commercial or business law.

We study it intensively simply because we are students of business. We will work in

business or advise people who do.


Constitutional Law

Constitutional Law is the study of the constitution, in our case the constitution of

the Commonwealth of Australia.

This involves the relative powers of the Commonwealth (Australian) and State Governments, disputes between States,

between States and Commonwealth.


Administrative Law

Public servants can now have their decisions tested by citizens through various tribunals. Formerly, only the legality of the decision

could challenged. Under administrative law, the correctness of the decision can now be challenged and reviewed by the tribunal.


The Rules of Equity

Different in origin from the “common law”, equity developed in the “King’s Court”, later taken over by the Chancellor, and became known as “Chancery Courts”.

The rules of natural justice (as distinct from common law rules) were applied. The two systems have “merged” in all out courts.


Further Reading

“Business Law for Business Students”,

pages 1 – 53; or

The Introductory Chapters of either

“Business Law in Australia”,

Vermeesch & Lindgren, or

“Australian Business Law”,

Latimer, CCH.


Contract Defined

A contract is An agreement that the law will enforce; A promise (or set of promises) that the

courts will enforce; or A legally enforceable agreement.

All emphasize “agreement” (or set of promises), and “enforceability”.


Contract Formation Formula

Many problems require us to say whether a contract exists.

To resolve this, a useful formula is

Offer + Acceptance = Agreement

Agreement + Intention + Consideration = Contract


Typical Formation Process

The vast majority of contracts are formed by the process outlined.

An offer is made by A to B.

That offer (or some negotiated variation of it) is accepted by B.

Agreement exists.

(Courts still typically apply this test.)


An Exception to the Rule

In Clarke v Dunraven [1897] AC 59, the Court of Appeal held (decided) that agreement had been achieved between C and D.

They had each advised a “third party”, the secretary of a Yacht Club, that they would be bound by the Club’s rules in the conduct of yacht races.


Introductory Points (about contract).

Contrast “Simple Contract” and “Formal Deed”.

Does the contract have to be in writing? Doctrine of “part performance”. How to prove terms of “verbal” contract? Contrast bilateral and unilateral contracts.


Components of a Contract

Essential components, or elements, are:- Offer; Acceptance (these two make agreement); Intention (to be legally bound); and Consideration.(Some add “capacity”, “legality of purpose” etc,

but these are less important).


Intention (to be legally bound)

Not all “agreements” are “contracts”.

Some will not be enforced in a Court.

Why?

Because they were never intended to create legal obligations or legal consequences.

Consider some simple examples.


Testing by Using Presumptions

A presumption is a “probable outcome”. It is not an absolute.

It can be overturned (“rebutted”), but only by strong contrary evidence.

Examples:-

The presumption of innocence.

The presumption of survivorship.


The Relevant Presumptions

If an agreement concerns a personal, domestic or social transaction, the Court presumes that intention was not present.

and

If the agreement concerns a business or commercial transaction, the Court

presumes that intention was present.


Testing Methods

Courts use two quite different testing methods.

One is “subjective” testing. This involves testing by reference to the persons actually involved in the case.

“What did you intend when you made this deal”?


Subjective Testing

Although used a lot in criminal trials, where intention is an essential ingredient of a crime in many cases, subjective testing is not often used in civil trials.

It is flawed because we usually get two opposite and competing answers to the same questions.


Objective Testing

The preferred method in civil trials, this method tests by reference to some

“outside” or “objective” criterion or yardstick.

The benchmark is often “the reasonable person”, or “the intelligent bystander”.Although not perfect, it is better than

subjective testing.


Summary of Testing (for Intention)

We can solve any problem on this question (“whether intention exists”) by following this strategy:-

1. Applying the presumptions as above; and

2. Testing the question objectively, not subjectively.

We will look at some relevant cases.


Domestic Arrangements

Married couples, and closely-related family members.

See Balfour v Balfour [1919] 2 KB 571

Cohen v Cohen (1929) 42 CLR 91

Murphy v Simpson [1957] VLR 598


Balfour v Balfour

B promised to pay maintenance to his wife pending her return to Ceylon, where he worked with the UK diplomatic corps.

He did not pay. After divorce, she sued.

The court held that agreements between spouses – while living together – are not contracts. No intention exists.


Social Agreements

Coward v Motor Insurers Bureau [1962] 1 All ER 531 (an agreement between two fellow workers for transport to and from work on a motor cycle), and

Cameron v Hogan (1934) 51 CLR 358 (an agreement between members of a political party)


Rebutting the Presumption

Remember that the two presumptions apply, but each presumption can be rebutted.

Rebuttal is achieved by leading strong evidence to defeat the presumption.

The onus of proof is borne by the party seeking to rebut the presumption.


Rebuttal in Domestic Cases

See

McGregor v McGregor (1888) 21 QBD 424

Merritt v Merritt [1970] 1 WLR 1211

The precedent set in Balfour v Balfour (no intention in husband/wife agreements) does not apply if the married couple are separated when the agreement is made.


Rebuttal in the “Migration Cases”

Wakeling v Ripley (1951) SR (NSW) 183

Riches v Hogben [1986] 1 Qd R 315

Todd v Nichol [1957] SASR 72

The presumption of non-intention was triggered by close relationship, but was held to be rebutted by serious outcomes

to the parties in each case.


Wakeling v Ripley

W’s married sister migrated to Australia from UK (at W’s request) to look after him, in

return for promised benefits.

After disagreement, W reneged on his offer.

R sued for damages for breach of contract.

Held: Despite close relationship, intention exists, and there is a contract.


Further Rebuttal Cases

Parker v Clarke [1960] 1 All ER 93

(aged care agreement between two friendly, unrelated couples)

Popiw v Popiw [1959] VLR 197

(separated husband and wife)

Simkins v Pays [1955] 1 WLR 975

(competitions, raffles and lotteries)


Commercial (business) Agreements

The presumption of intention applies here.

Any agreement made “at arm’s length” ( with a stranger) will be treated as commercial, even when the subject-matter is personal.

This presumption can also be rebutted, but the cases show that rebuttal is difficult to

achieve.


Carlill v Carbolic Smoke Ball Co.

Defendant argued that a cash reward offered in a newspaper to promote product sales was an “advertising stunt”, with no intention to be legally bound (to pay).

Held: The reward is an offer, accepted by C by buying and using the product. Intention exists and there is therefore a contract.


Edwards v Skyways Ltd

An agreement between Defendant and E’s Union to pay superannuation payments on early retirement of pilots “taking a package” was a commercial agreement.

The presumption of intention applied, was not rebutted, and therefore prevailed, despite the fact that the payments were described as “ex gratia”, (voluntary).


Express Exclusion (of intention)

Can the (contracting) parties exclude intention by agreement?

This was achieved by an “exclusion clause” in Jones v Vernon’s Pools Ltd [1938] 2 All ER 626. A ticket in a soccer pools competition contained an effective exclusion clause (“this is not a legal contract”). The claim by Jones failed.


Honour Clauses in Contracts

Can the parties avoid a contract by inserting an “honour clause” in the agreement?

See Rose & Frank Co v Crompton Bros Ltd. [1925] AC 445. Dispute taken to Court, but agreement contained a detailed and specific “honour clause”. The Court held that there was no legal contract.


“Ousting” the Jurisdiction

It is acceptable to say “This agreement is not a contract”, as in the last case.

But it is not acceptable to say “This agreement is a contract, but the Courts cannot adjudicate upon it”. This is an attempt to “oust the jurisdiction of the courts”, and is against public policy.


“Letters of Comfort”

A letter by a parent company to a Bank lending money to its subsidiary company might be a “letter of comfort”, or a guarantee to repay the loan if the borrower fails to do so.

It is a question of intention. Would a reasonable person conclude that intention existed?


Letter of Comfort Cases

Kleinwort Benson Ltd v Malaysian Mining Corp Bhd [1988] 1 WLR 799 (No intention)

Commonwealth Bank of Australia Ltd v TLI Management Pty Ltd [1990] VR 510 (No intention)

Banque Brussels Lambert SA v Australian National Industries Ltd (1989) 21 NSWLR 502 (Intention to guarantee repayment was found)


Administrative Arrangements

Is an agreement between government and a citizen a legal contract or not? See

The Administration of the Territory of PNG v Leahy (1961) 105 CLR 5, and

Australian Woollen Mills Ltd v Commonwealth of Australia (1954) 92 CLR 424

In both cases, no intention was concluded.


