in this seminar we will focus on - legallyunrobed.com · intention to create a legal relationship...

In this seminar we will focus on: Offer

Acceptance

Consideration

Intention

Certainty Capacity (online module)

Refer seminar guide

Last

Component

of Contract

Formation

Intention to create a legal relationship

What is the difference between borrowing $5,000 from your parents to buy a car and borrowing the same amount from the bank?

Why aren’t the courts filled with cases brought by the parents of kids that won’t repay their debts?

An agreement can only be enforceable if the parties intended by that agreement to create legally enforceable relationship.

This is tested objectively - would a reasonable person think that this agreement was intended to be legally binding?

Presumptive intentions

In the interests of certainty and predictability, the law has developed presumptions in relation to the intentions of the parties to an agreement.

Traditionally these have been:

Commercial agreements are presumed to create legal

relations - Banque Brussels Lambert SA v Australian National

Industries (1989) 21 NSWLR 502

Agreements made in a domestic or social context are presumed to not create legal relations - Todd v Nicol [1957]

SASR 72

Case Analysis - Banque Brussels Lambert SA v Australian National Industries (1989) 21 NSWLR 502

Facts ANI provided a letter of comfort to the bank (BBL) in relation to a $5M

loan provided by the bank to SSL.

ANI had a 45% controlling interest in SSL and provided a letter of comfort stating:-

It consented to the loan.

It agreed to provide the bank with 90 days notice if it sold its shares in SSL

It confirmed that SSL would be able to meet all of its financial obligations.

ANI then disposed of its shares in SSL without giving notice to the bank. SSL was unable to repay its debts & went into liquidation.

The bank sued ANI for damages for breach of the agreement.

Case Analysis

Banque Brussels Lambert SA v Australian National Industries (1989) 21 NSWLR 502

THE LAW

A party will only be regarded as making an offer and acceptance if that party manifested an intention to be legally bound.

In commercial transactions, the courts will assume there is a “presumption of intention”.

Therefore Onus of proof lies with the D (*ie denying the existence of the requisite intention).

ISSUES

Whether a letter of comfort can be regarded as a commitment to create legal relations.

Whether the letter of comfort in this case included an enforceable contractual promise to provide notice of its intention to dispose shares in its subsidiary and to ensure that SSL would be in a position to repay its debts.

Case Analysis - Banque Brussels Lambert SA v ANI

Banque Brussels Lambert SA v Australian National Industries (1989) 21 NSWLR 502

Held – The bank won Rogers CJ adopted the “honest and sensible approach”. To letters of

comfort, which recognized a letter of comfort from a parent company to a creditor of its subsidiary as being enforceable security.

Reason – “in commercial world the creation of a meaningless instrument or document is unthinkable”.

Intention, it was made quite clear to ANI & SSL that the facility was subject to BBL obtaining a suitable letter of comfort from ANI.

His honour was influenced by the refreshingly honest and sensible French approach to letters of comfort where they are regarded as a commitment to perform since the creation of a meaningless instrument would be unthinkable. Rogers CJ applied the commercial presumption.

Case Analysis - Todd v Nicol [1957] SASR 72Facts

The defendant, Nicol, a woman living in South Australia, invited sister and niece of her deceased husband (Margaret and Grace Todd) from Scotland (Hot Toddy!) to come live with her and share her home and to provide company.

"I must have company at my age - it is not good to live alone. The house is big enough, I will do all I can to make it comfortable for you, and we could change it around when you arrive. If you do come, and sell your things, keep your cutlery and linen as we might be short of those things. I will help with emigration and jobs”.

Series of letters was exchanged between the parties.

The defendant promised to alter her will such that the house would be Todd’s upon Nicol’s death or in the case of the niece (until she married). The Plaintiffs (Todds) accepted.

Case Analysis - Todd v Nicol [1957] SASR 72Facts

Plaintiffs moved from Scotland to Australia and resided with defendant Nicol for years.

Relationship between the parties soured [as they always do!] and the defendant Nicol asked the Plaintiff Todd to vacate her home.

Plaintiff Todd claimed to be entitled to remain in house.

Defendant Nicol counterclaimed for possession, either on basis that there was no contract between parties or that any contract had been validly terminated.

