CONTRACTS II - The Uni Tutor



1) INCORPORATION OF TERMS

(a) Written terms and the effect of signature [CB390]

(i) The general rule:

|L’Estrange v F Graucob Ltd (1934) |

|The general rule: “When a document containing contractual terms is signed, then, in the absence of fraud or misrepresentation, the party signing it is bound, |

|and it is wholly immaterial whether he has read the document or not“. |

[CB390] Facts: L purchased from G a cigarette vending machine and signed a form headed ’Sales Agreement’. The machine, when delivered, did not work satisfactorily. L brought an action for damages for breach of an implied warranty that the machine was reasonably fit for the purpose for which it was required. G relied on a clause in the sales agreement excluding all implied conditions & warranties.

Issue: Scrutton LJ – whether the clause formed part of the contract to exclude any condition or warranty

’Having signed the doc, and not having been induced to do so by any fraud or misrep, she is bound by the terms, regardless of whether or not she has read them’

• Maugham LJ: the contract was concluded when the order confirmation was signed.

• Distinguished from ticket cases (no signature) ~ Parker v South Eastern Ry Co (1877): necessary to prove an alleged party was aware, or ought to have been aware, of its terms & conditions.

Affirmation of the general rule:

|Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52 |

|The HC affirmed that, in the absence of misrepresentation or other equitable grounds for setting the contract aside, the rule in L’Estrange was applied and |

|the clauses were binding. |

[SHEET] Facts: A signed doc titled ‘Application for credit’ contained onerous exclusion and indemnity clauses.

‘To sign a document that is known and intended to affect legal relations is an act which itself ordinarily conveys the representation that the person who signs had read & approved the contents of the documents, or is willing to take the chance of being bound by those contents whatever they might be.’

(ii) Circumstances where effect of signature may be avoided: [CB392]

❑ Where the signature was induced by misrepresentation or fraud or mistake (Curtis)

❑ Where the document would not reasonably be considered a contractual document, eg receipt (Curtis)

❑ The rule will also not apply where the consent of the party to be bound has been vitiated by factors such as duress, undue influence, or unconscionable dealing

|Curtis v Chemical Cleaning and Dyeing Co [1951] |

|Rule: The rule in L’Estrange v Graucob will not apply where the signature was induced by misrepresentation or fraud, or in some cases of mistake. “Any |

|behaviour, by words or conduct, is sufficient to be a misrepresentation if it is such as to mislead the other party about the existence or extent of the |

|exemption. If it coveys a false impression, that is enough” – Denning LJ. |

| |

|The rule will also not apply where the document in question cannot reasonably be considered a contractual document, for example, because it appears to have |

|another function, such as being a receipt. |

[CB392] Facts: Curtis took a white satin wedding dress to the defendant for cleaning. The defendant’s shop assistant handed Curtis a paper headed ‘Receipt’ which she was asked to sign. Before doing so Curtis asked why her signature was required, and was told that it was because the defendant would not accept liability for certain specified risks, including the risk of damage to the beams and sequins with which the dress was trimmed. Curtis then signed the ‘receipt’. In fact the paper contained a term excluding the defendant from liability for any damage ‘howsoever arising’. When the dress was returned there was a stain on it, and Curtis claimed damages.

Issue: Was the assistant’s misrepresentation sufficient to change the content of the written contract?

Held: The defendant was not able to rely on the exemption clause to exclude its liability for damage. The defendant’s assistant had misrepresented the breadth of the exemption clause in the document.

• The appeal was dismissed on the basis that although the assistant made innocent misrepresentation, “by failing to draw attention to the width of the exemption clause, the assistant created the false impression that the exemption related to the beads & sequins, and that it did not extend to the material of which the dress was made”, so the customer was misled about the content of the ‘contract’ and therefore the exclusion clause could not apply – Denning LJ

• Denning LJ suggested that if the assistant had not misrepresented the extent of the clause, Curtis might not have been bound by the exemption clause, but Curtis might reasonably have understood the doc only to be receipt and not to contain contractual terms.

• ‘If a person wishes to exempt himself from a liability which the common law imposes on him, he can only do it by an express stipulation brought to the party affected, and assented to by him as part of the contract’ Olley v Marlborough Court [1949]

(b) Displayed terms – Incorporation of terms by notice (ticket cases) [CB394]

A supplier of goods or service who does not rely on a signed contract will instead usually attempt to incorporate terms by delivering a document containing the terms to the customer, or by displaying the terms on some form of sign.

The ordinary analysis of ticket cases is that the issuing of ticket is the offer, and acceptance is something done after this (eg: going on the trip or not disputing the terms after a reasonable period of time).

The other party will be bound by the terms in the contract delivered before or at the time of the transaction if:

• (i) Notice of the term(s) were given before the contract was formed [CB394]

|Oceanic Sun Line Special Shipping Co Inc v Fay (1988) |

|Rule: For delivered or displayed terms to form part of a contract they must be made available before the contract is made. Therefore, tickets cannot be the |

|offer if the parties believe that they are committed at an earlier stage. |

| |

|“No contract of carriage is made until after the passenger had intimated his acceptance of the ticket & its conditions, or after the passing of a reasonable |

|time during which the passenger has had a reasonable opportunity of reading the ticket & its conditions” – Brennan J |

[CB394] Facts: Dr Fay (pl) booked in Sydney a Greek Islands cruise on Oceanic Sun Line (def) owned by a Greek company. On payment of the fare, pl was handed an ‘exchange order’ which was exchanged for ticket when she boarded vessel in Athens, upon which was printed a condition that the Greek courts should have exclusive jurisdiction in any action against the owner. Pl received serious injuries on the ship and sued the owner for negligence in the Sup Court of NSW. The HC held that the contract for the cruise had been made when the cruise was booked and accordingly the conditions on the ticket issued later, when the passenger arrived in Greece, did not form part of the contract. Appeal dismissed.

Issue: Is the owner liable under NSW jurisdiction? The contract was made in Sydney when the cruise was booked. Accordingly, the conditions on the ticket were issued later, when the passenger arrived in Greece. As such it did not form part of the contract.

“If the contract is made when the fare is paid [contract is made], the ticket [contract] cannot alter the parties’ contractual rights & obligations” as this was made before the ticket was given, which contained the clause. ..The carrier cannot rely (on exemption clause) unless at the time of the contract, the carrier had done all that was reasonably necessary to bring the exemption clause to the passenger’s notice”. No notes of the clause were printed on the brochure

A ticket containing conditions of carriage is ordinarily treated as an offer by the carrier to carry on those grounds, no contract coming into existence until after the offer is accepted by the passenger – the ticket is not an agreement as it involved an exchange (or exchange order) upon boarding the vessel.

• (ii) Reasonable steps were taken to bring terms to the notice of the party to be bound [CB397]

If the timing requirement is satisfied, a party will be bound by delivered or displayed terms if he or she has either knowledge or reasonable notice of the terms.

▪ If a party knows that the relevant document contains contractual terms, he or she will be bound by those terms regardless of whether s/he had read them.

▪ In the absence of knowledge, a party will be bound by delivered or displayed terms if he or she had reasonable notice of the terms.

Where delivered or displayed terms are not contained in a document which would reasonably be thought to contain contractual terms, the party seeking to incorporate the terms must take reasonable steps to bring those terms to the notice of the party to be bound.

|Thornton v Shoe Lane Parking Ltd [1971] |

|General principle: the notice must be in such a form that it is likely to come to the attention of the party to be bound. |

| |

|What constitutes reasonable notice depends on type of contract, nature of terms and circumstances. |

[CB397] Facts: T parked his car at an automatic car park and upon entering was given a ticket which contained small print ‘this ticket is issued subject to the conditions of issue as displayed on the premises’. These conditions, which were not visible from T’s car, included a clause exempting the def from all liability. T did not read the print on the ticket or display & was severely injured.

Issues: Was this condition part of the contract?

Held: The customer was not bound by the exemption clause. The customer did not know that the ticket was issued subject to the exempting condition and the operator of the carpark had not done what was reasonable to give him notice of it.

• In cases, esp so involving automatic machines “the customer pays his money & gets his ticket. He cannot refuse it. He cannot get his money back… He was committed at the very moment when he put his money into the machine. The contract was concluded at that time” – Lord Denning. Notice inside the carpark is thus too late bc pl had not been given a reasonable opportunity of finding out the conditions on the ticket.

• “The customer is bound by those terms as long as they are sufficiently brought to his notice beforehand, but not otherwise. He is not bound by the terms printed on the ticket if they differ from the notice, bc the ticket comes too late”

• Ticket is no more than a voucher or receipt for the money that has been paid (Chapelton v Barry Urban Dist Council) on terms which have been offered & accepted before ticket is issued

• A notice must be in such a form that it is likely to come to the attention of the party to be bound. Def’s had not taken proper steps to bring the notice of the Pl at the time of making the contract that it was subject to any special conditions

o Meglaw LJ: “It is a highly relevant factor in considering whether proper steps were taken fairly to bring that matter to the notice of the plaintiff that the first attempt to bring to his notice the intended inclusion of those conditions was at a time when as a matter of hard reality it would have been practically impossible for him to withdraw from his intended entry upon the premises for the purpose of leaving his car there.”

|Causer v Brown [1953] |

|What constitutes reasonable notice of delivered or displayed terms will depend on the circums of the particular case. The general principle is that the notice|

|must be in such a form that it is likely to come to the attn of the party to be bound. |

Facts: Causer took his wife’s dress to the defendants for dry cleaning. When it was collected, the dress was found to have been damaged. The defendants sought to avoid liability by relying on the exclusion clause printed on a docket handed to Causer when he left the dress at the defendants’ shop.

Held: Defendants could not rely on the exclusion clause.

“Mr. Causer was one that might reasonably be understood to be only a voucher for the customer to produce when collecting the goods, and not understood to contain conditions exempting the defendants from their common law liability.”

Accordingly, the defendants should have drawn Causer’s attention to the existence of the exemption clause.

Interfoto Picture Library Ltd v Stiletto Visual Programs Ltd [1989] 2 QB 433

Facts: Interfoto ran a library of photographic transparencies. Upon the request of Stiletto, they sent 47 transparencies, along with a note setting out the date of dispatch and of return. At the bottom of the note was a heading ‘conditions’ printed in fairly prominent capitals and under this heading were set out nine conditions, one of which was that a holding fee of £5 per day would be charged for each transparency retained for longer than the return date. Stiletto retained the transparencies for an additional two weeks and was charged a fee of £3,783.50.

Bingham LJ: referred to the civil law principle that in carrying out contracts parties should act in good faith. He stated that good faith didn’t s imply mean that the parties should not deceive on another, but rather good faith imposed a duty on the parties to act in all fairness to draw attention to the ‘high price payable if the transparencies were not returned in time’.

Dillon LJ: The contract was not made until stiletto opened the bag contained the photographs. Once the delivery note was taken out, Stiletto would have recognized it as a document reasonably likely to contain contractual terms and would have seen the terms printed on the document. While those terms which were commonly encountered in the business of the parties would have been incorporated into the contract, Interfoto did not do what was reasonably necessary to draw the clause in question, which was ‘unreasonable and extortionate’, fairly to the attention of Stiletto.

(c) Unusual or onerous terms [CB400]

|Baltic Shipping Co v Dillon (The Mikhail Lermontov) (1991) |

|Reasonable notice must be given to a party of any unusual or onerous terms & conditions contained in a contract. |

| |

|The notice given for unusual or onerous terms will not be sufficient if there was more that the Def could have done to bring the provisions to the attention |

|of the Pl. |

[CB400] Facts: Dillon paid part money in advance for cruise; later received a ‘booking form’ which asserted that a contract of carriage was made ‘only at the time of issuing of tickets’. 2 weeks prior to cruise, D received a ticket which contained terms limiting the liability of BSC & some unusual conditions. When the ship sank, D lost possessions & suffered personal injuries; sued BSC.

Issue: Were the terms, inc the provision for limitations in liability, accepted by the customer so as to be incorporated into contract?

Held: the pl was not bound by the conditions purporting to limit the shipping co’s liability. For the conditions printed on the ticket to have been incorporated in the contract, the passenger must have been given notice of those conditions.

The booking doc was not the contract of carriage, and the limitation clause did not form part of the contract of carriage. Contract would arise ‘only at the time of the issuing of tickets’. At this stage, the passenger would have had no knowledge of the conditions on the ticket. Hence, the shipowners could not subsequently, by issuing a ticket containing the conditions, introduce such conditions into the contract when it was not subject to them originally. The passenger was entitled to take the view that she would be issued with a ticket which would contain no unusual provisions, and so more notice is required for unusual or onerous terms because more time is needed to decipher, or decide whether to accept, them.

Note: The requirement of special notice of onerous terms has only applied to terms contained in unsigned documents. In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd he High Court rejected the argument that a special notice requiring should apply to unusually onerous terms in signed documents.

(d) Incorporation by course of dealings [CB403]

Where parties have had a history of dealings, contractual terms introduced in earlier transactions may be incorporated into a subsequent contract even though the ordinary requirements for the incorporation of terms have not been met in relation to that subsequent contract: McCutcheon v MacBrayne [1964]. The justification for such incorporation will be that the party to be bound has, by continuing to deal with the party seeking to impose contractual terms, evidenced a willingness to be bound by the terms.

|Balmain New Ferry Co Ltd v Robertson (1904) |

|Rule 1: Where parties have had a history of dealings, contractual terms introduced in earlier contracts may be incorporated into a subsequent contract. |

[CB403] Facts: Company placed over the entrance to the wharf a notice stating that a fare must be paid by all persons, entering/leaving the wharf. Robertson (Pl) paid the fare and was admitted, but missed his boat, & attempted to leave, but refused to pay, so he brought an action against the comp for assault & false imprisonment.

Held: Robertson was bound by a term of the contract requiring the payment of one penny to leave the wharf. The HCA considered that, having traveled on many occasions on the comp’s ferries and paid his fare, R must have known of the terms upon which the ferry company conducted its business. BNFC was lawfully entitled to impose the condition of payment on all who used the turnstiles and Robertson did not have the right to force his way through the turnstile onto private property.

|Henry Kendall and Sons v William Lillico and Sons Ltd [1969] |

|Rule 2: For a term to be incorporated by a course of dealings, that course of dealings must have been regular and uniform (in order to show that a party knew |

|of or ought to have known of the terms of the current contract). |

[SHEET] Did the sold notes form part of the contract? Yes, they did because in continuing to conduct their business with Grimsdale on the basis of the sold notes which contained the relevant condition & by not objecting to that condition, SAPPA must be taken to have assented to the terms in the contract – Lord Guest

|Rinaldi & Patroni v Precision Mouldings (1986) |

|Rule 3: The document relied upon in previous transactions must reasonably be considered a contractual document, rather than having the appearance of a mere |

|receipt or docket. |

[CB405] It was only the fact that cart notes were not contractual in nature which prevented the courts from deciding similarly to Henry Kendell. Otherwise, the Pl ought to have known of the terms contained on the reverse side of the cart note because of the course of previous dealings.

Requirement for regularity & uniformity

|D J Hill and Co Pty Ltd v Walter H Wright [1971] VR 749 |

|For a term to be incorporation by a course of dealings, that course of dealings must have been regular and uniform. The document relied upon in previous |

|transactions must also reasonably be considered a contractual document, rather than having the appearance of a mere receipt or docket. |

Facts: the defendant agreed by telephone to carry some machinery for the plaintiff. The machinery was damaged in the transit and the plaintiff sued for damages. The defendant sought to rely on a clause excluding liability for loss or damage. The clause was contained in a document that had been presented to employees of the plaintiff for signature on previous occasions when machinery had been delivered.

Held: in the absence of actual knowledge by the plaintiff, the defendant was not entitled to rely on the exclusion clause in the document. The court considered that the document presented on previous occasions could not incorporate terms into the contract between the parties.Because the document was presented after the contact had been performed, it is not a contractual document. The document containing the exemption clause was presented for signature after the contract had been performed. Both parties regarded the white cart note as no more than identification of the act delivery for the customer, and not as a contractual doc. As such, the plaintiff reasonably regarded the document as merely an acknowledgement by it of the delivery of the good and not as a contractual document. So a course of dealings cannot be est.

Note: The ruling in D J Hill and Co v Walter has been criticized. It can be argued that when there is a course of dealings using the document in question, the time at which a document is received in any individual transaction should not be determinative of its contractual status. Frequent use of a document which might otherwise reasonable considered contractual should be able to overcome any timing problems.

(e) Standard Form Contracts [CB370]

A standard form contract is a document prepared by one party (usually the supplier of goods and services) and routinely used by that party in transactions of a similar kind. They are used in situations such in contracts for loans, mobile phones etc. The significant feature of standard form contracts is that they are concluded without negotiations; the standard terms of the supplier being presented on a ‘take it or leave it’ basis.

Consumers and Standard Form Contracts

The use of standard form contracts (SFC’s) by the supplier may benefit the consumer by reducing the cost of the transaction. The concern with SFCs is often said to arise from the inequality of bargaining power between the parties.

Classical contract theory emphasizes the role of consenting contracting. Yet, largely because of the disparities between the parties, in many transactions involving standard form contracts, in might be asked whether there is any meaningful consent by consumers to the terms in the contract. Many consumers have little choice but to agree to the terms offered in standard form contract because they need to purchase the goods or services. Should consumers in such circumstances be bound by terms that are harsh or onerous? E.g. should consumers lose all their rights they would otherwise have to company about defective or faulty goods?

One response to such concerns is that the market will provide protection for consumers of goods and services against harsh or unfair terms – consumers can vote on the feet by refusing the transact with suppliers who use SFCs with overly harsh or onerous terms.

However this might not always work, as parties simply may not have the time to read and attempt to negotiate the terms of the SFC presented before them. Even if the consumer reads the terms of the contract presented to them, they might not be able to adequately to comprehend the allocation of risks presented to those terms.

Consumer Protection

The Trade Practices Act 1974 has several provisions that deal with SFCs. It implies certain conditions as to fitness and quality into consumer contracts for the sale of goods or services and prevents these provisions from being excluded by the supplier. The courts have held that it is more difficult for a supplier to incorporate delivered or displayed terms into a contract where they are not contained in what might reasonably be considered a contractual document. The courts have also gone some way towards requiring certain onerous clauses to be clearly pointed out to parties entering into standard form contacts.

(f) Oral statements made during negotiations [CB377]

If the party can establish that the statement made during negotiations was intended to be a binding promise – in the context referred to as a warranty or a promissory statement, then subject to the Parol Evidence Rule, there will be a remedy for breach of contract should that statement prove not to be correct.

If, on the other hand, the statement was not made as a promise, the statement will not be part of the contract. Rather, the statement will be a mere representation and, should that statement prove false, a contractual remedy will not be available. In some cases however, equitable remedies under the law relating the misrepresentation, misleading and deceptive conduct or estoppel may be sought.

What factors must be considered when determining whether a statement was made as a promise (& thus part of the contract) or was a mere representation?

▪ Language used: A statement is more likely to be promissory where the party making the statement uses words that suggest a promise rather than a representation or an expression of opinion. Words such as ‘promise’, ‘agree’, ‘guarantee’ or ‘warrant’ suggest promissory intentions and are contractually binding. On the other hand, words such as ‘I’d estimate’ or ‘here’s proof’ suggest a mere representation (JJ Savage & Sons)

▪ Relative expertise of the parties: A statement made by a party with expertise to a person who is inexperienced is more likely to be promissory, than statements between parties with equal expertise. The converse also holds true (Oscar Chess Ltd v Williams)

▪ The importance of the statement: A statement which the circumstances show was highly significant or important to the transaction is more likely to be regarded as a promise than a statement of lesser significance (Van der Esschert v Chappell)

▪ The timing of the statement: If made a long time before agreement, less likely to be held promissory (Couchman v Hill and Ellul v Ellul)

▪ The form of the written contract: whether statement is followed up almost immediately by a contract that didn’t include it

|JJ Savage v Blackney [1970] |

|Rule: The statement must be a promise, rather than mere representation. |

|Test: NOT whether it influenced the party’s actions, but whether a reasonable person would consider the statement promissory. |

[CB378] Facts: During negotiations prior to S (def/appell) agreeing to construct a motor cruiser for B (plaintiff/respondent), S ‘estimated speed of 15 mph’ but boat was not capable of moving faster than 12 mph. B sued S for breach of warranty, alleging that the estimated boat speed was a condition or warranty of the contract, or that it was a collateral warranty to the contract.

Issue: Was the statement a promise by the appell that the boat would in fact attain the stated speed, the entry into the contract to purchase the boat providing the consideration to make the promise effective?

Held: Appeal allowed: the statement was a mere representation bc the words used indicated ‘an expression of opinion only’ ie An innocent representation which was not designed to induce a party to enter a contract cannot become a term of the contract or form a collateral contract.

Entering into the main contract is the consideration for the collateral contract. A collateral contract or warranty arises when a promise is given in exchange for entering a contract. It cannot contain term/s which contradict the main contract. Innocent representation does not amount to a collateral contract. Remedy for breach of collateral contract: only damages. No specific performance because cannot separate. NB: Collateral contracts not often found by courts because other actions available.

|Oscar Chess Ltd v Williams [1957] |

|The question of whether a warranty was intended depends on the conduct (words & behaviour) of the parties [objective], rather than their thoughts. |

|If an intelligent/reasonable bystander would reasonably infer that a warranty was intended, that will suffice. |

[CB379] Facts: W (def/appell) sold his car to OC (pl/resp) in part exchange for a new car. The registration book, which presumably was fraudulently altered, showed that it was a 1948 model, but later OC discovered that it was a 1939 model and sued B for breach of warranty. Issue: Was W’s statement an innocent misrep or a binding promise?

Held: appeal allowed: A statement made by a party with expertise to a person who is inexperienced is more likely to be promissory than a statement made by a party known to be inexperienced or statements made between two highly experienced parties… it should have been obvious to the car dealer that Williams had no personal knowledge of the year the car was made and was relying on the date in the registration book.

Williams’ statement did not amount to a promissory statement, but was an innocent misrepresentation. Applying the test above, the seller had no personal knowledge of the yr in which the car was made, and subsequently did not intend to bind himself as to warrant that it was a 1948 model. W did not make any express guarantees.

Here, the technical distinction between a condition & warranty is quite immaterial b/c it is far too late for the buyer to rescind the contract or reject the car. He can at best only claim damages.

Whole of the circumstances: Primarily, whether pre-contractual statements form part of a contract or are mere representation depends on a consideration of the whole of the circumstances, not one particular test.

|Dick Bentley Productions v Harold Smith (Motors) Ltd [1965] |

|If a representation is made in the course of dealings for a contract for the very purpose of inducing the other party to act on it, and it actually induced |

|him to act on it by entering into the contract, that is prima facie ground for inferring that the representation was intended as a warranty. [( Correct |

|decision, but on principle, Lord Denning erred in his dicta by saying that the maker of the representation can rebut the inference if he can show that it |

|really was an innocent misrep.] |

|But the maker of the representation can rebut this inference if he can show that it really was an innocent misrepresentation, in that he was in fact innocent |

|of fault in making it, and that it would not be reasonable in the circumstances for him to be bound by it. |

[CB382] Bentley purchased a second hand Bentley car from Smith. When purchasing, Smith assured that the car had only done 20,000 miles. This statement turned out to be untrue. Bentley sought damages for breach of warranty.

Lord Denning MR: “Here we have a dealer, Mr Smith, who was in a position to know or at least to find out, the history of the car… When the history of this car was examined, his statement turned out to be quite wrong. He ought to have known better. There was no reasonable foundation for it.”

Importance of the statement

|Van den Esschert v Chappell [1960] WAR 114 |

|A statement which the circumstances show was highly significant or important to the transaction is more likely to be regarded as a promise than a statement of|

|lesser significance. |

Facts: the purchaser of a house, before signing the written contract of sale, asked the vendor whether or not the house had any white ants. The vendor assured the purchaser that there were none. The full court of the Supreme Court of Western Australia held that the statement was a term of the contract.

Held: I would think that on the purchase of a house in this country, an inquiry regarding the presence of white ants was most important: when the prospective purchaser immediately before signing a contract makes a specific request to be informed about that matter and gets an affirmative answer such as the purchaser got in this case it was intended to be made a part and parcel of the contract and was to be regarded as a term.

|Couchman v Hill |

|[Obj]: Whether a reasonable person would interpret the person’s act as willingness to be committed to the contents of the unsigned doc. |

[SHEET] A cow which was advertised as being “unserved” at an auction. It wasn’t.

Held: A reas person would have concluded that the offer was made on the basis that the cow was ‘unserved’.

Affirmation:

|Ellul & Ellul v Oakes |

|Person’s intention must be judged objectively or according to what a reasonable person would conclude from his words & conduct, rather than in accordance with|

|his subjective intentions. |

[SHEET] The purchaser of a house read a booklet which stated that the particular house was “sewered.” On the basis of the statement in the booklet, the purchaser bought the house.

Held: The test for all these cases in the ‘reasonable bystander’ test which is an objective test…a reasonable person on the side of the parties would conclude that the statement in the booklet was promissory. Representation was a warranty of the contract. If statement is promissory in nature, it’s immaterial whether it was wrong & made innocently.

2) IMPLIED TERMS [CB453]

An implied term is a term of a contract which is imputed to the contract even though the parties have not expressly agreed to that particular term. Consistent with their status as ‘gap fillers’, terms will not be implied under the common law where they are expressly excluded by the parties or are inconsistent with the express terms of the contract.

Some statutes such as the Sale of Goods Act and consumer protection legislation such as the Trade Practices Act 1974 imply various conditions and warranties in contracts for the sale of goods, including undertakings by the seller that the goods will correspond with their descriptions, will be of merchantable quality and will be fit for their purpose.

•

Why would it be necessary to imply a term?

• Contracts fail to deal with every contingency

• Parties will not be able to foresee everything

• Expenses involved in trying to foresee every contingency

• A term can be implied into a contract (to give certain parties certain responsibilities) when its necessary to make the contract work in the way that both parties would certainly have intended for it to work unless one was acting totally unreasonably

When would the courts be prepared to imply a term?

• When agreement would be otherwise ineffective

• When some terms are implied by law in common contracts

• For business efficacy (implied in fact or ad hoc)

• Implied by custom

• Statute

• Note: limitations that parol evidence rule places on implying terms

(a) Terms implied in Law [CB453]

Terms implied in law are terms implied as a legal incident of all contracts of a particular class. Terms implied in law are not based on the intentions of the parties. Their use has been explained as resulting from policy.

Requirements for implying terms in law for the first time

1. First, the term must be applicable to a definable class of contractual relationship.

2. Secondly, the term must be suitable for it to be recognized as implied in all contracts of that class.

|Byrne; Frew v Australian Airlines Ltd (1995) |

|A term that may be implied by law “may be excluded by express provision made by the parties and also as a result of inconsistency with terms of the contract” |

| |

|It must be necessary to imply the term because otherwise “the enjoyment of the rights conferred by the contract would or could be rendered nugatory, |

|worthless, or, perhaps, be seriously undermined”. |

[CB454] Facts: Employees were dismissed for pilfering. They sought relief claiming that their dismissal was in breach of c11(a) of the Transit Workers Award 1988 which provided that termination of employment should not be harsh, unjust or unreasonable.

Held: There is much force in the suggestion that many terms that would now be classified as implied by law in particular classes of contracts had their origins as terms implied in fact o n the basis of the resumed intentions of the parties ‘but thereafter became so much a part of the common understanding as to be import into all transactions of the particular description’.

Liverpool City Council v Irwin [1977] AC 239

Facts: Concerned the obligations of a landlord of a 15 story apartment block with respect to common areas of the stairs and lifts. Under statute, the landlord, a public authority, was responsible for providing housing for members of the public, selected because of their need at a subsidized rent. The express contract listed out the obligations owed by the tenant; however, none were owed by the landlord.

Issue: Should the obligations of the landlord be implied by law, into the contract?

Held: The landlord was under an implied obligation to take reasonable care of the common areas. This is implied by law in the class of contract in question, namely tenancies in high-rise apartment blocks.

‘Stairs and the lifts are not just facilities, or conveniences provided at discretion – they are essentials of the tenancy without which life in the dwellings, as a tenant, in not possible. To leave the landlord free of obligation as regards these matters, and subject only to administrative or political pressure, is, in my opinion, inconsistent totally with the nature of this relationship. The subject matter of the lease and the relationship created by the tenancy demand, of their nature, some contractual obligation on the landlord.”

(b) Terms implied in Fact [CB459]

Terms implied in fact are traditionally said to be based on the ‘presumed’ intentions of the parties concerned and accordingly are unique to the contract in question.

(i) If a contract is wholly in writing (formal contracts)

|BP Refinery v Hastings Shire Council (1977) |

|Test: For a term to be implied, the following conditions (which may overlap) must be satisfied: |

|It must be reasonable and equitable; |

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

|It must be so obvious that it ‘goes without saying’ [also noted in Codelfa]; |

|It must be capable of clear expression; |

|It must be consistent with the rest of the contract and not contradict any express terms of the contract. |

[CB459] Argument: The parties’ expectations or intentions as to performance of the contract should be the focus of inquiry not whether the proposed implied term is obvious or clear in some abstract sense.

1. Reasonable and equitable: A term that, although beneficial to one party, imposes a significant detriment or burden to the other party, is unlikely to be reasonable and equitable.

2. Business Efficacy: A term implied in fact must be necessary to give business efficacy to the contract. The question might be thought of as being whether or not reasonable persons would consider that the proposed term was necessary to enable the contract to operate in a businesslike manner.

3. Obviousness: Made with reference to the dictum of Mackinnon LJ in Shirlaw v Southern Foundaries: Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common ‘Oh, of course!’.

4. Clarity: Term must be capable of being expressed in a clear or precise manner.

5. Consistency: The BP test precludes the implication of a term in fact which is not consistent with the express terms.

|Byrne; Frew v Australian Airlines Ltd |

|In order to prove the term goes without saying, P must prove that the contracting parties would assent to it. |

State of affairs essential to performance

A contract may be frustrated by the disappearance of a state of affairs necessary to enable the contract to be performed in the manner contemplated by the parties.

|Codelfa Construction Pty Ltd v SRA NSW (1982) |

|“The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or |

|susceptible of more than one meaning.” |

|Not for language which has a plain meaning. |

|Includes prior negotiations so long as it shows their presumed, not actual, intentions. |

|Extrinsic evidence allowed for above reason - ambiguity |

[CB511] Facts: SRA entered into a contract with CC for the construction of certain parts of a railway with the common understanding that in order to complete the work within the time specified in the contract, CC would work 3 shifts per day. CC & SRA had received & acted upon erroneous legal advice that the contract work could not be impeded by the grant of an injunction to restrain a nuisance. However, despite the Act, CC was restrained by injunctions fr local residents from working at night & on Sundays. CC incurred extra costs as a result of the delay.

Issue: Was there an implied term within the contract providing for the constructions would go ahead free from any injunctions?

Held: Courts are more cautious about implying terms into formal contracts because there is an expectation that the written contracts should have all the necessary terms in them. Courts should not make contracts for parties.

The test for implying terms in Australian contracts is the 5 criteria test established in BP Refinery.

“This is NOT a case in which an obvious provision was overlooked by the parties and omitted from the contract. Rather it was a case in which the parties made a common assumption which masked the need to explore what provisions should be made to cover the event which occurred.”