Summary of Intention

Problems involving intention can be solved by

1. Discussing and applying the two presumptions, using cases to illustrate the distinction between them, and

2. Remembering to use an objective, as distinct from a subjective, testing mechanism.


Offer Defined

“ A proposal or proposition which, if accepted, gives rise to an agreement”

The person making the offer (the “offeror”) will make it to

one person (the “offeree”), or to a group of persons, or sometimes to “the world at large”


Requirements of an Offer

The offer can be “express”, which means that it is expressed by being spoken or written, or it can be “implied”, usually from conduct or behaviour.

It must be “promissory”, i.e., it can be converted by acceptance into a binding obligation. Harvey v Facey [1893] AC 552


Offer v “Invitation to Treat”

Some activities appear to be making offers, but legally are not. They may be only extending an “invitation to treat” or an “invitation to negotiate or deal”. Consider

1. Display of goods for sale

2. Distributing brochures or circulars, and

3. Advertising goods for sale.


Display of Goods for Sale

A retailer of goods who displays them for sale appears to be “offering” the goods for sale to customers.

However, the courts take the view this action (placing goods on display for sale) is not an offer to sell as such, but only an invitation to customers to make an offer to buy. See


“Boots Case”

In Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1952] 2 QB 795,

When B displayed goods (including prescribed drugs) for sale in a “self-service” chemist store, plaintiff claimed that B was guilty of the offence of “offering drugs for sale otherwise than under the supervision of a qualified chemist”.


Boots Case (Cont.)

B’s defence was that the customer makes the offer at the check-out, where a chemist was in attendance to supervise sales.

The issue becomes “where is the offer made”?

Does B offer to sell (at the display shelf), or does the customer offer to buy (at the check-out)?

Held: The latter. Therefore B not guilty.


Display in “conventional” shop

Boots Case was a self-service, or supermarket situation. What happens in a conventional store? See Fisher v Bell [1961] 1 QB 394, where B was charged with offering for sale an offensive weapon when he put a flick-knife in his shop window with a price tag.

Held: Not guilty; display only an invitation.


Brochure Distribution

Distribution of brochures, circulars, catalogues or other advertising material looks like the making of offers, but it legally is not. See Grainger & Sons v Gough [1896] AC 325, where a circular listing products and prices from a wine store was held to be only an invitation to treat.


Advertisements generally

An advert. in a paper or other media looks like an offer, but generally it is regarded legally as only an invitation.

The prospective buyer has to make an offer that the advertiser can accept or reject.

See Partridge v Crittenden [1968] 2 All ER 421


Exceptions to the Rule

The general rule is that an advert will not be an offer. There are two exceptions:-

1. The advert may convert (from an invitation) to an offer if conditions are imposed that the prospective buyer must satisfy to buy the article advertised.

2. If the advert offers a reward to the reader


The Smokeball revisited

In Carlill v Carbolic Smokeball Co., the company argued the general rule that an advert is not an offer, and there was thus no contract with Mrs C.

The court rejected this argument, noting that when a reward is advertised, the advert becomes an offer that the reader can accept by conduct (buying the product etc.)


Sales by Auction

When selling goods (or land) by auction, the auctioneer in calling for bids is extending an invitation to the assembled buyers to make him an offer.

The resultant bids are offers.

The contract is formed if and when the auctioneer accepts one of the bids (offers)


Sales by Tender

Sale by tender is becoming more popular. Tenders have long been used to form contracts for major works, or high volume supply of goods.

Calling for tenders is an invitation.Submitting a tender is making an offer.When the advertiser accepts the preferred

tender, if any, the contract is formed.


Evaluating Tenders

If the advert inviting tenders specifies a process or procedure that will be applied in evaluating tenders, that process or procedure must be strictly followed.

If not, damages will be payable to an aggrieved unsuccessful tenderer.

See Hughes Aircraft Systems Int. v AirServices Australia (1997) 146 ALR 1


Acceptance of Offer

Offer + Acceptance = Agreement

An acceptance is a clear and undoubted assent to the offer and all of its terms.

It can be express (stated or written), or it can be implied from conduct.

No “magic formula of words”.

Four rules of acceptance have evolved.


The Four Rules of Acceptance

1. It must be clear and undoubted.

2. The correct method must be used.

3. The acceptance must be given with knowledge of, and in reliance upon, the offer.

4. Acceptance must be communicated.


Rule One of Acceptance

Acceptance must be clear, undoubted.

If the offeree tries to change any terms of the offer, he is not accepting it but making a “counter-offer”.

This replaces the first offer with a second one.

Less obviously, it destroys the first offer.


Conditional Acceptance

An acceptance given subject to a condition will not operate unless and until the condition is satisfied.

A simple example would be

“ I accept your offer to sell me your car for $20,000 provided I can get a loan of $10,000 from my Bank”.


Masters v Cameron (1954) 91 CLR 353

A complex case of conditional acceptance. C sold a property to M, who paid a deposit of 10%. Both signed a “Sale Note” prepared by the agent, to be replaced later on by a formal contract of sale that C’s solicitors would prepare.

The sale note contained a clause that C insisted be inserted by the agent.


Masters v Cameron (Cont)

“This agreement is made subject to the preparation of a formal contract of sale

which shall be acceptable to my solicitors”.When the contract was prepared to replace the

Sale Note, M refused to sign it because he couldn’t get the loan he needed to buy the house.

Is the Sale Note a binding, legal contract?


Masters v Cameron (Cont)

Was C’s acceptance of M’s offer to buy conditional on the signing of the replacement contract?

The High Court held that it was, because the words used suggested that new terms could be added to those in the Sale Note. M should not be forced to include new terms that he had not even seen or considered.


Rule Two of Acceptance

This rule focuses on the method to be used in accepting an offer.

The offeror, when making the offer, can dictate HOW the offer is to be accepted.

If he does, his stipulations are binding on the offeree, and must be strictly followed.


Rule Two Sub-rules.

1. An exclusive method must be used2. A nominated method, or any quicker one,

may be used3. If no method nominated, the same method

(as the offeror used) may be used4. If communication is instantaneous,

acceptance is effective when received.5. The Postal rule of acceptance.


Rule Two - Sub-rule One

In rare cases, the offeror might say (when making the offer):-

“If you want to accept this offer, you must accept by (say) fax”.

If he does, acceptance by any method other than fax will not be binding on the offeror.


Rule Two - Sub-rule Two

If a method is nominated by the offeror, but not exclusively, that method – or any faster method – may be used by the offeree.

For example, if acceptance by post is specified, fax could be used as an alternative. But the new method must in fact faster, not just in theory. See Eliason v Henshaw (1919) 4 Wheaton 225


Rule Two - Sub-rule Three

This is a very helpful sub-rule.If no method is nominated by the offeror,

there is a presumption that the offeree can use (to accept the offer) the same method that the offeror used (to make the offer).

So an offer made by post can be accepted by post if no alternative is stated by the offeror.


Rule Two Sub-rule Four

If communication is “instantaneous”, the acceptance is effective only when

actually received by the offeror.

This applies to telephone, telex, fax.

See Entores Ltd v Miles Far East Corporation [1955] 2 QB 327


Entores Ltd v Miles Far East Corp

A contract was formed by telex, the offer being telexed from London to Amsterdam, and the acceptance was telexed back.

The question was “where was the contract made”? This establishes the law of the contract which must be applied in any dispute. Held, acceptance occurred in UK


Rule Two - Sub-rule Five

If the Postal Rule of Acceptance is activated, the posted acceptance is legally effective when the letter is posted, (as distinct from when it is received).

This curious rule, created in England in early 19th century can be explained only in the context of the Law of Agency.


The Postal Rule of Acceptance

Remember to justify using this rule if you invoke it. It applies if the offeror expressly nominates it, or the circumstances allow it to be invoked by implication.