Case Analysis - Todd v Nicol [1957] SASR 72

Issue:

Whether there is an agreement legally binding between plaintiffs and defendant whereby the plaintiff Todd became entitled to live in the premises mentioned. Can social and domestic agreements constitute a legally binding contract? Presumption is NO

Held:

The court found that a binding contract had been created (the presumption was rebutted). Plaintiff Todd had to rebut the presumption (ie onus of proving that the intention was present)

Case Analysis - Todd v Nicol [1957] SASR 72

Held:

Mayo J - Here, there is no explicit reference to intention - so what inference can be drawn? Consider the expense and trouble the parties have been to in selling up and moving to Australia. Consider also the "testamentary adjunct" as the judge called it. Now this could all have been based on goodwill, but I incline to think that the arrangement was intended to be binding during D's lifetime. Otherwise the Ps would have been subject to the whim of D in such an important aspect of their lives. The intention of the parties was to enter into a legally binding arrangement.

Case Analysis - Todd v Nicol [1957] SASR 72However there was a sting in the decision….

The Court also found that there was an implied term of the contract that the parties would co-exist harmoniously and the Todd’s had behaved in a way that breached this term

“Mrs Todd..has not behaved in a reasonable and decent manner in the home”…

In the opinion of Mayo J her conduct was responsible for the cessation of reasonable home conditions. Mrs Todd was seen as responsible for creating conditions that were in breach of the very conditions that had been “agreed” to by virtue of the nature of the licence to live in Nichol’s house.

On the basis the Todd’s lost even though the contract was binding.

So far…. Commercial agreements are presumed to create

legal relations - Banque Brussels Lambert SA v Australian National Industries (1989) 21 NSWLR 502

Agreements made in a domestic or social context are presumed to not create legal relations - Todd v Nicol [1957] SASR 72

Presumptions of intention ….

As we have seen the courts, at least traditionally, used these presumptions to determine if the parties ever intended to enter into a legally binding relationship.

However……..

Australian research note (optional) Bovaird v Frost (30 April 2009) [2009] NSWSC 337; 118 ALD 263 (Brereton J)-

(see also Ashton v Pratt (No 2) (16 January 2012)[2012] NSWSC 3 (Brereton J)) There is a rebuttable presumption of fact that relatives such as husband and wife, and parent and child, do not

intend their agreements to be contracts, relying rather on “family ties of mutual trust and affection” [Jones v Padavatton [1969] 2 All ER 616, 621]. There are, however, many cases involving promises by elderly or disabled persons to confer benefits on a friend or relative in consideration of the latter taking up residence with the former or rendering household or personal services, in which the requisite intention to create legal rights and obligations has been found - particularly where implementation involved the promisee leaving existing advantages or selling an existing residence [Wakeling v Ripley (1951) 51 SR (NSW) 183; Todd v Nicol [1957] SASR 72; Parker v Clark [1960] 1 All ER 93; Schaefer v Schumann [1972] AC 572; Tanner v Tanner [1975] 1 WLR 1346; Raffaele v Raffaele [1962] WAR 29; Re Gonin (deceased) [1979] Ch 16; see also Scheps v Cobb [2005] NSWSC 455, [29]].

Sorbello & Ors v Sorbello & Anor (12 August 2005) [2005] QSC 219 (Mullins J)

The test of intention is objective: Riches v Hogben [1986] 1 Qd R 315, 316, 326, 329. It must be the intention of both parties to the contract: Todd v Nicol [1957] SASR 72, 78. It is permissible to have regard to the subsequent conduct of the parties for the purpose of ascertaining whether the intention to be attributed to them was to make a binding agreement or otherwise: Riches v Hogben [1986] 1 Qd R 315, 316, 329.

However…. and there are two howevers

1. As we have seen from Todd v Nichol, these presumptions may be rebutted if the evidence shows a contrary intention.

Question:

In the case of a loan between a parent and their offspring, what might indicate that the presumption should be rebutted?

Jones v Padavatton In Jones v Padavatton [1969] 2 All ER 616, a mother's promise to maintain her daughter at

a specified rate if she would go to England and read for the Bar with a view to later practising in Trinidad was held not legally binding, notwithstanding that performance would necessitate the daughter abandoning secure accommodation and employment in Washington and her teenage son's education there. The court found that the arrangement between the mother and daughter was a family arrangement depending on the good faith of the parties in keeping the promises made and was not intended to be a binding agreement. The daughter's claim thus failed. Salmon LJ said (at 621):

“Did the parties intend the arrangement to be legally binding? This question has to be solved by applying what is sometimes (although perhaps unfortunately) called an objective test. The court has to consider what the parties said and wrote in light of all the surrounding circumstances, and then decide whether the true inference is that the ordinary man and woman, speaking or writing thus in such circumstances, would have intended to create a legally binding agreement .”

http://jade-c2-app2.int.barnet.com.au/Jade.html#citable=1266903

Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 In any case, the High Court has recently cast doubt

about the usefulness of presumptions as a means of ascertaining the parties’ intention - Ermogenous v Greek

Orthodox Community of SA Inc (2002) 209 CLR 95.