The term wanting to be implied was not necessary to give rise to business efficacy of the contract. The contract was capable of operating without that term. Thus it failed on the 2nd & 3rd criteria in the BP Refinery test.

(ii) If a contract is not wholly in writing (no formal contract)

Where there is no formal contract, the court may not place such strict requirements as those in the BP v Hastings case, as the parties have not fully spelt out the full terms of the contract as they have given less thought to each minute detail.

Where the contract is informal, the court must first identify the actual terms of the contract. This is done by inference on the basis of the kind of relationship in question. The court may then consider the possibility of implied terms. In implying terms, the High Court has suggested that a flexible approach is required. The HCA has approved the following statement of principle of Deane J in Hawkins v Clayton:

“In a case where it is apparent that the parties have not attempted to spell out the full terms of their contract, the court should imply a term by reference to the imputed intentions of the parties, if but only if, it can be seen that the implication of the particular term is necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case.”

Cases suggest that reasonableness, business efficacy and obviousness are all important elements in implying a term in an informal contract.

Also the term must not contradict any express terms: Byrne v Aust Airlines Ltd

(c) Terms implied by Custom [CB460]

In some cases, a term may be implied on the basis of custom or usage in a particular market or context. The basis for implication is what where a custom is ‘well known and acquiesced in’ then ‘everyone making a contract in that situation can reasonably be presumed to have imported that terms into the contract’.

|Con-Stan Industries v Norwich (1986) |

|Rule: A term may be implied on the basis of custom where the custom is ‘well known and acquiesced in’ so that ‘everyone making a contract in that situation |

|can reasonably be presumed to have imported that term into the contract.’ |

| |

|The circumstances in which trade, custom or usage may form the basis for the implication of terms into a contract: |

|The existence of a custom is a question of fact: Nelson v Dahl (1879) |

|There must be evidence that custom relied on is so well known and acquiesced that the parties can be reasonably presumed to have imported that term into the |

|contract. However, not necessary that custom be universally accepted. |

|Term will not be implied where it is contrary to the express terms of the agreement. |

|A person may be bound by custom notwithstanding the fact that he had no knowledge of it. [OBJ test] |

[CB460] Facts: Con-Stan had insurance with Norwich through an insurance broker, to who it paid the premium as they fell due. However, the broker failed to pay these to Norwich & was wound up. Norwich sued Con-Stan for the premiums. CS claimed:

1. there was an implied term in the contract of insurance, arising by virtue of custom or usage in the industry, that an insurer that an insurer was entitled to look only to the broker for payment of the premium; or alternatively that

2. Payment of the premium to a broker discharged the assured’s obligation.

Held: For a term to be implied by custom, the term must be notorious, uniform, reasonable and certain. It is not sufficient to show that in the ordinary course of events the premium was paid to the insurer by the broker or that the insurer’s first demand for payment was addressed to the broker. It is necessary to establish a clear course of conduct under which insurers did not look to the insured for the payment of the premium…evidence supports the inference that at least since 1973, it is not an uncommon view of those involved in the industry that insurers were entitled to look past the broker for payment of the premium.

3) INTERPRETATION [CB433]

(a) Parol Evidence Rule [CB433]

[CB433] Corbin on Contracts (1950): The common law regards contracts which the parties have reduced to writing as being in a special category, and severely limits the kind of evidence outside the written document (extrinsic evidence) which it will admit to determine what the terms are and what they mean. The Parol Evidence Rule consists of 2 parts:

1) Prevents extrinsic evidence being given to add to, vary or contradict the terms of the contract as they appear on the document – the ambit of the contract. Extrinsic evidence includes oral conversations, letters or early drafts of the contract.

2) Limits the evidence which might be given to explain the meaning of those terms

That is, the meaning of the terms of the contract will be ascertained from the words the parties have used. Evidence of the meaning actually, subjectively intended by the parties, will generally not be admitted.

Classic explanation given by Denman CJ in Goss v Lord Nugent: ‘If there be a contract which has been reduced into writing, verbal evidence is not allowed to be given of what passed between the parties, either before the written document was made, or during the time that it was in a state of preparation, so as to add to or subtract from, or in any manner to vary or qualify the written contract.’

(i) What does the Parol Evidence Rule apply to?

The rule only applies to a contract wholly in writing

Parties relying on a written contract many often attempt to ensure that the contract is seen as wholly in writing, thus attracting the operation of the parol evidence rule, by including in their contract a merger or entire contract clause. Such clauses generally are taken as conclusive evidence that the writing represents the entire agreement between the parties.

In the absence of an express statement of intention by the parties, a court will have to determine whether a contract is wholly or partly written. In determining this, the court must consider all relevant evidence before it. Accordingly, extrinsic evidence will be admitted to establish whether the document in question was intended to be an exclusive record of the contract or whether the parties intend the written document to be supplemented.

This second approach has attracted support in recent Australian cases such as State Rail Authority of NSW v Heath Outdoor Pty Ltd and Thorne v Borthwick but the matter has not been conclusively determined by the HCA. This approach has the attraction of allowing courts to focus on the particular circumstances of each case. It is therefore more likely to accurately reflect the intentions of the parties regarding the status of a written document recording a contract.

|State Rail Authority v Heath Outdoors Pty Ltd (1986) |

|The parol evidence rule applies to contracts wholly in writing that are fully intended by the parties to be the complete source of contractual rights. |

| |

|In the absence of an express statement that the written doc contains the complete agreement between the parties, the PER has no application until it is |

|determined that the parties intended the written doc to contain all the terms of the contract. Hence, extrinsic evidence will be admitted to establish that |

|the doc in question was not intended to be an exclusive record of the contract. |

[CB434] Facts: HO (pl) entered into a no. of contracts with the SRA relating to the placing of advertising material. Clause 6 of the 1981 contract provided: ‘The authority may terminate this contract at any time upon giving the advertiser 1 calendar month’s notice in wiring of its intention to do so, but such action shall not give rise to any claim for compensation whatsoever on the part of the advertiser.’ In March 1983 the NSW govt announced a decision to phase out cigarette advertising on govt property, thereby giving rise to a dispute between the parties which resulted in the SRA terminating the agreement in 1983.

Issues: Did written document in fact contain whole agreement? Does the Parol Evidence Rule prevent reliance on the oral assurances of Giles? No evidence that contract was partly written and partly oral.

• Couchman not applied here because plaintiff did not insist on terms of contract being changed.

• “There mere production of a contractual document, however complete it may look, cannot as a matter of law, exclude evidence of oral terms if the other party asserts that such terms were agreed. If that assertion is proved, evidence of the oral terms cannot be excluded”.

• Less formal contracts are presumed to be not wholly contained in writing – must look at circumstances of case

• It is possible to conclude that the assurances amounted to a collateral contract, since the terms of the assurances contradicted the terms of c6: Hoyts Pty Ltd v Spencer (1919). The main contract can be the consideration for a collateral contract only when the terms of the collateral contract do not reduce or alter the rights created by the main contract.

If contract is totally in writing it may be reasonably presumed that the document contained all the terms of the contract. However, evidence may be admitted which may rebut the presumption that the written contract included all the terms, so no parole evidence rule can apply. Parol Evidence Rule does not apply if the writing is no more than an evidentiary foundation and there is evidence of binding oral terms. Parties may expressly clarify their intention for a contract to be wholly in writing through a merger or entire contract clause which states that the written contract contains the entire agreement of the parties.

|Brambles Holdings v Bathurst City Council |

|Give words their ordinary English meaning. |

|The intentions of the parties are considered objectively. |

|The meaning of the term(s) will be that understood by a reasonable person in the position of the parties. |

|Thorne v Borthwick (1956) SR(NSW) 81 |

|You must look at all the evidence to see if the contract is wholly written. If so, the Parol Evidence Rule applies. If not, the extrinsic evidence may be used|

|to add/alter the terms of the contract. |

Held: Given the particular circumstances, the contract is wholly written and as such no extrinsic evidence can be used to change, alter and add to the terms of the contract.

Construction

|Investors Compensation Scheme Ltd v West Bromwich Building Society |

|In construing the terms of a contract, a court will aim to give effect to the parties’ intentions interpreted objectively using the ‘natural’ or ‘ordinary’ |

|meaning of the words used. Courts will also try and avoid a construction that is unreasonable on the assumption that parties would not normally make such an |

|agreement. |

(ii) Exceptions to the Parol Evidence Role – Collateral contracts [CB437]

The parol evidence rule will not apply to exclude evidence of a collateral contract. A collateral contract is a contract made when one party makes a promise, connected to but independent of a main contract, and as consideration for that promise, the other party agrees to enter into the main contract.

The requirements for a statement to be a collateral contract:

1. It must be made as a promise: JJ Savage & Sons Pty Ltd v Blakney

2. It must be intended to induce entry into the contract: JJ Savage & Sons Pty Ltd v Blakney

3. It must also be consistent with the terms of the main contract: Hoyts Pty Ltd v Spencer

The burden of a party seeking to prove a collateral contract is eased where the alleged contract deals with a subject matter that one would not naturally expect to find in the main contract.

Lord Moulton, Heilbut Symons & Co v Buckleton [1913]: “there may be a contract the consideration for which is the making of some other contract. ‘If you will make such and such a contract I will give you £100’, is in every sense of the word a complete legal contract. It is collateral to the main contract, but each has an independent existence, and they do not differ in respect of their possessing to the full the character & status of a contract’.

Shepperd v Municipality of Ryde (1952)

o Plaintiff purchased house in reliance of a pamphlet that there would be parks. The pamphlet was a collateral contract

o This promise was not fulfilled despite not being placed in the contract, the homebuyer could claim damages

o For it to be a collateral contract, the statement must be made as a promise and must be intended to induce entry into the contract

|Hoyt’s Pty Ltd v Spencer |

|The rule that a collateral contract must be consistent with the main contract means that the collateral contract many have a relatively narrow operation as a |

|means of avoiding the parol evidence rule and giving contractual force to an oral representation varying a contract in writing. |

[CB438] Facts: A written lease provided that the lessor might at any time terminate the lease ‘by giving the lessee at least four weeks’ notice in writing of his intention to do so’. The lessor later gave notice to terminate the lease. The lessee alleged that in consideration of his taking the lease, the lessor agreed not to give such notice except in certain circumstances.

Held: This alleged collateral contract was not binding on the lessor because it was inconsistent with the main contract.

The requirement of consistency means that, while a collateral contract many add to the main contract, it must not alter the provisions of the main contract. The two contracts must be able to stand together…the rationale for this rule is that the collateral contract must be ‘supplementary’ only to the main contract.

(iii) Extrinsic evidence in construing a contract

As already noted, the second aspect of the parol evidence rule prevents extrinsic evidence from being given to explain the meaning of the terms of a written contract.

The circumstances surrounding the contract – i.e. the commercial purpose of the transaction and the context in which the parties are operating- may potentially be relevant in construing the words of the contract to discern the objectives which the parties had in view.

In Codelfa Construction Pty Ltd v State Rail Authority of NSW, Mason J Stated:

“The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning”.

Numerous House of Lords cases have suggested a broader approach in allowing extrinsic evidence to construe the meaning of contracts. For example Lord Hoffman said in ICS Ltd v West Bromwich BS:

“Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”

|Royal Botanic Gardens & Domain Trust v South Sydney City Council (2002) |

|The Parol Evidence Rule doesn’t apply to a term that is ambiguous. |

[CB447] Facts: The Trust (appell/def) leased part of the Domain to the Council (pl/resp) for its parking station & moving footway under a deed entered into in 1976. Lease ran for 50 years from 1958, and provided for the yearly rent to be determined by the trust at the commencement of every 3 years at not less than $2000. Cl 4(b)(iv) provided ‘in making any such determination the Trustees may have regard to additional costs and expenses which they may incur in regard to the surface of the Domain above or in the vicinity of the parking station and the footway and which arise out of the construction operation and maintenance of the parking station by the Lessee’.

Issue: What is the correct interpretation of the clause- is it ambiguous, and can the Trust have regard to matters other than those stipulated in the clause? Gleeson CJ, Gaudron, McHugh, Gummow & Hayne JJ (joint judgment) held that the lease was ambiguous bc it did not make clear whether the specified considerations were the only considerations which could be taken into account ( so extrinsic evidence was allowed. It is appropriate to have regard to more than internal linguistic considerations and to consider the circumstances with reference to which the words in question were used and, from those circumstances, to discern the objective which the parties had in view.

Look at surrounding circumstances

o Look at purpose of the transaction: The provision of a public facility w/o providing for the obtaining by one public authority of profit at the expense of another protected the lessor from financial disadvantage. The surrounding circumstances reinforced the non-commercial character of the transaction.

o Only additional costs to be included

Held: The HCA first stated that the Australian courts perceive any inconsistency between English decisions and the statements of principle in Codelfa, the courts “should continue to follow Codelfa until the High Court made a determination on the issue… i.e. In Australia, ambiguity is necessary before looking at the evidence of the surrounding circumstances when construing a contract.

The majority considered that the lease was ambiguous because it did not make clear whether the specified considerations were the only considerations which could be taken into account…the existence of a viable alternative argument as to what the clause might mean was sufficient to constitute ambiguity.

Given the clause was ambiguous, the majority judges referred to the circumstances of the transaction… they were both public enterprises providing amenities to the public. The aim of the clause was to ensure that costs incurred by the Botanic Gardens & Domain Trust in maintaining the Domain in light of the activities of the car park could by reimbursed the Sydney City Council. They were not intending to profit from one another and as such rental should only be increased in regards to maintenance costs. As such the Trust was not permitted to take into consideration the value of the property in determining its rental pricing.

|State Rail Authority v Heath Outdoors Pty Ltd (1996) |

|If a person does not have the power to vary the terms of a standard contract, then anything promised by him in negotiations is not admissible. |

|Codelfa Constructions v State Rail Authority of NSW |

|Evidence of surrounding circumstances is only admissible to resolve ambiguity in the meaning of the words of a contract where the words in question have no |

|clear meaning or are susceptible to more than one meaning. – Mason J |

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

|Such surrounding circumstances may be taken to be the commercial purpose of the transaction and the background, the context, the market in which the parties |

|are operating. |

[CB511] Issues: a) Can a term relating to the granting of the injunction be implied into the contract? No.

b) In deciding this, can the Court take into account the common beliefs of the parties? The fact that the parties had the working conditions in common contemplation is not enough in itself to justify the implication of a term. The term does not ‘go without saying’.

c) Was it legitimate for the NSWCA to look at the circumstances surrounding the making of the contract, including evidence of discussion? Actual intentions of parties cannot constitute the basis of an implied term

d) Did the granting of the injunction frustrate the contract? Yes: ‘ … the discussions did not have the character of negotiations in the course of which the parties gradually evolved the terms of a bargain ultimately embodies in written form. Had the discussions been of that kind … recourse to them would have been prohibited for the purpose of interpreting the contract by reference to the parties’ actual intentions as expressed before entry into the contract’

Contract may well have been frustrated.

Narrow approach taken: Words of the contract are to be given their plain & ordinary meaning

Look @ obj framework of facts & the parties’ presumed intention

NB// The same process is applied whether court is implying a term or construing a contract.

NB// because of the number of exceptions to the parol evidence rule, it can often be circumvented.

|Brambles Holdings v Bathurst City Council |

|Mutually known facts establishing the commercial purpose of the contract are admissible. |

(b) Exclusion Clauses [CB420]

Exclusion clauses aim to reduce or exclude a party’s liability for conduct that would otherwise be in breach of contract or constitute a tort, such as negligence.

Until the 1980s, the use of exclusion clauses, particularly in standard form contracts have been met by a degree of suspicion by English Courts due to their ability to exploit the party with the weaker bargaining power. Legislation has been passed to address, to some extent, concerns about the misuse of exclusion clauses in consumer contracts. This has reduced the need for judicial intervention under common law principles to restrict the effect of such clauses.

|Greig & Davis, The Law of Contract (1987) |

|Exclusion clauses are terms of a contract that attempt either: |

|To modify the principal obligation(s) arising under a contract of that particular type; or |

|To limit or exclude the liability of a party which would otherwise arise as a result of a breach by that party of his primary obligations to perform the |

|contract in accordance with its terms. |

[CB421] An indemnity clause is similar to an exemption clause, in that it seeks to exclude the liability of one party by imposing on the other a duty to indemnify the former in respect of any loss occurred.

It must be shown that the clause was incorporated into the contract, and asked whether, as a matter of construction, the clause applies to exclude or restrict liability in relation to the issue in dispute.

Exclusion clauses are governed by statute (ss68, 68A Trade Practices Act 1974 (Cth)) which applies in contracts for the supply of goods and services involving consumers. No exclusion clause can restrict the contents of ss 68, 68A of the TPA. If it does, the clause will have no effect. S68 renders void terms which purport to exclude, restrict or modify terms implied and certain rights conferred under that legislation or that work to that effect. S68A allows the use of clauses to limit liability provided it is ‘fair and reasonable’.

(i) The common law approach to exclusion clauses [CB421]

In some cases there may be an issue as to whether a ‘third party’ can claim the benefit of an exemption clause in a contract made by 2 other parties: ‘The New York Star’ (1978). Where not regulated by legislation, two questions need to be asked in determining whether an exclusion clause applied to reduce or exclude a party’s liability under a contract:

1. Before a party can rely on the protection of an exclusion clause it must be shown that the clause was incorporated into the contract.

2. If it is, then it must be asked whether, as a matter of construction, the clause applies to exclude or restrict liability in relation to the issue in dispute

An overly broad exclusion clause may even be found to empty a contract of all content: Barwick CJ, MacRobertson Miller Airline Services v Commission of State Taxation (WA) (1975)

Construing an exclusion clause

|Darlington Futures Ltd v Delco Aust Pty Ltd (1986) |

|HC: Exclusion clauses are to be construed according to their “natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due |

|weight to the context in which the clause appears, including the nature & object of the contract and, where appropriate, construing the clause contra |

|proferentem (against the interest of the party seeking to rely on the clause) in case of ambiguity”. The ordinary rules of contract interpretation apply. |

[CB421] Facts: DF entered a written contract with DA under which DA instructed DF to engage on its behalf in a form of commodity futures trading. DA sued damages from the losses it sustained on contracts as a result of DF’s breach of duty in trading in futures contracts w/o DA’s authority. DF relied on the exclusion clause.

Held: In determining the meaning of exclusion clauses, its plain and ordinary meaning should be adopted. The clause should be read in its context and with any necessary implications based upon their presumed intention.

The clause did not protect the broker because the words of the clause plainly referred to activity undertaken by the broker with the client’s authority. It could not be supposed that the parties intended to exclude the broker from liability for lessees from trading activity that the broker had not authority to undertake.

(ii) Deviation [CB425]

|Thomas National Transport Pty Ltd v May & Baker Pty Ltd (1966) |

|A carrier is unlikely to be able to rely on an exclusion clause to exclude liability for loss occurring during a deviation from the contractually agreed |

|voyage or route which may be expressly stipulated or stipulated by implication as the customary or usual route. |

| |

|An exclusion clause is unlikely to have been intended to apply to acts that are unauthorised or outside the ‘four corners’ of the contract. |

[CB425] Facts: TNT’s (defendant/appellant) subcontractor collected goods from May & Baker (plaintiff), but arriving too late to TNT’s depot to store the goods or take instructions, the driver took the goods home with him. An unexplained fire destroyed the goods. The defendant sought to rely on an exclusion clause in the contract that exempted liability for loss or damage or misdelivery of goods in transit or storage.

Held: The exclusion clause had no application in this particular case…the subcontractor carried out the defendant’s obligations in an authorised way, on the ground that it was implicit in the contract that the goods would be taken to the depot overnight.

The four corners rule

Courts have shown some unwillingness to construe an exclusion clause as excluding liability for acts that are not authorised by the contract. The four corners rule suggests that an exclusion clause is unlikely to have been intended to apply to acts that are unauthorized or outside the ‘four corners” of the contract.

(iii) Negligence [CB429]

|Davis v Pearce Parking Station Pty Ltd |

|The most effective way for the carrier to exempt himself from liability for negligence is to specifically refer to negligence as an excluded head of liability|

|“in express, plain & unambiguous terms”. |

[CB429] Facts: Due to PPS’s negligence, D’s car was stolen from PPS’s carpark. PPS sought to rely on a term printed on the parking check stating that the car was parked ‘at the owner’s risk’ & that they were not responsible for loss or damage of any description.

Held: ‘clear words are necessary to exclude liability for negligence’…the most effective way for a party to exclude liability for negligence is specifically to refer to negligence as an excluded head of liability. Nonetheless a clause expressed in general but strong language, such as excluding liability for losses “howsoever caused” or stating that “under no circumstances” will the party in question be liable may be sufficient.

A combination of factors may influence a court in deciding whether an exclusion clause applies to exclude liability for negligence.

‘The defendant was taking a very small charge for accepting custody of goods which are or may be of great value. He is likely to intend, to protect himself against a possibly very heavy liability arising from the negligence of a servant... the cause may reasonably be taken to mean that if the plaintiff wishes to be protected against loss or damage, he must insure.’

4) THE IMPLIED DUTY OF GOOD FAITH [CB463]

(a) Why recognise a duty of good faith? [CB463]

The duty of good faith performance is a gap-filling term which supplements to express terms of a contract to preclude certain types of unco-operative, opportunistic, unconscionable or unfair conduct to ensure an acceptable level of co-operation and fairness in contract performance. The good faith obligation does not force parties to negotiate in a certain way, only how those obligations should be carried out. Although it has not been confirmed by the High Court, an implied duty of good faith has been recognised by courts (eg many Lower Courts & NSW Court of Appeal).

Measuring good faith

There is no clear statement from the courts or commentators as to how a duty of good faith should be measured. There are generally two broad categories of approach to measuring the requirements of a duty of good faith performance.

• Under the reasonable expectations approach, the duty of good faith requires the parties to conform to their own expectations at the time of contracting as to the manner in which their contract will be performed. The reasonable expectations approach is predominately contractual in its orientation and the courts will be unlikely to intervene in a contract to restrict the exercise of clearly expressed contractual powers such as a clear and unqualified right to terminate a contract.

• Under the community standards approach the measure of good faith is based on standards deemed appropriate by a ‘judging community’ external to the parties. This approach is more likely to restrict the express contractual rights of one party to a contract ensuring that the interests of the other party are protected.

(b) What would be required in an implied duty of good faith? [CB486]

• The duty to co-operate (Renard Constructions (ME) v Minister for Public Works; Service Station v Berg Bennet; Hughes Aircraft Systems International v Airservices Australia)

• Reasonableness in exercising rights conferred by a contract (Renard Constructions (ME) Pty Ltd v Minister for Public Works). This seems to suggest that, under a duty of good faith or reasonableness, a party exercising a contractual discretion must act in an unbiased way and perhaps also make an attempt to verify the information on which a decision is to be based.

• The preclusion of a party exercising a contractual power ‘capriciously’ or for an ‘extraneous purpose’ (Burger King Corporation v Hungry Jack’s Pty Limited). NB: Not covered in readings.

• It will not operate to restrict decisions/actions, reasonably taken, which are designed to promote the legitimate interests of a party (South Sydney District Rugby League Football Club Ltd v News Ltd).

• More than likely would exclude instances of bad faith rather than include positive statements, like these above, of what constitutes good faith (Renard): Priestley’s approval of Summer’s ‘excluder definition’: good faith as not bad faith. This reflects the desire of the courts to exclude certain behaviour rather than formulate a positive standard.

If the duty of good faith is an implied term, then the category of implied term to which good faith belongs needs to be identified. A duty of good faith has also been treated as a term to be implied in fact. Satisfying the criteria for implying a term in fact may often prove difficult, at least in relation to that aspect of a duty of good faith which qualifies the exercise of a contractual power.

Good faith has also been treated as a term implied in law. In Burger King Corporation v Hungry Jacks Pty Ltd the NSW court of Appeal stated that ‘there also appear to be increasing acceptance…that if terms of good faith and reasonableness are to be implied, they are to be implied as a matter of law”

[CB464] Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992)

Facts: Renard Constructions (contractor) and the Minister for public works (principal) entered into a contract for the construction of pumping stations. Sub-clause 44.1 of the contract stated that “if the contractor fails to give notice to show cause to the satisfaction of the principal why the powers hereinafter contained should not be exercised the principal…may take over the whole of the work, or cancel the contract.”

The principal’ assistant project manager was concerned by what he considered the delay and poor workmanship of the contractor and asked the contractor to show cause under 44.1 The contractor wrote that he was ‘willing and able to complete the contract’ and that it had 20 employees 10 hours a day, up to 7 days a week.

The principal’s assistant project manager then recommended cancellation of the contract. The minister then followed the recommendation.

Priestley JA: it seems obvious to me, that an objective and reasonable outsider to this contract upon reading subcl 44.1 would assume without serious question that the principal would have to give reasonable consideration to the question whether the contractor had failed to show cause and then, if the principal and reasonably concluded that the contract had failed, that reasonable consideration must be given to whether any power and if any which power should be exercised.

The contract can only be effective as a workable business document if the sub-clause is read subject to the requirements of reasonableness. i.e. if the principal, acting reasonable, is in fact not satisfied, then the principal has the power to decide whether one or more of the powers should be exercised.

My conclusion is that the case contains an implied ad hoc term of reasonableness in the performance of sub-clause 44.1.

The kind of reasonableness I have been discussing seems to me to have much in common with the notions of good faith which are regarded in many of the civil law systems of Europe and it all States in the United States as necessarily implied in many kinds of contract. Although this implication has not yet been accepted to the same extent in Australia, as part of judge-made Australian contract law, there are many indications that the time may be fast approaching when the idea, long recognized as implicit in many of the orthodox techniques of solving contractual disputes will gain explicit recognition in the same way as it has in Europe and in the US.

[Referring to the US cases] the New York Court of Appeals said in 1918 ‘every contract implies good faith and fair dealing between the parties to it’… ‘good faith is a principle applicable to all contracts and dealings’.

[Referring to the Uniform Commercial Code] There are a great many references to good faith throughout and I here mention only those particularly relevant for present purposes. Section 1-203 said “every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement’.

Good faith is best understood as an ‘excluder’; that is, it ‘has no general meaning or meanings of its own, but serves to exclude many heterogeneous forms of bad faith’.

In NSW, there has been an ever-growing number of statutes permitting Courts to remold particular kinds of contracts in the interests of fairness. The result is that people generally, including judges and other lawyers, have grown used to the courts applying standards of fairness to contract which are wholly consistent with the existence in all contracts of a duty upon the parties of good faith and fair dealing in its performances. In my view this is in these days the expected standard, and anything less is contrary to prevailing community expectations.

[CB479] Service Station Association v Berg Bennett (1993)

Held: There is no authority which supports the proposition that every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.

You can generally achieve the results you want using the existing law…whether we want an over-arching concept of implied good faith is another matter.

Party must be reasonable & honest in exercising an express power which will significantly affect the interests of the other party. However, this should not be taken to be an implied term but used in constructing the express terms of the contract.

Using ‘community standards’ to determine what is acting in good faith may simply be public policy by another name.

• “A term to the effect of s205 (good faith) is said to be implied as a matter of law, subject to the qualification that the parties are free to determine by express agreement what ‘good faith’ will permit or require of them”

• “Duty of good faith is not imposed upon parties before they have reached agreement and whilst they are in negotiations.”

• Contract should be construed according to express terms, and there is no need for the implication of a further term

Priestley JA’s decision in Renard has received support from several cases including Hughes Aircraft International v Air services Australia [CB483] in which Finn J suggests that we should be moving towards Priestley JA’s notion of the need to imply a term of good faith.

Agreements to negotiate

|Aiton Australia v Transfield [1999] |

|Requirement to act in good faith sufficiently certain and is legally recognised. |

|Einstein J attempts a positive (but non-exhaustive) definition of the duty to negotiate/mediate in good faith: |

|Must actually undertake process of negotiation/mediation. |

|Have an open mind, ie. be willing to consider: |

|a. solutions proposed by other party |

|b. putting forward own solutions |

|But these obligations do not mean that the party must act: |

|in the interests of the other party |

|act against self interest |

|However Standard of good faith needs to be determined on the facts on a case-by-case basis. |

[CB181] The plaintiff entered into three construction contacts with the defendant, each containing a dispute resolution clause – clause 28. The dispute resolution clause provided that the parties make diligent and good faith efforts to re solve all disputes in accordance with the provisions set out in the clause before commencing mediation, arbitration or legal action.

Sub-clause 28.2 provided that if the dispute is not resolved pursuant to the processes established in 28, a mediator will be employed, during which period both parties will again use all reasonable endeavors in good faith to resolve any disputes. No provision was given for the apportionment of the mediator costs.

If mediation fails, an expert resolution process will be employed. The costs of the mediator were to be borne by the party nominated by the mediator.

The plaintiff, as a result of deceptive conduct by the defendant, attempted to invoke the provisions under section 28. These attempts were frustrated by the defendant. As such the plaintiff initiated proceedings in the Supreme Court. The defendant sought a stay of those proceedings on the basis that the dispute resolution procedures stipulated by clause 28 had not been carried out.

Held: ‘If parties have entered into an agreement to conciliate or mediate their dispute, the court may, in principle, make orders achieving the enforcement of that agreement as a pre-condition to commencement of proceedings in relation to the dispute. A party may postpone the other party’s right to commence legal proceedings; however it can’t oust the jurisdiction of Court altogether.’

‘However in order to be enforced, the process of ADR must be sufficiently clear. In the particular case there is no provision dealing with the remuneration to be paid to a mediator. You can’t imply a term regarding the remuneration either as it fails the BP refinery criteria for implied terms…as such the mediation clause is unenforceable. Because the mediation clause is not severable from the negotiation clause, the entire dispute resolution clause is unenforceable’.

‘The decisions in Renard Constructions and Hughes Bros mean that in NSW a duty of good faith, both in performing obligations and exercising rights, may by implication be imposed upon parties as part of a contract…it appears to be commonsense that as an obligation to act in ‘good faith’ may, in principle, by legally recognized as an implied or imputed obligation, there is no reason why it should be struck down as uncertain in cases where there is an express contractual term.’

‘It is commonplace that good faith can be read as having both a subjective sense (requiring honesty and fairness in mind) and an objective sense (requiring compliance with standards of fair dealing’.

‘Authorities and academic writing demonstrate that while the content of any good faith requirement depends on context (statutory or otherwise) and the particular factual circumstances, it is possible to delineate an essential framework for the notion of ‘good faith’ such that the requirement of ‘good faith’ in cl 28 is sufficiently certain for legal recognition.’

“In conclusion, the mediation agreement is unenforceable by reason of its failure to spell out the mediator’s costs. If this be incorrect, the finding that cl 28, including the obligations to negotiate and to mediate in good faith, it sufficiently certain to be enforceable. As a result, the application for an order staying the proceedings is unsuccessful.”

5) RIGHT TO TERMINATE [CB545]

(a) Termination by agreement [CB547]

• The parties’ original contract may include an express term providing for its termination.

• OR, the parties may make a subsequent agreement expressly terminating their original contract.

• OR, it’s possible that courts may find an implied agreement by the parties to terminate their contract, in either an existing contract or a subsequent contract.

(i) Termination under the Original contract [TB339;CB547]

(1) Express powers to terminate

Particularly in long-term commercial contracts, parties will usually include an express term providing when or how their contract many be brought to an end. Often the parties will also specify a procedure to be followed before the contract can be terminated, for example, requiring notice of the decision to terminate.