Remember also that it applies only to acceptances – not revocations, counter-offers, or any other communications.


Electronic Transactions Acts

Recent Acts have been passed by the Australian and Victorian Parliaments to authorize the use of electronic communication (e-mail etc) in business and in dealing with government.

This has some implications for us in the area of contract formation.


Rule Three of Acceptance

An acceptance must be given with knowledge of the offer, and in reliance upon the offer. You cannot accept “by accident” – it must

be a conscious decision to make the contract.

See R v Clarke (1927) 40 CLR 227


R v Clarke

C had heard of an offer by the government of WA to pay a reward. When arrested and questioned, he gave the information sought. He claimed the reward in contract.

Held. On his own admission, he had forgotten the reward, and was seeking to protect himself. No valid acceptance of offer.


Rule Four of Acceptance

The acceptance must be communicated.

This can be express (stated or written), or

implied from the offeree’s conduct.

But it must be one or the other. See Felthouse v Bindley (1862) 142 ER 1037

See also Brogden v Metropolitan Railway Co (1877) 2 AC 666


Acceptance by Agent

An agent can be used to accept on behalf of the offeree.

But the agent must be properly authorized to accept the offer.

See Powell v Lee (1908) 99 LT 284

Contrast Northern territory of Australia v Skywest Airlines Pty Ltd [1987] 48 NTR 20


Cross Offers

What if two identical offers (A to sell to B, and B to buy from A) cross in transit? Is there a contract in this situation.

The court held in Tinn v Hoffman & Co (1873) 28 LT 271 that two identical offers are not the same as an offer and an acceptance. One offer has to be accepted.


Counter-offers

The counter-offer does two things1. It substitutes a new offer for the offer that

it replaces.2. It legally destroys the previous (replaced)

offer. The offeree cannot revive the replaced offer,

but the offeror may. See Hyde v Wrench 1840 49 ER 132


Request for Information

A counter-offer destroys the replaced offer. An enquiry or “request for information” does not.

See Stevenson Jacques & Co v McLean (1880) 5 QBD 346

This distinction can be very important in problem solving.


Revocation of Offer

The general rule is that an offer can be revoked at any time before it is accepted, even if the offeror says he will leave it open for a defined time period. See Routledge v Grant (1928) 4 Bing 653

Revocation of Offer


Exception to the Rule

The exception to the general rule occurs when an option is bought and paid for by the offeree in order to keep the offer open for an agreed amount of time.

See Goldsborough Mort & Co Ltd v Quinn (1910) 10 CLR 674


Revocation (Continued)

If revoking an offer before the expiry of its stated life-expectancy, which can only be done if there is no valid option, the offeror should take care to ensure that the offeree is notified of the revocation.

A revocation is not affected by the postal rule. See Byrne v Van Tienhoven (1880)


Lapse of Offer

How long does an offer last? At the latest, at the end of its allocated

timeframe, if one is set.But if none is set, it will lapse after a

“reasonable time”. See Ramsgate Victoria Hotel v Montefiore (1888).

This is a question of fact in each case. It could be seconds, or many years.


Consideration

Consideration emerged in the English courts in the 16th Century to defeat fraudulent claims.

Consideration is• Peculiar to the “common law” systems;• Traceable back to the 1500s.It means that a“gratuitous” promise will not

be legally enforced.


Consideration Defined

Lord Pollock defined consideration as

“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”.

Consideration must be “something of value”.


Elements of Consideration

Consideration can be• Positive (doing something, or promising to

do something), or• Negative (a “forebearance”, such as

promising that you will NOT do something).Consideration can be present or future, but

not past.


The 6 rules of Consideration

1. Necessary in all “simple contracts”.

2. Past consideration is “not good consideration”.

3. It must come from the “promisee”, but need not go back to the “promisor”.

Note: The promisor makes the promise, the promisee receives it.


The 6 Rules of Consideration

4. It need not be “adequate”, or commercially realistic.

5. It must not be too vague.

6. It must be “sufficient” in the eyes of the law.

These last three rules are inter-related.


Rule 1 of Consideration

If the contract is a simple contract, consideration must be proved to exist.

If it is a formal deed, consideration is not required.

Formal deeds are rare, and recognisable by the words used in the “jurat” or signing

clause, namely “signed, sealed and delivered”.



Consideration can be in the present or the future, but past consideration is not acceptable.

See Eastwood v Kenyon (1840),

Roscorla v Thomas (1842), and

Anderson v Glass (1868)


Possible Exception to Rule 2

In contracts of service, this rule might be overcome.

See Lampleigh v Braithwait (1615), and

Re Casey’s Patents, Stewart v Casey (1892)

A promise to pay something is implied when the work is requested.



Consideration must come from the promisee, but need not revert to the promisor.

That is, the benefit may move “sideways”, to a third party.

The doctrine of “privity of contract” states that only a party to a contract can sue or be sued under that contract.

See Dunlop Pneumatic Tyre Co v Selfridge.


Rule 3 – Joint Promisees

If a promise is made to 2 promisees “jointly”, as where

A promises B and C to pay for work done, or for value provided only by B or by C

See: Coulls v Bagots Executor & Trustee Co Ltd (1967)

One promisee providing value on behalf of 2 promisees is acceptable.



Put simply, this rule means that the price does not have to be right.

The court will not enquire whether the price is adequate or not.

It is not the court’s concern.

So long as some price is paid, the court will look no further.


Nominal Consideration

The price might be a price in name only.

See Thomas v Thomas (1842)

Does it have to be expressed in currency terms?

See Chappell & Co Ltd v Nestle Co Ltd (1960)



Consideration must be something of recognisable value – it must not be too vague.

See White v Bluett (1853)

Dunton v Dunton (1892), and

Loftus v Roberts (1902)



It must be legally sufficient.

A moral obligation “per se” is not enough.

What about a promise not to sue, or to abandon a claim?

See Wigan v Edwards (1973), and

Hercules Motors Pty Ltd v Schubert (1973)


Existing Legal Obligation

If the promisee is already legally obliged to do that which the promisor asks him to do to justify payment, there is no consideration for the promise.

See Collins v Godefroy (1831).

But if he does something extra, there is.See Glasbrook Bros Ltd v Glamorgan CC (1925)


Existing Contractual Duty

If payment is promised just to perform an existing contract, there may be a problem enforcing that promise.

See Stilk v Myrick (1809)

Hartley v Ponsonby (1857).

Contrast Williams v Roffey Bros & Nicholls (Contractors) Ltd (1991)

Musumici v Winadell Pty Ltd (1994)


Existing Contractual Duty (cont)

The two old cases concluded that there is no consideration for a promise to simply perform your existing contract, and no more.

The “modern” cases are more creative in looking for things that might amount to consideration.


Discharge of Obligation

A contract can be formed to discharge an obligation created by an earlier contract, such as a debt or loan.

In other words, the first contract creates the debt and the second contract discharges it.

This is normally, but not always, done by total repayment of the debt.


Discharge of a Loan Contract

As with the first contract, the second contract must have all necessary components, including consideration.

Assume A owes $1000 to B under an existing contract. Assume it is due for repayment, but A cannot pay in full.

He offers B $700, and B agrees to accept it in full settlement of the debt.


Discharge of a Loan (cont)

In other words, B is promising A that he will not sue him for the other $300.

But, is this promise enforceable at law?

It is enforceable as a contract ONLY if there is consideration for it.

Sadly for A, there is no consideration.

So B can change his mind


The Rule in Pinnel’s Case

This rule states that “payment of a lesser sum will not extinguish a debt for a greater amount”.

Since 1608, the rule has impacted on the doctrine of consideration, and exposed the one area where it does not function fairly.

The rule enables a creditor to make a promise, and then change his mind.


Foakes v Beer (1884)

This case restated the rule in a different context.

B’s promise not to claim interest on a debt paid by installments was ignored by her.

The court held that her promise (to forego interest) was not binding as a contract, because it lacked consideration.



Courts did not like the Rule, but could not avoid it without destroying consideration.

Their solution was to allow exceptions to the rule whenever possible.

The following exceptions were created and allowed by the courts over many hundreds

of years until its impact was effectively eroded.