{hint: read paras [24]-[28]}

Case Analysis - Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95Facts: Archbishop Ermogenous was employed by the The Greek Orthodox

Community of SA Inc which was a lay organisation that ran a number of cultural, social, sporting and religious activities in South Australia. The parties had discussed the basic terms and conditions, including accommodation, remuneration and the nature of the role.

Although the fledgling church did not gain national recognition as planned, Ermogenous remained in his role as Archbishop for 23 years during which time the Community continued to pay him, even when on leave, and deduct PAYE tax.

When he retired after some years of often strained relations with the Community, the Archbishop requested payment of accrued employee entitlements.

The Community refused and argued he could not be treated as an employee because he was the holder of an ecclesiastical office.

Case Analysis - Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95ISSUE:

The issues before the High Court were whether a minister of religion could be employed by their church and, if so, whether the Archbishop and the Community had in fact demonstrated the requisite intention to enter into a contract of employment.

If a contract of employment existed, the Archbishop was entitled to be paid the accrued employee entitlements.

HELD:

The High Court (Gaudron, McHugh, Hayne, Callinan and Kirby JJ) unanimously held that there was a contract of employment and that the Archbishop was entitled to his accrued employee entitlements.

Case Analysis - Ermogenous RATIO:

Their Honours said it would be both difficult and wrong to ascribe rules to determining whether or not intention exists in any particular case. They noted the objectivity of the requirement (the Court does not search for uncommunicated subjective reservations of intention) and that this meant that the circumstances in which intention may or may not exist could potentially be so varied that prescriptive rules were not appropriate.

"It is said that it may be presumed that there are some "family arrangements" which are not intended to give rise to legal obligations and it was said in this case that it should not be presumed that there was an intention to create legal relations because it was a matter concerning the engagement of a minister of religion. For our part, we doubt the utility of using the language of presumptions in this context. … Reference to presumptions may serve only to distract attention from that more basic and important proposition."

Their Honours considered use of presumptions could (wrongly) lead to the conclusion there was no intention here without full consideration of the circumstances surrounding this particular contract.

Since Ermogenous….

In Australia

The courts will take all the circumstances of the transaction into account when deciding whether the parties have manifested an intention to create legal relations, and these will vary from case to case.

In a domestic setting, it is the person seeking to enforce the contract that bears the onus of proving the presumption should be rebutted.

Indicia of intention

The question is whether a reasonable person would regard the agreement as intended to be binding

A court may look at:

Terms of the contract

Relationship of the parties to each other

Subject matter of the agreement

Status of the parties

Surrounding circumstances

Other cases where intention was an issue

Administration of Papua and New Guinea v Leahy (1961) 105 CLR 6

Masters v Cameron (1954) 91 CLR 353

Case Analysis – Administration of Papua and New Guinea v

Leahy (1961) 105 CLR 6

Facts:After a request from the plaintiff, the Commonwealth Dept of Agriculture took over spraying to eradicate ticks.

Plaintiff was to pay for the labour required and to muster the cattle.

The Dept’s officers failed to carry out the spraying carefully enough and more serious infections occurred.

Plaintiff sued for damages for breach of contract.

Issue:Was there an intention to create a legally binding agreement?

Held:It was held that the arrangements were administrative and not contractual. Same where the public authority is carrying out a statutory duty and charges a fee to cover the cost of the service, it is unlikely that the arrangement will be seen as contractual.

Case Analysis – Administration of Papua and New Guinea v

Leahy (1961) 105 CLR 6

Ratio:Dixon CJ - There was no contract as there was no intention to create legal relations. The Department was doing no more than giving effect to government policy for tick eradication when it agreed to assist Leahy. The plaintiff had sought aid and in responding the defendant was doing no more than performing a function of government in accordance with settled policy.

McTiernan J - Agreed promises alone are insufficient to make a contract. The Administration did not intend to enter into legal relations with Leahy – it was an administrative arrangement in accordance with the Administration’s agricultural policy – McTiernan considered it analogous to a ‘social service’ which does not have ‘as its basis a legal relationship of a contractual nature’.

Kitto J - agreed

Administration of PNG v Leahy

Key Points:

The case falls into the same class as AWM v Cth.