Where the contract is silent as to its duration, courts may be prepared to imply a right for one or both of the parties to terminate that contract.

▪ Parties might agree that one or both of them reserve the right to terminate.

▪ Broad discretionary right to terminate at any time.

▪ Termination at will.

▪ Right to terminate after a specified period of notice.

▪ Right to terminate triggered by certain events such as breach of contract by the other party or the non-fulfillment of a contingent condition.

▪ Express term may specify a procedure to be followed before the contract is terminated.

▪ May require a party to give notice of termination in a particular form.

▪ However, strict interpretation may result in the terminating party to lose the right due to some minor or technical failure to comply precisely with the termination procedure.

|Decision in Pan Foods v ANZ Banking Group (2000) suggests that requirements of commercial contracts should not be construed in an overly technical or |

|restrictive manner. |

|Kirby J – Contracts should be construed practically, so as to give effect to their presumed commercial purposes and so as not to defeat the achievement of |

|such purposes by an excessively narrow and artificially restricted construction. |

|On this approach, it would not be fatal that a party did not comply with a strict construction of a specified procedure for termination, provided the apparent|

|defect did not prejudice the other party in any substantial way. |

Facts: A bank provided finance to Pan Foods in the form of a no. of loans. Express terms provided that if certain specified events occurred, the bank could terminate its obligations under the agreement and declare any moneys owing immediately due & payable. Notice of termination by the bank had to be given by an ‘authorised representative’ of the bank in writing. Following the default by Pan Foods, the bank instructed its solicitors to prepare the notice. An officer of the bank handed the notice to PF, but PF argued that the notice was from the solicitors, not the bank itself. HC struck down the argument, saying that it did not specify the notice to be signed by the bank.

(2) Implied right to terminate contract of indefinite duration

If a contract is silent as to its duration, courts may imply a right for one or both of the parties to terminate the contract on the inference that the parties would not have intended the contract to continue indefinitely.

|Crawford Fitting Co v Sydney Valve |

|Courts will usually require the party terminating to give reasonable notice of termination, so as to allow “a reasonable opportunity to enter into alternative|

|arrangements and to wind up matters which arise out of the relationship” |

Facts: In 1969 Crawford, the appellants appointed Value, the distributor, as exclusive distributor of its products in NSW. The distributor agreed not to deal any other products. In 1984 the appellants gave the distributor six months’ notice of termination by agreement. It was held that the ‘reasonable period of notice should have been two years”. The appellants appealed.

Held: When the question arises whether c commercial agreement for an indefinite period may be terminated, the answer depends upon whether the agreement contains an implied term to that effect. The existence of the term is a matter of construction. But the question of construction does not depend only upon a textual examination of the words or writings of the parties. It also involved consideration of the subject matter of the agreement, the circumstances in which it was made, and the provisions to which the parties have or have not agreed.

When a contract is terminable on reasonable notice, the period of notice must be sufficiently long to enable the recipients to deploy his labour and equipment in alternative employment, to carry out his commitments, to bring current negotiations to fruition and to wind up the association in a businesslike manner.

It will often be a common purpose of a distributorship agreement that the relationship of the parties will continue for long enough after the giving of a notice of termination to enable the distributor to recoup any extraordinary expenditure or effort.

The implication of a term that a distributorship or agency should continue for a reasonable period gives effect to the reasonable expectations of the parties. The distributor often experiences extraordinary expenses in activities such as the establishment or development of the business, in purchasing stock and plant and employing workers. He has no hope of recouping his initial expenditure or effort if the manufacture can terminate the agreement at will or by a period of notice sufficient only to enable the distributor to deploy his labour and equipment elsewhere…as such extraordinary expense should be taken into account in determining the reasonableness of any notice.

The chief purpose of a notice for a reasonable period therefore, is to enable the parties to bring to an end in an orderly way a relationship which has existed for a reasonable period so that they will have a reasonable opportunity to enter into alterative arrangements and to wind up matters which arise out of their relationship. Matters to be wound up will include carrying out existing commitments, bringing current negotiations to fruition, and where appropriate, obtaining the fruits of any extraordinary expenses carried out within the scope of the agreement.

(ii) Termination by subsequent agreement [TB341]

Parties may terminate a contract by making a new subsequent contract under which each agrees to release the other from the original contract where the consideration will be the release of the other party from their remaining obligations. In the absence of a deed, consideration is generally required to discharge contractual obligations in this manner. The need for consideration required that a distinction be drawn between contracts that remain at least partly unperformed on each side (executory contracts) and contracts that have been fully performed by one party.

Where one party (performing party) has fully performed the original contract and the other party (non-performing party) has not, the performing party will be able to give good consideration by agreement to release the non-performing party from their obligations. However because the performing party has no further obligations under the contract, the non-performing party can’t provide a release.

In these circumstances, the non-performing party may provide ‘fresh’ consideration. In this situation, the parties may make a contract known as an accord and satisfaction. In Russian Gazette & Trade Outlook Ltd v Associated Newspapers Ltd, the court explained:

“An accord and satisfaction is the purchase of a release from an obligation whether arising under contract or torts by means of any valuable consideration, not being the actual performance of the obligation itself. The accord is the agreement by which the obligation is discharged. The satisfaction is the consideration which makes the agreement operative.”

Where both parties still have existing contractual obligations, each party must provide consideration in agreeing to release each other from their remaining obligations.

It is uncertain whether the consideration for an accord and satisfaction is a promise or an act and it has been suggested that where the issue is uncertain, courts are inclined to interpret it was requiring performance of the promised act rather than merely the promise (Greig and Davis, The Law of Contract).

Formal requirements

• An original contract required to be in writing may be terminated by a subsequent oral contract. Suttor v Gundowda Pty Ltd (1950)

• Writing is not required for an agreement to terminate an existing contract. However, it will be required where the subsequent contract seeks to vary rather than terminate the original contract (Tallerman & Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd)

(iii) Termination inferred from a subsequent contract [TB343]

• In the absence of an express term explaining the subsequent agreement, whether the agreement varies or terminates the original contract will depend on the intentions of the parties as disclosed by the terms & conditions of the subsequent agreement: Tallerman & Co v Nathan’s Merchandise (1957)

• The distinction between the 2 possibilities is a ‘matter of degree’. FCT v Sara Lee Household & Body Care (Aust) Pty Ltd

• Intention to terminate: British & Benningtons Ltd v North Western Cahchar Ter Co Ltd

• A subsequent contract will be taken to vary the original contract rather than terminate it where the subsequent agreement cannot stand alone as a new & independent contract. Tailerman & Co Pty Ltd v Nathan’s Merchandise (1957)

• More generally, an intention to terminate the original contract is unlikely to be inferred where the parties cannot be presumed to have intended to abandon their rights under the original contract. Concut Pty Ltd v Worrell

• Where a subsequent contract does not change the obligations under the original contract, but rather substitutes new parties, the subsequent contract is treated as a new contract [novation] discharging the original one. Vickery v Woods; TC Industrial Plant Pty Ltd v Robert’s QLD Pty Ltd

• An intention to terminate the contract will be inferred where, because the obligations in the subsequent agreement are inconsistent with those in the original contract, the two cannot be supposed to have intended to co-exist. British & Benningtons Ltd v North Western Cachar Tea Co Ltd

▪ 2 possible interpretations of the parties’ subsequent agreement:

▪ a) The parties may have intended the subsequent agreement to replace, and thus terminate, the original

▪ b) They may have intended the subsequent agreement merely to vary the original contract

▪ There must evidently be an objective intention by both parties to terminate the contract (as disclosed by the terms & circumstances of the subsequent agreement), rather than merely vary it.

▪ The courts will not lightly infer termination unless it is clear.

(iv) Termination by abandonment [TB344]

Termination is treated by courts as a mutual abandonment of contract (DTR Nominees v Mona Homes)

A contract may be inferred to have been mutually abandoned where:

▪ An ‘inordinate’ length of time has been allowed to elapse ‘during which neither party has attempted to perform, or called on the other to perform’: Fitzgerald v Masters; or

▪ Both parties no longer consider the contract to be in force DTR Nominees Pty Ltd v Mona Homes Pty Ltd

|DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) |

|If both parties express a wish to discontinue the contract, but neither have the right to terminate and after a delay, it is evident that both parties no |

|longer consider the contract to be in force, then the courts will hold that the parties have mutually agreed to abandon the contract. |

Here, the parties adopted different interpretations of the contract and both purported to terminate the contract for the other’s repudiation. HC held that neither of the notices of termination was effective and that the contract was at that time still in existence. However, by the time of proceedings, neither party considered the contract as still being afoot. The parties should be regarded as having abandoned their contract.

|Where one party has partly performed a contract, courts may be less likely to conclude from a later period of inactivity that the contract has been abandoned |

|on the assumption that it is unlikely that the partly performing party will walk away from work done or money paid: Fitzgerald v Masters (1978) |

(b) Termination by failure of a contingent condition [TB346]

A contingent condition is a promise that makes the performance of the contract conditional on the occurrence of a specified event that neither party promises to ensure will occur. A contingent condition may qualify the performance (obligation to perform is suspended but parties bound to contract) or formation (parties not bound until fulfillment of condition) of all the obligations under a contract or a particular obligation only.

If the required event does not occur, then one or both parties are entitled to terminate the contract but there will be no breach of the contract as neither party has promised to ensure that the condition occurs ( no right to damages

Conditions and promissory conditions

The word ‘condition’ is also sometimes used to refer to a contractual promise which is essential in the sense that a breach of the promise by one party will entitle the other party to terminate the contract and claim damages. If one party, on the specified date, fails to perform the promissory condition, the other party may terminate the contract and will have a right to damages for the breach of the condition. Whether a condition is promissory or contingent depends on the construction of the contract in the circumstances of the case McTier v Haput

Contingent conditions to performance & formation

Although the presence of a contingent condition does not oblige the parties to perform the contract until it is fulfilled, it will not prevent a contract from coming into existence. Even before the condition is fulfilled, parties will be bound to the contract and may not do anything inconsistent with the relevant contractual obligations. The HC has preferred to treat contingent conditions as a qualifying performance not formation although the final result depends on construction (Perri v Coolangatta Investments Proprietary Limited). When a contingent condition qualifies the formation of a contract, the parties are not bound by the contract unless the condition is fulfilled.

Contingent conditions precedent or subsequent to performance

A contingent condition precedent to performance is one that must be fulfilled before the parties are bound to perform their contract. A condition subsequent is one where the parties’ obligation to perform is immediately binding but will come to an end should the event specified in the condition occur.

Whether the satisfaction of a contingent condition is judged by an objective or subjective test depends on the wording of the condition. Whether or when a duty of reasonableness should apply to a condition of satisfaction (rather than simply honesty) has not been resolved in Australia. In Meehan v Jones, the majority thought that only honest was required. However, Renard Constructions (ME) Pty Ltd v Minister for Public Works, is more supportive of a test of reasonableness. It must be noted that Meehan was a High Court judgment while Renard, despite being more recent, was a Supreme Court judgment.

(c) A duty to co-operate? [TB348]

• Where a condition is contingent, the contract may still expressly require one or both of the parties to use a certain level of effort in attempting to ensure that the condition is fulfilled, for eg, by requiring a party to use his or her ‘best endeavours’ or ‘best efforts’ (Hawkins v Pender Bros (1990); Butts v O’Dwyer).

• In the absence of an express obligation of this kind, the parties may still be under an implied duty to co-operate. This requires the parties to do everything reasonably within their power to see that the condition is fulfilled (Perri v Coolangatta Investments Proprietary Limited)

• If a contingent condition is not fulfilled due to a breach of the implied duty to cooperate, the party in breach will not be entitled to rely on the failure of the condition as a reason for terminating the contract (Perri v Coolangatta Investments Proprietary Limited).

• Where a party breaches the duty to cooperate in fulfilling a contingent condition, damages will usually be available to the other party although they may be discounted to take account of the fact that, even if the party in breach had cooperated, the condition might not have been fulfilled (Commonwealth v Amann Aviation Pty Ltd).

• If condition depends on judgment of one party (party has to ‘approve’ or be ‘satisfied’), the party making the judgment must at least act honestly in deciding whether or not condition has been fulfilled (Meehan v Jones)

(d) Non-fulfillment for a condition qualifying formulation [TB350]

A contingent condition will not be fulfilled where:

1. The events occur that are contrary to what was contemplated in the condition

2. The condition is not fulfilled within the period of time required by the contract.

❑ If no time is specified, courts will construe the contract as requiring the condition to be fulfilled within a reasonable period of time (Perri v Coolangatta Investments Pty Ltd). The amount of time reasonable will be determined by the circumstances of the case.

❑ Where a date if fixed for completion of the contract but not for the condition precedent, the date by which the condition must be fulfilled will usually be the date of completion (Aberfoyle Plantations Ltd v Cheng; Australian Mutual Provident Society v Landsa Ltd).

This means neither party is bound ( no contract forms.

Whether the fulfillment of a contingent condition is judged by an objective or a subjective test depends on the language of the condition. In some cases, the condition will clearly refer to an objective fact, eg. A contract subject to the purchaser obtaining an import license.

In other cases, contingent condition may depend upon a discretionary judgment on the part of one or other of the parties, for example, one party many have to be ‘satisfied’ with or ‘approve’ a particular matter. In these cases, fulfillment of the condition will have a subjective element; the party making the judgment must at least act honestly in deciding whether or not the condition has been fulfilled. There is also a question as to whether the party making the judgment must act reasonably. This question was discussed in Meehan v Jones in which the majority suggested that the parties merely had an obligation to act honestly and not necessarily reasonably as well.

(i) Non-fulfillment for a condition qualifying performance [TB350]

This makes the contract able to be terminated, but contract is rarely automatically terminated.

(ii) The consequences of non-fulfillment of a contingent condition [TB352]

• If a contingent condition which relates only to a particular obligation is not fulfilled, then generally the parties will be excused from performance of that obligation, though the contract will remain on foot.

• If a contingent condition relating to performance of the whole of a contract is not fulfilled, the contract will generally be voidable (Perri v Coolangatta Investments Pty Ltd (1982)). This means that the contract will still continue unless a party elects to terminate the contract

• If neither party elects to do so, the contract will continue on foot

• If the contract is terminated, neither of the parties will be liable in damages merely for the fact that the condition has not been fulfilled.

• If the event upon which the condition depends may be brought about by the default of one of the parties – in failing to take reasonable steps to co-operate in fulfilling the condition – courts will generally interpret the contract as being voidable at the option of the party not at fault, rather than being void.

• In some cases the contract may provide that, upon non-fulfillment of a contingent condition, the contract will be ‘deemed to’ or will ‘automatically’ come to an end. In such cases, where the parties’ intentions are clear, the court will interpret the contract as void upon failure of a contingent condition.

• Void or voidable? Courts are more likely to accept that the parties intended to provide for automatic termination in a case where the condition concerns an event over which neither party has control eg weather

Who can elect to terminate?

|Suttor v Gundowda Pty Ltd |

|If one party had by his/her default caused the condition not to be fulfilled, then only the other party might terminate the contract. If the event happened |

|w/o default on either side, then either party might terminate the contract. |

|Where a contingent condition fails to be fulfilled, notice is not required before the contract can be terminated. |

Facts: A contract for the sale of property provided that in the event of the consent of the Treasurer not being obtained within a specified time, the contract should be ‘deemed to be cancelled’. The event upon which the condition depended, not obtaining the Treasurer’s consent, could be brought about by either of the parties failing to take necessary steps needed to obtain that consent.

Held: a contingent condition may fail as a result of the fault of one, both or neither of the parties. The HCA considered that the condition was to be construed as making the contract voidable. If one party had by his or her default, caused the condition not to be fulfilled, then only the other party might terminate the contract…if the event happened without default on either side, then either part might terminate the contract. Despite the failure of the contingent condition, both parties did nothing, and reasonable time had passed. As such the contract is seen to still be on foot.

When are the Courts likely to hold automatic termination?

|NZ Shipping Co Ltd v Société des Ateliers et Chantiers de France |

|Courts will be more likely to hold automatic termination if contract expressly states this will be the result of failure, or if condition concerns an even |

|over which neither party has control. |

(e) Waiver of a contingent condition [TB353]

• Where a/both party waives compliance with a contingent condition, that action prevents either of the parties from refusing to perform the contract or terminating the contract on grounds of non-fulfillment of the condition

• If the contingent condition is for the benefit of a particular party, then that party alone will have a right to waive compliance with a contingent condition. In such a case, that party will then not be allowed to rely on the contingent condition at a later time. However, the other party may still be entitled to rely on the non-fulfillment of the condition as a reason for terminating the contract in the absence of the waiver.

• Where the contract benefits both parties, it can't be waived by the innocent party, as shown in Gough Bay Holdings Pty Ltd v Tyrwhitt-Drake [1976] where both vendor & purchaser had the benefit

Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537

Held: In the case, the condition was for the benefit of the purchaser because it protected the purchaser from being committed…the HCA held that a condition making a contract for the sale of land subject to the sale of the purchaser’s property was for the benefit of the purchaser along and so was capable of being waived by the purchaser.

A condition making a contract for the sale of land subject to the sale of the purchaser’s property was capable of being waived by the purchaser. However, provided the condition had not been waived by the purchaser, the vendor was entitled to terminate the contract for non-fulfillment of the condition.

(f) Restrictions on the right to terminate for non-fulfillment of a contingent condition[TB354]

A party many lose its right to elect to terminate a contract for non-fulfillment of a contingent condition in certain circumstances. Other than a waiver, the doctrine of estoppel and relief against forfeiture may also prevent a party from terminating a contract for non-fulfillment.

(g) Termination for breach [TB356; CB577]

Briefly, a breach occurs when a party fails to perform at the time or to the standard required by the contract. The aggrieved party has a right to damages to compensate for loss caused by any breach of the contract. Where an aggrieved party seeks to terminate a contract, the other party may argue that the right to terminate has been lost by some conduct on the part of the aggrieved party.

When is there a right to terminate? If the term is a:

|Condition |Intermediate/innominate term |Warranty |

|Aggrieved party will be entitled to |Aggrieved party’s right to terminate depends on gravity & |Aggrieved will not be entitled to terminate |

|terminate for any breach of that term by |consequences of the breach. If the breach is likely to have serious |merely by reason of a breach of the term of |

|the other party regardless of the gravity|consequences for further performance of the contract then the |the other party. Damages to compensate any |

|or consequences of that breach. |aggrieved will be entitled to terminate in addition to claiming |loss by the aggrieved party will be |

| |damages for losses caused by breach. |available. |

There is overlap in Australia between the intermediate term and a fundamental breach which looks to the consequences of the breach. There is some authority that a fundamental breach, going to the ‘root of the contract’, will also entitle an aggrieved party to terminate a contract.

(i) Termination for breach of a condition [TB359]

Test of essentiality:

|Tramways Advertising Pty Ltd v Luna Park (1938) |

|“The question whether a term in a contract is a condition or a warranty, that is, an essential or inessential promise, depends upon the intention of the |

|parties as appearing in or from the contract. The test of essentiality is whether it appears from the general nature of the contract, or from some particular |

|term or terms, that the promise is of such importance to the promise that he would not have entered into the contract unless he had been assured of a strict |

|or substantial performance of the promise, and this ought to have been apparent to the promisor.” |

| |

|Consider the language in which the obligation is described: The words ‘we guarantee’ were words of strong obligation which emphasized the importance of the |

|term to the parties. |

| |

|The party who is able to terminate the contract loses his right to terminate if: |

|He proceeds to do some act, referable in the contract, which could only be properly done by him by virtue of the contract |

|Defaulting party carries on with performance with the express or tacit permission of innocent party |

[CB578] Facts: Tramways agreed to exhibit advertisements for Luna Pak on boards on Sydney trams. The contract provided that ‘we [Tramways] guarantee that these boards will be on the tracts at least eight hours per day throughout your season’. After some time, Luna Park complained that Tramways had not complied with this undertaking; each board had not been displayed for at least eight hours on each and every day.

Held: The HCA considered that, as a matter of construction, the contract required the boards to be on view for at least substantially eight hours each day… It also held that the undertaking was a condition…thus any breach of the undertaking accordingly entitled Luna Park to terminate the contract.

Other relevant factors in assessing whether term is a condition:

Courts may be more inclined to treat the term as a condition if:

• It has been classified as a condition in a previous judicial decision

• There is need for certainty: Parties’ likely need for certainty of knowing their rights is particularly important in mercantile contracts (commercial contracts for the sale of goods), and thus a term is more likely to be classified as a condition in mercantile than non-commercial contracts: Bowes v Chaleyer

• It is described in clear and precise language is more likely to be a condition than general/vague terms. Tramways Advertising Pty Ltd v Luna Park Ltd E.g. “we guarantee” are words of strong obligation showing importance of term to contracting party

• If every breach of a term is likely to have serious consequences for an aggrieved party – depriving the aggrieved party of ‘substantially the whole of the benefit’ which it was intended he or she should obtain from the contract, then the term is likely to be classified as a condition. Conversely, a term which may be breached in a variety of ways, from trivial to significant, is more likely to be an intermediate term than a condition – Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd.

• If damages would not adequately compensate the aggrieved party for the breach of a particular term or would be difficult to prove

(ii) Termination for breach of an intermediate term [TB363]

|Hongkong Fir Shipping v Kawasaki Kisen [1962] |

|For it to give rise to a right to terminate, the breach must be serious or deprive the aggrieved party of ‘substantially the whole benefit which it was |

|intended that s/he should obtain from the contract’. |

[CB587] A contract between the parties required the ship to be seaworthy. The breach in question had resulted in the ship being unavailable for some seven months out of a totally hire period of 24 months.

Held: Where a term is intermediate, the right to terminate depends on the nature of the breach and its foreseeable consequences. Courts have used different descriptions to refer to the type of breach that will entitle an aggrieved party to terminate. Courts have referred to a breach which is ‘grave’, ‘serious’, ‘fundamental’, which goes to the ‘root’ of the contract or which gives rise to events frustrating the ‘commercial purpose’ of the contract.

The breach “must deprive the innocent party of substantially the whole benefit which it was intended that he should obtain from the contract”.

The seaworthiness term was not a condition that entitled the carter to terminate merely in the event of breach. Nor was the term a mere warranty for which there was no right to terminate for breach…the term was an intermediate term.

Although there was some delay caused by the need for repairs, the ship was still made available for about 17 months under the charter party, and as such the events were not such as to justify termination.

This decision was affirmed in Ankar Pty Ltd v National Westminster Finance (Aust) (1987) – thus est that it was also part of Aust law.

Loss of bargain damages and termination under a term

|Shevill v Builders Licensing Board (1982) |

|Parties can confer a right to terminate for breach of a particular term. However, this does not make the term a condition, and so right to bargain damages |

|depends on common law assessment of whether term is condition, intermediate or warranty |

[CB773] ‘A contract may be repudiated if one party renounces his liabilities under it – if he evinces an intention no longer to be bound by the contract… or shows that he intends to fulfil the contract only in a manner substantially inconsistent with his obligations and not in any other way’ – Gibbs CJ

• Contract must spell out precisely the consequences of breaching what has been specified as a condition. Here the contract expressly states it is a condition that there is a right to terminate (cl9a) (re-enter the premises), despite not being of such importance as to be deemed a condition otherwise

• It would be unjust for a landlord to exercise her right to re-enter the premises and then claim damages for breaching an ‘essential term’ as stipulated in the contract.

• Policy consideration: unfair for landlord to have lost rent and the benefit of leasing out the premises again.

|Progressive Mailing House Pty Ltd v Tabali Pty Ltd: If there is a clause stating when termination can arise, it cannot be exclusive as the general rights of |

|contract law always sit alongside it |

(iii) Breach of a warranty

Generally, the classification of a term as a condition, warranty or intermediate term is a matter of construction depending on the presumed intentions of the parties as derived from the terms of the contract and the circumstances.

This category will rarely be applied, except where prescribed by statute, in particular under the Sale of Goods Acts. (Courts prefer to classify a term as intermediate because it gives courts greater flexibility in dealing with a breach).

|Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd |

|Lord Diplock suggested that, in the absence of a clearly expressed intention to the contrary, a term will only properly be classified as a warranty if it is |

|such that no possible breach could give rise to an event which would deprive the aggrieved party of substantially the whole of the benefit which it was |

|intended s/he should receive from the contract. |

(h) Termination for Repudiation [CB596]

Repudiation describes a refusal or inability, as judged objectively, of one party to carry out its contractual obligations to the extent that the other party (the aggrieved party) is justified in discharging the contract. That is, he renounces his liabilities if he evinces an intention no longer to be bound by the contract or shows that he intends to fulfill the contract only in a manner substantially inconsistent with his obligations: Shevill v Builders Licensing Board (1982)

Anticipatory breach occurs when one party repudiates his or her obligations under the contract prior to the time set for performance of those obligations. ( The other (aggrieved) party is then entitled to terminate the contract and sue for damages for breach of contract, even though the date for performance by the repudiating party has not yet arrived.

▪ Termination for anticipatory breach does not affect the measure of damages available to the aggrieved party except insofar as to bring into immediate operation the duty of the aggrieved party to mitigate their damages

▪ If on the other hand, an aggrieved party can choose not to accept a repudiation occurring before the time set for performance, the contract will continue on foot, but there will be no right to damages unless & until an actual breach occurs. Progressive Mailing House Ltd v Tabali Pty Ltd; Foran v Wright

▪ It does not apply ‘to contract completely executed on one side’ (ie where the aggrieved party has fully performed). An actual breach must have occurred. Mackenzie v Rees; Progressive Mailing House Ltd v Tabali Pty Ltd

The authorities suggest that only a repudiation of a promise or promises of which an actual breach would have found a right to discharge, will give rise to a right for the aggrieved party to terminate the contract. That is, the term repudiated must be an ‘essential term’ or ‘otherwise go to the root of the contract’. Foran v Wright

• If you wrongly terminate a contract for repudiation on the other party’s behalf, the other party can terminate for your repudiation and claim damages.

(i) Conduct amounting to repudiation [CB597]

A party will repudiate a contract where he or she evidences a lack of willingness or ability to perform the contract. Either unwillingness or inability will suffice. Whether the conduct of a party amounts to a repudiation does not depend upon the subjective intention of the party. As Devlin J stated in Universal Cargo Carriers Corp v Citati, a party that says “I would like to but cannot” repudiates the contract equally with the party that simply says “I will not”. No fault is necessary for repudiation.

1. An express statement [CB597]

The most straightforward case of repudiation is where the repudiating party makes an express statement to the effect that he or she is unwilling or unable to perform the contract.

2. Repudiation based on words or conduct [CB598]

❑ A party may repudiate a contract through conduct which puts it out of his or her power to perform the contract or through conduct which indicates that a party will not perform the contract according to its terms.

❑ Repudiation can be inferred from a combination of events (Progressive Mailing House Pty Ltd v Tabali Pty Ltd; Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd)

❑ With instalment contracts, breach of one or more instalments of such a contract may indicate that the party in breach is unwilling or unable to perform the remainder of his or her obligations under the contract and is thus repudiating the contract. Courts must take into account the terms of the contract and the circumstances in deciding whether the breach amounts to repudiation. Two relevant considerations are the quantitative ratio the breach bears to the contract as a whole and the degree of probability or improbability that such breach will be repeated (Maple Flock Co Ltd v Universal Furniture Products (Wembley) Ltd).

3. Repudiation and an erroneous interpretation of the contract

❑ A party who refuses to perform his or her obligations under a contract or will not accept performance from another party except according to an incorrect interpretation of those obligations may have repudiated that contract (Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd). However, if the party asserting the incorrect interpretation honestly believes it and it is possible that if the error was explained would go ahead with the contract in its true interpretation, the contract will not be repudiated (DTR Nominees Pty ltd v Mona Homes Pty Ltd).

❑ A party who attempts to terminate a contract where no such right exists may have repudiated. However, if a party has terminated on an invalid ground but has an unknown valid ground to terminate, the termination will still be valid. (DTR Nominees Pty Ltd v Mona Homes Pty Ltd).

❑ The suggested response for an aggrieved party, where the other party may have repudiated a contract through incorrect interpretation, is to inform and persuade the other party of its error and, if necessary, seek an ‘authoritative exposition of the correct interpretation’. (DTR Nominees Pty Ltd v Mona Homes Pty Ltd)

4. Inability in fact

Factual impossibility leading to repudiation is harder to prove than conduct leading to repudiation and ‘must be proved in fact not supposition’ (Universal Cargo Carriers Corp v Citati). This means the aggrieved party must prove that the repudiating party was ‘wholly and finally’ disabled from performing.

|DTR Nominees Pty Ltd v Mona Homes Pty Ltd |

|TEST: can you infer, from the party’s words & conduct, an unwillingness or inability to perform future contractual obligations? |

|Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd |

|TEST: whether a reasonable person in the position of the parties would conclude that the party did not intend or was unable to perform the contract |

(ii) Conduct showing an inability or unwillingness to perform [CB598]

A party may repudiate a contract through conduct which puts it out of her or his power to perform the contract. Similarly, repudiation may be found in conduct which indicates that a party will not perform the contract according to its terms.

If time is of the essence, and the promise is not performed on the day, the promisee is entitled to rescind the contract, but he may elect not to exercise this right, and an election will be inferred from any conduct which is consistent only with the continued existence of the contract. If time is not of the essence, the promisee is not entitled to rescind for non-performance on the day.

If promisee elects not to exercise right to rescind on day performance is due, whether time is of the essence or not, the promisee can only rescind after he has given a notice requiring performance within a specified reasonable time and after non-compliance with the notice. However, even w/o notice, the promisee may be able to est that the conduct of the promisor with respect to his promise amounts to a refusal to be bound by the contract (repudiation).

Where a party indicates an unwillingness or inability to perform the whole contract, there is no difficulty in finding that there has been a repudiation which the aggrieved party may accept by terminating the contract. However, the circumstances may be such that it cannot be said that a party is repudiating the whole contract. It may be, for example, that a party is unable or unwilling to perform only a particular obligation out of a number of obligations. Does this necessarily constitute repudiation? The authorities suggest that only a repudiation of a promise or promises of which an actual breach would found a right to discharge, will give rise to a right for the aggrieved party to terminate the contract.

Dawson J stated in Foran v Wight anticipatory breach of a term of a contract will give rise to a right to terminate the contract if the term in an essential term or otherwise goes to the root of the contract.

|Carr v JA Berriman Pty Ltd (1953) |

|Repudiation may be found in conduct which indicates that a party will not perform the contract according to its terms e.g. contractor may conclude that a |

|building owner has repudiated the contract where a building owner engages another contractor to carry out a large part of the work of the contract. |

[CB598] Carr, the building owner and Berriman, the builder entered into a contract to the building of a factory on land owned by Carr. Under the contract, the building owner was meant to excavate the premises by 29 May. The contract also provided that steal for the building would be supplied by the builder. The building was not excavated by the date specified. The builder then accepted a tender from a steal producer for the steal. The building owner was aware of this. He then advised the builder that he had already entered into a contract for the supply of steal. On 31 July, the builder purported to cancel the contract and claim damages.

Held: In this particular case, it is not necessary to determine where time was of the essence of the promise to excavate the site. For the company after 29 May did acts which seem consistent only with the continued existence of the contract after that date.