Exceptions to the Rule (cont.)

1. Prepayment

2. Payment by transferring a chattel

3. Fraud on a “third party”

4. Composition with creditors or settlement of a valid legal claim, and finally

5. Promissory estoppel.

We will examine each exception.


Prepayment of Debt.

Payment (of a lesser sum) on the due date is a problem.

But, if the debtor pays a lesser amount before repayment is legally required, such prepayment benefits the creditor and disadvantages the debtor.

The benefit and/or disadvantage is good consideration for the creditor’s promise.


Transferring a Chattel

If, instead of paying cash, I give my creditor some object of value, and he agrees to

accept it in full settlement, he cannot later change his mind and sue.

This is because the court will not ascribe a value to the object. It could be worth a

fortune to the creditor


Fraud on a “Third Party”

If a person “outside the contract”, that is a “third party” pays part of the debt and the creditor agrees to accept it, the creditor cannot later sue the debtor for the balance.

If he could, it would amount to a deception of the person who paid part of the debt. See Hirachand Punamchand v Temple (1911)


Composition with Creditors

If a debtor convenes a meeting of creditors and they approve a composition under Part X of the Bankruptcy Act, no creditor can later sue for the unpaid balance of debt.

This applies even if the relevant creditor voted against the scheme. All creditors are bound if it is a valid composition.


Settlement of a Legal Claim

If a plaintiff settles a genuine legal claim for less than its “face value”, he cannot later sue for the balance.

Settlement is encouraged by the courts.

There are many reasons why a claimant may settle for less than he is owed.

Once settled, the claim cannot be revived.


Estoppel

If a person is “estopped” from doing something, he is prevented from doing it.

Estoppel is a legal doctrine that prevents a person saying one thing and meaning

another in a business dealing.

If another person acts on your statement, you are “estopped” from denying its truth.


Estoppel (continued)

Look at the agency example on pages 33 – 34 of the Lecture Notes on E-Reserve.

If I create a deception, or even allow it to be created and do nothing to correct it, I cannot later benefit from that deception by trying to revert to the true facts.

Why didn’t Dr.Foakes argue estoppel?


Limitation on estoppel

The limiting aspect of estoppel was that courts applied it only to statements of a

factual nature, and refused to extend it to promises of future intention.

“He is my agent” is a statement of fact.

“I will not sue you for the interest” is a promise of Mrs Beer’s future intention.


Promissory Estoppel

This approach was changed in 1947 in the “High trees House Case”.

Central London Property Trust Ltd v High Trees House Pty Ltd The facts are set out in detail on page 34.

Lord Denning, using lateral thinking for which he became famous, created “promissory estoppel”.


Promissory Estoppel (cont)

Ordinary estoppel applied to facts.

Promissory estoppel applies to promises.

By extending the concept in this way, making us accountable for our promises, Lord Denning effectively overcame 339 years of problems. It quickly caught on, despite being only “obiter dicta”.


Limiting the Doctrine

But, the logical extension of promissory estoppel arguably does away with consideration completely.

If I make you a promise, and you act on it to your disadvantage, I must perform it!

The fear of this result was overcome by the decision in Combe v Combe (1951)


Combe v Combe

Mrs Combe tried to create a new contract by arguing promissory estoppel.

The Court of Appeal limited the doctrine to cases where there is an existing contract, and an attempt is made to vary or discharge it by entering into a second agreement.

The doctrine of consideration was preserved.


Detriment or Disadvantage.

To invoke the doctrine, the promisee must act on the promise.

But need he act to his detriment?

Yes, but potential detriment will suffice. See Je Maintiendrai Pty Ltd v Quaglia (1980) and Legione v Hateley (1983)


A “New” Development

Consideration has evolved over 400 years of cases, the “standout” 20th century case being High Trees House.

But the Australian case of Waltons Stores (Interstate) Ltd v Maher in 1988 could have even more repercussions in the long term.

Some say it could do away with consideration.


Waltons v Maher

Maher won a claim for damages against W, even though there was no contract signed, because

• W had promised M that they would sign, • M acted on that promise to his substantial

detriment, and • the court held that W’s conduct was

“unconscionable”


Waltons v Maher (cont)

This is a radical departure from established precedent.

You can get damages for a person’s failure to enter into a contract as promised.

But its application is limited, and subsequent cases show that it has not, as was once feared, opened the floodgates.


Contents of the Contract

A contract can contain • Express (stated or written) terms, and• Implied terms, that is terms that are not

apparent, but may be implied into the contract by the court.

This can be done by reference to prior dealings, trade custom, to make the contract workable, or by statute.


Express Terms

Some typical questions about express terms are: -

• How important is the term?

• Are all terms of equal importance?

• What if its meaning is not clear?

• What if it is ambiguous?

• How to you prove oral terms?


Proving Oral Terms

There are obvious problems in proving oral terms that are not admitted by an opponent. But it is possible to do so by giving credible evidence of them, having witnesses present

and so on.It is always better to have a written contract.See Buckenara v Hawthorn Football Club

Ltd (1988)


The “Parol Evidence Rule”

Whenever we have a written contract, an important rule is activated.

The Parol Evidence Rule states that if we have a written contract that appears to cover

all the details, verbal evidence to add terms, vary existing terms, or change the written contract in any way, will not be

considered by the Court.


The Rule Explained

Courts assume that the written contract will accurately tell the whole story about the

transaction.

If prepared by experts, it should!

If either party can add or subtract terms, or change terms, what is the point of having a

written contract in the first place?



Custom or trade usage; Verbal “condition precedent”; Written contract is not complete; Ambiguous terms; Mistake in the terms; and Confusion as to identity of the parties.


Custom or Trade Usage

If contracts in a particular industry or trade always contain fixed terms, they do not

have to be included in the written contract. They will be implied by the Court if they

are established and accepted by most people in that industry.

See British Crane Hire Corp. Ltd v Ipswich Plant Hire Ltd (1974)


Limit to this Exception

But a term based on trade customs or conventions will not be implied into the contract if it will directly contradict an

express term in the contract.

See Summers v Commonwealth of Australia (1918)


Verbal “Condition Precedent”

A detailed, written contract might fail to mention that it is conditional.

For example, it is not to commence operation until some event occurs to activate it.

If so, verbal evidence of the “condition precedent” is allowable.

See Pym v Campbell (1856)


Incomplete Written Contract

It is possible, but difficult, to prove that some vital clause has been omitted from the

contract, and to argue for its inclusion.

There must be special circumstances to succeed in this approach.

See Van Den Esschert v Chappell (1960)

This exception is rarely invoked.


Ambiguous or Mistaken Terms

If a term has more than one meaning, or has been included in the contract by mistake, the Court will allow verbal evidence to be lead to remove the ambiguity, or to rectify

the mistake.

This is necessary to make the contract operate properly, and to achieve its purpose.


Identity of the Parties

Confusion can arise as to the correct identity of a party – usually when a “natural

person” enters into a contract “on behalf of a company to be incorporated”.

Pending incorporation, who was liable?

The “shelf company” industry has largely overcome this problem.


Analysis of Statements

Consider statements made during negotiations.

Are all “promises” potential terms?

Putting that another way, is everything said actionable if false or incorrect?

The Parol Evidence Rule covers this if the contract is written.


Verbal (oral) Contracts

Some statements become terms, allowing a contractual remedy if untrue. You can get

damages for breach of condition or for breach of warranty.

But if the statement is not a term, it might be a misrepresentation.

The remedies are different.


Oscar Chess Ltd v Williams

An important case outlining the method of deciding whether a pre-contract statement

becomes a term or not.

W. traded in his car, which he said was a 1948

model, on a new one. It was actually a 1939

model, but he did not know. OCL sued for damages for breach of warranty to recoup

the excess money they had allowed.


Tests Applied

In deciding that it was not a warranty, the court examined: -

The objective intention of the parties; The actual words used; The proper inferences from known facts; Was it written down? Comparative skill and knowledge.


The Result

Having concluded that it was not a warranty, the court could not award damages to OCL.

They could have proved innocent misrepresentation (W unknowingly made a false statement), but the remedy for that is

rescission, not damages.

The court could not rescind this contract.