In this case the government was simply providing gratuitous assistance in the execution of its policy (in this case to eradicate ticks).

Think about the relevance of these cases if you have a problem involving a government instrumentality.

Case Analysis – Masters v Cameron(1954) 91 CLR 353

Facts: On 6 December 1951, both parties signed a written memorandum for

the sale of Cameron’s farm to Masters (purchaser).

The memorandum stated that ‘this agreement is 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’.

On the same day Masters paid a deposit of £1,750 to Cameron’s real estate agent.

Later, Masters refused to complete the transaction and claimed he was entitled to a refund of the deposit paid to the agent.

Cameron (seller) claimed that the memorandum created a binding and enforceable contract, even though no formal contract was ever entered into between the parties.


ISSUE:

The issue before the High Court was whether the memorandum of 6 December 1951 created a binding and enforceable contract.

HELD:

In a unanimous decision, the High Court (Dixon CJ, McTiernan and Kitto JJ) held in favour of Masters, holding that the memorandum did not create a binding and enforceable contract.


RATIO:

The situation may be one of three possibilities:

1. The parties have finalised their agreement and intend to be bound straight away, but intend to put it into more precise form. Lord Blackburn in Rossiter (1878) - said that the mere fact that you have indicated a desire to have a more formal expression of the terms does not mean that negotiations are still continuing. An assent without power to vary the terms indicates a completed contract.

2. They have agreed all the terms, but have made performance of one or more terms conditional upon the execution of a formal document.

3. The parties do not want to be bound until they have completed the formal document. Here, the parties may wish to retain the right to withdraw, if agreement cannot be reached on outstanding matters.

In the first two cases we have a binding contract. In the third case we merely have a record of the terms which are intended to form the basis of a contract to be finalised.

The question is to be determined by the parties’ intention as disclosed by their language. If "subject to contract" means there are terms to be agreed, or conditions to be fulfilled, then there is no contract until those things have been done.


RATIO (cont.):

The question is to be determined by the parties’ intention as disclosed by their language. If "subject to contract" means there are terms to be agreed, or conditions to be fulfilled, then there is no contract until those things have been done.

Sir George Jessell in Winn v Bull (1877) said that where a proposal or agreement is "subject to contract", it means what it says, that it is subject to a formal contract being prepared. When not expressly stated to be so, then it is a matter of construction. Similar views have been expressed in Spottiswoode [1942] and Keppel [1927]. No reason why those principles should not apply here, and thus we conclude that no contract has been formed.

This leaves the question of the status of the deposit. Was the payment anticipatory, to become a deposit under the contract, or was it intended to be an interim guarantee that the purchaser would enter a reasonable contract. As noted in Chillingworth v Esche (1924), prima facie, the latter is not common sense. We conclude that the payment was merely anticipatory.

Masters v Cameron

Key Points:

1. Agreements that are ‘subject to contract’ are not normally binding unless expressly stated to be so. It is a matter of construction as to whether the intention has been expressed.

2. In this case the agreement stated that it was subject to a satisfactory contract being agreed to and there was no indication that the parties intended to go ahead with the sale if satisfactory terms couldn’t be agreed.

3. The ‘deposit’ was merely paid in anticipation and was not a guarantee that agreement would be reached.

Part B - Uncertainty & Incompleteness

Although there may appear to be offer and acceptance, there might in fact be no concluded agreement capable of being enforced when:

The terms are uncertain,

The agreement is incomplete or a

Contractual promise is illusory.

However, a contract will only be invalid where the courts cannot reasonably ascertain what the parties intended - Meehan v Jones (1982) 149 CLR 571.

Case analysis - Meehan v Jones

Meehan v Jones (1982) 149 CLR 571

Facts:J agreed to sell land to M. The contract was executed, subject to the following conditions: M entering into a satisfactory agreement with Ampol for the supply of

a satisfactory quantity of oil; and M receiving approval for finance on satisfactory terms and conditions

If these conditions were not satisfied by 31 July 1979 then the agreement was null and void

J claimed the contract was void for uncertainty and, on 23 July 1979 sold the property to another person

About a week later (before 31 July 1979) M gave notice that it had made satisfactory arrangements with Ampol and obtained finance

M sought specific performance of the contract

Trial judge and Full Court of Supreme Court refuse specific performance on the basis that the contract was void for uncertainty. The words ‘satisfactory terms and conditions’ were held to be too imprecise.