While the initial breach doesn’t itself suffice repudiation, subsequent conduct that shows unwillingness to fulfill your obligations under the contract can amount to repudiation. The failure to do anything at all towards performance of the contractual duty, the failure to make any attempt even to move any of the machinery from the site, the pacing of further machinery on the adjoining land, the absence of any explanation or any assurance that any steps at all would be taken in the immediate future showed that the building owner wasn’t willing to continue with his obligations under the contract. Thus the builder is lawfully allowed to rescind the contract and recover damages.

Tramways Advertising Pty Ltd v Luna Park Ltd

• One essential promise which is implied in every contract is that neither party will without just cause repudiate his obligations under the contract, whether the time for performance has arrived or not.

• This may be express or implied

(iii) Repudiation inferred from combination of events [CB601]

|Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) |

|Repudiation may be found in a combination of events which, on their own, would not entitle the aggrieved party to terminate e.g. non-payment of rent not |

|enough, but together with inflicting physical damage to premises and subletting without consent of lessor amounted to repudiation justifying termination |

[CB601] Tabali leased factory premises to Progressive Mailing for five years. Clause 10.1 of the agreement provided that if rent was unpaid for 14 days the lessor may reenter ‘without prejudice to any claim which he might have against the lessee in respect of any breach of the covenants”. The contract also provided that the lessor would perform certain repair work on the premises. The lessee denied that the work was satisfactorily completed and cased to pay rent. The lessee also committed a number of other breaches of covenant and failed to remedy these pursuant to notices served by the lessor.

Held: Repudiation of a contract is a serious matter and is not to be lightly inferred and that neither a breach of a covenant to pay rent nor a breach of a covenant to repair, without more, constitutes a breach of a fundamental term, not amounts to repudiation of a lease. However, the initial breach, in association with the other breaches all amounted to repudiation.

Under clause 10.1, the lessor had a contractual right to re-enter the premises and seek any unpaid rent. However, the lessor ALSO had a common law right to rescind the contract for repudiation and thus sue not only for past rent, but also any future rent.

|Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) |

|Repudiation may be found in conduct which indicates that a party will not perform the contract according to its terms e.g. contractor may conclude that a |

|building owner has repudiated the contract where a building owner engages another contractor to carry out a large part of the work of the contract |

Facts: The parties entered into an agreement for the lease of a shop. As part of this contract, the lessor undertook to procure the registration of a formal lease or to deliver a registerable lease to the lessee. The lessee authorised the lessor to complete any details required for the registration of the lease and paid the stamp duty & registration fees to the lessor. The lessee then took possession of the premises, and in the following months, was told that the lease would be delivered ‘shortly’ in the ‘not too distant future’. 10 months after the original contract was made, the lessee wrote to the lessor’s solicitor requesting registration within 14 days, to which the solicitors did not respond to until the last day before the expiry of the notice, merely stating that they were seeking instructions. The lease was not registered and the lessee terminated the agreement.

The HC concluded that the lessor’s conduct constituted a repudiation of the contract that entitled the lessee to terminate.

• The time for providing a registered or registerable lease was not ‘of the essence’. This meant that mere delay on the part of the lessor would not have entitled the lessee to terminate the contract. However, HC held that the lessor’s conduct viewed as a whole indicated that the lessor was not prepared to perform the contract.

• The lessor also had not given an adequate response to the lessee’s repeated inquiries about the progress of the matter. As Mason J explained, the lessee’s conduct towards the lessee was ‘not only dilatory but also cavalier & recalcitrant’

(iv) Installment contracts

|Maple Flock Co Ltd v Universal Furniture Products (Wembley) Ltd [1934] |

|Breach of an installment contract will give rise to a right to treat the whole contract as repudiated if the breach is of such a kind or takes place in |

|such circumstances as would reasonably lead to inference that similar breaches will be committed in subsequent deliveries. |

|The tests to be considered are: |

|Quantitative ratio which the breach bears to the contract as a whole |

|The degree of probability or improbability that such a breach will be repeated |

[CB609] The appellant contracted to sell 100 tons of rag flock delivered at 3 tons per week. The appellants warranted that the flock complied with the standard of not more than 30 parks chlorine per 100,000 parts flock. After delivery of 18 tons, it was found that the 16th ton contained 250 parts of chlorine. The respondents accepted two more tons before seeking to rescind the contract.

Held: A contract for the sale of goods by instalments is a single contract, not a complex of as many contracts as there are instalments under it. If the breach is of such a kind, or takes place in such circumstances as reasonably to lead to the inference that similar breaches will be committed in relation to subsequent deliveries, the whole contract may then be regarded as repudiated and may be rescinded

1) Here, the delivery involved only a small ratio of the whole (no more than 1.5 tons out of 100)

2) Here, it was ‘practically negligible’ as the seller’s business was carefully conducted and the breach complained of was an isolated incident affecting one delivery out of 20 made both before and after the defective installment.

The Sales of Goods Act requires a Court to have regard to the terms of the contract and the circumstances of the case in deciding whether or not a breach amounts to a repudiation of an installment contract

(v) Erroneous interpretation of contract [CB610]

In such cases, the conduct of the party asserting the incorrect interpretation may indicate that the party is unwilling to perform the contract according to its terms.

However, there are 2 principles that reduce the likelihood of repudiation in these circumstances.

1. Where an aggrieved party has relied on a ground for terminating that proves invalid, that party will generally be able to justify the termination by reference to any other grounds that were at the time available for termination, even though those grounds were not known to the aggrieved party.

2. Courts have held that the honesty or ‘bona fides’ of a party propounding an incorrect interpretation of a contract will be relevant in assessing whether or not that party has repudiated the contract.

The reason for this approach is that a party who asserts an erroneous interpretation of a contract believing it to be correct may not be rejecting the contract. In a sense, the party is attempting to rely on the terms of the contract; it is just that his or her interpretation of those terms is incorrect.

|DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) |

|An erroneous interpretation of the contractual terms does not itself amount to repudiation. However, some slight effort must be made to persuade party with|

|incorrect view of the contract interpretation. |

|To be able to rescind for anticipatory breach, party must at time of rescission be willing to perform contract on its proper interpretation. |

|If party continues to rely on incorrect interpretation, this may show unwillingness to perform contract according to its correct terms (repudiation). |

[CB610] Facts: A contract for the sale of land was to be subdivided by the vendor, who interpreted it erroneously. The purchasers purported to terminate the contract on the ground that the vendor had shown an unwillingness to perform the contract according to its terms, and so had repudiated the contract. The vendor asserted that the purchasers’ termination was wrongful, and itself constituted a repudiation of the contract.

Held: The relevant question is whether the events which we have recounted evidence an intention on the part of the vendor to repudiate or renounce the contract or more precisely whether such an intention is to be inferred from those events.

In this case, the vendor acted on its view of the contract without realizing that the purchasers were insisting upon a different view until such time as they purported to rescind. There is no justification for drawing an inference that the vendor intended not to perform the contract according to its terms or that it repudiated the contract. That being so, the purchasers were not entitled to rescind for ‘anticipatory breach’.

Thus the contract was still on foot. However, it is clear that since proceedings commenced, neither party intended that the contract should be further performed. In these circumstances the parties must be regarded as having so conducted themselves as to abandon or abrogate the contract.

Limits to the relevance of a mistaken party’s honesty

In Vaswani v Italian Motors Ltd, the Privy Council indicated that a party who asserts an incorrect interpretation, albeit honestly, will be found to have repudiated that contract where that party has also engaged in conduct detrimental to the aggrieved party or inconsistent with the contract remaining on foot.

(vi) Inability in fact

|Universal Cargo Carriers Corp v Citati [1957] |

|Repudiation may be established if the aggrieved party shows, as a matter of fact, the repudiating party was ‘wholly and finally’ disabled from performing. |

|When time is not of the essence, a delay becomes unreasonable when it would frustrate the contract. |

|Anticipatory breach means that a party is in breach from the moment that his actual breach becomes inevitable. |

Facts: As part of a ship chartering agreement, the defendant was supposed to load the ship in 3 days. Time was not of the essence, and when the ship wasn’t loaded, the plaintiff sought to terminate the contract on the basis of repudiation.

Issues : (1) Where times is not of the essence of the contract, how long must the delay last before the aggrieved party entitled to throw up the contract?

(2) Whether any of the breaches was of a condition of the charter party as distinct from a warranty

Held:- The aggrieved party is relieved from his obligation when the delay becomes so long as to go to the roots of the contract and amount to a repudiation of it. (An objective reasonable test)

- If a man proclaimed by words or conduct an inability to perform the other party could safely act upon it without having to prove that when the time for performance came the inability was still effective. A profession by words or conduct of inability is by itself enough to constitute renunciation.

- Anticipatory breach is not confined to any particular class of breach, deliberate or blameworthy or otherwise, it covers all breaches that are bound to happen.

Very few cases since an aggrieved party wishing to terminate for repudiation will usually be able to rely on the conduct of the other party as indicating an inability to perform.

Rights to suspend performance

In some cases, an aggrieved party may believe but not be able to establish that the other party is not willing or able to perform the contract.

(i) Termination for delay [CB614]

Often a contract will commonly specify a time by which the obligations in the contract are to be performed. Where no time is specified for performance, the law implies a reasonable time.

(i) If the time is of the essence [CB614]

If time is of the essence for an obligation to be performed, the time stipulation will be essential and construed as a condition. Accordingly, failure by one party to complete performance by the appropriate time means that the aggrieved party can terminate the contract.

The parties may expressly agree that time is to be essential in relation to some or all of the obligations in their contract. The most common formulation is a statement that time is to be of the essence. If there is no express statement, courts will use construction of the contract in order to determine whether or not time is of the essence. That is, it can sometimes be inferred from the nature of the contract and the surrounding circumstances that the parties intended time to be of the essence. Courts are most likely to construe time as being of the essence in mercantile contracts (commercial contracts for the sale of goods). However, there is no uniform rule.

(ii) If time is not of the essence [CB615]

If time is not of the essence, failure by one party to perform on time will give rise to damages for breach of contract but does not give rise to a right of the aggrieved party to terminate. However, a right to terminate will be available should the delay continue so long or in such circumstances as to amount to repudiation (Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd).

(iii) Notice [CB615]

Where time is not of the essence, the aggrieved party can gain a right to terminate for delay through notice.

|Louinder v Leis (1982) |

|A valid notice must: |

|Specify a time for performance |

|Allow reasonable time for performance |

|Clearly convey that either the time fixed for performance is of the essence or that the party giving the notice will regard himself or herself as being |

|entitled to terminate should the notice not be complied with |

|This criterion must be proved to the Court by the party giving notice. |

[CB615] A contract for the sale of land did not fix a date for completion and did not state that time was of the essence. The contract provided that within 28days from the delivery of the vendor’s statement of title, the purchaser should tender a transfer to the vendor for execution. When the purchaser did not comply with this provision, the vendor’s solicitor posted a notice to the purchaser requiring completion of the contract within 21days. When this notice was not complied with, the vendor purported to terminate the contract.

Held: To be effective, notice must be given in relation to the time stipulation that has been breached. The notice procedure cannot be used to require the performance of some other obligation, the time for performance of which has not yet arisen….While the vendor would have been entitled to give the purchaser a notice requiring a transfer to be tendered within a reasonable time, the vendor was NOT entitled to give a notice requiring completion of the contract.

|For contracts with no fixed time for performance |For contracts with a fixed time for performance |

|There is an implied term that performance should occur within a reasonable |Immediately after the time stipulated, aggrieved party can give notice. |

|time. | |

|A notice can only be given after an unreasonable delay: Louinder v Leis | |

What is a reasonable time for compliance with a notice?

|Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd [1989] |

|To discern what is a reasonable time to perform, courts take into account: |

|The subject matter of the obligation |

|What remains to be done at the date of the notice |

|Whether the aggrieved party has been continually pressing for performance |

|Any unnecessary delay on the part of the party in breach before the notice was given |

|Expert evidence about the time required to perform the obligation in question may also be relevant. |

[CB622] Facts: The parties entered into a contract for the lease of a shop forming part of a retail centre, and as part of this contract, the lessor undertook to procure the registration of a formal lease or to deliver a registerable lease to the lessee. After considerable delay, the lessee’s solicitors wrote to the lessor’s solicitor requiring the lessor to complete registration within 14 days. The notice stated that if registration was not completed within the required time ‘our clients naturally reserved their rights in respect of your client’s default’. The lease was not registered within the specified 14day period and the lessee terminated the agreement.

Held: - the High Court held that the notice was not effective to give the lessee a right to terminate.

- The notice must convey a definite and specific intent to require strict compliance with the terms of the contract within a reasonable time, so that the recipient will be made aware that the party giving the notice may elect to treat the contract as at an end at the conclusion of such reasonable time unless compliance is forthcoming

- The time specified in the notice was not reasonable. Evidence had been given to the effect that registration of a lease required a longer time than 14 days. Further, the notice did not communicate the consequences of non-performance. Thus the notice was invalid.

- In judging whether the time allowed was reasonable the court must consider all the circumstances of the case, including any unnecessary delay on the part of the party to whom the notice is given before it is given. The onus must be with the party giving the notice of showing that the time limited by the notice is reasonable judged as at the time the notice is given.

- Thus while the notice was invalid, the unjustified delay on the part of Capalaba, accompanied by incorrect statements and unfulfilled assurances amounted to repudiation, giving Laurinda right to terminate.

Why does failure to comply with a valid notice give rise to a right to terminate?

• Courts have explained that failure by the party in breach to comply with a notice setting a reasonable time for performance will amount to an unreasonable delay in complying with a non-essential time stipulation.

• The unreasonable delay is evidence from which repudiation of the contract giving the aggrieved party a right to terminate may be inferred.

Where the contract is silent about the time for performance

• Where time is not expressly of the essence, a term will be implied requiring performance within a reasonable time.

• To terminate fro breach of an implied stipulation to perform within a reasonable time, an aggrieved party must usually rely either on repudiation or non-compliance with a notice by the party in breach.

• It is important to remember that where time is not specified; there must be an initial period of unreasonable delay before a breach arises.

The effect of an extension of the time for performance

Where one party is having difficulty in performing their obligations, the other party many decide to give an extension of time for performance. Such an extension may, in some cases, suffice a variation of the contract. Alternatively, the extension may give rise to an estoppel preventing the granted party from exercising its original rights under the contract.

If time was originally of the essence, and the extension specified a new time at which the obligation in question was to be performed, time generally will remain of the essence. If time was originally of the essence but the extension did not specify a new time for performance, instead merely indicating a willingness to accept late performance, then time will no longer be of the essence. In order to regain a right to terminate, the party granting the extension must either establish repudiation or give a notice specifying a reasonable time for the obligation to be performed.

|Ogle v Comboyuro Investments Pty Ltd |

|If time was originally of the essence, and extension specifies new time, time will remain of the essence. |

|However, if extension does not specify new time, time will no longer be of the essence. |

6) CONSEQUENCES OF AFFIRMATION OR TERMINATION [CB633]

When a breach of a condition or a grave breach of an intermediate term or repudiation has occurred, the aggrieved party has a right to choose to terminate the contract, ie put to their election, or they must affirm (continue with contract). Once the choice is made, an election is final and cannot be retracted.

(a) Consequences of affirmation [CB633]

Consequences of affirmation for the aggrieved party

If an aggrieved party affirms a contract, he or she retains the right to claim damages for loss caused by the breach, except in the case of anticipatory breach.

Damages will be available for a repudiation occurring before the time set for performance that is accepted by the aggrieved party terminating the contract. If repudiation is not accepted, then the contract will contain on foot, there will be no right to damages, and the aggrieved must perform their obligations as required.

It must be noted that the general principle that the aggrieved party must perform is subject to qualification by estoppel where the aggrieved party may be absolved of the consequences of non-performance of his or her obligations where the other party intimate that performance would be futile (Foran v Wight).

An anticipatory breach only gives aggrieved party the right to loss of bargain damages if it is the reason why the contract is terminated (Bowes v Chaleyer). If, after an anticipatory breach, the contract is affirmed, the aggrieved party cannot claim damages until an actual breach occurs (Foran v Wight)

An aggrieved party who affirms a contract remains liable to perform its own contractual obligations. An aggrieved party may be absolved of the consequences of non-performance of his or her own obligations where the other party intimates that performance would be futile. In Peter Turnbull & Co v Mundus Trading Co, Dixon CJ explained that “by persisting that it could not perform the contract according to its terms, the seller clearly intimated to the buyer that it was useless to pursue the condition of the contract applicable to shipment in Sydney and that the buyer need not do so”.

In order to be absolved of the consequences of non-performance of his or her obligations under a contract, an aggrieved party must show that he or she was ready and willing to perform those obligations at the time of the other party’s breach or repudiation. As the doctrine is based on estoppel, the aggrieved party must also show that he or she relied on the other party’s repudiation as a reason for not tendering performance of his or her obligations.

Consequences of affirmation for the breaching or repudiating party

|Bowes v Chaleyer (1923) |

|As an affirmed contract remains on foot, a party who has breached or repudiated a contract may him or herself become entitled to terminate the contract on the|

|ground of subsequent breaches by the aggrieved party. |

|General rule in a contract for the sale of goods: a stipulation in a contract that the goods shall be shipped at a given time is, prima facie, a condition |

|precedent. |

|A breach of a condition precedent justifies the innocent party in rejecting the goods tendered. |

[CB634] Facts: Bowes (purchaser/def/appell) ordered silk from Chaleyer (vendor/pl/resp) with term ‘goods to be shipped, half asap, half 2 months later’. Short time later, B wrote to C canceling the order due to concerns over price, and C proceeded to import the silk, though not at the times promised. C tendered the silk but it was rejected, and claimed his loss on resale, alleging that B wrongfully repudiated the contract.

Held: The HCA held that the delivery terms were conditions of the contract. In rejecting the repudiation, the seller kept the contract on foot, thereby becoming liable to perform its side of the contractual obligations…part of which was to deliver the goods in accordance with the contract. In failing to do so, the buyer is then able to take advantage, and terminate the contract for breach of condition.

(b) Consequences of termination [CB637]

|McDonald v Dennys Lascelles Ltd (1933) |

|As a general rule, on the failure or refusal of a purchaser to complete an executory contract for the purchase of land, the vendor is not entitled to sue for |

|the purchase money as a debt. He is entitled merely to sue for specific performance or for damages for the loss of his bargain. It is only when the contract |

|has been completed by the execution and acceptance of a conveyance that unpaid purchase money may become a debt and can be recovered accordingly. |

| |

|Accrued rights: Rights which have accrued prior to termination continue in force and may accordingly be relied upon even by a party who has breached or |

|repudiated the contract. |

| |

|Payment independent of performance: The parties to a contract may make the payment of a particular sum of money independent of performance of the contract. It|

|will not be necessary to analyse whether or not the required performance for that sum has been given. The basis for the claim is that the purchaser contracted|

|to receive the property and so, if the contract is terminated, will not have received that consideration. If, in such a case, the contract expressly provides |

|that installment payments will be forfeited should the contract not be completed, relief against forfeiture of those payments may be available. |

The purchasers entered into a contract for purchase of certain land from the vendor, who assigned to Dennys his interest under the contract with the purchasers, which however made default in payment of an instalment of the purchase money. McDonald guaranteed payment of instalment but instalment was never paid. Purchasers repudiated contract and vendor bought actions against guarantor for instalment.

(Mayson v Clouet) Installments already paid may be recovered by a defaulting purchaser when the vendor elects to discharge the contract. Where there is no express agreement excluding the implication made at law, the vendor is unable to deduct from the amount of the installments the amount of his loss occasioned by the purchaser’s abandonment of the contract. However, vendor may counterclaim for damages. As such, in the particular case, the vendor may keep the deposit and the property but must return the installments.

Eg of rights which have accrued before a contract is terminated: right to recover payment for any part of the contract which has been performed; right to claim damages for any breaches accruing up until the time the contract was terminated

Relying on a right to terminate they were unaware of

An aggrieved party is allowed to rely on a right to terminate that they were unaware of at the time of termination (Rawson v Hobbs).

7) RESTRICTIONS ON THE RIGHT TO TERMINATE [CB638]

There are a number of restrictions on the right of an aggrieved party to terminate a contract, generally based on the conduct of the aggrieved party themselves. While these restrictions many prevent them from terminating a contract, they don’t preclude them from claiming damages for any breach.

Restrictions can also be written into the contract – i.e. include exclusion clauses.

Further, there are some statutory restrictions. E.g. S 75A of the TPA.

(a) Readiness & willingness [CB638]

To be entitled to terminate a contract for breach or repudiation, an aggrieved party must show that they were ready and willing, that is, able, to perform the contract: Foran v Wight. If the aggrieved party was not ready & willing to perform, then they were also at fault. They should not, therefore, be entitled to take advantage of the other party’s breach or repudiation merely bc it came first in time.

|Actual breach |Anticipatory breach |

|To be entitled to terminate a contract for actual breach by |To be entitled to terminate a contract on the basis of repudiation by the other party prior |

|the other party, an aggrieved party must show that they were |to the time set for performance, the aggrieved party must show that s/he was ready and |

|ready & willing to perform their obligations at the time of |willing to perform his or her obligations under the contract at the time of the repudiation. |

|the breach. DTR Nominees Pty Ltd v Mona Homes Pty Ltd; Foran v|The accepted standard of proof is lower than for an actual breach and will normally be met |

|Wight |where the aggrieved party can show that he or she was not substantially disabled of |

|Not required to prove it unless defendant puts it at issue, |incapacitated from performing at the time set for performance. (Foran v Wight) |

|and burden of proof rests on the plaintiff (Hensley v |Where the contract is not terminated for anticipatory breach and a breach occurs, the |

|Reschke). |aggrieved party will usually be only required to show that s/he was willing and ready to |

|If the parties’ obligations are concurrent, the aggrieved |perform at the time of the anticipatory breach. (Foran v Wight). |

|party must have tendered performance of their own obligations |As this doctrine is based on estoppel, the aggrieved party must show that his failure to |

|to the other party before terminating for breach by the other |tender performance or to be ready & willing was due to his reliance on the party’s intimation|

|party. |that performance of the contract would be futile |

For anticipatory breach:

|Where repudiation is accepted |Where the contract is not terminated |

|Courts have held that the test for readiness and willingness for |An aggrieved party who chooses not to terminate a contract in response to an anticipatory |

|anticipatory breach is less stringent than for actual breach. |breach may not be required to perform those of his or her obligations which fall due after|

|An aggrieved party can satisfy this by showing that at the time |the repudiation. |

|of the other party’s repudiation, he or she was not substantially|The other party may have intimated that it is useless for the aggrieved party to perform. |

|disabled or incapacitated from performing at the time set for |If the aggrieved party seeks to terminate the contract for an actual breach, the aggrieved|

|performance. |party need not show that they were ready and willing. |

| |Only need to show if it was an anticipatory breach. |

|Foran v Wight (1989) |

|Where there has been an anticipator breach, the innocent party may elect to either: |

|Accept the repudiation & terminate/rescind the contract; or |

|Treat the contract as still on foot. |

|If second option taken, innocent party then remain bound to perform the contract. |

[CB638] The contract involved a contract for the sale of land. The sale was due on 22 June 1983 and time was specified as being of the essence. On 20 June, the vendor advised the purchaser that they would not be able to settle on 22 June. At this time the purchasers would have had a right to terminate for anticipatory breach, however, the purchasers chose not to terminate. On 22 June, neither party attempted to settle. On 24 June the purchasers purported to terminate the contract and claimed return of their deposit. The purchasers relied on an actual breach of the contract.

Held: The majority accepted that the purchasers had relied on the vendor’s intimation that they would not perform by giving up the chance of obtaining finance. Deane J explained that it was ‘clear from the evidence that there was, at the least, a real chance that, if they had not been induced to cease their efforts to arrange finance by the vendor’s intimation, that purchasers would have been able to obtain the balance of the price.

Where the aggrieved party elects not to terminate the contract for an anticipatory breach by the other party but later seeks to terminate the contract for an actual breach, the aggrieved party is not required to show that he/she was ready and willing to perform at the time the contract was terminated but that he/she was ready and willing to perform at the time of the anticipatory breach in the sense of not being substantially disabled or incapacitated from performing

(b) Election [CB652]

An aggrieved party who terminates a contract loses the right to further performance. Conversely, an aggrieved party who affirms a contract loses the right to terminate in respect of that event. This restriction however, is subject to two qualifications:

1) Further breaches

|Tropical Traders Ltd v Goonan (1964) |

|An aggrieved party who has affirmed a contract following a particular event giving rise to a right to terminate will not generally be prevented from |

|terminating the contract in repose to a further event giving rise to a right to terminate. |

[CB652] The case involved a contract for sale of land, in which it was stated that time was of the essence. Payment for the land was to be made in installments. A Clause in the contract provided that vendor could elect to rescind contract upon purchaser failing to make all payments on time. The purchaser was late on some payments but was given extensions on each occasion by the vendor. However, when the purchaser was late on the final payment, the vendor purported to terminate the contract.

Held: The fact that an aggrieved party has affirmed a contract following a particular event giving rise to a right to terminate will not generally prevent the aggrieved party from terminating the contract in response to a further event giving rise to a right to terminate. As such the vendor’s termination of the contract was valid.

2) Continuing breaches

An aggrieved party’s decision to affirm a contract following a breach giving rise to a right to terminate will not preclude him from terminating in response to that breach at a later time if the breach can be classified as a continuing breach (as opposed to a once and for all breach).

A continuing breach will occur where a party has promised to ‘maintain a state or condition of affairs’ and fails to do so. Examples of such obligations include ‘maintaining a building in repair, keeping the insurance of a life on foot etc. In the case of a continuing breach, a further breach arises ‘in every successive moment of time during which the state or condition is not as promised’. Accordingly, despite having already affirmed the breach, an aggrieved party will retain a right to terminate if the breach continues – Larking v Great Western (Nepean) Gravel Ltd (1940)

• Delays in exercising the right to terminate – while reasonable time is available for an aggrieved party to make an election, if no election is made after a reasonable time, it will be taken that the party has chosen to affirm the contract – Champtaloup v Thomas

|Immer Pty Ltd v Uniting Church in Australia Property Trust (1992) |

|Test for determining whether there has been an election to rescind the contract: |

|Innocent party must have knowledge of at least the facts giving rise to the right to terminate. |

|The aggrieved party must show unequivocal conduct consistent only with the choice to continue the contract. |

| |

|Conduct that may suggest affirmation of contract include: |

|Accepting or encouraging performance – an aggrieved party may be found to have affirmed a contract where, following the event giving rise to a right to |

|terminate, the aggrieved party accepts or insists upon receiving performance from the other party to the contract – Carr v Berriman |

|Acts contemplated under the contract – AN aggrieved party may be found to have affirmed a contract where he or she continues to perform acts contemplated by |

|the contract. Similarly, failure by the aggrieved party to perform his obligations under the contract suggests that the party elected to terminate the |

|contract – Sargent v ASL Developments |

| |

|Reasonable time to elect: An aggrieved party is entitled to a reasonable time to elect to affirm/terminate, as long as s/he does not otherwise affirm or cause|

|prejudice to other party. |

[CB652] The trust was entitled to air space rights in relation to building which it proposed to refurbish. Following the refurbishment the Trust agreed to sell rights to Immer. As part of the contract, a clause stated that if approval for transfer was not granted by 1 April 1989, Immer was entitled to rescind contract. However, on 1 April, the refurbishments were not completed.

On 26 June, deed was sent by Immer to the Trust in the mistaken belief that council had approved the transfer. On 25 August after discovering that the refurbishment had not been completed, Immer gave Trust notice of rescission (ie. termination) on the grounds that rights had not been approved by the specified date.

Issue: Whether Immer, the purchaser under an agreement for sale, abandoned its contractual right to rescission and elected to affirm the agreement (ie. by sending deed).

Judgment: A party may be held to have elected to affirm a contract notwithstanding that it was unaware of the legal situation which would have allowed it to rescind it. In such a case however, the party alleged to have elected to affirm the contract must have at least been aware of the facts giving rise to the right to avoid the contract.

“It is the essence of election that the party electing shall be confronted with two mutually exclusive courses of action between which he must, in fairness to the other party, make his choice.”Here, Immer had not been confronted with the necessity of making an election at the time the documents were sent to Trust. Being no necessity for Immer to make a choice, Immer’s conduct did not constitute an election to proceed with the contract and give up its right to rescind (ratio per Deane, Toohey, Gaudron and McHugh JJ).

- An election will be found in any unequivocal communication or conduct that conveys the aggrieved party’s choice either to affirm or to terminate the contract.

- The conduct must be “unequivocal in the sense that it is consistent only with the exercise of one of the two sets of rights and inconsistent with the other”

- Here, conduct in forwarding documents to trust not unequivocal but an intimation that if the vendor was in a position to complete the transaction the purchaser was not intending to exercise its right to terminate the contract (ratio per Brennan J)

Decision: Immer’s actions did not constitute an election on its part not to exercise its right of rescission.

Communication of election

An aggrieved party need not personally communicate her or his choice of election to the other party. It has been suggested that it is sufficient for the fact of the election to come to the attention oft eh party in breach, such as ‘by notification by an unauthorized broker or other intermediary’. Nonetheless, it’s just polite to convey your intentions to the other party.

(c) Estoppel [CB660]

The exercise of a right to terminate a contract may be restricted by equitable estoppel. An aggrieved party may be estopped from terminating a contract if they induced the other party to believe that the contract will not be terminated, and the other party has relied on that assumption (Legione v Hateley).

(d) Waiver [CB660]

The expression ‘waiver’ is sometimes misleadingly used to describe the doctrines of election or estoppel where the aggrieved party is sometimes said to ‘waive’ a breach if he or she indicates an intention to continue with performance (Sargent v ASL Developments Ltd). This is the operation of election though.

(e) Relief against Forfeiture [CB660]

Relief against forfeiture is an equitable doctrine based on unconscionable conduct that may preclude an aggrieved party from exercising his/her right to terminate a contract where termination would result in the forfeiture of an interest in property by the other party.

• Traditionally, only available to protect an interest in property (personal property may also be protected). In Australia, the HCA has also been prepared to grant relief against the loss of a purchaser’s interest in land under a contract for the sale of the land, notwithstanding a breach by the purchaser of an essential time stipulation entitling the vendor to terminate the contract.

• Relief may be in the form of specific performance; order allowing party more time to pay purchase price; and/or order for payment of installment money back to purchaser.

• Relief against forfeiture is based on relief against the unconscionable exercise of legal rights – fraud, accident, mistake or surprise.

• Ultimately, the question is whether a party is acting unconscionably by insisting on being unjustly enriched.

• The High Court has stated that relief against forfeiture is based on relief against unconscionable exercise of legal rights and will only be granted along with specific performance in favour of the party in breach in exceptional circumstances (Legione v Hateley). This is because the court must not be too ready to deprive an aggrieved party of his or her right to terminate a contract (Stern v McArthur).

• Traditionally courts have required something in the order of ‘fraud, accident, mistake or surprise’ to warrant relief against forfeiture (Shiloh Spinners Ltd v Harding; Stern v McArthur). However, the High Court has stated that these elements do not exhaust the scope of unconscionable conduct.