Collateral Contract

The preferred result for the victim of a false statement is to be able to show that a term has been breached, rather than to try and

argue misrepresentation.

The remedies are stronger.

This has lead to the emergence of the “collateral contract” argument.


Collateral Contract Explained

A collateral contract is a separate contract from the main contract, and is represented by a separate promise not included in the

main contract.

It can be argued that A signed the main contract only because B made the

collateral promise.


Consideration??

If the collateral promise is to become a collateral contract, there must be

consideration for that promise.

What consideration exists?

The act of signing the main contract arguably provides the consideration for the collateral

promise, making it contractual.


De Lassalle v Guildford

A lease had been drawn up between D and G, and they were about to exchange parts (copies) of the lease, which would result in the lease contract existing.

When asked, the owner promised the tenant that the drains were in good order. They were not! D claimed damages for breach of a collateral contract.


De Lassalle v Guildford (cont)

In defence, the owner pleaded the Parol Evidence Rule. The court held that the

tenant had signed the lease only because the collateral promise had been made.

There was thus consideration for the promise, transforming it into a collateral contract. As

the promise was false, this contract had been breached. D got damages.


Interchangeable Arguments

The collateral contract argument is virtually interchangeable with the 3rd exception to the Parol Evidence Rule argument, as used in Van Den Esschert v Chappell.

Both arguments emerged as creative solutions to the Parol Evidence Rule.

Both have limited application.


Limiting Aspects

Our Courts limit the argument, requiring 1. Consistency between the collateral

promise and the terms of the main contract [See Hoyts Pty Ltd v Spencer (1919)]

2. A strong motivational link between the promise and the signing of the main contract. [J.J Savage & Sons Ltd v Blakeney (1970)]


Interpreting Contract Terms

Courts often have to give meaning to a term if it is unclear. But if it is so uncertain that they cannot save it, they will either

preferably, sever the uncertain term, or reluctantly, declare the whole contract

“void for uncertainty”.

They will try and uphold contracts if possible.


Scammell & Nephew v Ouston

To illustrate, an agreement to buy a new truck on “hire purchase terms over 2 years”

could not be enforced by the court, because the term was too uncertain.

Since the price was not clearly defined, and the price is a vital term in any contract, the

contract was held to be “void for uncertainty”.


Importance of Terms

The terms (clauses) of a contract fall into three possible categories.

1. Conditions.

2. Warranties.

3. Intermediate (or “innominate”) terms.

Correct classification controls the remedy for breach of each category.


Conditions

A condition is an important term or clause in the contract. It is central to the contract, and “goes to the root of the contract”.

If you took this term away, the contract would be radically different.

Note that, if there is a dispute, the court will decide if the term is a condition, whatever

the parties might have called the term.


Warranties

A warranty is a term of lesser importance than a condition.

It is “subsidiary” to the condition, but it is nevertheless still important.

It deals with “cosmetic” rather than “structural” or “fundamental” aspects of

the transaction.


Intermediate Terms

A recent creation, intermediate or “innominate” terms are “hybrids”, being sometimes treated as conditions and at other times treated as warranties.

The choice (between condition and warranty) is made depending on the timing and importance of the relevant breach.


Remedies for Breach

A breach of condition entitles repudiation of the contract and/or damages.

A breach of warranty entitles damages only.Breach of an intermediate term entitles either the remedy for breach of condition

(if it was a condition at the time), or the remedy for breach of warranty (if it

was a warranty at the time).


Relevant Cases

Cases illustrating the distinction between conditions and warranties include

Bettini v Gye (1876); Poussard v Spiers & Pond (1876);

Associated Newspapers Ltd v Bancks (1951).

Note that intermediate terms are rarely found.


Condition Precedent

A condition precedent is a term in a contract that relates to some outside event.

That event must occur before performance is required.

A common example is a clause making the buyer’s performance conditional upon

obtaining the necessary loan.


Condition Subsequent

A condition subsequent is also a term relating to some outside event.

When it occurs, it will bring an operating contract to an end.

The return of faulty goods is a common example. See Head v Tattersall (1871)


Exclusion Clauses

An exclusion clause is a term in a contract that seeks to either

Totally exclude (called an “exclusion clause”), or

Limit in some way (called a “limitation clause”)

the liability of one party if a breach occurs.


Common Examples

Such clauses are to be found, for example, in

1. Car park tickets;

2. Dry cleaning dockets;

3. Entertainment tickets;

4. Airline tickets;

5. Film processing dockets, and elsewhere.


Signed & Unsigned Documents

Such clauses can be found in signed contracts, or in what we call “ticket

cases”, where the clause is found on a ticket or docket that has not been signed by the

customer.The examples listed above are all “ticket

cases”.The distinction matters as the rules differ.


Signed Document Rules

Predictably, a person is bound by the terms of any contract that they sign.

This applies whether or not they have read it, and also whether or not they understand it.

Put simply, if you sign it, you wear it!

See L’Estrange v Graucob Ltd (1934).


Possible Exceptions

The only possible escape routes from this are

1. If the clause is misrepresented to the customer. See Curtis v Chemical Cleaning & Dyeing Co (1951).

2. If the customer can successfully plead “non est factum”.


“Non Est Factum”

Literally, this means “It is not my deed!”, which implies that the wrong document is

signed.

Historically a defence for illiterate people, it is very hard to prove in modern times.

See Gallie v Lee (1971), and contrast Petelin v Cullen (1975)


Unsigned Documents

Most problems occur in this context. The question that the court must decide is

“Has the exclusion clause printed on the ticket or docket become part of (a term of) the contract?”

If so, it will affect the customer’s rights.

If not, it will not bind the customer.


The Testing Process

To test whether the clause has become part of the contract, the courts will apply two tests, namely

1. The “nature of the document test”, and

2. The “reasonable notice test”.

These tests are applied sequentially in the order stated.


Nature of the Document Test

This test involves examining the docket and asking “what is its role in the transaction?”

Would a reasonable person expect it to contain terms of the contract?

Does it have any other logical function, such as proving payment (a receipt), or proving

ownership (a voucher)?


Cases on the First Test

See Causer v Brown (1952), where the court held that a dry cleaning docket was logically a voucher to prove ownership of garments.

Also Chapelton v Barry Urban District Council (1940), where the ticket was logically a receipt to prove payment of a deck chair hiring charge.


Signed Delivery Dockets

When delivery dockets are signed after receipt of goods, it is too late to try to include new terms in the contract, which has already been performed.

See Walter Wright Pty Ltd v DJ Hill & Co Pty Ltd (1971), and Rinaldi & Patroni Pty Ltd v Precision Mouldings Pty Ltd (1986)


Future of the First Test

As exclusion clauses become more common, and more accepted by society, it will be increasingly hard to pass this test, since the test is applied objectively.

It is no advantage to say “I didn’t know it was there”, because the question is whether a reasonable person would know.


The Reasonable Notice Test

This test is applied only if the customer fails the first test.

It requires that reasonable steps be taken by the business operator to bring the clause to the notice and attention of the customer.

Again, the test is applied objectively.


Relevant Cases

See, as examples Parker v South Eastern Railway Co (1877)

[clause on back of ticket] Thompson v L. M.&S. Railway Co (1930)

[clause on train timetable on platform] Thornton v Shoe Lane Parking Co (1971)

[clause hidden on back of pillar in car park]


Exclusion Clause on Display

The clause may be displayed on a sign, rather than (or as well as) being printed on a ticket or docket.

This is quite effective, so long as the sign containing the clause is prominently on display at a point where all customers can see and read it.


Actual & Constructive Notice

See Balmain New Ferry Co v Robertson (1906), where the High Court held that terms may be communicated by displaying them for the public to read.

Those who see and read the sign have actual notice of the clause. Those who could have, but didn’t read it have constructive notice.


Timing of the Notice

Notice (of the exclusion clause) must be given before or when the contract is formed, not later. If given afterwards, it is too late.

See Olley v Marlborough Court Ltd (1949), where an attempt to rely on a clause of which details were given after formation of the contract, failed.


Prior Dealings

The business operator can rely on previous dealings with the same customer to try and invoke an exclusion clause.