Meehan appealed to the High Court

Meehan v Jones (1982) 149 CLR 571

HELD: The contract was enforceable

RATIO:Gibbs CJ - He began by determining the correct construction of the "subject to finance" clause. Does it indicate a subjective or objective test? Is the finance to be satisfactory to the purchaser? Or is the condition fulfilled if finance is available which the purchaser ought to find satisfactory?

Correctly construed the clause means satisfactory to the purchaser - the clause is to protect the purchaser. An adventurous purchaser should not be prevented from proceeding because a reasonable person might have been more cautious - and a cautious person should not be required to proceed if there is genuine concern over the finance.

Mason J - "Satisfactory to the purchaser" may well be subject to an implied obligation that the purchaser will act honestly and reasonably in attempting to obtain finance. To say that such a clause renders the contract void for uncertainty would be draconian - there are many cases where an agreement depends on finance to complete the contract. This is not to say that the purchaser has an absolute or unfettered right to decide what is satisfactory.

Meehan v Jones

Key Points:

Uncertainty and vagueness will only invalidate a contract where the courts cannot reasonably ascertain what the parties intended

The language has to be capable of at least some meaning whereby the court can attribute a particular contractual intention to the parties

Uncertainty When interpreting the meaning of a contract it is important to

distinguish between obscurity and lack of meaning - Council of the

Upper Hunter County District v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429

The language has to be capable of some meaning that indicates

the contractual intention to the parties - Meehan v Jones (1982) 149

CLR 571

Even if the language is obscure, the agreement is valid IF the court can interpret the words to discern contractual intention.

For the purposes of ascertaining the intention of the parties the court may make reference to external standards of mechanisms

or standards of reasonableness -Biotechnology Australia Pty Ltd v Pace

(1988) 15 NSWLR 130 & Whitlock v Brew (1968) 118 CLR 445

Case Analyses re: Uncertainty

In order to better understand how the courts approach the issue of uncertainty in contracts lets look at another two cases:

Council of the Upper Hunter County District v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429.

Whitlock v Brew (1968) 118 CLR 445

Council of the Upper Hunter County District v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429

FACTS: The appellant, The Council of the Upper Hunter County District, a statutory corporation, purchased bulk electricity from two generating sources with a view to on-sell it for profit. The respondent, Australian Chilling and Freezing Co Limited, contracted with the appellant on 18 December 1959 for the supply of electricity for its works at Aberdeen. Clause 5 of the contract between the parties stated:

'It is agreed that during the term of this agreement if the Supplier's costs shall vary in other respects than as has been hereinbefore provided the Supplier shall have the right to vary the maximum demand charge and energy charge by notice in writing to the Purchaser given not less than 14 days before the commencement of any month after the date hereof such varied rates to take effect from the commencement of that month '.

On 9 August 1963, the appellant served notice on the respondent that its costs had varied and that the levies for the electricity supplied would rise effective 1 September 1963. The respondent disputed the right to increase the levy and alternatively the amount of the increase.

The Supreme Court of NSW held that the agreement was void for uncertainty. The Council appealed to the High Court.

Council of the Upper Hunter County District v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429

HELD The court found for the Upper Hunter Council stating that clause 5 of the agreement was not void for uncertainty.

RATIO Barwick CJ - 'Supplier's costs' related only to the costs incurred by the supplier as opposed to the costs of generating the electricity. He affirmed the general proposition that a contract with more than one meaning is not void for uncertainty providing it is capable of some meaning. Also, that to determine the meaning of a contractual term, one relies on the construction of the term as a way of ascertaining the intention of the parties.

“the concept of a cost of doing something is certain in the sense that it provides a criterion by reference to which rights of the parties may ultimately and logically be worked out, if not by the parties then by the courts”.

Kitto J - was of the same mind as Barwick CJ, and stated that the notion of 'supplier's costs' was capable of ascertainment by applying ordinary business concepts. In this respect, in his Honour's view, the term meant the costs of the appellant carrying out the contract

Council of the Upper Hunter v AC&F

Key Points:

A contract with more than one meaning is not void for uncertainty providing it is capable of some meaning

"But 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, or in an appropriate case, an arbitrator, decides is its proper construction . . . “ (Barwick C.J at p 436).

It is only if the court is unable to put any definite meaning on the contract that it can be said to be uncertain. (Barwick C.J at p578)

To determine the meaning of a contractual term, one relies on the construction of the term and by reference to external standards as a way of ascertaining the intention of the parties e.g. by using ordinary business concepts.

Whitlock v Brew (1968) 118 CLR 445.