• Courts are more likely to provide relief against forfeiture for informal contracts, or for contracts where the parties have unequal bargaining power, than for commercial contracts or contracts drawn up by lawyers.

|Legione v Hateley |

|The following factors are relevant in deciding whether a case is appropriate for the grant of relief against forfeiture |

|Did the conduct of the [aggrieved party] contribute to the [other party’s] breach? |

|Was the [other party’s] breach (a) trivial or slight and (b) inadvertent and not wilful? |

|What damages or other adverse consequences did the [aggrieved party] suffer by reason of the [other party’s] breach? |

|What is the magnitude of the purchaser’s loss and the vendor’s gain if the following is to stand? |

|Is specific performance with or without compensation an adequate safeguard for the vendor? |

[CB661] Facts: Vendor sought to terminate contract because purchaser failed to pay accordin to contract. Purchaser asked if an extension would be allowed and solicitor’s secretary said it should be alright.

• Relief against forfeiture would potentially be available as:

o It was inadvertent and not willful

o Vendor’s solicitor contributed to the breach

o Purchaser built a house on the land – this was be a windfall to the vendors

Stern v McArthur

Vendor terminated contract of sale payable in instalments for late payments; land value increased. It was held that it was the purchasers who had a reasonable expectation of benefiting from any increase in the value of the land with the passage of time

Tanwar Enterprises Pty Ltd v Cauchi

[CB676] Cauchi (vendors) offered to sell land to Tanwar (purchaser) on 28 February. Date of final settlement had being pushed back several times. Parties eventually settled date on 25 June 2001. Time was stated to be of essence and terms stated that consequences of the breach of the time stipulation by the purchaser would be forfeiture of all moneys paid. The funds were delayed because of an unexpected event in Singapore. The funds were ready on the 26 June 2001. The vendor knew of this, yet still purported to terminate the contract. Tanwar claimed relief against forfeiture or alternatively return of each deposit.

Held: - In Legione v Hately, the court identified questions in deciding whether or not a case is appropriate for the grant of relief against forfeiture:

1. Did the conduct of the aggrieved party contribute to the other party’s breach?

2. Was the other party’s breach (a) trivial or slight, and (b) inadvertent and not willful?

3. What damage or other adverse consequences did the aggrieved party suffer by reason of the other party’s breach?

4. What is the magnitude of the purchaser’s loss and the vendor’s gain if the forfeiture is to stand?

5. Is specific performance with or without compensation an adequate safeguard for the vendor?

- Circumstances must be exceptional before equity intervenes – it must be necessary to intervene to avoid injustice or unconscientious conduct.

- Equity will not relieve where the possibility of the accident may fairly be considered to have been within the contemplation of the contracting parties (Tanwar). The party should have provided for such contingencies. Appeal dismissed.

8) THE MEASURE OF DAMAGES [CB691]

(a) The right to damages [CB691]

The general principle governing the measure of damages in contract law was articulated by Parke B in Robinson v Harman and endorsed by the High Court of Australia in Commonwealth v Amann Aviation Pty Ltd. It follows: “Where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation with respect to damages as if the contract had been performed”

- Contract damages are compensatory not punitive, that is, they are aimed at compensating the plaintiff for the losses caused by the breach of contract, not at punishing the defendant.

- There are generally 3 categories of damages:

1. Expectations damages – compensate the plaintiff for the benefit he or she would have gained if the contract had been performed, but were lost by reason of the breach.

2. Reliance damages – in cases where the plaintiff cannot establish the value of the benefit he or she could have gained if the contract had been performed, the courts may award damages to compensate the plaintiff for the expenditure incurred in reliance on the contract being performed. It can be explained as an approximation of expectation damages. [Compensation for money expended by one party in the performance of the contract, where that expenditure is proved to be wasted]

3. Loss of chance damages – awarded where the plaintiff only expected to gain the chance of a benefit from performance of the contract.

- Generally, a plaintiff seeking an award of damages bears the onus of proving that they have suffered a loss as a result of the breach of the contract. Where no loss is established, the plaintiff will usually recover only nominal damages – where a sum of money is awarded in recognition of the fact that the plaintiff’s legal rights have been infringed but without compensating for actual loss.

(b) The compensation principle [CB691]

The guiding principle for an award of damages for breach of contract is that such damages are compensatory.

[CB692] Commonwealth v Amann Aviation Pty Ltd (1991)

The Commonwealth entered into a 3 year contract with Amann under which, Amann was to provide coastal surveillance flights for the Commonwealth. The Commonwealth wrongfully terminated the contract, which Amann treated as a repudiation of the contract and upon which it elected to terminate the contract and claim damages.

Amann required a significantly longer period of operation than three years to recoup expenditure incurred in equipping itself to carry out its contractual obligations. Thus, Amann’s ability to recoup the initial expenditure and to make a profit depended on the contract being renewed for a further term after the initial three year period.

Held: The plaintiff is entitled to recover such damages as arise naturally from the breach or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach.

- Where the plaintiff is unable to prove his expectation loss, he may instead be able to recover damages compensating him for expenditure incurred in reliance on the contract being performed - “reliance damages” or “wasted expenditure damages”

- To recover expectation damages, plaintiff must to prove that net benefits is greater than the expenditure incurred in preparing to perform the contract

- To recover reliance damages, plaintiff must prove that the net value of the benefits which he would have been entitled if the contract had been performed would have exceeded the wasted expenditure

|Expectation damages |Reliance damages |

|Onus is on the PL to prove, on the balance of |Onus is on PL to prove: |

|probabilities, that their expectation of a |Amount of expenditure |

|certain outcome, as a result of the |That the expenditure was reasonable |

|performance of the contract, had a likelihood |That the money was spent in reliance on the contract |

|of attainment rather than being mere |The onus then shifts to DEF to prove that the PL would not have recouped his expenditure even if the contract|

|expectation. |had been performed. (This onus shifts to DEF bc there is a presumption that the person would not enter a |

| |contract if they wouldn’t recoup expenditure and also bc the def’s breach is the reason why there is no |

| |evidence about what the pl would have gained from the contract). |

- Plaintiff might be entitled as of right by performing a contract to obtain an opportunity of profitable engagement under another contract (loss of a chance). The benefits to which a plaintiff is entitled under a contract may include an uncertain prospect of obtaining such an engagement provided the prospect is sufficiently substantially to ascertain as a real commercial advantage

- When assessing damages, consideration must also be given to the fact, the plaintiff, by not having to performing his obligations as a result of the breach of contract, would have saved some expenses in not performing those obligation. These savings must be taken away from the damages to ensure that the plaintiff isn’t over compensated. However, expenditure incurred need not be on reasonable reliance on the contract being performed, but the expenditure has to be reasonable. If expenditure incurred on an unreasonable reliance on the contract being performed, it would have unlikely been contemplated by the parties and is therefore too remote to be recovered as damages.

- Amann could not prove that the contract would have been renewed – cannot recover expectation damages on further contracts but only on the outstanding benefit it expected to gain under only the original contract. Amann was awarded substantial reliance damages (wasted expenditures were covered by value of prospect of renewal of contract).

(i) Reliance damages [CB721]

A party may incur significant costs in reliance upon a contract being performed. For example, a party contracted to perform building work may purchase equipment and materials suitable only for that work. The plaintiff will usually have calculated the contract price for those goods to allow him to recover both the expenditure expected to be incurred in performing, and a margin of profit over and above the expenses of performance.

Where a plaintiff terminates such a contract by reason of the defendant’s breach, the plaintiff will usually recover as expectation damages an amount equivalent to the price payable under the contract. If the contract is terminated before the plaintiff completes performance, the plaintiff may be saved some costs which would otherwise have been incurred in performing his or her obligations. So that the plaintiff is not over-compensated, these saved costs of performance will be deducted from an award of expectation damages based on the contract price.

Features of reliance damages include:

1. Burden on the defendant to show that the benefit expected from performance would not have covered the plaintiff’s cost of performance or, more simply, that the plaintiff had entered into a loss-making contract. (Commonwealth v Amann Aviation Pty Ltd).

2. A plaintiff will not recover an award of both reliance damages and expectation damages.

3. Courts often refer to ‘reasonable expenditure’ incurred by the plaintiff in reliance of the contract being performed (Commonwealth v Amann Aviation Pty Ltd) but it is not considered a separate element in deciding whether to award reliance damages. It might be argued that expenditure that was unreasonably incurred by a plaintiff would be unlikely to have been contemplated by the parties and is therefore too remote to be recovered as damages (McRae v Commonwealth Disposals Commission).

Reliance damages where the plaintiff cannot prove his or her expectation loss

Where the plaintiff is not able to calculate the value of the expected loss, the court will nonetheless award damages reliance damages to compensate the plaintiff for expenditure incurred in reasonable reliance on the contract being performed.

MaRae v Commonwealth Disposals Commission (1951)

Facts: The plaintiffs entered a contract with the Commonwealth Disposals Commission for the purchase of a wrecked oil tanker which they intended to salvage. The plaintiffs were also given coordinates of the supposed wreck. In fact, there was no oil tanker lying anywhere near this location. However, before discovering this fact, the plaintiffs incurred considerable expenditure in fitting out a salvage operation.

Held: The Commission had breached an implied promise that the tanker existed, however, if was impossible to place a value on the salvage of a non-existent tanker. As such expectations damages are not available.

However, the court accepted that the plaintiffs incurred the expense of mounting a salvage operation on the basis of the Commission’s promise. Accordingly, the court considered that the plaintiffs were entitled to recover reliance damages for the breach of contract measured by reference to the expenditure reasonably incurred and wasted in reliance on the Commission’s promise.

(ii) Expectation damages [CB717]

Direct and consequential loss

In most cases, the most readily apparent loss will be the loss of value of the promised performance. This sort of loss is known as a direct loss because it is directly linked to the defendant’s breach of contract.

- Where a contract is not terminated, expectations damages will commonly represent the difference in value between what the defendant has done and what the defendant should have done if the defendant had complied with the contract.

- Where the contract is terminated, expectation damages will commonly represent either the price promised under the contract (sometimes referred to as loss of bargain damages) or the cost of obtaining performance to replace that promised under the contract.

In addition to losses directly related to the breach of the contract, a plaintiff may also be entitled to recover damages to compensate him or her for other sorts of less direct losses, known as consequential losses. These might include the loss of profit on a subsequent transaction or expenses which have reasonably been incurred by the plaintiff as a result of the breach.

Damages for breach of an obligation to repair

Where the defendant has breached an obligation to build or repair property, the general rule is that courts award damages equal to the difference between the market value of the property without the building or repair having been done and the value of the property would have had if the building or repairs had been carried out in accordance with the contract.

However, in some cases, this measure may not adequately compensate the plaintiff. The difference between the market value of the property with and without the work being done in accordance with the contract may not cover the cost to the plaintiff of rectifying the defective work. In such cases, courts have sometimes been prepared instead to award damages based on the cost to the plaintiff of rectifying the work to make it conform with the contract.

Bellgrove v Elridge (1954)

[CB717] The parties entered into a contract for the building of a house. There was a subsequent breach of contract as the house not built to contractual specifications.

Issue: Whether the plaintiff should be awarded the difference between the market value of the property and the value it would have had if the contract had been properly performed; or should the plaintiff be award the cost of remedying the work?

Held: The HCA gave damages for cost of demolishing the house as constructed and erecting one in accordance with the contract specifications. This was the only measure which would genuinely compensate the owner (damages for cost of rectification).

• Usually damages would be the cost of remedying the defects complained of and so give to her the equivalent of a building on her land which is substantially in accordance with the contract

• Rectification must be a reasonable course to adopt and necessary. In this case, it was the cost of demolishing and re-building as the damage done to the foundation threatened the stability of the house

No award of both expectation damages and reliance damages

‘Expectation damages’ incorporates reliance damages. Hence the plaintiff will not be able to recover an award of both expectation damages and reliance damages

Expectations damages v/s reliance damages

|Expectation damages |Reliance damages |

|Aim to put the pl in the same position he would have been in if the contract |Aim to put the pl in the same position he would have been in if the contract |

|had been performed |had not been made |

|burden on plaintiff to prove his loss of bargain on balance of probabilities |burden on defendant to prove that the plaintiff would not have recouped his |

| |expenditure even if the contract had been performed (since there is a |

| |presumption that plaintiff would not enter into a loss-making contract) |

It is preferable to sue for expectation damages, because the compensation will be greater.

Tests

▪ Will the value of a future uncertain benefit be taken into account? The value of the prospect of a future uncertain benefit for P (e.g. renewal of a contract) will be taken into account in determining whether P would have recouped his/her expenditure (Cth v Amann Aviation Pty Ltd).

▪ Ineligibility for expectation damages: In McRae v Commonwealth Disposals Commission the plaintiff was ineligible for expectation damages because the subject of the contract, the tanker, did not actually exist (and thus the plaintiff could not show the value of the salvaged tanker).

▪ Difference in value – does this formula always work?

• In sale of goods and marketable commodities, the difference in value between expected goods and goods received would put the aggrieved party in the position they would have been in.

• This is not the case for the sale of things, such as a house with unstable foundations, for which there is no market (Bellgrove v Eldridge).

• For badly built houses, the homeowner is not always entitled to the cost of cure, only if the remedial works are ‘necessary’ and ‘reasonable’ (Bellgrove v Eldridge).

▪ An award for the loss of amenities: In Ruxley Electronics & Constructions Ltd v Forsyth, the courts held that an objectively trivial breach, here one that only affected the customer’s enjoyment of the pool, was insufficient to allow an exorbitant cost of cure, even though the difference in market value was nil. They gave an award for loss of amenities instead.

(iii) Damages for loss of a chance [CB721]

Courts have been prepared to award damages compensating a plaintiff for the loss of a chance or an opportunity of obtaining a benefit. The reason for such an award is that even a chance may be of value. Damages for loss of chance have been awarded where the breach of contract has deprived the plaintiff of a chance to succeed in a contest or game (Chaplin v Hicks; Howe v Teefy) or the plaintiff has loss the chance to pursue a potentially successful commercial opportunity (Commonwealth v Amann Aviation Pty Ltd).

Quantifying the loss of a chance

Quantifying the damages awarded to compensate a plaintiff for the loss of a chance will inevitable involve some sort of speculation. To obtain damages for loss of a chance, it seems that the plaintiff must show on the balance of probabilities that he or she lost a chance of some value. In quantifying the damages, the court will adjust the award to reflect the fact there was only a chance of success. Accordingly, the value of the benefit the plaintiff had a chance of obtaining may be discounted by the probability of success. Courts must:

1. Quantify the loss of chance

❑ ‘Mere difficulty of estimation does not relieve a court or jury…of the task and responsibility of placing value on the chance lost’ (Commonwealth v Amann Aviation Pty Ltd).

❑ To obtain damages for loss of chance, the plaintiff must show on the balance of probabilities that he or she lost a chance of some value (Sellers v Adelaide Petroleum NL)

❑ It does not matter that the value of the lost chance may only be estimated by reference to a degree of probability which is less than 50% and indeed may involve an element of speculation (Sellars v Adelaide Petroleum NL).

❑ When quantifying the damages, the court will adjust the award to reflect the fact there was only a chance of success (Commonwealth v Amann Aviation Pty Ltd).

2. Discount expectation damages for unforeseen contingencies [TB377]

❑ There has not been much discussion of the extent to which such contingencies should affect the quantification of expectation damages for breach of contract (Commonwealth v Amann Aviation Pty Ltd). It is still uncertain whether or not courts will reduce a plaintiff’s damages for loss of expected benefit by the probability of events adverse to the plaintiff.

|Howe v Teefy (1927) |

|Street CJ: P must have had an actual loss resulting from breach of contract, and if it had a monetary value, Court must assess it even if it is difficult. The|

|test is whether the plaintiff was possessed of something which had a monetary value and of which he was deprived by the breach. |

|Test: Plaintiff must prove: |

|There has been a loss of some chance |

|The chance was not too remote. A loss is not too remote if the point of the contract was to make money from the chance in the way the PL (here, horse trainer)|

|had imagined. |

| |

|For loss of a chance it is not the value of what has been lost which is calculated but the value of the chance. The probability that the chance may or may not|

|have eventuated is also taken into account in assessing the amount of damages. |

[CB721] Facts: Teefy (defendant) leased a racing horse to Howe (plaintiff), but wrongfully took it back. Pl claimed damages for loss of opportunity to win prizes w the horse, to win bets placed by himself on the horse & to make profits from supplying information to other people.

Held: The test is whether the plaintiff was possessed of something which had a monetary value, and of which he was deprived by the Defendant’s breach of contract.

The calculation which must be made is not how much the plaintiff would probably have made in the shape of profit out of his own use of the horse, but how much his chance of making that profit, by having the use of the horse, was worth in money? Damages for loss of chance were awarded to the plaintiff.

(c) Restitutionary damages and account of profits [CB723]

Restitution

Rule: Otherwise known as the law of ‘unjust enrichment’, a plaintiff may be entitled to restitution (return of consideration) if the defendant is enriched by the plaintiff in such a way that it would be unjust to allow the enrichment to continue. Used when there is a total failure of consideration.

Restitution acts as an alternative to damages. Restitution is a third source of civil obligation now in Australian law, but it is not clear what the content of the law is (ie not settled by HC).

• The plaintiff is sometimes able to recoup the value of benefit it conferred on the defendant (the defendant having not provided reciprocal performance) through the ordinary award of expectation damages.

• Alternatively, the plaintiff may claim restitution, based on unjust enrichment to the defendant, which would require the defendant to disgorge a benefit made through his wrong in breaching the contract

• Plaintiff cannot combine claims so as to recover more than once for the same loss. Thus, full damages and complete restitution will not be given for the same breach of contract (Baltic Shipping Co v Dillon).

The question of restitutionary damages has not been settled by the Australian High Court. However, in England, the possibility of a plaintiff obtaining relief based on the defendant’s profits has been accepted by the House of Lords in Attorney-General v Blake:

Account of profits as an alternative remedy to damages.

An account of profits or restitutionary damages would require the defendant to account for any profit made by reason of his or her breach.

|Attorney-General v Blake [2001] |

|To gain an account for profits, the plaintiff must show: |

|Ordinary remedies are inadequate |

|There is a legitimate interest for the plaintiff to prevent the defendant from profiting from the breach. |

[CB723] Facts: Case involved publication of book by former UK spy. Material disclosed was not confidential anymore but did breach term of employment contract. Rather than damages (quantum of which government would not be able to prove) an accounting of profits was requested.

Issue: How does A-G prove damages for breach of this kind of a contract? A-G entitled to be paid amount due to Blake since an account of profits was a just response to the breach of the undertaking in the special circumstances of the intelligence services & even though the information in the book was no longer confidential.

In suitable cases damages for breach of contract may be measured by the benefit gained by the wrongdoer from the breach.

No fixed rules for determining when such suitable cases arise, but a general guide is whether P had a legitimate interest in preventing D’s profit making activity & hence in depriving him of his profit. So here, account for profits was allowed.

|Hospitality Group Pty Ltd v Australian Rugby Union Ltd (2001) |

|The Federal Court in Australia did not accept the account of profits. |

|“... The position in Australia is that the loss recoverable for breach of contract is limited to that laid down in Robinson v Harman. That is, the aggrieved |

|party is entitled only to compensation. If he suffered no loss, he is not entitled to be compensated. [However], in an appropriate case, the aggrieved party |

|may also be able to recover (by a claim of restitution) benefits that he has made available to the wrongdoer.” |

[CB731] Aggrieved party is entitled only to compensatory damages. The court is unable to award disgorgement damages. Australian Courts are bound by Robinson v Harman and Amann. Presently it would be inconsistent with the current principles laid down by the HC to confer a windfall on a plaintiff under the guise of damages for breach

(d) Date for assessing damages [CB732]

Rule: Damages are assessed at the date of the breach of contract or when the contract arises. However, the rule is not universal (to make it fairer for pl bc of the effect of inflation on purchasing power). Courts have the power to depart from the general rule and fix some other date for assessing damages ‘whenever it is necessary to do so in the interests of justice’.

Exceptions:

|Johnson v Perez (1988) |

|If it can be shown that another date is more appropriate in giving an injured plaintiff the amount of damages that will most fairly compensate him for the |

|wrong suffered ie ‘whenever it is necessary to do so in the interests of justice’ |

|Personal injury: date of assessment = date of judgment (since injury could have improved/gotten worse) |

|Debt in foreign currency: date of assessment = date the debt should have been paid, not date of breach |

|Eg in cases of contracts for the sale of goods which the seller fails to deliver ( damages will normally be assessed at the date of non-delivery. |

|Eg where there is no market in which the plaintiff can buy substitute goods, thus fixing damages at a later date when the plaintiff is actually able to |

|purchase replacement goods may be more appropriate. This will allow any increase in the price of the goods over the search period to be taken into account |

[CB732] Solicitors were negligent in failing to initiate proceedings for damages against two previous employers. The actions had been dismissed for want of prosecution and have become statute barred.

Held: The date of assessment determines which party, bears the risk of changing prices during the inevitable delay between the injury and delivery of judgement (inflation).

9) LIMITATIONS ON THE AWARD OF DAMAGES [CB736]

(a) Causation [CB736]

In order to recover damages for a breach of contract, the party seeking damages (plaintiff) must show a causal connection between the breach caused by the other party (defendant) and the loss for which the P is seeking compensation.

“But for” test with common sense: March v E & MH Stramare (1991)

Is there a novus actus interveniens that breaks the chain of causation?

|Barnes v Hay (1988) 12 NSWLR 337 |

|Mahoney JA: There is no all encompassing rule/test; “a causal question involves…a normative decision” and a “functional evaluation of the relationship and the|

|purposes and policy of the relevant part of the law” |

(b) Remoteness of damage [CB736]

Remoteness sets limits beyond which the defendant’s responsibility for loss will not extend. The plaintiff must show that the loss to be compensated was not too remote.

|Hadley v Baxendale |

|General rule: The damage caused must either: |

|Arise naturally in the usual course of things (what you would expect generally from a breach of this kind of contract); OR |

|Reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it |

In order to determine the remoteness of damage, the following issues must be considered:

1. Knowledge of the parties (Hadley v Baxendale; Victoria Laundry (Windsor) Ltd v Newmann Industries Ltd) must be either:

❑ A) Imputed: The defendant is taken to be a reasonable person and to know the ‘ordinary course of things’ and consequently what loss is liable from a breach of contract in that ordinary course.

❑ B) Actual: If the defendant had knowledge of special circumstances and that a breach in those special circumstances would be liable to cause more loss, the plaintiff is able to recover for the additional loss. Subjective

2. The extent of damage that needed to be contemplated

❑ It is not necessary that the defendant should actually have asked himself what loss is liable to result from the breach. It suffices that, if he had considered the question, he would as a reasonable man have concluded that the loss in question or the general kind of loss was liable to result. (Victoria Laundry (Windsor) Ltd v Newmann Industries Ltd)

3. The degree of likelihood of damage resulting from the breach

❑ It does not need to be proved that upon a given state of knowledge the defendant could, as a reasonable man, foresee that a breach must necessarily result in that loss. It is enough if he could foresee it was likely so to result and that there was a ‘serious possibility’ or ‘real danger’ of it occurring (Hadley v Baxendale; Victoria Laundry (Windsor) Ltd v Newmann Industries Ltd)

Mitigation of damage: Mitigation looks to the reasonable steps which have been or should have been taken by a plaintiff to reduce his/her loss.

Victoria Laundry Ltd v Newman Industries Ltd [1949]

[CB737] Facts: Newman Industries sold a boiler to Victoria Laundry and was aware that they wanted it for use immediately. It was delivered 20 weeks late, and Victoria Laundry claimed as damages for: (i) loss of new customers and (ii) loss of highly lucrative contract.

Issue: Was the damage (ie the lost contracts) too remote?

Appeal allowed.

It is important to enquire what info the def’s possessed when the contract was made – they knew that the pl’s were laundry men & dyers so they knew that the damages were not too remote. Victoria Laundry cannot get damages for loss of opportunity because Newman did not have in reasonable contemplation that Victoria would bid on a government contract.

1) Could claim damages for loss of customers b/c that was reasonably foreseeable.

2) Could not claim damages for lost lucrative contracts because it was not in contemplation of defendant when made contract.

1. P only entitled to damages for loss which was reasonably foreseeable b/c of breach.

2. What was reasonably foreseeable depends on the knowledge of the parties .

3. Knowledge of parties must be:

(i) imputed: ordinary course of things;

(ii) actual: contract breaker must know consequences. [subjective]

4. If D had considered consequences of breach, reasonable person would have concluded that loss in question would likely result.

5. It is enough that D would have foreseen likely to result.

|Alexander v Cambridge Credit Corp Ltd (1987) |

|Test: Whether the def’s breach was so connected to the pl’s loss that, as a matter of ordinary common sense, it should be considered as a cause of the loss. |

|The pl only needs to show that the cause was A cause, not necessarily THE sole cause. |

| |

|Glass J: dissenting but summarises law. |

|Principles of causation: |

|P must show that D’s breach caused damage suffered & that he is responsible for it in law. |

|If evidence suggests multiple causation, inquiry is whether D’s breach was a cause of P’s loss. |

|The test of causation is: whether P’s loss would not have been suffered but for D’s breach. Questioned is to be answered by applying test in a practical |

|commonsense way. |

|Losses suffered must not be too remote. |

[CB740] Facts: The auditors of Cambridge Credit breached a contractual duty to note deficiencies in the provisions for bad debts, which, if disclosed, would have led to the appointment of receivers in 1971 rather than 1974 when the company collapsed. The receivers sued the auditors for this loss.

Issue: Was there a causal connection between the breach and the loss suffered? Here, the novus actus interveniens was the collapse of the real estate market as it broke the causal connection. The damage was too remote as it was not contemplated as being a serious possibility of occurring when they made the audit contract. No need for contemplation of the precise details or the degree or extent of the loss or damage suffered; it is sufficient that they contemplate the kind/type of loss/damage suffered.

(c) Mitigation of damage [CB751]

|McGregor on Damages (1980) |

|Three rules as to mitigation of damage: |

|The plaintiff must take all reasonable steps to mitigate the loss to him consequent upon the defendant’s wrong and cannot recover damages for any such loss |

|which he could have avoided but has failed, through unreasonable action or inaction, to avoid. [P cannot recover for avoidable loss] |

|Burns v MAN Automative (Aust) Pty Ltd suggests that the fact that a pl cannot afford to take steps to reduce the loss caused by a breach of contract will not |

|protect him or her from a reduction in damages. |

|Approved in Simonius Wischer & Co v Holt & Thompson |

|Where the plaintiff does take reasonable steps to mitigate the loss he can recover for loss incurred in doing so. [P can recover for loss incurred in |

|reasonable attempts to avoid loss] |

|An example is Simonius Vischer & Co v Holt & Thompson |

|Where the plaintiff does take steps to mitigate the loss and these steps are successful, the defendant is entitled to the benefit accruing from the |

|plaintiff’s action and is liable only for the loss as lessened. [P cannot recover for avoided loss] |

|An example of this is British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd |

|Simonius Vischer & Co v Hold & Thompson [1979] |

|Recovery is allowed for losses & expenses reasonably incurred in mitigation even if the resulting damage is greater than it would have been had the mitigating|

|steps not been taken – Samuals J |

[CB759] Facts: staff of firm of wool brokers (pl) exceeded their authority in speculative operation in the futures market, suing the firm’s auditors for failing to discover the improper operations; once these operations were found out, the contracts were maintained as a speculation of the firm’s own account and resulted in further losses. The defs argued that, as a result of this conduct, the pl’s had failed to mitigate their losses and accordingly, the future losses incurred should not be recoverable. This argument was rejected by the NSW Court of Appeal which accepted the trial judge’s finding that the pl conduct in deciding what to do with the open contracts had been reasonable, so it follows that the defs were bound to make good the loss sustained.

Issues: Were the actions of Simonius Fischer in attempting to mitigate their losses reasonable? Can SF recover for these extra losses?

The law is satisfied if the party placed in a difficult situation by reason of the breach of duty owed to him has acted reasonable in the adoption of remedial measures, and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken

|Burns v MAN Automotive Pty Ltd (1986) |

|A failure to take all reasonable steps to mitigate their loss reduces the damages the PL can recover. |

|The onus is on the DEF to prove that the PL did not take reasonable steps. |

[CB752] Facts: contract for sale of prime moved; seller warranted that the engine was fully reconditioned, knowing it was used for business and he was not rich; it was within the reasonable contemplation that if the warrant was broken, the appellant might lose profits. All judges held that it was reasonable for the pl not to recondition his truck on account of his impecuniosity, but it was not reasonable to continue to carry out business at a loss. Pl was thus only entitled to damages for loss of profit, not for loss actually experienced.

• Appellant bound to take all reasonable steps to mitigate loss:

o Have engine reconditioned or buy another to replace it

o Plaintiff’s duty to mitigate loss does not require him to do what is unreasonable

o Financial difficulties large brought about by actions of respondent

• Unreasonable to carry on his business with the defective prime mover, knowing that he was operation at a loss, when he should have known that he had no prospect of making a profit

• Remoteness – not in reasonable contemplation that you would run at a loss

Avoided losses: Mitigation action actually taken

• Any benefits obtained by the plaintiff as a consequence of the defendant’s breach will be taken into account in calculating the plaintiff’s damages.

• Eg: where by reason of the def’s breach, the plaintiff enters into an alternative, more beneficial transaction.

|British Westinghouse Electric & Manufacturing Co v Underground Electric Railways Co of London [1912] |

|Plaintiff can recover for loss incurred in reasonable attempts to avoid loss. |

|But plaintiff cannot recover for losses avoided by their mitigation (even where the law would not consider that those actions were part of what should |

|reasonably be done by P to reduce his/her loss). |

| |

|The rule that a pl will not recover for avoided loss applies only to benefits obtained by the pl which arise out of the consequences of the breach. It does |

|not apply to benefits that are wholly collateral even if they have the effect of reducing the pl’s overall financial loss. |

Facts: Plaintiff replaced deficient turbines which the defendant has supplied in breach of warranty, by others of greater power and efficiency, which reduced costs and increased profits. The pl claimed as damages from the def the cost of the new turbines.

This claim was rejected by the House of Lords: after taking into account the gains in profit and saved expenses resulting from the use of the new turbines, no net loss had been incurred by the pl. However, the pl was entitled to recover the loss suffered while using the defective turbines.

Since the new turbines were superior, the savings in cost and gain in profits must be brought to account in reduction of the plaintiff’s damages

(d) Limitations relating to specific types of claims [CB761]

(i) Disappointment, distress, loss of reputation

General rule: Damages are not generally awarded to compensate non-pecuniary losses such as disappointment, anxiety or loss of reputation occurring on breach of contract.

Exceptions:

|Baltic Shipping Co v Dillon (1993) |

|Damages may be obtained for pain & suffering arising from physical injury caused by breach of contract. |

|Damages for disappointment & distress are available when caused by a physical inconvenience created by breach of contract. |

|Damages for disappointment & distress are available where the object of the contract was to provide enjoyment, relaxation or freedom from distress (often |

|holiday cases). |

[CB761] Case concerned a claim for damages for disappointment and distress for breach of a contract to provide a holiday cruise. The plaintiff was a passenger on a cruise ship which sank halfway through the cruise. The defendants refunded a substantial proportion of the plaintiff’s fare. The plaintiff also successfully obtained damages for personal injuries suffered and loss of property.

• When an innocent party pays in advance in expectation of entire performance of contract, the innocent party cannot recover unless there has been a total failure of consideration. Here, the failure of consideration was partial, not total, as part of the trip had been enjoyed

• Damages must be such as are capable of being appreciated or estimated

• The High Court affirmed the rule against awarding damages for non-pecuniary losses in an action for breach of contract.