But it can be difficult. See Hollier v Rambler Motors (1972).

In this case, the court refused to allow reliance on the clause when prior dealings were pleaded.


The “Contra Proferentem” Rule

Because exclusion clauses damage our rights, change the rules of the game, and are sometimes introduced in a “sinister” way, courts do not like them.

They interpret them “contra proferentem”, that is adversely to the business operator. See White v John Warwick & Co. (1953)


Implied Terms

Implied terms, as distinct from express terms, are not evident in the contract.

We have to find them elsewhere, either by using some common law rules to imply

them, or – more frequently – by relying on a statute to imply them.

Terms will be implied only if it is necessary.


Common Law Implication

Terms can be implied as follows: - By industry custom or convention,

sometimes called “trade usage”; By reference to past dealings; To give “business efficacy” to a contract,

in order to make the contract work properly .


Industry Custom or Convention

See British Crane Hire Corporation Ltd v Ipswich Plant Hire Ltd (1974) as an example.

Note that a term will not be implied in this way if it contradicts an express term in the contract.

Summers v Commonwealth of Australia (1918)


Past Dealings

Previous dealings between the parties will often lead to the inclusion by the Court of “missing” terms .

See Hillas & Co Ltd v Arcos Ltd (1932);

Balmain New Ferry Co v Robertson (1906);

Hollier v Rambler Motors (AMC) (1972).


Business Efficacy

If the contract does not make sense, a term may be implied to make it function.

See “The Moorcock” (1886).

But a term will not be implied in this manner if the contract makes sense without it. See Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982).


Statutory Implied Terms

Part I of the Victorian Goods Act 1958 (originally enacted in the 1890s) implied terms into all contracts for the sale of goods.

These related to title, fitness for purpose, quality and description of goods sold, and protected the buyer against unscrupulous sellers. But they could be avoided!


Part I of Goods Act 1958

Protection for buyers under this old Part of the Goods Act became ineffective, because sellers could – and therefore usually did – avoid these implied terms by getting buyers to sign away their rights.

See L’Estrange v Graucob Ltd (1934) as an example of this trend.


Trade Practices Act 1974

A Commonwealth Act, the TPA restored to buyers the old Goods Act protections.

They could not be avoided as previously.

But the TPA applied only to corporations (not “natural persons”), and only to “consumer sales”.


Goods Act Part IV

Because of the gaps in the TPA, the Victorian Parliament passed the Goods (Sales & Leases) Act 1981, which added Part IV to the “old” Goods Act.

Sales and leases to “consumers” in Victoria are covered by this Act. Dealers and wholesalers can look after themselves.


Fair Trading Act 1999 (Vic)

In 2003 the Victorian Government decided to move the statutory implied terms from Part IV of the Goods Act 1958 into the Fair Trading Act 1999.

It did so by enacting new Parts 2A and 2B of the FTA, being sections 32A to 32 ZD. Part IV of the Goods Act has been repealed.


Avoidance of Terms

As with the TPA, the new part of the Victorian goods Act does not permit a seller to escape these reinstated protections.

So long as the buyer is a consumer, and the criteria for application of the Acts are met, the seller cannot avoid the implied terms (as they once could).


Capacity to Contract

Some persons do not have the ability (the legal capacity) to contract.

These include minors, mentally ill persons, persons badly affected by alcohol or

drugs, bankrupts, foreign nationals (in time of war), prisoners.

In some cases, such as bankrupts, capacity is limited.


Married Women

Under the common law, married women lacked the capacity to contract, as we saw in

Eastwood v Kenyon.

This has now been overcome by statute.

The most common problem area is with minors (persons under the age of 18).


Legal Minors

The general rule is that a minor does not have the capacity to make a contract.

The exceptions are A contract for the purchase of

“necessaries”, and A contract of employment for the benefit

of the minor, such as an apprenticeship.


“Necessaries”

A necessary is something without which the minor cannot exist, such as basic food,

shelter, clothing, medical and like services in an emergency.

Clearly, a luxury item is not covered.

See Nash v Inman (1908)


Necessaries (cont)

Necessaries were summarized in Chapple v Cooper (1844), where the “station in life”

concept was evident.

More modern examples appear in Scarborough v Sturzaker (1905), and in

Bojczuk v Gregorcewicz (1961).

Some statutes affect minor’s contracts.


Mistake

If a mistake occurs during contract formation, the court may declare the “contract” void

for (because of the) mistake.If so, there was never a contract at all, since

the parties never reached agreement in the first place.

The “contract” is “void ab initio”, or a nullity from the beginning.


Consequence of Voidness

It is vital to understand that, when a finding of mistake occurs, the “contract” is void.

It follows that there can be no legal outcomes resulting from the contract.

For example, if the contract was intended to transfer ownership from A to B, such

transfer cannot be achieved!


Categories of Mistake

Mistake is not easily proved, since it allows a convenient escape route from a contract.

But three categories of mistake exist, namely Common mistake; Mutual mistake; and Unilateral mistake.


Common Mistake

Cases usually relate to non-existence of the subject matter.

See Pritchard v Merchants & Tradesmans Mutual Life Ass. Society (1858)

But if one party effectively guarantees the existence of the subject matter, he cannot argue mistake. See McRae v CDC (1951)


Mutual Mistake

This occurs when the parties are at “cross-purposes”, as where A owns cars 1 and 2.

B offers to buy car 1 from A, whereas A thinks that B is offering to buy car 2.

This type of confusion arose in Raffles v Wichelhaus (1864), when cargo was described as “Ex Peerless from Bombay”


Unilateral Mistake

This is “one-sided” mistake. One party is mistaken, and the other knows (or ought reasonably to know) that he is mistaken.

Note “actual” and “constructive” knowledge.

Usually unilateral mistake applies to The subject-matter of the contract, or The identity of the other party.


Payment by Personal Cheque

These cases often arise when goods are sold and paid for by personal (as distinct from bank) cheque.

To accept a personal cheque in exchange for goods is to give credit to the buyer.

Can the seller argue mistake (as to identity), and have the “contract” declared void?


Mistaken Identity

If the contract IS declared void, it means that it was void from the beginning, and it cannot achieve legal outcomes, such as transferring ownership.

Therefore, the goods “sold” have not been sold at all, and legal ownership of the goods never left the seller. He gets them back!


Mistake v Misrepresentation

There is a competing argument, namely that the buyer has fraudulently misrepresented

his identity.Mistake makes a contract VOID.

Misrepresentation makes a contract VOIDABLE.

This distinction is vitally important! The cases explain why it is important.


Phillips v Brooks Ltd. (1919)

P sold goods to X, believing him to be Y, and accepted a cheque drawn on Y’s account.

The cheque was forged, and “bounced”.X quickly pawned the goods to BL. P sued BL for the goods, arguing mistake.

Held. You cannot argue mistake when dealing “face-to-face”.


Phillips v Brooks (cont)

P could have proved misrepresentation of identity by X, and this would have made the

contract voidable (capable of being avoided at the option of P).

But P did not take any steps to avoid it before X resold the goods to BL. Therefore BL

keeps the goods. P can only sue X.


Avoiding the Contract

How do you avoid a contract that is voidable because of a misrepresentation?

This can be done by physical cancellation of the contract, or by endeavour.

See Car & Universal Finance Co v Caldwell (1965). It was held that a contract is avoided if all reasonable attempts are made.


Ingram v Little (1961)

This case appeared to contradict the precedent of Phillips v Brooks. Two ladies sold their car to a trickster, who said he was “Hutchinson”. He wasn’t. They took a cheque in payment. Later they found their car in Little’s used car yard. The court held they were mistaken, and they got their car back.


Lewis v Averay (1971)

Lewis sold his car to “Green”, another trickster who had Green’s cheque book and proof of identification.

He later found the car which had been bought from G by Averay, and sued for its return.

Lord Denning strongly criticised Ingram v Little, and reinstated Phillips v Brooks.


“Bona Fide Purchaser”

Note that the third party who buys the goods must be a genuine buyer, paying fair value for the goods, and being unaware of any defect in the title.

If he is not, he does not get good title as against the true owner.

A price comparison is a good guide.