FACTS: Whitlock agreed to sell to Brew some land part of which was leased to Shell who operated a petrol station there.

Inserted in the contract was a Special Condition 5 of the agreement which stipulated that Brew would grant a lease of the land to the Shell Company of Australia for the sale of its products on such reasonable terms as commonly govern such a lease.

Brew paid the deposit of £15,600 but shortly after declined to complete the purchase. The deposit was short £900.

Whitlock then rescinded the contract and kept the deposit.

Brew sought recovery of the deposit.

Brew argued that special condition no.5 was uncertain and could not be severed from the rest of the agreement with the consequence that the whole of the agreement was void for uncertainty.

Trial judge held that clause 5 was void through uncertainty but was severable from the rest of the contract. Therefore contract could have been completed and Brew was wrong to fail to complete. He should therefore forfeit his deposit. Brew appealed.


ISSUE:The issue before the High Court was whether Special Condition 5 was uncertain, thereby rendering the whole of the agreement void for uncertainty.

HELD: In a majority decision, the High Court (Kitto, Taylor, Menzies and Owen JJ; McTiernan J dissenting) held in favour of Brew.

They found that clause 5 was void for uncertainty and that, given it was a material term of the contract, it was not severable from the contract and the appeal was therefore dismissed and the deposit returned to the respondent.

On the issue of clause 5 being void for uncertainty, the court was not unanimous. Four judges, Kitto, Taylor, Menzies and Owen JJ, found that clause 5 was uncertain with a lone dissenting judge being McTiernan J.


RATIO:

Kitto J's short judgment relied on the fact that the words in clause 5, that the lease was to be granted:

….upon such reasonable terms as commonly govern such a lease [would have been certain enough if] evidence had been established that for such a lease an ascertainable set of reasonable terms are in common use. But this has not been established, and the result is that the document did not record consensus ad idem as to the duration of the term, the rent, or anything else except the commencing date and the premises intended to be let.

See also Gibbs J [9] Meehan v. Jones – for counter view

The remainder of the majority delivered a joint judgment that was very brief on the issue of uncertainty.

Whitlock v Brew

Key Points: The courts will not in effect draft a contract where the parties have

failed to stipulate the terms

We are firmly of opinion that the expression "upon such reasonable terms as govern such a lease" is not, in the context in which it appears, apt to refer to either the period for which the contemplated lease is to subsist or to the rent to be payable thereunder. Taylor, Menzies & Owen JJ at [5]

However, if the language of a clause lacks meaning, then the contract might still be enforced if the meaningless clause can be severed without affecting the substance of what was agreed

"When a contract contains a number of stipulations one of which is void for uncertainty, the question whether the whole contract is void depends on the intention of the parties to be gathered from the instrument as a whole. If the contract be divisible, the part which is void may be separated from the rest and does not affect its validity.“ (Knox C.J. in Life Insurance Co. of Australia Ltd. v. Phillips (1925) 36 CLR 60; [6] of Whitlock v Brew)

Incompleteness

Even though the language used is clear, the agreement might still fail because it is incomplete.

An incomplete agreement is one where essential terms have been omitted, e.g. price, a party, a quantity, etc. This may be so even if the language of the contract is clear in all

other aspects – Hall v Busst (1960) 104 CLR 206

Note: we’ll talk about essential terms later in the course.

Case analysis - Hall v Busst (1960) 104 CLR 206

Hall v Busst (1960) 104 CLR 206.

FACTS

Hall bought a small island off Qld from Busst and promised that he wouldn’t resell it without letting Busst know and giving him the option to buy it back.

The agreement was documented with Clause 5 stating that the purchase price was to be £3,157 "to which shall be added the value of all additions and improvements to the

said property since the date of purchase by the Grantor" [Hall] "(such value to be taken as at date of exercise of this option) and from which shall be subtracted the value of all deficiencies of chattel property and a reasonable sum to cover depreciation of all buildings and other property on the land"

Hall subsequently sold the island to a 3rd party for £8,500 without giving notice to Busst.

Busst sought damages for breach of contract


ISSUES:

Did the formula specified in clause 5 meet the degree of certainty required to enforce the agreement?

HELD:

The High Court held that because the measure of depreciation was uncertain, the promise was void and Busst could not enforce the option for purchase.


RATIO

The concept of a ‘reasonable amount for depreciation’ is uncertain because there are different ways to calculate depreciation. If the parties had specified a way to calculate the amount (even though the actual amount was not nominated) the clause may not have been uncertain.