• The High Court also confirmed that the restrictive rule is subject to at least three significant exceptions, the third of which covered the case in question.

a) The High Court confirmed that damages may be obtained for pain and suffering arising from physical injury caused by a breach of contract.

b) The Court confirmed that damages for disappointment and distress will be available where they relate to physical inconvenience caused by a breach of contract.

c) The High Court confirmed that damages for disappointment and distress arising from a breach of contract will be available where the object of the contract was to provide enjoyment, relaxation or freedom from distress.

• Damages for disappointment and distress may be awarded where a contract to provide a holiday was breached.

• For first exception:

o Bailey v Bullock: plaintiff compelled to live with parents-in-law in circumstances of physical inconvenience. The ‘inconvenience should have been reasonable contemplated by the defendants as a probable result of their failure to perform their contractual duties’

• Second exception:

o Jarvis v Swans Tours Ltd: Damages for ‘loss of enjoyment where the plaintiff’s skiing holiday did not measure up to the promises in the defendant’s brochure

o Cox v Philips Industries Ltd [1976]: Damages could be awarded for vexation, frustration and distress if ‘it was in the contemplation of the parties’ that such damage would result from breach.

o Recoverable if it arises from breach of an express or implied term that the promisor will provide the promise with pleasure or enjoyment of personal protection or if it is consequent upon the suffering or physical injury or physical inconvenience

• Cannot recover the fare (restitution) AND damages for breach of contract as it results in overcompensation as the innocent’s party’s consideration is given back and is compensated for the breach

(ii) Contributory negligence

The first response is to find that negligence on the part of the pl has broken the chain of causation between the def’s breach and the pl’s loss. A second response is to reduce the pl’s damages to account for the negligence.

Legislation (Law Reform (Misc Provisions) Act 1965) permits courts to apportion responsibility between parties to reduce damages when P’s negligence contributed to their own damage to the extent that it is ‘just & equitable’.

Now regulated in all Aust states & territories except WA.

The amended legislation provides that liability may be apportioned in respect of an act or omission ‘that amounts to a breach of a contractual duty of care that is concurrent and coextensive with a duty of care in tort’. Accordingly, where the plaintiff has concurrent claims in tort and contract and the plaintiff’s own negligence would have reduced the liability of the defendant in tort, the damages payable by the defendant may be reduced to take account of the negligence of the plaintiff in contributing to the loss, regardless of whether the plaintiff claims in tort or contract.

(iii) Loss of bargain damages and termination under a term

Loss of bargain damages are based on the price the plaintiff would have received if the contract had been performed as promise, less the price the plaintiff would receive by entering into a substitute transaction.

❑ A plaintiff will generally be entitled to loss of bargain damages where the plaintiff terminates following a breach which at common law gives rise to a right to terminate. However, in Shevill v Builders Licensing Board, it was held that loss of bargain damages will not be available where a plaintiff has gained right to terminate through a term in the contract, and that right was not also conferred by the common law.

❑ [CB773] In Shevill, HC held that since the lessor could only rely on a contractual right to terminate, he was entitled to receive arrears in rent, but not loss of bargain damages.

❑ Parties can avoid restriction on loss of bargain damages through careful drafting. E.g. the parties may include in their contract an agreed damages clause which provides that loss of bargain damages will be available should the plaintiff exercise its contractual right to terminate (Shevill v Builders Licensing Board).

❑ The High Court affirmed in Progressive Mailing House Pty Ltd v Tabali Pty Ltd that the right to loss of bargain damages will depend on the plaintiff showing that, in addition to any term in the contract giving a right to terminate for the breach that has occurred, the plaintiff would also have been entitled to terminate for the same breach under the common law rules on termination.

10) LIQUIDATED DAMAGES & PENALTIES [CB777]

Liquidated damages are damages (an amount that is payable to one party in the event of a breach by the other) set out as a clause in a contract. A penalty is a clause that requires the payment of a sum on breach that is not a genuine pre-estimate of the damage suffered as a result of the breach. It is not enforceable. (As per rule against penalties).

(a) Rules against penalties

• Liquidated/agreed damages are enforceable

• A liquidated or agreed damages clause ‘makes for greater certainty by allowing the parties to determine more precisely their rights and liabilities consequent upon breach or termination’: AMEV-UDC Finance Ltd v Austin (1986)

• If one party (the defendant) breaches the contract, the other party (the plaintiff) may sue to enforce the clause and recover the specified sum in an action for a liquidated sum, instead of being required to prove his or her loss in an action for damages.

• Penalties are unenforceable

|AMEV-UDC Finance Ltd v Austin (1986) |

|Rule: if a clause requiring the payment of a sum on breach is not a genuine pre-estimate of the damage suffered (ie the sum is extravagant or unconscionable, |

|having regard to the greatest loss which could be suffered by the pl following the breach of contract to which the sum relates) as a result of the breach, the|

|clause will be a penalty and unenforceable. (However, the innocent party may still claim damages at common law). |

[CB777] Facts: AMEV leased equipment to Lithotone (for which plaintiff was a guarantor), but terminated the agreement pursuant to an express power after L failed to pay an instalment within 7 days. The lease allowed AMEV to claim the total rental for the unexpired period of the lease plus the residual value of the equipment less the proceeds of any sale.

Issue: Was term liquidated damages or a penalty clause? The clause relied on by the lessor was penal because it required the lessee to pay the balance of the instalments without any rebate for the accelerated payment of future installments and without the lessor having to account to the lessee for the proceeds from the sale of the equipment. The High Court held that a purported agreed damages clause was a penalty.

(b) Distinguishing liquidated damages clause from penalty clauses [CB779]

A clause will be a penalty if the amount prescribed is ‘extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach’. (Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915]). Ie compare unliquidated damages to liquidated damages to see if there is a gross disproportion

• If the breach was a failure to pay money, and the sum stipulated is more than the money owing Kemble v Farren

• The clause will be construed from the point of view of the parties at the time of entering into the contract

• Must consider the degree of disproportion between the stipulated sum and the loss likely to be suffered by the plaintiff. (AMEV-UDC Finance Ltd v Austin (1986))

|Unliquidated damages |Liquidated damages |

|You cannot gain right to loss of bargain damages after |If a clause stipulates payment of loss of bargain damages for termination resulting from a |

|termination for a non-repudiatory breach: Shevill |non-repudiatory breach, it is not considered a penalty. This is because it is still a genuine |

| |pre-estimate of damage, and is not penal in character (Esanda Finance Corp v Plessnig). |

|Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd |

|In assessing whether a clause is a genuine pre-estimate of loss or an invalid penalty, the following should be considered: |

|It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could |

|conceivably be proved to have followed from the breach |

|It will held to be a penalty if the breach consists only in not paying a sum of money and the sum stipulated is a sum greater than the sum which ought to have|

|been paid. |

|There is a presumption (but no more) that it is penalty when ‘a single lump sum is made payable by way of compensation, on the occurrence of one more or all |

|of several events, some of which may occasion serious and others but trifling damages’ (Lord Elphinstone v Monkland Iron & Coal Co). |

|It is no obstacle to the sum stipulated being a genuine pre-estimate of damage that the consequences of the breach are such as to make precise pre-estimation |

|almost an impossibility. On the contract, that is just the situation when it is probably that pre-estimated damage was the true bargain between the parties. |

[CB779] Facts: New Garage signed a price maintenance agreement in which they agreed not to resell Dunlop tyres etc at prices below Dunlop’s current price list. It agreed to pay 5 pounds for each & every tyre sold in breach of the agreement as & by way of liquidated damages and ‘not as a penalty’. Dunlop later sought to recover under the agreement for sales by New Garage below the current price list.

Issue: Was it a penalty clause? House of Lords found that the stipulated sum was not a penalty. Although the clause stipulated the same sum as payable in respect of a no. of diff breaches, the stipulated sum was not unconscionable in respect of those breaches.

- The courts will decide whether a clause is a penalty clause regardless of terminology used in contract.

- Liquidated damages are a genuine pre-estimate of damage, while penalty clauses constitute a threat.

- Determining whether penalty/liquidated is a question of construction and decided upon terms and inherent circumstances

- Penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach

- Penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid

- Presumption that it is a penalty when a single lump sum is made payable on the occurrence of one or more events, some of which may occasion serious and others but trifling damages

|Esanda Finance Corp v Plessnig (1989) |

|A plaintiff may under an agreed damages clause recover an amount equivalent to the total price payable under the contract otherwise known as loss of bargain |

|damages. |

| |

|Courts are prepared to allow parties latitude in determining their rights & liabilities but the agreed sum most not be out of all proportion to damage likely |

|to be suffered as a result of the breach. |

[CB781] Facts: P had hire-purchase agreement with Esanda for prime mover. Cl 6 of contract entitled Esanda to terminate contract upon any default of payment. Cl 5 stipulated that Esanda could keep rent already paid, plus recover rest of rent, less the wholesale (not the retail which is more) value of the car.

Issue: Was it a penalty clause? No.

• Test is one of degree, depending on the degree of disproportion between the stipulated sum and loss likely to be suffered, and the nature of the relationship between the parties, a factor relevant to the unconscionability of the plaintiff’s conduct in seeking to enforce

• If the stipulated sum is payable on the occurrence of any breach of the contract, whether serious or trifling in its consequences, there is a presumption that the sum is a penalty

• Provisions will not be penal unless their operation is to impose some additional or different financial obligations or burden upon the defaulting party in the nature of a disincentive or punishment

This contrasts with Shevill v Builders Licensing Board and Brennan J suggested that it may be appropriate for the court to reconsider the incongruity in some later case.

Similar facts to AMEV-UDC. However, in this case the High Court held that the sum claimed by the lessor was not a penalty. The clause reduced the amount of outstanding rent claimed to take into account the benefits accruing to the lessor by reason of the lease being terminated. The possibility that the amount recoverable under the clause might in some circumstances exceed the lessor’s actual loss did not prevent the clause from being valid.

11) ACTIONS FOR DEBT [CB789]

(a) Debts & liquidated sums

Generally an action for debt will only arise upon an ‘executed consideration’ – performance of the contract by the party claiming payment (plaintiff). However in some cases, a sum may be recovered as a debt or liquidated sum where payable on a fixed day, regardless of whether the consideration has been exercised eg payment of installment.

• Entire obligation – one that must be wholly performed for P to be entitled to recover any of the payment for that performance specified, i.e. complete performance is a condition precedent to D’s obligation to pay

• Divisible obligations – where work to be done and corresponding payments are divided by the contract

(b) Requirements of an action for debt [CB789]

1. The contract must impose an obligation to pay a certain or ascertainable sum of money.

2. The right to payment of the sum must have ‘accrued’.

• Generally, for the right to a payment under the contract to have accrued, the party claiming the debt must have earned the payment by performing the obligations to which the payment relates.

• What amounts to sufficient performance of a party’s contractual obligations to entitle the party to claim the payment under the contract as a debt depends on a distinction between entire and divisible obligations and on the doctrine of substantial performance.

Advantages for an action for debt

• A party to a contract may sometimes be entitled to claim from the other party money owing under a contract through an action for a debt. (sometimes called an action for a liquidated sum)

• Where brought by a party not in breach of contract, the action in debt may be brought as an alternative to or in conjunction with an action for damages.

• Regardless of how the action is framed, the same sum cannot be claimed twice.

• The action to recover a debt is distinct from an action for damages.

o The common law does not and never did conceive of indebtedness in a sum certain for an executed consideration as a mere breach of contract: it is rather the detention of a sum of money. (Young v Queensland Trustees Ltd)

• A party may be entitled to recover a debt even where the party has breached the contract and the contract has been terminated in response to that breach.

• Whereas a party claiming damages must prove that there has been a breach of contract and a loss has been suffered, in an action for debt it is for the party against whom the debt is being claimed to prove any defence of payment.

• Moreover, the principle of mitigation of loss applicable to a claim for damages does not apply to the recovery of a debt.

> What amounts to sufficient performance of a plaintiff’s contractual obligations to entitle the plaintiff to claim payment of a debt depends on the following:

(i) Entire obligations [CB790]

❑ An entire obligation is one that must be wholly performed for a plaintiff to be entitled to recover any of the payment for that performance specified in the contract. ie complete performance is a condition precedent to def’s obligation to pay

❑ A contract will be entire if it appears that the parties intended that performance would only be acceptable if exact and complete.

❑ A contract is more likely to be construed as entire where it provides for a single sum of money payable on completion of performance although this factor is not conclusive (Hoenig v Isaacs).

(ii) Divisible obligations [CB790]

❑ A contract is likely to be divisible where the work to be done and the corresponding payments for that work are divided by the contract into corresponding segments. Where a contract is divisible the plaintiff will be entitled to payment for each segment or party of work which has been fully performed (Steele v Tardiani)

❑ Whether a contract is entire or divisible is a matter of construction depending on the presumed intentions of the parties and the circumstances of a particular case (Purcell v Bacon; Hoenig v Isaacs)

❑ A contract is more likely to be construed as divisible where payment and services are divided into instalments although this factor is not conclusive (Smith v Jones)

|Steele v Tardiani (1946) |

|Where a contract is entire, the defaulting party will not be entitled to a quantum meruit, ie to partial payment for that part of the contract properly |

|performed. |

| |

|Quantum meruit (dictionary): A claim to recover a sum as a quantum meruit for partial performance (such as work done or materials supplied), rendered at D’s |

|request. |

[CB790] Facts: Plaintiffs were employed by Steele to cut timber. No particular amount of timber was specified; plaintiffs were to be paid for each ton of wood cut. The contract required the timber to be cut into lengths each 6 feet long & 6 inches in diameter. The plaintiffs had cut 15000 tons of wood at lengths varying from 6 to 15 inches in diameter. Steel accepted wood, and sold wood that did not fit specifications as firewood. However, he refused to pay for any of the work. P claimed a quantum meruit for work correctly performed.

Issue: Was the contract entire or divisible? Plaintiffs were not employed to do a single piece of workforce a lump sum under an entire contract. The contract was instead ‘infinitely divisible’. Plaintiffs entitled to recover the contract price in respect of those tons of wood which qualified by substantial compliance with the contract specifications.

• Where the consideration for the payment of money is entire and indivisible…no action is maintainable, if any part of the consideration has failed; for, being entire, by failing partially, it fails altogether

• Where work is done outside the contract, and the benefit of the work is taken, a contract may be implied to pay for the work so done at the current rate of remuneration

• Subsequent sale of the firewood is considered here as taking the benefit of the work

Zamperoni Decorators Pty Ltd v Lo Presti [1983]

Facts: painting work which was substandard

While in particular instances it is proper to hold that there had not been substantial performance wit hthe consequence that the contractor fails in his claim, the court may regard defects, even though substantial but capable of remedying, as not justifying the denial of all reward to the contractor, but denying him an amount sufficient to pay for the remedying of the defects

(iii) Legislation [CB794]

|Nemeth v Bayswater Road Pty Ltd [1988] |

|Rent, like interest, accrues from day to day, so if a contract is terminated before rent is due, the plaintiff can claim rent apportioned according to |

|the time the def used the property. This legislation (Apportionment Act 1905 (NSW)) can be excluded in a contract. |

[CB794] Facts: Contract for hire of aircraft, effective 1 February; on 16 February the aircraft crashed and contract was thereby frustrated. Issues: Did the payer lose payment when there was no benefit? Was payer entitled to recover amount for remainder of month when there was no aircraft? Pursuant to the Property Law Act 1986, the monthly payment due (2200) is apportionable, i.e. due in respect of the incomplete period of 1-16 February

• “All rents, annuities, dividends, and other periodical payments in the nature of income… shall, like interest on money lent, be considered as accruing from day to day, and shall be apportionable in respect of time accordingly.”

• These apportionment provisions may be excluded by express stipulation.

• The provisions only apply to payments which are periodical; that is not to lump sum payments.

• Pursuant to the Property Law Act 1986, the monthly payment due (2200) is apportionable, i.e. due in respect of the incomplete period of 1-16 February

• Rent, like interest, accrues from day to day, and the payments shall be apportioned in respect of the time at which the rent, like interest, accrued due.

(iv) Substantial performance [CB796]

❑ Where a plaintiff has substantially performed his or her obligations under the contract, the doctrine of substantial performance may allow recovery of the contract price. Subject only to a counterclaim for omissions or defects in execution of performance of contract. If there is no substantial contract, the contractor cannot recover performance price as a debt: Bolton v Mahdeva

❑ Test: In assessing whether or not a contract has been substantially performed, courts will consider the performance rendered and the nature of the defects in that performance. Bolton v Mahdeva

❑ From Hoenig v Isaacs, it is stated that only a breach that goes to the ‘root of the contract’ will mean that substantial performance has not taken place. This is echoed in Bolton v Mahdeva where the ‘general ineffectiveness of [the object] for its primary purpose’ leads to a conclusion that substantial performance has not occurred.

|Hoenig v Isaacs [1952] |

|In a contract for work and labour, to be paid for by a lump sum on completion, defendant cannot repudiate liability to pay under the contract just because |

|work, though done, is in some respects not in accordance with the contract. The promise to complete work is not a condition, and so only a breach that goes to|

|the root of the contract will be sufficient to absolve employer from payment |

[CB796] Facts: D employed P to decorate his flat & provide it with furniture for sum of 750. P claimed to have carried out work in compliance with the contract & requested payment of 350, being the balance of money owing under the contract. Def argued that P had failed to perform his contract. Alternatively, work done negligently, unskillfully & in an unworkmanlike manner

Issue: In a lump sum contract for labour, can D repudiate on ground that work, though finished, is in some aspects not done in accordance with contract?

Doctrine of substantial performance only applies to entire contracts: fulfillment of each & every term under a contract is not necessarily a condition precedent in a contract for a lump sum.

If contract is entire & not performed there is no right to get paid.

• Contract had been substantially performed (according to official referee), so the fee would be paid, but the plaintiff can claim the amount less the amount to fix it up

• Whether it was substantial performance depends on whether it goes to the root of the contract/collateral to the main purpose

• Employer must pay contract price subject to deduction for defects or omissions; entire performance was not strictly condition precedent

|Bolton v Mahdeva [1972] |

|Where there has been substantial performance in a lump sum, contract must be considered in light of the nature of the defects & the proportion between the |

|cost of rectifying them & the contract price. |

[CB799] Facts: P agreed to install a combined heating & hot water system in D’s home for price of 560. D alleged that work was improperly done & that P had wholly failed to perform the contract.

Issue: Whether the defects in workmanship were of such a nature & amount that the pl could not be said to have substantially performed his contract (defects to cost 174 pounds to be repaid)

• Relevant to take into account both the nature of the defects and the proportion between the cost of rectifying and the contract price; law is not concerned with trifles (minor breaches)

• As a result of improper work, the heating system did not heat the house adequately, gave out fumes, and as a result, living rooms were uncomfortable ( not substantially performed

Plaintiff not untitled to payment for work which had been done because:

1. cost of repairing defect for D

2. Proportion b/w cost of defect & contract price.

3. Nature of the defect.

(v) Payment independent of performance [CB801]

Where payment is independent of performance, the sum will be owing as a debt when the time for payment arises.

The right of the vendor to retain the payments is conditional on the vendor completing the contract:

|McDonald v Dennys Lascelles Ltd (1933) |

|If the contract is not complete, the purchaser will be able to make a claim in restitution for return of the payments on the ground of total failure of |

|consideration. |

|If the contract expressly provides that installment payments will be forfeited should the contract not be completed, relief against forfeiture of those |

|payments may be available |

[CB801] Facts: Vendor of land assigned its contract to Dennys Lascelles. Purchaser needed to time to pay off land so McDonald agreed to guarantee payment. The contract was repudiated by Rye. Dennys Lascelles sued under the guarantee.

Issue: Was guarantor liable for payments? Lascelles must return payments already made. Because the contract had been terminated by the vendors, McDonald’s liability under the guarantee was extinguished, since it was secondary or accessory to the purchaser’s obligations.

• In such cases the purchase money of such part thereof becomes, on the day so fixed for its payment, a debt immediately recoverable…

• Upon a breach, both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. The rights to payment are still owed.

• This is contrasted to cases of fraud, where parties are rehabilitated and restored to the positions they occupied before the contract was made (void)

• Purchaser lost the land, and was not obliged to pay the instalment

• Principal debtor is relieved from personal liability to pay the instalments, and vendor’s right to obtain and retain the instalment ceases

• Once a right has accrued, it is payable and it doesn’t matter if the contract is subsequently terminated

(vi) Deposits [CB804]

A deposit is paid as a guarantee of the purchaser’s genuine intention to perform the contract. The deposit is paid by the purchaser in return for the vendor entering into the transaction, so the consideration for which the deposit is paid is the vendor entering into the contract.

Right to payment is considered independent of performance of the contract when it concerns deposits.

• If there is no express provision in the contract as to what is to happen to the deposit should the transaction not proceed, the matter is determined as a matter of construction of the contract based on the parties’ presumed intentions.

• If the deposit has not been paid when the vendor terminates the contract based on the purchaser’s breach, there is an unconditional right on the part of the vendor to recover and retain the deposit before the contract is discharged, that right survives the termination of the contract.

• Accordingly, if the purchaser has not paid the deposit before the contract is terminated, the vendor may recover the deposit from the purchaser. Bot v Ristevski

|McDonald v Dennys Lascelles Ltd |

|Generally, if the transaction goes ahead, the deposit is treated as part of the purchase price. |

|A purchaser can only recover their deposit if vendor breached contract & does not complete transaction. |

|If the transaction is not completed by reason of the default of the purchaser, the vendor with retain the deposit. |

|Bot v Ristevski |

|Courts have confirmed that a vendor’s right to retain a deposit following breach by the purchaser is not conditional upon subsequent completion of the |

|transaction. |

|That is, the right of action for debt will only be extinguished after termination if the balance of the deposit was conditional upon the subsequent completion|

|of contract. |

[CB804] Facts: Ristevski paid part of his deposit upon signing a contract to purchase land from Bot, and agreed to pay the balance within 7 days. When later wrongly repudiated the contract, Bot accepted this as a discharge. Bot sued for the unpaid balance of the deposit.

Issue: Was Bot able to recover unpaid deposit as a debt? A vendor is entitled to recover the deposit that should have been paid by the purchaser before she repudiated the contract.

Accrued right to exist after termination

|Westralian Farmers v Commonwealth (1935) |

|The termination of an executor agreement out of the performance of which pecuniary (financial) demands may arise imports that, just as on the one side no |

|further acts of performance can be required, no liability can be brought into existence if it depends a further act of performance. |

12) FRUSTRATION [CB502]

(a) Frustration as an excuse for non-performance [CB502]

Frustration = when the performance of a contract is disrupted by the occurrence of catastrophic events which have not been provided for by parties in their contract. Frustration discharges the parties from most future obligations under the contract, ie will not be liable for failing to perform.

Frustration encompasses cases in which performance becomes:

• Literally impossible: Taylor v Caldwelli

• And in some cases, when future performance has been rendered commercially unfeasible: Codelfa Constructions Pty Ltd v SRA NSW

(b) When is a contract frustrated? [CB502]

The test for frustration is based on the construction of the contract. Frustration may be based on the removal of the foundation of the contract, a total failure of consideration and an implied term.

The doctrine of frustration provides an excuse for non-performance:

• Parties may sometimes themselves provide in their contract what is to happen should certain disruptive events occur.

• In the absence of express provision, it will often be possible to assume that the risk of a disruptive event has been implicitly allocated to the party affected with the result that he or she will remain liable to perform any outstanding obligations under the contract.

|Davis Contractors Ltd v Fareham Urban District Council [1956] |

|Frustration occurs whenever the law recognizes that without the default of either party a contractual obligation has become incapable of being performed |

|because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. |

|Non haec in foedera veni: It was not this that I promised to do. |

|Contract becomes void when that event takes place – all pending obligations are discharged. |

| |

|Mere hardship, inconvenience or material loss, are generally not sufficient to frustrate a contract. |

Approved by the HC in Codelfa Constructions Pty Ltd v SRA NSW

A contract will not be frustrated merely because one party has made a bad bargain or because the results that one party had hoped or expected did not eventuate. Examples of more specific instances of frustration are:

(i) Destruction of the subject matter [CB503]

|Taylor v Caldwell (1863) |

|A contract is likely to be frustrated where the subject matter of the contract is destroyed. |

[CB503] Facts: The plaintiff hired the use of ‘The Surrey Gardens & Musical Hall’ for a series of concerts and day & night fetes. The hall was destroyed by fire before the dates, and the plaintiffs sued for damages.

Court held that contract was frustrated, and so the hall owners were not liable for breach of contract for failing to make the hall available. This was justified bc the parties contracted on the basis of the continued existence of the hall, and the existence of this subject matter was essential to the contract. Applying a similar principle, the Sale of Goods Acts provide that an agreement to sell specific goods is avoided where the goods perish before the risk passes to the buyer.

• Party must show that that the Music Hall, to be in a state fit for a concert, was essential for the fulfillment of the contract – such that the parties contemplated that the agreement could not be given without it

• The parties when framing their agreement had not present their minds the possibility of such a disaster and have made no express stipulation with reference to it

• Occurrence out of no fault of either party

• ‘Contracts where the performance depends on the continued existence of a given person or thing imply a condition that the impossibility arising from the perishing of the person or thing shall excuse the performance’

(ii) Disappearance of the basis of the contract [CB505]

|Krell v Henry [1903] |

|A contract may be frustrated not only where the subject matter is destroyed, but also where the event in question destroyed the whole basis or purpose of the |

|contract. |

| |

|As per Vaughan Williams LJ: |

|The condition or state of things need not be expressly specified. It is sufficient if the condition or state of things clearly appears by extrinsic evidence |

|to have been assumed by the parties to be the foundation or basis of the contract, and the event which causes the impossibility is of such a character that it|

|cannot reasonably be supposed to have been the contemplation of the contracting parties when the contract was made. |

| |

|You must ask: |

|What, with regard to all the surrounding circumstances, was the foundation of the contract? |

|Was the performance of the contract prevented? |

|Was the event which prevented the performance of the contract of such a character that it cannot reasonably be said to have been in the contemplation of the |

|parties at the date of the contract? |

|If all these questions are answered in the affirmative… both parties are discharged from further performance of the contract. Ie FRUSTRATED. |

[CB505] Facts: Henry took Krell’s chambers on 3rd floor of a Pall Mall building because he expected to have a good view of the coronation processions. The procession was cancelled because of the unexpected illness of the King, and Henry refused to pay the agreed balance of 50. Krell sued.

Issue: Was the contract frustrated? Contract was frustrated so no hire money was owing. The procession was regarded by both parties as the foundation of the contract, therefore it became radically different.

Vaughan Williams LJ cites Nickoll v Ashton [1902]: English law also applies the Taylor v Caldwell principle “where the event which renders the contract incapable of performance is the cessation or non-existence of an express condition or state of things, going to the root of the contract, and essential to performance”.

|Codelfa; Krell v Henry. |

|It is legitimate to look to extrinsic evidence in the form of relevant surrounding circumstances to assist us in the interpretation of the contract, unless |

|its language is so plain that recourse to surrounding circumstances would amount to no more than an attempt to contradict or vary the terms of the contract. |

|Brisbane City council v Group Projects Pty Ltd (1979) |

|“It is ‘the occurrence of any unexpected event that, as it were, changes the face of things’ that give rise to frustration” – Stephen J. |

| |

|Frustration occurs when, after the radically different situation, the contract is terminated, NOT when the parties realise the frustration and contract to |

|deal with it |

| |

|Limitations on doctrine of frustration: For an event to frustrate the contract: |

|it must not be one which the parties could reasonably foresee |

|it must not be just a change in how onerous it is to perform contract |

|there must a fundamental alteration in the nature of the contract |

[CB507] Facts: contract for construction; one party to develop residential subdivision, the other to apply to have the land zoned residential in consideration. Before the rezoning had been approved, the Crown resumed the land, Group could not proceed with the proposed subdivision; council claimed obligation was still in force.

Issue: Did Group Projects obligations remain in place? The contract had been frustrated. Although this was not a case where performance was rendered impossible, the acquisition of the land had wholly destroyed Group Projects’ purpose in undertaking the obligations.

This can be used as an analogy: “Although Group Projects no doubt remains able to perform the bulk of the obligations which it has undertaken, being that part of the work which is not to be undertaken on the acquired land, and although the work will have neither changed in character nor become more onerous, yet the acquisition of the land for a school site has wholly destroyed Group Projects’ purpose in undertaking any obligations at all.”

(iii) A change in the state of affairs is essential to performance [CB511]

|Codelfa Construction Pty Ltd v SRA NSW (1982) |

|“A contract will be frustrated when the parties enter into it on the common assumption that some particular thing or state of affairs essential to its |

|performance will continue to exist or be available, neither party undertaking responsibility in that regard, and that common assumption proves to be |

|mistaken.” – Mason J. |

| |

|Ie. Mason J: Modern view of frustration: Frustration occurs wherever the law recognizes that w/o default of either party a contractual obligation has become |

|incapable of being performed b/c the circumstances in which performance is called for would render it a thing radically different from that which was |

|undertaken by the contract. |

|A party may succeed in a claim in restitution for reasonable remuneration for work done after the contract was discharged by frustration. |

[CB511] Facts: When Codelfa contracted with the SRA to complete excavation and construction work on the Eastern Suburbs Railway within 130 weeks, the parties assumed that it would have statutory immunity from proceedings for nuisance & that it would work continuously. However, despite the Act, Codelfa was restrained by injunctions from working at night & certain work was prohibited on Sundays. Codelfa incurred extra costs as a result of the delay.

Codelfa claimed costs either

1. as damages for breach of an implied warranty as to the hours is could work; or

2. On a quantum meruit following frustration of the contract.

Issue: Had the contract been frustrated? Yes bc the granting of the injunction made the situation in which performance was to occur fundamentally different from the situation contemplated by the parties as revealed by the construction of the contract in the light of the surrounding circumstances.

• Day of granting injunction = date of frustration

• As a result of frustration, the contract does not cease to exist, it just stops being enforced from the date of frustration and further obligations are discharged ( arbitration clause is to remain as if the contract is still alive

|Tsakiroglou & Co Ltd v Noblee Thorl GmbH |

|However, a change in the state of affairs affecting performance may not frustrate the contract where there is an alternative method of performance possible |

|which, although more onerous, is not radically different from that contemplated under the contract. |

Frustration v mutual mistake? Codelfa Construction Pty Ltd v SRA NSW (1982)

Mason J:

|Frustration |Mutual mistake |

|Common contractual assumption is one of future fact. |Common contractual assumption is one of present fact. |

|( Contract is binding until the assumption is falsified |( Contract is void ab initio |

(c) Limitations on the doctrine of frustration [CB527]

1. The risk of the frustrating event must not have been provided for by the parties in the contract (Codelfa Constructions Pty Ltd v SRA NSW)

2. The purported frustrating event must not be one which the parties could ‘reasonably be thought to have foreseen’ (Codelfa Constructions Pty Ltd v SRA NSW; Davis Contractors Ltd v Fareham Urban District council)

3. The frustrating event must have occurred w/o fault by the party seeking to rely on frustration (Bank Line Ltd v Arthur Capel & Co; Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal)

(d) The consequences of frustration [CB527]

(i) The consequences of frustration at common law [CB527]

At common law, the rights of the parties in relation to payments made, or due, before the contract was frustrated depends on whether or not there has been a total failure of consideration. Where the consideration for that payment has totally failed, a paying party will be entitled to restitution, that is, repayment of money s/he has paid under a frustrated contract. Under the doctrine of total failure of consideration, consideration refers to performance of the promise.