Conclusion

In cases of this type, the better view is that the third party – if genuine – will obtain and retain good title to the goods.

The original owner therefore loses title, and is left with a doubtful remedy, namely an action to recover his loss from the trickster.


Non Est Factum

Remember the defence of “non est factum”, which is really based on unilateral mistake

as to the nature of the document signed.

The cases of Gallie v Lee and Petelin v Cullen, previously discussed in exclusion

clauses, apply. You must prove both mistake and an absence of carelessness.


Misrepresentation

If a false statement cannot be proved to be a term, the misrepresentation possibility

should be explored.

This is a false statement made during negotiations, that induces the person hearing it to enter into the contract.

The essentials are fact and inducement.


Types of Misrepresentation

There are three distinct categories of misrepresentation, namely

Innocent (unintended deception); Fraudulent (intended deception); and Negligent (breach of a duty of care).

The remedies vary for the different types.


Statement of Fact

The offending statement must be of a factual nature – not a statement of law or an

expression of opinion.

Note that an apparent statement of a factual kind might in some circumstances be

treated as only an expression of opinion.

See Bissett v Wilkinson (1927)


The Converse Result

Similarly, what appears to be an expression of opinion might in some cases be treated

by the court as a statement of fact.

This is specially so if the person making the statement knows exclusively all of the facts upon which the apparent opinion is based.

See Smith v Land & House Property Corp Ltd.


Silence as a Response

Generally speaking, silence (as a response to a question) will not be misrepresentation.

Exceptions apply, including “Utmost good faith” contracts; Special relationships; If silence distorts the truth; and If a statute requires disclosure.


“Utmost Good Faith”

Some types of contract are governed by the requirement that the parties are bound to apply the utmost good faith in their dealings.

Insurance contracts require full disclosure in proposals by the customer because of the “imbalance” of knowledge.


Special Relationships

When a special relationship exists between the parties, the dominant party must make full disclosure when contracting with the “subservient” or weaker party.

Examples include doctor/patient, solicitor/client, parent/child, teacher/pupil, banker/customer, director/shareholder etc.

There is a “fiduciary duty” owed.


Distortion of the Truth

Sometimes, silence can distort the truth, if only part of the story is told.

In such case, silence is not acceptable.

See R v Kylsant (1932) to illustrate.

Director’s statement in a prospectus that profits had been paid for 6 years did not tell

the full story.


Statutory Requirements

Some Acts of Parliament require that certain information be disclosed, such as the Sale of Land Act 1962 (Vic).

The vendor of real estate must supply detailed information to prospective buyers before the contract is signed.

Similar rules apply to sale of a business.


Inducement is Required

The second requirement for misrepresentation is that the innocent party must be induced by the false statement to

enter into the contract.

If he isn’t induced, no harm results.

See Attwood v Small (1838) as an example. The same would apply to an RACV check.


Misrepresentations Classified.

The false statement may be Innocent (unintended); Fraudulent (intended); or Negligent (carelessly given).

An innocent misrepresentation is relatively easy to prove, requiring only proof of a

false statement that induced the contract.


Fraudulent Misrepresentation

More difficult to prove, this requires the additional component that the person knew that the statement was false, or that he couldn’t care less whether it was true or false.

See Derry v Peek (1889) for discussion on the elements of fraudulent misrepresentation.


The Remedies

In all cases of misrepresentation, rescission is the appropriate remedy. In the case of fraudulent and negligent misrepresentation, damages are also available.

The problem with rescission is that – although in theory a good remedy – the right to rescind is easily compromised or lost.


Limitations on Rescission

Rescission will not be awarded if there is Unreasonable delay; Affirmation of the contract; Intervention of third parties; Change or destruction of subject-matter; The rule in Seddon’s Case applicable.


Effect of Losing Rescission

When the right to rescind is lost for one or more of the foregoing reasons, this places

the victim of an innocent misrepresentation in an invidious position.

He cannot get damages, since they are not available for innocent misrepresentation. He has lost the right to rescind. He has no

remedy at all!


Possible Solutions

The options are

1. Try to prove it is fraudulent or negligent.

2. If an oral contract, try to prove it is a term, as was tried in Oscar Chess v Williams.

3. If a written contract, try to include it as a term by arguing the 3rd exception to the PER, or arguing collateral contract.


Continued

While these solutions are possible, we have seen that they have their difficulties.

Proving fraud is not easy, if denied.

The 3rd exception to the Parol Evidence Rule has limiting factors, as does the collateral contract argument.

There is thus no simple solution available.


Negligent Misrepresentation

Negligence is “breach of a duty of care”. There must therefore be a case where the duty is owed and breached.

This can occur in a special relationship, or if an opinion is given carelessly by an expert.

As an example, see Esso Petroleum Ltd v Mardon (1976).


Statutory Misrepresentation

Business operators are now subject to legislation in this area. Relevant Acts are

Trade Practices Act 1974 (C’th); and Fair Trading Act 1999 (Vic).

Misrepresentation occurs if a “misleading or deceptive” statement is made in the conduct of a business. Note s.52 TPA.


Duress, Undue Influence & Unconscionable Conduct

Here we examine 3 types of behaviour or conduct occasionally apparent when

contracts are being negotiated.

If occurring, the contract becomes “voidable at the option of the victim” of such activity.

This makes sense, because “agreement” has not been freely and voluntarily given.


Duress

Duress is the use of violence, or the threat of violence to a person, his goods or his

assets in order to force him into a contract.

The victim of such contract can – at his option – have the contract set aside (avoided)

because of the duress.

See Barton v Armstrong (1974)


Duress (continued)

Historically, physical violence or threats to harm the person or immediate family was

required. Today, threats of economic damage will suffice.

See Universe Tankships of Monrovia v International Transport workers

Federation (1982)


Undue Influence

Less obvious, undue influence occurs when the free will of a party is compromised by

a person in a dominant situation.Usually this involves a “special relationship”

between the two parties.In such cases, the courts presume that the

stronger party has unduly influenced the weaker.


Undue Influence (cont)

The onus is then upon the dominant party to prove that the weaker party was not unduly

influenced.

If he fails, the contract is voidable at the option of the victim.

See Lloyd’s Bank Ltd v Bundy (1974), and Tate v Williamson (1866)


Unconscionable Conduct

This means conduct that offends good conscience. Relatively unknown under the

common law, due to the “freedom of contract” doctrine, it is now a recognized

reason to have a contract set aside.

There is usually an inequality of bargaining power, and the weaker is disadvantaged.


….continued

Such inequality can result from ignorance, illness, pressing need, financial desperation.

See Clifford Davis Management Ltd v WEA Records Ltd. (1975), where advantage was taken of the business inexperience of

musicians and composers to negotiate grossly unfair management terms. The

contract was set aside.


Australian Cases

Apart from the case of Waltons v Maher, important Australian cases on unconscionability include

Commercial Bank of Australia Ltd v Amadio (1983), and

Nolan v Westpac Banking Corporation Ltd (1989)


Parliamentary Intervention

This is another area where Statutes have been passed to strengthen the common law.

Conduct in business that is “harsh and oppressive” is now outlawed by the TPA

and the Fair Trading Act (Vic).The courts will consider bargaining strength,

conditions imposed, clarity of documents, unfair tactics and so on.


Discharge of Contract

A contract can be discharged (terminated) by

1. Performance;

2. Agreement;

3. A term in the contract;

4. Breach of a condition in the contract;

5. Operation of law; and

6. Frustration.


Performance

The most common method of discharge, as most contracts are formed and performed without

problems.

Note that part-performance is not acceptable.See Cutter v Powell (1795)

Performance must exactly comply with the terms of the contract. See Moore v Landauer (1921)


Part Performance Exceptions

The total ban on “part performance” created hardship, and exceptions have been allowed when

The contract is “divisible” into parts; and When the contract has been substantially

(almost totally) performed.Contrast “divisible” and “non-divisible”

contracts.


Quantum Meruit

If a contract has been partly performed, and there is a reason for not completing it, the court will use the “quantum meruit” rule to decide how much the contractor should be paid. This also applies if there is no agreement as to price.

A reasonable price will be paid for a reasonable quality job.