Fullager J - For a contract for the sale of land there cannot be a binding contract without 3 essential elements which are the subject of a concluded agreement - the parties - the subject matter and the price. If these are fixed with certainty, the courts will supply the rest. A certain price is not a specific figure – it would be sufficient if the price were to be that fixed by a named or described person. If the parties are silent as to price, there can be no implication that a reasonable price is to be paid, even if the agreement is expressed to be "for a reasonable price".

What if you provided for an objective methodology to calculate price?

Agreements to agree – a form of incompletenessParties who want to get the contract signed but can’t agree on certain points might be tempted to include a clause stating that they agree to agree on certain points (i.e. subject to further negotiation)

For example, X agrees to supply Y with 100 text books at a price that will be agreed between the parties after the contract is signed.

However, parties may make a valid contract that defers agreement on an essential term if they provide an effective mechanism for supplying the term in the event they fail to reach agreement.

For example, a lease may provide an option for renewal of rent to be agreed between the parties or, failing agreement, a specified valuer.

Parties may also agree on a formula for settling a term of their agreement, which can then be applied by the court in case of dispute.

Agreements to agree – some movement?

As we’ve seem, the standard rule is that the courts will not in effect draft a contract where the parties have failed to stipulate the critical terms and that an agreement to agree does not rectify a situation where there is a missing term that is critical to the meaning of the contract.

However, there has been some movement in this area of the law in regards to the promise to negotiate in good faith even though an agreement to agree is generally invalid.

Case analysis - United Group Rail Services Ltd v Rail Corporation NSW (2009) 74 NSWLR 618

United Group Rail Services Ltd v Rail Corporation NSW (2009) 74 NSWLR 618

FACTS

RailCorp and United entered into two contracts, in which United agreed to design and build new rolling stock for RailCorp.

The two contracts contained detailed dispute resolution clauses. As with many commercial contracts, there were many levels of dispute resolution. In certain circumstances, the clause required the dispute or difference to be referred to a senior representative of each of the parties, who were required to “meet and undertake genuine and good faith negotiations with a view to resolving the dispute or difference”. If the parties could not resolve the dispute within a fixed period of time, the contract provided that the dispute would be referred for mediation.

As it turns out, the parties agreed that the mediation referral clause was uncertain and therefore unenforceable.

United argued that the clause requiring the parties to undertake genuine and good faith negotiations was also uncertain, or alternatively that it was unenforceable because it was linked to the mediation clause.


HELDThe NSW Court of Appeal concluded that the clause to negotiate genuinely and in good faith should be enforced, as the clause was not uncertain and had identifiable content.

RATIO

Allsop J - the parties had promised to undertake negotiations in a genuine and good faith manner for a limited period of 14 days. As a matter of language, the phrase “genuine and good faith” in this context needs little explanation as, in His Honour’s view, it indicates an honest and genuine approach to the task at hand.


RATIO (cont.)

His Honour summarised the proper approach when considering agreements to negotiate in good faith as follows:

1. An agreement to agree is incomplete, lacking essential terms.

2. The task of the court is to give effect to business contracts where there is a meaning capable of being ascribed to a word or phrase or term or contract - ambiguity not being vagueness.

3. Good faith is not a concept foreign to the common law, the law merchant or businessmen and women. His Honour noted that the New South Wales Supreme Court had previously held that a duty of good faith, both in performing obligations and exercising rights, may by implication be imposed upon parties as part of a contract.

Illusory Promises

A contractual promise is illusory where the performance required by the promise is at the discretion of the promisor.

Such a promise “is not enforceable…promises of this character are treated… not as vague and uncertain promises – for their meaning is only too clear – but as illusory promises” - Placer Development Ltd v Commonwealth

(1969) 121 CLR 353 at 359-360 per Taylor and Owen JJ, see [5.19] and [6.53C].

Case analysis: Placer Developments

Placer Development Ltd v Commonwealth (1969) 121 CLR 353FACTS:

Placer and the Cth formed a timber company to operate in Papua New

Guinea.

Clause 14 of the agreement provided that, if customs duty was paid on the importation of the company’s products into Australia the Cth would pay to the timber company a subsidy at a rate to be determined by the Cth, but not exceeding the amount of customs duty paid.

Both parties sought the Court’s opinion if there was an obligation to pay the subsidy.

Placer Development Ltd v Commonwealth (1969) 121 CLR 353

ISSUES:

1. Is the government’s promise illusory because of discretion the Cth had as to performance, which would render the promise unenforceable, because the amount could be $0

2. Does clause 14 imply an obligation that the government act reasonably in determining the subsidy, there by overcoming any uncertainty?