Frustration terminates the contract, and no further performance of obligations is required. At common law, rights and liabilities which have accrued unconditionally prior to the time of the frustrating event remain in place, while the parties will be discharged from most future obligations.

Many residual obligations continue unaffected (e.g. arbitration clauses) (Codelfa).

|Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] |

|It was held that the mere fact that a party has incurred expenses in preparing to perform a contract does not prevent there being a total failure of |

|consideration. Moreover, for there to be a common law right to restitution of money paid under a frustrated contract on the basis of failure of |

|consideration, the failure must be total, not partial. |

|Ie. Common law does not allow apportionment of contractual payments to reflect a partial performance of the contract. |

| |

|Where money has been paid but other party fails to perform, the money paid to secure performance must be returned. |

[CB527] Facts: A contract was made in 1939 between the sellers, an English company (defendant), and the purchasers, a Polish company (plaintiff/appellant), for the sale of machinery at a price of 4,800. In accordance with the contract, the purchasers made an initial payment to the sellers of 1000. Later that year Germany invaded Poland and Britain declared war on Germany. The contract was found to be frustrated. Purchasers requested return of the money. Sellers sought to retain the money on the basis that they had done considerable work in manufacturing the machinery.

Issue: whether, when this contract became frustrated, the appellants could claim back from the respondents the 1000 pounds paid when placing the order? The House of Lords held that the purchasers could recover their 1000 pounds bc the 1000 was an advance payment for consideration which had failed totally, so it was recoverable. Although the seller had incurred expenses in preparing to perform the contract, the consideration in this case was the delivery of the machinery, which had not taken place.

The courts considered total failure of consideration in regards to one party having already partially prepaid for goods and requesting the return of the money while the sellers had already heavily modified the goods that were to be delivered and claimed that there had not been a total failure of consideration.

• Where frustration occurs, generally ‘the loss lies where it falls’ [The Chandler v Webster rule]– sums paid or rights accrued before that event are not to be surrendered, obligations due for performance after that event are discharged ( This is NOT seen as the ideal solution in this case

• Upon frustration, neither party can sue on the contract in respect of anything which was to be done under it after it

• Here, a plaintiff can sue for the recovery of a payment in respect of which consideration has failed

• Vendor must return all the money prepaid, despite spending time and money in the process of performance

(ii) The consequences of frustration under legislation [CB530]

The NSW Frustrated Contracts Act 1978 seeks to apportion the losses caused by frustration between the parties through detailed provisions aimed at establishing a complete code for adjusting parties’ rights. The 4 main situations contemplated by the Act are:

• S12: The Act requires the return of money paid before the contract was frustrated.

• S13: Where expenses have been incurred for the purpose of performance of the contract which is not rendered, the Act provides for the loss relating to those expenses to be shared between the parties.

• S10: Where a party has performed his or her obligations under the contract, the Act provides for compensation to be paid.

• S11: Where only partial performance has been rendered, the Act sets out complex provisions for valuing the compensation to be paid for that performance.

• The amount payable depends on the extent to which the acts performed where beneficial to the other party. The court may disregard the detailed adjustment provisions where their application would be ‘manifestly inadequate or inappropriate’, would cause ‘manifest injustice’ or would be ‘excessively difficult or expensive’.

|NSW Frustrated Contracts Act 1978 |

|Section 6: Act does not apply to certain contracts |

|(1) This act |

|a) does not apply to a contract made before the commencement of this act |

|b) Does not apply to a charter-party, except a time charter-party and except a charter-party by way of demise. |

|c) does not apply to a contract (other than a charter-party) for the carriage of goods by sea |

|d) does not apply to a contract of insurance |

|e) does not apply to any other contract in so far as the parties thereto have agreed that this Act does not apply to the contract |

|(2) This act does not apply to a contract embodied in or constituted by the memorandum or articles of association or rules or other instrument or agreement |

|constituting or regulating the affairs of, any of the following bodies: |

|a) - g) details the bodies that do not apply |

|(3) Where a contract is severable into parts and one or more but not all parts are frustrated, this Act does not apply to the part or parts not frustrated. |

| |

|Section 10: Adjustment where who performance received |

|Where a contract is frustrated and the whole of the performance to be given by a party under the contract has been received before the time of frustration, |

|the performing party shall be paid by the other party to the contract an amount equal to the value of the agreed return for the performance |

|IE: if you carried out the obligation you are entitled to payment |

| |

|Section 11: Adjustment where part performance only received |

|(1) This is designed to ameliorate the view that ‘the loss lies where it falls’ |

|(2)Where a contract is frustrated and part, but not the whole, of the performance to be given by a party under the contract has been received before the time |

|of frustration, the performing party shall be paid by the other party to the contract: |

|a) an amount equal to the attributable value of performance, except where the attributable cost of the performance exceeds its attributable value; or |

|b) where the attributable cost of the performance exceeds its attributable value an amount equal to the sum of: |

|i) the attributable value of the performance; and |

|ii) on-half of the amount by which the attributable cost of the performance exceeds its attributable value |

|NOTE: this sub-section looks at the circumstances of the case, and asks; what is a reasonable payment for performance thus far completed? |

| |

|Division 2: other adjustments |

|Section 12: Return of money paid |

|Where a contract is frustrated and a party to the contract has paid money to another person (whether or not a party to the contract) as, or as part of, an |

|agreed return for performance of the contract by another party (whether or not that other party is the person to whom the payment was made and whether or not |

|there has been any such performance) that other party shall pay the same amount of money to the party who made the payment |

|Section 13: Adjustment of certain losses and gains |

|Basically this refers to the idea that expenses are shared. |

13) MISTAKE [CB839]

• Mistakes induced by others = relief for misrepresentation/misleading/deceptive conduct

• If a subjective mistake is found by common law, the contract becomes void ‘ab initio’, that is, there never was any contract between the parties. As this is a drastic consequence, common law recognises mistake as operative in very few cases.

• Moreover, the law may clearly put the risk on one party by applying principles such as caveat emptor (let the buyer beware) or caveat venditor (let the seller beware)

• Restitution – person who has received money under the alleged contract will have to return it

• In equity, a contract affected by an operative mistake is treated as voidable rather than void. A voidable contract is one which may be set aside, that is, rescinded, and the parties are restored to the position they were in before the contract was made. As the consequences are not as drastic in equity as in common law, it is more likely that a mistake will be found in equity.

• Equity can also refuse to grant specific performance on the ground of mistake, or provide rectification.

There are two categories of cases:

1. Parties are in agreement: Both parties have reached a consensus ad item, making the same false assumption in respect to a fundamental matter, such as the very existence of the subject matter or an important quality of the subject matter, or in recording their common intentions.

2. Parties are not in agreement. If both of them make different mistakes and misunderstood eachother, the mistake is said to be mutual. If only one of them makes a mistake, the mistake is said to be unilateral.

How to approach a mistake problem

1. Adopting an offer and acceptance analysis, is there a contract?

2. As a matter of construction of the contract, has one of the parties, expressly or impliedly, undertaken the risk of the mistake or is the contract subject to a condition precedent relating to the subject matter of the mistake?

3. What kind of mistake was made? Was it a common mistake (where the parties are in agreement), or was it mutual (where the parties are at cross purposes) or unilateral (where the parties are at cross-purposes, but one party is right and the other wrong; or where one party knows of the other’s mistake)?

4. What did the mistake relate to and was it fundamental? Did it relate to the existence of the subject matter, the title to the subject matter, the quality of the subject matter, the terms of the contract, the nature of the contract, the identity of the parties, or the recording in writing of the contract?

5. To what extent, if any, is the mistake in question recognized as operative at common law or in equity?

6. What relief, if any, is available?

When does mistake operate?

|Bell v Lever Brothers Ltd [1932] |

|As per Lord Atkin: “If mistake operates at all it operates so as to negative or in some cases nullify consent. The parties may be mistaken in the identity of|

|the contracting parties, or in the existence of the subject matter of the contract at the date if the contract, or in the quality of the subject matter of the|

|contract…” |

(a) Parties in agreement [CB841]

(i) Parties in agreement ( Mistake as to existence of subject matter [CB841]

▪ It is all a matter of construction: McRae v Commonwealth Disposals Commissions (1951)

▪ s11 Sale of Goods Act: “where there is a contract for the sale of specific goods, and the goods without the knowledge of the seller have perished at the time when the contract is made the contract is void”

• Does not apply where the goods NEVER EXISTED (McRae)

▪ It is an implied condition of a contract for the sale of specific chattels that at the time of making the contract or before the time of performance the chattels are or will be in existence: Goldsbrough Mort and Co Ltd v Carter (1914) as per Griffith CJ.

Different approaches:

|Constructionist approach |Civilian approach |

|The question of liability can be solved by construction or interpretation of |Start by looking at the contract itself. If the contract itself did not |

|the contract. |evidently allocate the risk of non-existence of the subject matter then the |

|One interpretation is that the seller has promised the subject matter exists. |question would be weather the contract was void for mistake on the basis that |

|Another interpretation is that the purchase promised to pay for the chance |the consent of both parties were nullified. If the mistake is so fundamental |

|that the subject matter existed. Yet another interpretation could be that the|that it related to the possible achievement of the contract’s object, neither |

|contract is subject to an implied condition precedent that the subject matter |party would be liable. |

|existed and thus there is no contract if the subject matter does not exist. | |

|McRae v Commonwealth Disposals Commission (1951) |

|The HC used a constructionist approach and said that even if a civilian approach is used, even if a common mistake of a fundamental nature could render a |

|contract void, a party cannot rely on such a mistake where it consists of a belief entertained without any reasonable ground and deliberately induced by that |

|party in the mind of the other party. |

[CB841] Facts: The Commission invited tenders for the purchase of an oil tanker lying at the bottom of Jourmans Reef (north of New Guinea) which it said contained oil. The plaintiffs/appellants (brothers) submitted a tender of 285 pounds which was accepted. Despite extensive efforts, no such tanker was found to exist. The plaintiffs incurred considerable expense in fitting out a salvage expedition, only to discover they had purchased a non-existent tanker.

• Here, there is a failure of consideration, and the purchaser was not bound to pay the price; if he had paid it before the truth was discovered, he could have recovered it back as money had and received

• No need for a doctrine of mistake

• Did not imply a condition precedent as it does not fulfill the tests of implying a term

Goldsbrough Mort v Carter (1914)

• It is an implied condition of a contract for the sale of specific chattels that at the time of making the contract or before the time of performance the chattels are or will be in existence

• Section 11 of the Victorian Goods Act: where there is a contract for the sale of specific goods, and the goods without the knowledge of the seller have perished at the time when the contract is made the contract is void

(ii) Parties in agreement ( Mistake as to title

❑ A case of res sua (his/her own property): A person may enter a contract to purchase or lease some property which, unknown to the parties, is already owned by the purchaser or lessee. From various authorities, the contract may be void for common mistake (Bell v Lever Brothers Ltd), void by reason of an implied condition precedent (Solle v Butcher) or that it is voidable in equity on a total failure of consideration (Svanosio v McNamara).

❑ If after a contract of sale has been entered into it is discovered that a third person owns the property, it could be argued that the contract is void on the basis of mistake or an implied condition precedent. However, it is more likely that the seller is in breach of an implied promise that he or she has title to the property (Svanosio v McNamara; Bell v Lever Brothers Ltd).

(iii) Parties in agreement ( Mistake as to quality of subject matter [CB849]

❑ A fundamental common mistake as to the quality of the subject matter of the contract is unlikely to render the contract void at common law but may render it voidable in equity.

❑ Regarding mistakes in common law, in Bell v Lever Brothers Ltd, the House of Lords held that the mistake must be fundamental when related to the quality of the subject matter. Lord Atkins said that the common mistake must be ‘as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be’. (See TB for more details)

❑ For a later English case, Associated Japanese Bank (International) Ltd v Credit du Nord SA, see TB. However, the persuasiveness of the case in Australia may be doubted due to a potential conflict with McRae v Commonwealth Disposals Commission.

❑ Regarding mistakes at equity, in Solle v Butcher, it was held that a contract can be set aside in equity ‘if the parties were under a common misapprehension either as to facts or as to their relative and respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault’.

❑ In Australia, the view of Lord Denning from Solle v Butcher that despite the parties’ mistake a contract holds good unless and until it is set aside on some equitable ground was approved in Svanosio v McNarmara. However, the test in Australia might be strichter than the one in Solle v Butcher as the Dixon CJ and Fullagar J said that ‘it is difficult to conceive any circumstances in which equity could properly give relief by setting aside the contract unless there had been fraud…or a condition can be found express of implied in the contract’.

|Bell v Lever Brothers [1932] |

|Rule: A mistake as to the quality of subject matter will not affect assent unless it is the mistake of both parties, and is as the existence of some quality |

|which makes the thing without the quality essentially different from the thing as it was believed to be. |

|Test: Does the state of the new facts destroy the identity of the subject matter as it was in the original state of facts? |

| |

|Lord Atkin: a common mistake must be as to the existence of some quality which makes the thing without that quality substantially different from the thing it |

|was believed to be. |

[CB849] Facts: Bell (defendant/appellant) employed by Lever Brothers(plaintiff/respondent) to manage a company. Lever Brothers gave him a massive payout because wanted to restructure company. They later discovered that Bell had conducted secret dealings which would have led his immediate dismissal without compensation.

Issue: Was the contract void for common mistake? No.

• Lord Atkin: “The party paying for release of the employee got exactly what he was bargaining for” and it was not essentially different from what it was meant to be. E.g. A buys a picture from B; both A and B believe it to be the work of an old master and a high price is paid. It turns out to be a modern copy. A has no remedy in the absence of representation or warranty

(iv) Parties in agreement ( Mistake as to equity

|Taylor v Johnson (1983) |

|HCA recognised an equitable jurisdiction to set aside a contract where it is unconscionable for one party to take advantage of another’s mistake |

|Test: Were the parties under a fundamental misapprehension either as to the facts or their respective rights? |

NB: This is similar to the formulation of Lansdowne v Lansdowne as discussed by Denning LJ in:

|Solle v Butcher [1950] |

|Lord Denning introduces doctrine of equitable mistake. Mistake is of two kinds: |

|Mistake which renders the contract void (common law mistake). |

|mistake which renders the contract voidable, ie liable to be set aside on such terms as the courts thinks fit (equitable mistake) |

| |

|“A contract is… liable in equity to be set aside if the parties were under a common misapprehension either as to the facts or as to their relative and |

|respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault.” |

| |

|NB// over-ruled by Great Peace in England but continues to be applied in Australia. |

[CB853] Facts: Solle (tenant/plaintiff) leased a flat from Butcher (landlord/appellant) for 7 years on an annual rental of 250. When the lease was signed they both considered the recent alterations to the flat were so substantial as to take it outside the controls of the Rent Restrictions Act. Solle later claimed that the controls did apply so that Butcher could only recover a rent of 140.

Issue: Both made a mistake, but what kind of mistake & what was the appropriate remedy? The lease should be set aside, on terms that the landlord should complete the notice required to take the rent outside the legislative control, and the tenant who could in the mean time stay on, should be offered a new lease for the balance of the original term at a rental of 250.

• A contract will be set aside if the mistake of one party has been induced by misrepresentation

• Also liable to be set aside if there was a common misapprehension either as to facts or as to their relative and respective rights, provided that the misapprehension was fundamental and the party seeking to set it aside was not himself at fault

[CB857] Great Peace [2003] Abolishes doctrine of equitable mistake ( Unlikely to be followed in Australia.

In order for common mistake to avoid a contract, there must be a common assumption as to the existence of a state of affairs.

(v) Parties in agreement ( Mistake in recording the agreement [CB870]

❑ Courts have an equitable power to rectify a contract in writing where the writing does not express the parties’ common intention.

❑ Although the PER rule applies in common law, in equity evidence can be given that the written contract was not in accord with the true intentions of the party and the court can rectify the document so that it expresses the true intentions of the party (MacDonald v Shinko Australia Pty Ltd).

❑ In Maralinga Pty Ltd v Major Enterprises Pty Ltd, Mason J said that ‘the court must be satisfied that the instrument does not reflect the true agreement of the parties. It cannot be so satisfied unless the writing was intended to record the earlier agreement and by mistake of the parties it fails to do so. If the plaintiff fails to establish these elements he does not displace the hypothesis arising from the execution of the written instrument, namely, that it is the true agreement of the parties’.

❑ An agreement does not have to have been concluded before the execution of the written instrument in order to obtain a grant of rectification. The remedy is available in cases in which the instrument sought to be rectified constitutes the only agreement between the parties but fails to reflect their common intentions (Maralinga Pty Ltd v Major Enterprises Pty Ltd).

❑ Rectification: available where the parties have deliberately ‘used words which, when properly construed, do not accord express their true intention’. Available where the parties are mistaken as to the meaning or effect of the words they have used. The crucial requirement is that there must be a lack of correspondence between the form of the document and the common intention of the parties.

|Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) |

|The court must be satisfied that the instrument does not reflect the true agreement of the parties. |

|Need to look for “common intention” not just intention of one party or even both parties unless intention is communicated |

[CB870] Facts: Major Enterprises (plaintiff/appellant) put up land for sale by auction. The auctioneer announced that the purchaser would be allowed a mortgage back to the vendor for $64,500 for 3 years at 8%. Maralinga’s bid was accepted & it executed a contract which required the whole price in cash. Both parties were aware that the contract did not contain a provision for any part of the purchase price to remain on mortgage. Ie Appell was mistaken as to the effect of the contract, but not what was in the contract. Pl sued for rectification & specific performance of the contract as rectifies

Issue: Could the wording of the contract be rectified? Majority of HC refused to order rectification. No mistake had been made as to what the written contract contained. Both parties knew the written instrument differed from the terms of the antecedent bargain. Need to look for ‘common intention’ not just intention of one party or even both parties unless intention is communicated.

Barwick’s dissent: “common intention of the parties in signing the form was to record the oral agreement made by and at the auction and that there was no intention on the part of either by the writing to make an agreement in any respect at variance with that oral agreement”

Rectification:

Pukullus v Cameron (1982)

[CB873] Contract for sale of land: Mistaken as to what was in subdivision 1, but the parties’ intentions were to sell subdivision 1, so rectification was not needed.

The High Court held that the written contract did embody the intention of the parties, which was to transfer Subdivision 1 or portion 1154. Although the parties erroneously believed the bore and cultivated area to be included in that parcel, there was no evidence of an intention to contract for the sale of that area. Moreover, to obtain rectification, the purchaser would need to prove the precise term that was agreed between the parties and mistakenly omitted from the written contract. Brennan J said that rectification could only be granted ‘upon proof that the parties intended that a further parcel of land, precisely identified, was to be included in the sale’.

(b) Parties not in agreement [CB875]

(i) Parties not in agreement ( Mistake as to terms [CB875]

When one of the parties to the alleged agreement knows (or perhaps ought to know) that the other party is under a mistaken impression as to terms, it is known as a unilateral mistake. According to Taylor v Johnson, the objective approach should be used hence where there is unconscionable conduct the contract is rendered voidable.

|Smith v Hughes (1871) |

|‘A party who has entered into a written contract under a serious mistake about its contents in relation to a fundamental term will be entitled in equity to an|

|order rescinding the contract if the other party is aware that circumstances exist which indicate that the first party is entering the contract under some |

|serious mistake or misapprehension about either the content or subject matter of that term and deliberately sets out to ensure that the first party does not |

|become aware of the existence of his mistake or misapprehension’ |

|The above statement may be too narrow as knowledge of circumstances indicating serious error may be sufficient for it to be unconscionable to accept the |

|benefit of the contract and mistake as to the subject matter, rather than mistakes as to terms, may be sufficient. |

| |

|Unilateral mistake: When one of the parties of the alleged agreement knows that the other party is under a mistaken impression as to the terms of a contract, |

|there is not question of the former person being misled by the apparent assent of the latter. For contract to be set aside for unilateral mistake there needs |

|to be fraud, misrepresentation or a condition in the contract. Fraud was equated with unconscionable dealing. |

[CB876] Facts: The plaintiff farmer offered a parcel of oats for sale and the defendant racehorse trainer accepted the offer. However, the defendant refused to accept the oats on the basis that they were new (green) oats and of no use to him (he thought he was buying old oats).

The jury found for the defendant but a question arose as to whether the trial judge’s direction to the jury was correct.

1. If the word ‘old’ was used in the discussions preceding the sale, then the verdict was correct as the contract was for the sale of old oats.

2. If the word ‘old’ was not used, but the seller knew that the buyer believed the oats to be old, then the verdict was wrong on the basis of Caveat Emptor (let the buyer beware).

3. If the word ‘old’ was not used, but the seller knew that the buyer believed that the seller warranted that the oats were old, the verdict was correct.

In other words, there is a distinction between a unilateral mistake regarding the existence of a contractual term as to quality and a unilateral mistake as to the existence of the quality itself.

|Taylor v Johnson (1983) |

|Mistake that would be so inequitable that a party should be held to his contract that equity would be set aside. Unlikely to do so unless there is fraud |

|misrepresentation or there’s a condition. Fraud includes unconscionable dealing |

| |

|As per Lord Denning LJ: Once a contract has been made, that is to say, once the parties, whatever their inmost states of mind, have to all outward appearances|

|agreed with sufficient certainty in the same terms on the same subject matter, then the contract is good unless and until it is set aside for failure of some |

|condition on which the existence of the contract depends, or for fraud, or on some equitable ground. Neither party can rely on his own mistake to say it was a|

|nullity from the beginning, no matter that it was a mistake which to his mind was fundamental, and no matter that the other party knew that he was under a |

|mistake. |

|Lord Denning LJ remarks were intended to extend to a mistake as to the existence or content of an actual term of such a contract. |

[CB878] Facts: Johnson (vendor/defendant) agreed to sell Taylor (purchaser/plaintiff) some land for a total purchase price of $15,000, which was reflected in the written contract. Vendor claimed she mistakenly believed that the amount was $15,000/acre not a total purchase price, with a total purchase price of $150,000. Johnson subsequently declined to perform the contract.

Issue: Was the contract voidable in equity for unilateral mistake? Contract should be set aside. Applied Solle v Butcher.

Limitations

1. The 2nd party must actually be aware that the 1st party is entering into the contract and the 2nd party deliberately sets out to ensure that the 1st party does not become aware of the mistake

2. 2nd party has not materially altered his position

3. rights of third party have not intervened

High Court Judgment:

• Judgments of Blackburn and Hannen JJ in Smith v Hughes: A contract is void if one party to the contract enters into it under a serious mistake as to the content or existence of a fundamental term and the other party has knowledge of that mistake.

• Holmes J in The Common Law (1881): The law is concerned, not with the real intentions of the parties, but with the outward manifestations of those intentions.

• In practice, as between the contracting parties, there is little difference in the result of the application of the two competing theories since allied with any assertion of the ‘subjective theory’ is acceptance of one manifestation of the doctrine of estoppel which would ordinarily operate to preclude one, who had so conducted himself that a reasonable man would believe that he was assenting to the terms of a proposed contract.

|Subjective theory |Objective theory |

|There is no binding contract either at common law or in |There is a contract which, in conformity with the common law, continues to be binding, unless and |

|equity, equity following the common law in this respect. |until it is avoided in accordance with equitable principles which take as their foundation a |

| |contract valid at common law but transform it so that it becomes voidable. |

|the contract is void ab initio |the contract is void only |

• Denning LJ in Solle v Butcher had likewise expressed the view that, in the absence of fraud or misrepresentation, resort must be had to equity to escape from the terms of a contract on the ground of unilateral mistake. In this case, the court is prepared to accept that where the mistake is as to the existence or content of an actual term in a formal written contract.

• Professor Corbin: There is practically universal agreement that, if the material mistake of one party was caused by the other, either purposely or innocently, or was known to him, or was of such character and accompanied by such circumstances that he has reason to know of it, the mistaken party has a right to rescission.

• For this case, the appropriate proposition of law applies:

o It is that a party who has entered into a written contract under a serious mistake about its contents in relation to a fundamental term will be entitled in equity to an order rescinding the contract if the other party is aware that circumstances exist which indicate that the first party is entering the contract under some serious mistake or misapprehension about either the content or subject matter of that term and deliberately sets out to ensure that the first party does not become aware of the existence of his mistake or apprehension. ( This statement may be too narrow.

o Firstly, the statement refers to deliberate acts of concealment, whereas knowledge of circumstances indicating serious error may well be sufficient to make it unconscionable to accept the benefit of the contract.

o Secondly, it refers to mistakes as to terms, whereas there is a hint in the case that mistake as to subject matter might also be sufficient.

• The court found that Taylor believed Johnson was mistaken about either the terms or the subject matter.

• The stipulated price was clearly a fundamental term of the contract, and it can be inferred from the evidence that Mr Taylor deliberately set out to ensure that Mrs Johnson did not become aware that she was being induced to grant the option and, subsequently, to enter into the contract by some material mistake or misapprehension as to its terms or subject matter.

• Appeal dismissed. Dawson J dissenting though.

(ii) Parties not in agreement ( Mistake as to identity [CB881]

(1) When parties are not face to face: [CB882]

|Cundy v Lindsay (1878) |

|Where the parties are not face to face and there is a mistake to identity, it was decided, that no title for the subject matter could be passed to the rogue |

|and hence no title for the subject matter could be passed to the man he sold the subject matter to. Ie voidable before it has been sold to third party. |

Facts: purchaser, pretending to be someone else, purchases goods, and sold to another

However, the opposite conclusion was reached in Kings Norton Metal Co Ltd v Edridge Merrett & Co. The difference between the two cases was that in the first there was a mistake as to identity while in the second there was a mistake as to attributes (e.g. status, honesty, experience, creditworthiness).

|Shogun Finance v Hudson [2003] |

|Where dealings are not face-to-face, the contract is void, not voidable. |

|No contract could arise between the parties without Patel’s authority. No contract as there was no consensus ad idem between the parties. |

Facts: A rogue pretending to be Mr Patel gained possession of a car via a hire-purchase agreement it made with Shogun Finance. There was no face-to-face meeting b/w the rogue & Shogun. Hudson was a private purchaser who bought the car from the rogue. The rogue disappeared and no repayments were made under the agreement. The relevant legislation stipulates that a private purchaser of a car bought under hire purchase shall have the title of that vehicle transferred to her.

Issue: Was the rogue a debtor within the meaning of the act, ie. did the title to the car pass to the rogue and then to Hudson? Title did not pass because contract between the rogue & the crook was void.

The company, in conducting Patel’s credit and employment records, would show that the company did intend only to contract with Patel and not just anyone. The reasonable bystander would infer that a contract was not made due to this.

(2) When parties are face to face: mistaken identity/false name: [CB883]

|Lewis v Averay |

|When parties are face to face, and one party is assuming a false name, it will be presumed that the mistaken party is intending to contract with the person |

|physically present. The contract is voidable, ie liable to be set aside by the mistaken person so long as third parties have not in good faith acquired rights|

|under it. |

[CB883] Facts: Lewis (plaintiff) sold his car to a person claiming to be the actor, Richard Greene. Lewis was unwilling to hand over the car unless the rogue provided proof of who he was, which he did. Lewis was satisfied & handed over the car, but the cheque was later dishonoured. The rogue sold the car to Averay (defendant), an innocent purchaser. Lewis sued Averay for conversion.

Issue: Was the contract void or voidable?

When 2 parties make an (apparent) contract that fact that one party is mistaken as to the identity of the other party does not mean there is no contract. It only means the contract is voidable, ie liable to be set aside by the mistaken person so long as third parties have not in good faith acquired rights under it.

When a dealing is b/w a seller & a person who is actually there present before him, there it is presumed there is a contract even tho’ there is a fraudulent impersonation by the buyer. There is a contract made with that very person there. The contract is liable to be avoided for fraud, but it is still a good contract under which title will pass & until it is avoided.

(iii) Parties not in agreement ( mistakenly signed document: non est factum [CB886]

|Petelin v Cullen (1975) |

|The Non est factum defence is available to those who: |

|Are unable to read owing to blindness or illiteracy and who must rely on others for advice as to what they are signing |

|Through no fault of their own are unable to have any understanding of the purport of a particular document |

| |

|Rule: If a person proves that he or she signed a document without carelessness and believing it to be a document fundamentally different from what it was, he |

|or she is not bound by the signature. The rule is applicable to cases where the issue arises between the person who signed the document and the other party |

|to the contract, and where it arises between the person who has signed the document and an innocent third party. |

|There is a heavy burden on a person who seeks to rely on the rule. |

[CB886] Facts: Cullen (plaintiff/respondent) presented Petelin (who spoke little English) with a document for signature & told him it was a receipt for $50 he had previously sent him. In fact it was an extension of an option (in favour of Cullen) to buy land owned by Petelin. Cullen exercised the option, but Petelin refused to sign the contract of sale. Cullen sued for specific performance. Petelin raised the defence of non est factum.

Issue: Does the non est factum defence succeed in this case? Appeal allowed bc the document Petelin signed was radically different from what he believed it to be, so accordingly the option was void.

In this case, the signer’s carelessness or otherwise was irrelevant. Cullen was not an innocent person who had relied on a signature with no reason to doubt its validity. He had misrepresented the nature of the document to Petelin and knew of his language problem. In any event, Petelin was not careless -he could not read English and he had a choice of either relying on Cullen or incurring the expense of a solicitor’s advice.

It should be noted that this type of case is an instance of unilateral mistake and instead of claiming the option was void at common law, Petelin could have invoked equity to have the contract set aside.

NB: It must be noted that when the plea of non est factum is raised again the person who induced the signing and was aware of the mistake or had reason to suspect it, the issue of the signer’s carelessness or otherwise does not arise.

(iv) Parties not in agreement ( Mistake in recording agreement [CB889]

Courts have an equitable power to rectify a contract in writing where the writing does not express the parties’ common intention. Purpose is to correct the instrument to reflect parties’ true agreement (recording error).

|Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) |

|Rule: Must prove a common, objective intention to record the whole antecedent agreement |

|‘If one party to a transaction knows that the instrument contains a mistake in its favour but does nothing to correct it, he will be precluded from asserting |

|that the mistake is unilateral and not common’ |

NB: in Maralinga, although Mr Mutton was mistaken in the reason which led him to accept the contract in its written form, the unilateral mistake he made as to its legal effect was not a mistake of the kind that grounds rectification (as per Mason J)

|Pukallus v Cameron (1982) |

|Provides a useful overview of the principles which govern the rectification of the contract |

|There need not be a concluded antecedent contract, but there must be an intention common to both parties at the time of contract to include in their bargain a|

|term which by mutual mistake is omitted therefrom: see Crane v Hegeman-Harris Co Inc [1939], Maralinga (1973) |

|So long as there is a continuing common intention of the parties, it may not be necessary to show that the accord found outward expression, notwithstanding |

|the view expressed to the contrary in Maralinga |

|The plaintiff is required to advance ‘convincing proof’ that the written contract does not embody the final intention of the parties. The omitted ingredient |

|must be capable of such proof in clear and precise terms: see Australian Gypsum Ltd and Australian Plaster Co Ltd v Hume Steel Ltd (1930) and also Maralinga. |

| Thomas Bates v Wyndham’s (Lingerie) Ltd [1981] |

|The English Court of Appeal held that a contractual document could be rectified where one party mistakenly enters into a contract in writing which does not |

|express her or his intention and the other party enters the contract knowing of the first party’s mistake. |

| |

|4 requirements for rectification where the mistake is unilateral: |

|A erroneously believes that the document contains or does not contain a particular provision |

|B is aware of the omission or inclusion and that it was due to a mistake by A |

|B omits to draw the mistake to the notice of A |

|The mistake is one calculated to benefit B |

|Eveleigh LJ states that the fourth step should not be necessary yet the 4 requirements seem to be more in keeping with the purpose of rectification. |

|Leibler v Air New Zealand Ltd (No 2) [1999] |

|In 1 VR 1, Kenny JA held ‘The principles which govern an application for rectification of a contract on the ground of unilateral mistake can be briefly |

|stated’. |

|If one party, A, makes an agreement under a misapprehension that the agreement contains a particular provision which the agreement does not in fact contain; |

|and the other party, B, knows of the omission and that it is due to a mistake on A’s part; and lets A remain under the misapprehension and concludes the |

|agreement on the mistaken basis in circumstances where equity would require B to take some step or steps, depending on those circumstances, to bring the |

|mistake to A’s attention; then B will be precluded from relying upon A’s execution of the agreement to resist A’s claim for rectification to give effect to |

|A’s intention…. Whether or not the mistake must be one which operates in favour of B or merely to the detriment of A is not entirely clear. |

14) MISREPRESENTATION [CB890]

A misrepresentation is a false statement made expressly or implied by one party (the representor) to another (the representee) that acts as an inducement to the latter to enter into a contract with the former. A representation must generally be a statement of existing fact, whether the representation be written, oral or implied by conduct.