Time of Completion.

The term setting the date for completion of the contract is usually only a warranty.

It can be converted to a condition by saying time shall be “of the essence” in this contract.

If this is done, any late completion is breach of condition, not breach of warranty.


Discharge by Agreement

A contract is created by agreement. Logically, it can be discharged in the same way. This can be done by a term in the original contract, or by a separate agreement.

If it is done by a separate agreement, remember that there must be consideration, or the agreement will not be enforceable.


Discharge by a Term

This is a reference to a “condition subsequent”, which we have discussed

previously.

It is a term referring to some event which – when it occurs – will bring the contract to

an end.


Discharge by Law

The possibilities here are: - Merger of two contracts, when the smaller

contract merges with the larger one; Bankruptcy, when the Act prevents the

continuation of some contracts; and Document alteration in a material way.


Discharge by Breach

This refers to breach of condition, entitling repudiation, as distinct from breach of warranty, which entitles only damages.

Note the terms: - “Repudiatory breach”, and “Anticipatory breach”.


Discharge by Frustration

An outside, “supervening” event, might make performance of the contract impossible.

Prevention of performance by an “act of God”, natural disaster, “force majeur”, riot, civil commotion, might discharge the contract.

The event must be beyond the control of the parties, and not anticipated by them


Historical Background

Historically, courts would not entertain this argument, saying that the parties should have protected themselves by terms in the contract.

In theory, that is alright, but how do you foresee the unforeseeable? A contract covering every possibility would be too heavy to carry into court.


Acceptance of Frustration

In Taylor v Caldwell (1863), the frustration argument was accepted when a building hired to stage concerts was destroyed by fire the night before the first concert.

The promoter’s action to recover expenses from the owner failed, since the contract was discharged by the frustrating event (in this case, the fire).


Proving Frustration

In National Carriers Ltd v Panalpina (Northern) Ltd (1981) it was held the requirements are

1. A supervening event;

2. Not caused by either party;

3. Not contemplated by the contract;

4. Changes the nature of the contract; and

5. Causes resulting injustice to the parties.


Examples of Frustration

Destruction of the subject-matter, as in Taylor v Caldwell;

Illegality of purpose, as in Esposito v Bowden;

Circumstances ceasing to exist, as in Horlock v Beal;

Cancellation of event, as in Krell v Henry;


Examples (continued)

Change of government policy, as in MWB v Dick, Kerr & Co.;

Event making performance impossible, as in Wong Lai Ying v Chinachem Investment Co.;

Event causing unreasonable delay, as in Bank Line v Capel


Limitation on Frustration

Note that frustration will not apply if it still possible to perform the contract. This applies even though it might be much more onerous and/or less profitable to do so.

See the Tsakiroglou Case, arising out of the closure of the Suez Canal in wartime. The frustration argument failed in this case.


Codelfa Constructions Case

This Australian case in 1982 against the NSW State Rail Authority shows a more flexible approach by the High Court to the frustration argument.

Codelfa was able to have the contract rewritten because of the intervention by residents to limit the hours of work.


Frustrated Contracts Act

Under the common law, frustration does not operate retrospectively, so that prepayments for work not done at time of frustration cannot be recovered.

The Act changes this, and the contractor may now only retain money paid for work already done at time of frustration.


Remedies for Breach (of contract)

Before we discuss damages – the traditional and main remedy for breach of contract - we need to examine 2 equitable remedies, namely: -

Specific performance; and Injunction (restraining order).


Specific Performance

If a legal contract exists between A and B, and B refuses (for no valid reason) to perform it, A can seek an order for “specific performance of the contract” by B.

If satisfied (that the contract exists, is valid, and B’s refusal to perform cannot be legally justified), the court will order B to perform his contractual obligations.


Continued…….

We thus have a strategy to compel performance of a contract when refusal occurs. This covers cases, such as a property purchase, where damages might not properly compensate.

An assertive threat to take this step (seek specific performance) usually works.


Injunction

In contrast to specific performance, which is a positive remedy, the injunction is a

negative remedy.

It prevents or restrains a person from taking action that will breach the contract or will damage property that is the subject-matter

of the contract.


Injunction Risks

By their nature, injunctions are often sought and obtained “ex parte”, in the absence of

the party restrained.

The applicant must give undertakings to the court that he will pay costs and damages if it emerges that he has improperly sought

and obtained the injunction. This is a significant deterrent.


Damages

The court’s objective in awarding damages is to compensate the victim (of the breach of contract), not to punish or penalise the one

who breached the contract.

Punitive damages have no relevance to contract law, although applied in some

other areas, such as tort.


Two Aspects of Damages

Two questions arise for determination.

1. Do the losses claimed result from the contract breach? This is the question of “remoteness of damage”.

2. How much damages do we award? This is the question of the “measure of damages”.


Remoteness of Damages

Not all damages that appear to result from a breach of contract can necessarily be claimed.

They may be too remote from (too far removed from) the breach.

There has to be a “causal connection” or an identifiable link between the breach and the loss claimed to result from it.


Continued ………

Consider the textbook examples of bizarre cases.

You could argue that these losses could be claimed, specially if you apply the “but

for” test.

In Leisbosch Dredger v SS Edison (1933), Lord Wright said we have to draw the line.


Hadley v Baxendale (1854)

Still the leading case on remoteness, involved a cartage contract under which B agreed to transport H’s broken crankshaft from his flour mill to the manufacturer to use as a pattern for a replacement shaft.

B was also to transport the new shaft, when made, back to H.


Continued ………

B took much too long to perform the contract, and H claimed damages for loss of production in his mill.

It was held that B is liable only for losses that he can foresee. He can foresee losses that are either

A natural consequence of his breach, or Losses he has been told about by H.


Foreseeable Losses

Any losses falling outside these two categories were not foreseeable by B when the contract was formed, and he cannot be liable to pay them.

H could have made the production losses foreseeable by B simply by telling him that the broken crankshaft was his ONLY crankshaft.


Continued ……..

Losses are too remote from the breach if they are not foreseeable by the contracting party.

They are foreseeable if they are either Natural consequences (everyone knows, or

should know, they will result!), or Consequences that the contractor has

been told about when the contract is made.


The Practical Solution

The solution is to make sure that you tell your contractor what the consequences of any

breach by him will be, and he will be liable for resultant losses.

But, in business, people often are too secretive as they do not want others to

know their commercial secrets.


Victoria Laundry Case

The decision in Hadley v Baxendale was followed and endorsed in Victoria

Laundry (Windsor) Ltd v Newman Industries Ltd (1949).

Again, the defendant was liable for losses they could foresee, but not for those that

they could not foresee.


Interest on Lost Capital

If capital is lost and successfully claimed as damages, the High Court held in Hungerfords v Walker (1989), that the plaintiff could also claim interest on the capital for the duration of the loss.

Interest paid on lost capital, or lost on investing it, is a “natural consequence” of the breach causing the loss of capital.


Measure of Damages

Damages can be special, general, nominal or punitive. As noted, the latter are not given in contract disputes.

Restoration – not punishment – is the aim.

Damages are measured by the “expectation loss” method if applicable, and by the “reliance loss” method if not.


Amann Aviation Case

In Commonwealth v Amann Aviation Pty Ltd (1992), an award of $410,000 under the expectation loss method was increased on appeal to the Full court of the Federal Court to $6.6 million by using the reliance loss method.

The High Court upheld this increase on a further appeal.


Mitigation of Loss

All plaintiffs are required to keep losses to a minimum, and to prevent unnecessary escalation of loss.

This applies to contract and other areas of law. It is tempting to allow the losses to mount up, but this can work against the claimant. Reasonable steps to mitigate are required.


Examples of Mitigation

Examples include The wrongfully dismissed employee must

take reasonable steps to find another job; The landlord must take reasonable steps to

find a replacement tenant if the tenant leaves before end of lease.

They might not succeed, but they must try!


Jarvis v Swan Tours Ltd (1972)

Tourism students should note that Jarvis won a claim for damages for “injured feelings” and “emotional upset” against a tour operator who breached a contract with him.

This was the first recorded case of this happening in a contract case (cf tort), and was a typical Lord Denning innovation.

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