Placer Development Ltd v Commonwealth (1969) 121 CLR 353HELD:

The promise to pay the subsidy was illusory and there was no contract.

RATIO:

Kitto J - The principle established in Loftus v Roberts is that a promise -combined with a discretion as to whether it will be carried out - amounts to no [enforceable] promise (or no contract) at all. A promise of a subsidy is meaningless if there is no specification of the amount. There is no implication that a reasonable subsidy should be paid, for there is no standard by which to judge such a thing.

Taylor and Owen JJ - A promise to pay an unspecified amount is not enforceable. There is no criteria by which the court could fix the amount.

Menzies J (dissenting) - Either there is an illusory promise, or there is a promise subject to conditions (i) to fix an amount (ii) to pay that amount. Obviously there can be no obligation in advance of a determination, but if one asks whether there is a duty to fix a subsidy, the answer must be yes. It is hard to imagine the parties giving the agreement any other interpretation at the time. I do not regard a promise by the Commonwealth to fix an amount as being illusory.

Placer Development Ltd v Commonwealth (1969) 121 CLR 353

RATIO:Windeyer J (dissenting) - Ordinarily the court would have no difficulty, where an unspecified sum is to be paid, in inferring that a reasonable sum was intended. A quantum meruit, requires such a judgment. In this case there is no course of business dealing which the court can use for comparison, therefore the court has no basis upon which to substitute its own judgment. But because the court cannot make such a judgment, it does not follow that the Commonwealth is released from the obligation to make such a judgment.

Uncertainty Vs Illusory terms

Sometimes it may be difficult to determine whether a term is illusory (i.e. discretionary) of uncertain.

Does this really matter?

Case analysis - Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130

Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130

FACTS:Pace entered into an employment contract with Biotechnology which provided that he would have ‘theoption to participate in the company's senior staff equity sharing scheme.’ There was no such scheme in existence at the time of contract or at any time during Pace’s employment. Pace sued for breach of contract.

HELD: Pace did not succeed but the two judges couldn’t agree whether it was because the term was illusory (i.e. discretionary) or uncertain!


RATIO: Kirby P - the contract failed due to uncertainty.

His Honour noted the distinction between illusory terms and uncertain terms

“… a promise to pay an unspecified amount of money is not enforceable where it expressly appears that the amount to be paid is to rest in the discretion of the promisor …... Promises of this character are treated … not as vague and uncertain promises - for their meaning is only too clear -but as illusory promises ….”

However, where a person is given power to (and does) resolve ambiguities in an agreement then the agreement will not be too uncertain - but that was not the case here and the term was far too uncertain to be enforced. It depended entirely on the decision of one of the parties (Biotech) to provide an equity scheme and there was no 'external standard' the court could use to try and resolve the ambiguity. Even if the term was not illusory it was uncertain – how many shares, what class of shares, what options would exist, what rights would attach?. The term was, therefore, unenforceable.


RATIO:McHugh JA - the contract failed due to an illusory term

On the issue of whether the consideration was illusory, it will be ‘illusory if its payment or fulfilment depends upon an unfettered discretion vested in the promisor. Thus a promise by the Commonwealth that it will pay a subsidy “of an amount or at a rate determined by the Commonwealth from time to time” is an illusory consideration’. Similarly, the promise of an employer to pay such sum of money as they deem right in exchange for work performed will be illusory.

In employment contracts, however, where there is a promise to remunerate normally the court will apply a ‘reasonable remuneration’ standard based on market criteria, subject to terms specified by the parties.

In addition, even if the ‘promisor retains a discretion, the consideration will not be illusory if the discretion must be exercised within specified parameters.’

In this case, however, consideration was illusory, as it was solely within Biotech’s discretion and there were no objective standards.


Key points:

In some cases, it can be hard to distinguish whether a term is illusory of uncertain.

In either case the promise is unenforceable.

Seminar Problems

That’s all we need to cover on intention & certainty, and now is probably a good time to look at one of the problems in the seminar guide.

Seminar 4 – problem A – Sarah the nurse

In groups read problem 1 on page 19 of seminar guide.

Identify and discuss the main issues relating to contract formation

Clue: compare the ratios in Jones v Padavatton, Todd v Nichol and Ermogenous v Greek Orthodox Community

End intention and uncertainty

in this seminar we will focus on - legallyunrobed.com · intention to create a legal relationship...

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