(a) Positive misrepresentation of fact [CB890]

As a general rule, in order to obtain relief, the representee must show that he or she was misled by and relied on a positive misrepresentation of fact by the representor. For other kinds of statements (mere puffs, representations of law or statements of opinion or future intent) generally no relief is available although the courts may find an implied statement of fact.

|Opinions |Statements as to the future |Statements of law |

|A statement of opinion may be merely a statement of |A statement or promise that something will happen in the |A fraudulent misrepresentation of law|

|belief, or just sales talk. If it is characterised by |future is not a misrepresentation simply because that |is recognised as providing a basis |

|precise/specific assertions (albeit extravagant), then it|something dos not happen. However, every promise, whether |for relief as a statement of law |

|may be a statement of fact. |contractual or pre-contractual, implies a representation of |implies a representation of fact, |

|A statement of opinion may imply a statement of fact. |fact, namely that there is a present intention to fulfil the|namely, that the person professing to|

|A person who states an opinion implies that s/he in fact |promise. If there is no such intention, a misrepresentation |expound the law believes it to be as |

|holds that opinion, but if the opinion is not held, there|is established Beach Petroleum NL v Johnson (1993) as per |stated (Public Trustee v Taylor). |

|is a misrepresentation of fact (Fitzpatrick v Michel). |Bowen J: The state of a man’s mind is as much as the state | |

|Eg in Smith v Land & House Proprty Corp, a vendor |of his digestion. It is true that it is very difficult to | |

|described a tenant as ‘a most desirable tenant’ when the |prove what the state of a man’s mind at a particular time | |

|tenant was in fact in arrears of rent. The vendor’s |is, but if it can be ascertained it is as much a fact as | |

|statement implied that he had grounds that justified his |anything. | |

|opinion when in fact he had no such ground. |A misrepresentation as to the state of a man’s mind is | |

| |therefore a misstatement of fact. | |

Effects of misrepresentation:

• The statement becomes a term of the contract; or

• The statement constitutes a collateral contract; or

• The innocent party may seek relief on the basis of misrepresentation and seek rescission ( no damages if successful

|Krakowski v Eurolynx Properties Ltd |

|If a statement is ambiguous, it will first have to be determined what it means before it can be determined whether it is false. In such a case ‘the sense in |

|which a representation would be understood by a reasonable person in the position of the representee is prima facie the sense relevant to the question whether|

|the representation is false’. |

| |

|Other tests: (from the perspective of the reasonable person in the position of the representee): |

|Was the representation false? |

|Did the representor intend the representee to rely on the representation? |

|Was the representation made fraudulently? |

|Smith v Land & House Property Group (1884) |

|If both parties can assess the situation (whether he is a good tenant), it would not be a representation of fact. ‘Where the facts are equally known to both |

|sides, what one says to the other is frequently nothing but an opinion’ – Bowen LJ. |

|If the facts are not equally known to both sides, then a statement of opinion by one who knows the facts best involved often a statement of material fact, for|

|he implies that he knows facts which justify his opinion. |

[CB891] Facts: The vendor described a tenant as ‘a most desirable tenant’ when the tenant was in fact in arrears in rent. The purchaser (defendant/respondent) refused to complete when real facts were discovered. Vendor sued for specific performance. Purchaser counter-claimed for rescission of the contract.

Issue: Was there a misrepresentation of fact? The tenant was not a desirable tenant. Here, the vendor had exclusive access to facts, asserts a statement of opinion, he impliedly states he knows facts which justify his opinion ( representation of fact

|Fitzpatrick v Michel |

|If a statement is the honest expression of an opinion honestly entertained, it cannot be said that it involves any fraudulent misrepresentation of fact. |

|Ferguson J: A statement of opinion always necessarily involves a statement of fact: the fact that the person holds that opinion. If the person does not |

|genuinely hold that opinion then she is guilty of misrepresentation. A statement that something will happen in the future (ie that a certain amount of rent |

|will be earned) is similar. Unless she binds herself with a warranty, it can only be a statement of opinion. |

[CB892] Facts: Tenants (plaintiff/respondent) rented a block of flats for 5 years from the landlord (defendant/appellant). They brought an action to recover damages for misrepresentation by the defendant’s agent regarding the amount of rent they would receive from other tenants in the flat.

Issue: Was there a misrepresentation of fact? There was no false representation.

|Edgingon v Fitzmaurice |

|The state of a man’s mind is as much a fact as the state of his digestion |

Facts: subscriptions for debentures with the intention to complete alterations. In fact, it was to pay off liabilities

|Public Trustee v Taylor |

|No distinction will be made between a misrepresentation of the law and a misrepresentation of fact. |

|NB// case has no application outside Victoria but it is likely the High Court will follow this case when the opportunity arises. |

[CB893] Facts: The Public Trustee (plaintiff) sought specific performance of a contract for the sale of land to Taylor. Taylor claimed that the land had been knowingly misrepresented in advertisements as ‘zoned: special use 10’, and that he was entitled to rescind the contract.

Issues: Was there a misrepresentation? The plaintiff made a fraudulent misrepresentation of the law ( def entitled to rescind contract.

General rule of non-disclosure: there is no duty imposed on one contracting party to disclose material facts to the other prior to the contract. Thus a contracting party cannot claim relief for the failure of the other party to disclose a material fact. Silence is not a basis of relief. In the absence of a positive misrepresentation, the caveat emptor (let the buyer beware) rule applies (Smith v Hughes).

Important qualifications to the general rule of non-disclosure:

o There are instances when a failure to speak creates a false impression in the circumstances.

o A duty of disclosure may arise by virtue of the special relationship between the parties or by virtue of the nature of the proposed contract.

Exceptions to the general rule of non-disclosure:

• A duty to disclose may arise where a statement is literally true but gives rise to a false impression (Dimmock v Hallett; Curtis v Chemical Cleaning Co).

• A duty to disclose may arise where a statement is true when made but is later rendered false by a change of circumstances or where the representation is believed to be true when made but is later discovered to be false (Davis v London & Provincial Marine Insurance Co).

• Where one party is in a much better position to know the material facts that the other party, it may lead to a duty to disclose those facts to be imposed in respect to certain types of contracts such as insurance (Insurance Contracts Act 1984).

• A duty of full disclosure is imposed on fiduciaries (McKenzie v McDonald).

• A fiduciary is a person who is reasonably expected by another (beneficiary) to act in the interests of the beneficiary and not in the interests of the fiduciary. Eg partners, director & company, master & servant, solicitor & client

False Impressions

Although a person may say nothing, a false impression may be created by conduct.

There is a duty of disclosure in the following circumstances:

1. Although a person makes a statement that is literally true, it may create a false impression by telling only half the truth. This statement may imply falsely, that there are no other facts that qualify the statement.

2. Events that occur subsequently to the making of a statement, but before the contract is entered into, may affect the characterization of the statement.

a. A representation which was true when made may be falsified, to the knowledge of the representor, by later events.

b. A representation believed to be true when made, may later be discovered by the representor to be false.

In both instances (a) and (b), the silence of the representor cannot be justified and a duty to disclose the truth to the representee arises. Davies v London & Provincial Marine Insurance Co (1878)

Special contracts and relationships

Contracts of Insurance

A contract of insurance is classified as a contract uberrimae fidei (of utmost good faith).

A duty is imposed on a person applying for insurance to disclose all material facts known to him or her. (In relation to marine insurance the duty of disclosure extends to what ought to be known: Marine Insurance Act 1909 (Cth)s 24(1))

|The Insurance Contracts Act 1984 (Cth), s21(1) provides that: |

|An insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being |

|a matter that: |

|The insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; |

|A reasonable person in the circumstances could be expected to know to be a matter so relevant. |

Contracts of guarantee

Contracts of guarantee are not contracts uberrimae fidei in the sense of requiring full disclosure of all material facts, but a limited duty of disclosure is imposed.

|Westpac Banking Corporation Ltd v Robinson (1993) |

|The rule concerning contracts of guarantee: |

|Requires disclosure of facts only if concealment of those facts would otherwise misrepresent the transaction which the guarantor is undertaking to guarantee. |

|In general, it would only be the non-disclosure of those circumstances which were not naturally to be expected which would misrepresent the material features |

|of that transaction. |

Fiduciary Relationships

A fiduciary relationship gives rise to a duty of disclosure. The duty is imposed on the fiduciary in favour of the person to whom fiduciary obligations are owed (the beneficiary).

A fiduciary is a person who undertakes to act in the interest of another (the beneficiary) and not in the interests of him/herself, as est in Pilmer v Duke Group Ltd (in liq) (2001). The primary obligations of a fiduciary are to avoid a conflict of interest between the duty to the beneficiary and the interests of the fiduciary, and not to profit from the position of trust enjoyed by the fiduciary.

If the fiduciary is entering into a contract with the beneficiary, a ‘most ample disclosure of everything’ will be demanded. Davies v London & Provincial Marine Insurance Co (1878)

|McKenzie v McDonald [1927] |

|An agent is not prevented from purchasing a principle’s property but the agent is bound to show that reasonable use has been made of that confidence placed in|

|him by the principal. |

| |

|A fiduciary’s duties extend beyond disclosure of material facts, to giving advice about the wisdom of entering into a particular contract. Failure to give |

|suitable advice where appropriate may be just as much a breach of duty as a failure to disclose material facts. Haywood v Roadknight [1027] |

[CB898] Facts: Real estate agent persuaded widow in dire financial need to swap her far for his corner shop. He had deliberately concealed the true value of her farm & inflated the value of the shop. He resold the farm to a 3rd party. P commenced actions claiming rescission or alternatively damages.

Issue: Was D under a duty to disclose? Judgment for the plaintiff as D was under a duty to P to make a full disclosure of all that he knew about the farm.

Contracts for the sale of land

Contracts for the sale of land are not contracts uderrimae fidei. A vendor of land comes under no duty of general disclosure. A purchaser, equally, comes under no such duty. The position is of course different if a fiduciary relationship exists between the parties, as it did in McKenzie v McDonald.

Duty of Care

If the representor is under a duty of care to the representee, the discharge of this duty in a particular case may well involve an obligation of disclosure. The representor must be careful in providing information and advice, and a failure to reveal a relevant fact or to advise on a pertinent matter may constitute a breach of the duty of care giving rise to a possible claim in negligence.

Culpability

The representee who wishes to claim damages at common law for a ‘mere’ misrepresentation must establish an action in tort. A plaintiff claiming in the tort of deceit had to establish that he or she acted on a fraudulent misrepresentation to his or her detriment.

• Fraudulent misrepresentation: Fraud on the part of a representor means knowledge of the falsity or absence of belief in the truth of the representation.

|Derry v Peel |

|Lord Herschell: Fraud is proved when it is shown that a false representation has been made: |

|Knowingly |

|Without belief in its truth |

|Recklessly, carelessly, whether it be true or false |

Deceit may be defined as a false representation of fact made by a representor, w/o belief in its truth, with the intention that the representee should act in reliance on the representation, and which causes damage to the representee as a consequence of the latter’s reliance.

|Krakowski v Eurolynx Properties Ltd |

|In order to determine whether the representation was made fraudulently, ‘the sense in which the representor intended the representation to be |

|understood is relevant to the question whether the representation was fraudulently made’. |

• Negligent misrepresentation

|Hedley Byrne v Heller |

|There could be liability in negligence for a negligent misstatement where the plaintiff must establish that the defendant owed him/her a duty of |

|care and that a breach of that duty caused him or her damage. There needed to be a ‘special relationship’ between the person who made the |

|statement and the person who acted on it where special relationships comprise of ‘all relationships where it is plain that the party seeking |

|information or advice was trusting the other to exercise such a degree of care as the circumstance required, where it was reasonable for him to do |

|that, and where the other gave the information or advice when he knew or ought to have known that inquirer was relying on him’. |

|Shaddoc & Associations Pty Ltd v Parramatta City Council |

|The duty of care is not only imposed on the person who had or claimed to have skill & competence in the subject matter of the info & advice. |

• Innocent misrepresentation

Innocent = neither fraudulent nor negligent

No claim for damages possible though the representee may be entitled to rescind the contract

(b) Reliance by the representee [CB901]

The representee must have relied on the misrepresentation in entering the contract otherwise there will be no causal link between the misrepresentation and entering the contract. The two main issues in respect of the requirement of reliance are:

|Materiality of misrepresentation |Actuality of reliance |

|The issue is whether the representation would induce a reasonable |According to Redgrave v Hurd, the ‘mere fact that a party has the opportunity of |

|person to enter the contract. |investigating and ascertaining whether a representation is true or false is not |

|If the representor intends that the representee should act on the |sufficient to deprive him of his right to rely on a misrepresentation as a defence to an|

|representation and the representee does so act, it does not matter |action for specific performance’. |

|in cases of fraudulent misrepresentation that a reasonable person |The representation need not be the sole inducement as long as it played some part in |

|would not have so acted (Nicholas v Thompson). |contributing to the formation of the contract (Gould v Vaggelas). |

|In the case of negligent misrepresentation, ‘a person should be |If a defendant makes a deceitful representation which is intended to induce reliance by |

|under no duty to take reasonable care that advice or information |the plaintiff, there is an inference that the plaintiff was in fact induced to rely on |

|which he gives to another is correct, unless he knows, or ought to |the representation (Gould v Vaggelas). |

|know that the other relies on him to take such reasonable care and |According to Burt J in passing, ‘the question whether a person has been induced by a |

|may act in reliance on the advice or information which he is given |statement made to him to enter into an agreement is, in my opinion, a single issue of |

|and unless it would be reasonable for that other person so to rely |fact. No doubt, pre-contractual knowledge that the statement made is not wholly true |

|or act’ (Shaddock v Parramatta City Council). |has a very direct bearing upon the resolution of this question of fact but it does not |

| |itself necessarily provide the answer’ (Sinclair v Preston). |

|Henjo Investments v Collins Marrickville Pty Ltd (1988) |

|Silence can give rise to an actionable misrepresentation where there is a duty upon the representor to reveal a matter if it exists, & where the other party |

|is entitled to infer that the matter does not exist from the silence of the representor. |

Facts: Collins completed its purchase of the New York Deli, owned by Henjo Investments, before it discovered that Henjo had been operating it contrary to local government & licensing conditions intended to prevent customers from having direct access to the bar. The contract contained an acknowledgment that the purchaser had not relied on any statement, representation or warranty given by the vendor. The business declined after the removal of the 8 bar stools. Collins claimed relief for breaches of s 52 of the Trade Practices Act.

Henjo had a duty to reveal the true position as to the restaurant’s lawful seating capacity and its silence constituted misleading conduct under the Act. Policy grounds: s52 should not be allowed to be ousted by private agreement.

Damages: Under s 82 they have ruined it so they will not get much

Rescind: Under s 87, the buyers have collapsed the business after 2 years. Lockhart J declined to exercise the power to rescind.

|Nicholas v Thompson [1924] |

|If Def makes the wrong statement for the purposes of inducing, and P is thereby induced, that is sufficient to amount to a misrepresentation |

[CB901] Facts: P entered into 2 contracts with D for the purchase of D’s interest in a speculative venture. During the course of negotiations, D said that a very high offer had been made which he had refused to sell. This turned out to be untrue. Pl sought to rescind the contract & recover the purchase price on the basis of misrepresentation which induced them to enter the contract.

Issue: Did the representation have to be material? Appeal dismissed- P entitled to rescission of the agreement.

Although questionable whether misrepresentation was material, did not matter in this case.

15) MISLEADING & DECEPTIVE CONDUCT [CB907]

The misleading nature of conduct is determined objectively but taking into account the audience at whom the conduct is directed. While some judges have characterised the conduct by testing its effect on a reasonable member of the particular audience, others have allowed for a less than reasonable member of the audience given that the audience may include the ingenuous as well as the ingenious. However, the latter approach will not cater of the unusually gullible of unusually unintelligent people.

|Carpet Fashion Pty Ltd v Forma Holdings Pty Ltd |

|“Whether particular conduct is misleading or deceptive is a question of fact to be determined in the context of the evidence as to the alleged conduct and as |

|to the whole of the complex of relevant surrounding facts and circumstances” |

What is meant by ‘misleading’?

▪ Misleading does not necessarily involve intent (Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd)

▪ Misleading is wider than ‘deceive’ (Henjo Investments)

▪ ‘trickery, craft and guile’ are linked to misleading (Henjo Investments)

|TRADE PRACTICES ACT 1974 (CTH) |

|S 52: a corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. |

|S 82: ‘the amount of the loss or damage’ suffered as a result of a contravention is recoverable, although the damages are reduced where the loss has been |

|caused partly by the claimant’s failure to take reasonable care |

|S 87: under this section the court is given the power to grant other order it thinks fit to prevent loss being suffered as a result of a contravention, such |

|as a declaration that a contract is void, or is to be varied, or that a person should refund money or return property. |

|A claim under s 82 or s 87 may be made against a person ‘involved in a contravention’ of s 52. This phrase is defined by s 75B to include persons who have |

|aided or abetted, or have knowingly concerned in a contravention of s 52. |

| |

|Sections: 52, 82 (damages and apportionment for contributory), 87(2) (court can make various orders), 75B(1) (court can make orders for anyone involved), 51A |

|(representations with respect to any future matter and onus-reversal) |

| |

|Section 52 – provides that ‘A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or |

|deceive.’ |

|The general prohibition is followed by specific prohibitions against various kinds of representation and misleading conduct. |

| |

|Part VI – provides for a wide range of remedies in respect of loss or damage that is causally linked with a contravention |

|Under s 82, ‘the amount of the loss or damage’ suffered as result of a contravention is recoverable |

|Henville v Walker: A developer (H) dealt with a real estate agent (W). W said that there is a huge demand for what he is doing. He sues W for misleading him |

|about buying the stuff in the 1st place. W said that his stupidity was the cause, he never would have made money. Was the conduct ‘BY’ |

|BY is mean common law causation but in H v W, it shouldn’t be rigidly applied (McHugh J) |

|s 82 (1B) if damage is partially caused by claimant’s failure to take res. care. ( apportionment |

|Under s 87m the court is given the power to grant any other order it thinks fit to prevent loss being suffered as a result of the contravention such as a |

|declaration that a contract is void or to be varied or that a person should refund money or return property. |

| |

|Part V – can apply beyond corporations to individuals |

|E.g. where the ‘trade and commerce’ is not intrastate or is by way of supply of service to the Commonwealth or where ‘engaging in conduct’ involves the use of|

|postal, telegraphic or telephone services or takes place in a radio or television broadcast. |

|Claim under s 82 or s 87 may be made against a person ‘involved in contravention’ of s 52. This phrase is defined in s 75B as including persons who have |

|aided or abetted or have been knowingly concerned in a contravention of s 52 |

Corporation to include all parties involved (staff, board, execs)

The ‘trade or commerce’ limitation

What does s 52 apply to?

“What the section is concerned with is the conduct of a corporation towards persons, be they consumers or not, with whom it (or those whose interests it represents or is seeking to promote) has or may have dealings in the course of those activities or transactions which, of their nature, bear a trading or commercial character” (Concrete Constructions (NSW) Pty Ltd v Nelson)

Does the use of facilities commonly used in trade or commerce make the conduct commercial in nature?

No, “the mere use, by a person not acting in the course of carrying on a business, of facilities commonly employed in commercial transactions, cannot transform a dealing which lacks any business character into something do in trade or commerce” (O’Brien v Smolonogov)

|Fair Trading Act 1987 (NSW) – If a person being sued is an individual |

|Section 41 ( Section 51A |

|Section 42 ( Section 52 |

|Section 68 ( Section 82 |

|Contracts Review Act 1980 (NSW) |

|Section 6: Restrictions(Corporations can’t sue under CRA |

|Section 9: Considers matters to determine a contract as unjust |

|Section 7: Remedies( Anything can be done |

Concrete Constructions (NSW)

• ‘in trade or commerce’ is anything done in course of, or as incidental to, the carrying on of an overall trading or commercial business

• Not limited to consumers, can include competitors as victims

O’Brien

• A private sale of property by an individual is not conduct in trade or commerce except if done in the course of a business activity or otherwise arising in a business context

Carpet Fashion

• Test – whether, in all of the circumstances constituted by acts etc., there has been conduct likely to mislead or deceive

• “likely to mislead of deceive” – unnecessary to prove that the conduct actually did deceive/mislead, sufficient if there is a real or not remote change or possibility

• Disclaimer (exclusion clause) had no effect for excluding liability under the TPA

• Representor must show objectively that it had reasonable grounds for making the representation

• Genuine change of mind and appears to have been a proper and reasonable commercial response

• Victim’s director was a very experienced business person, intimately familiar with the terms and took legal advice about the terms -> must have realized that redevelopment was a possibility

Genuine change of mind

A genuine change of mind does not make earlier predictions as to future conduct misleading or deceptive (James v ANZ Banking Group Ltd)

Silence

Silence, or the failure to disclose information, will sometimes constitute misleading conduct. A half-truth is a misleading conduct, just as it is a misrepresentation under the general law.

▪ Possible tests:

• Was the silent person under a duty to disclose?

• Did the circumstances give rise to a reasonable expectation of disclosure?

▪ Silence may be relied on in order to show a breach of s 52 of the TPA when the circumstances give rise to an obligation to disclose relevant facts (Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd)

▪ Circumstances can give rise to a reasonable expectation of disclosure (Henjo Investments)

▪ The fact that the other party could have made its own inquiries which would have brought the true situation to light does not negate the duty to disclose which the circumstances otherwise imposed (Henjo Investments)

Henjo Investments

• Facts: representation by a party that the restaurant seated 128 people as he showed a card with the words written ‘seats 128’ and ‘licensed’

• Silence can give rise to an actionable misrepresentation where there is a duty upon the representor to reveal a matter if it exists

• Causal chain was not broken even where the applicant had failed to take reasonable care of his own interests by undertaking a proper investigation of the figures presented

• Parties selling the business, represented by silence, failing to inform of the true position with respect to the limitation on seating capacity

Reliance

▪ Recovery under s 52 of the TPA is founded by the applicant’s actual reliance upon the misleading or deceptive conduct of the respondent although the conduct was not the only factor in the applicant’s decision to enter a particular agreement, and although the applicant did not seek to verify the representations or did so inadequately and so failed to discover this falsity (Henjo Investments)

Relief

▪ In exercising its discretion under s 87 of the TPA, the court will consider the conduct of the parties after they had knowledge of the misleading quality of the conduct (Mister Figgins Pty Ltd v Centrepoint Freeholds pty Ltd)

▪ Section 82 (1B) of the TPA provides that, where economic loss of property damage was caused partly by conduct in breach of s 52 and partly by the claimant’s failure to take reasonable care, the damages the claimant may recover are to be reduced to the extent that the court considers just and equitable.

▪ Part VIA of the TPA provides for the apportionment of damages where economic loss or damage to property has been caused by two or more independent acts or omissions.

15) DURESS [CB955]

If duress to the person/goods or economic duress is found, the contract becomes voidable and the remedy of rescission becomes available.

(a) Basic elements of duress

|Universal Tankships of Monrovia v International Transport Workers Federation |

|There are two elements in the wrong of duress: |

|Pressure amounting to compulsion of the will of the victim; and |

|The illegitimacy of the pressure exerted: In order to determine whether something is illegitimate or legitimate, firstly the nature of the pressure must be |

|determined which will usually be decisive. If the first consideration is not decisive, then the nature of the demand which the pressure is applied to support|

|must be determined. |

| |

|The absence of choice can be proved in various ways, for eg, by protest, by the absence of indep advice, or buy a declaration of intention to go to law to |

|recover the money they paid or the property transferred. |

Duress does not render a victim’s actions non-voluntary, because there is always a choice whether to succumb to a threat or not. It is more correct to say that the victim’s will is inhibited or deflected, because they must choose between two evils. It is material how and why the deflection of freedom occurred – need to distinguish between legitimate and illegitimate pressure.

1. A contract procured by duress is voidable not void (except perhaps in extreme cases)

2. It is material how and why the deflection of freedom occurred. Contractual promises are often procured by pressure exerted by one party on another. It becomes necessary to distinguish between legitimate and illegitimate pressure.

Illegitimate pressure

McHugh J in Crescendo Management Pty Ltd v Westpac Banking Corp stated: Pressure will be illegitimate if it consists of unlawful threats or amounts to unconscionable conduct.

A threat may be perfectly lawful in itself but nonetheless rendered illegitimate by virtue of the particular demand which accompanies it ( Blackmail.

Impaired Consent

There is no duress if the illegitimate pressure of the stronger party had no impact on the victim’s decision or there were responses reasonably available to the victim other than acceding to the stronger party’s demands.

Generally, the contract procured by duress is not void but voidable at the discretion of the party subject to the duress.

(b) Duress and Coercion of the Person [CB958]

At common law, duress concerns promises procured by actual or threatened violence to the person or unlawful imprisonment. Only contracts induced by such conduct could be set aside. However, the burden of proof in respect to causation is quite favourable to the victim.

What must be proved?

1. plaintiff must show that some illegitimate means of persuasion was used

2. must establish the relationship between the illegitimate means used and the language taken (a reason NOT the predominant reason)

Where does the burden lie?

|Barton v Armstrong [1976] |

|The person claiming duress has the burden of proving that threats were made to his person |

|The person denying duress has the burden of proving that his threats were not a factor inducing the other party to enter the contract – i.e. the onus shifts |

|to the person applying the pressure. |

| |

|The threats do not need to be THE predominant reason why the PL entered the contract, but merely A reason. [( Also held in Crescendo Mgt Pty Ltd v Westpac |

|Banking Corp] |

[CB958] Facts: P (Barton) alleged D had coerced him into executing a deed relating to the sale of certain companies by threatening to have P murdered.

Issue: Does the duress to enter the contract have to be the only reason for entering into the contract? Appeal allowed. P should be able to obtain relief even though he could not prove that, but for the threats. He would not have signed the deed.

• If Armstrong’s (inducer) threats were ‘a’ reason fro Barton’s executing the deed he is entitled to relief even though he might well have entered into the contract if Armstrong had uttered no threats to induce him to do so

• The onus lays on inducer to establish that the threats and unlawful pressure for the purpose of inducement in fact contributed nothing to the innocent party’s decision to sign

The narrow scope in common law means that a person could be coerced by subtle of indirect methods with impunity. However, equity recognised the pressure to be coercion with part of the judgment from Ormes v Beadel stating that: ‘Where an agreement, harsh and inequitable in itself has been executed under circumstances of pressure on the part of the person who executes it, the court will set it aside.’

(c) Duress of Goods & Compulsion [CB961]

If a person pays money which he is not bound to pay, under compulsion or urgent & pressing necessity or of seizure actual or threatened of his goods, he can claim back in an action in restitution for unjust enrichment (the action for money had and received) (Maskell v Horner).

• If the person promised to pay money in order to obtain the release of goods unlawfully taken or retained, there was authority (Skeate v Beale) that such a contract was enforceable if consideration was provided and the contract could not be avoided for duress.

• A threat can be inferred from the circums and need not be explicit (Hawker Pacific v Helicopter Charter)

• The modern approach was illustrated by Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd where it was held that the concept of duress applied not only where money was paid but also where promises were made to retrieve detained goods.

Does there need to be a threat of physical violence to a person?

|Occidental Worldwide Investment Corps v Skibs A/S Avanti |

|Per Kerr: NO - ‘If I should be compelled to sign a lease or some other contract for a nominal but legally sufficient consideration under an imminent threat |

|of having my house burnt down or a valuable picture slashed, though without any threat of physical violence to anyone, I do not think that the law would |

|uphold the agreement. I think that a plea of coercion or compulsion would be available … |

(d) Economic Duress [CB967]

Interference with contractual rights (e.g. threatening to discontinue performance of an existing contract) has been recognised as a possible form of illegitimate pressure even though the promise extracted is supported by consideration.

One problem with duress is whether a new contract that has been procured under pressure should be regarded as voidable or whether it should be regarded as a valid compromise or settlement of claim. The two possible outcomes are:

❑ If the victim entered into the contract with the intention of closing the matter in order to avoid the inconvenience of litigation, such a contract will be upheld as a settlement.

❑ If the victim entered into the contract to do what was necessary to avoid illegitimate pressure, to avoid the threat and its consequences, making it clear that the matter was still open, the contract will be voidable.

Factors considered by courts include whether there was any effective alternative remedy, whether there was a protest at the time the pressure was exerted, how quickly the victim sought to have the contract set aside after the pressure was lifted, whether the victim received independent advice etc.

|Illegitimate pressure |Impaired consent |

|The issue of economic duress arises where one party threatens to breach a |The second issue concerns whether the consent of the victim was impugned. The |

|contract unless the other party enters into a varied or new contract on terms |court will consider whether the victim protested at the threat, whether there |

|more favourable to the first party. In these contexts, there will be an issue |was any effective alternative remedy, and how quickly the victim sought to |

|of whether any new variation or new contract will be supported by |have the contract set aside after the pressure was lifted. |

|consideration. |If the victim enters the new contract under coercive pressure to avoid the |

|The first issue is whether the pressure to vary was illegitimate. Courts have |threat and its serious consequences, making it clear the matter is still open;|

|accepted that a threat to break an existing contract may be illegitimate |the contract may well be voidable. |

|pressure. The nature of the circumstances giving rise to the renegotiations |If, on the other hand, the victim enters the contract under commercial |

|will be important. Was the renegotiation prompted by events over which the |pressure but with the intention of closing the matter to avoid the |

|stronger party had control of involve a risk the stronger party might |inconvenience of litigation, the contract may well be upheld as a settlement. |

|reasonably be expected to have assumed? | |

|Ta Sundell & Sons Pty Ltd v Emm Yannoulatos (Overseas) Pty |

|A person cannot by any promise or performance which does not go beyond the duty of his pre-existing legal duty to another person provide a new consideration |

|for a promise by that other person in his favour. |

[CB967] Facts: Vendor (defendant/appellant) entered into a contract to sell purchaser (plaintiff/respondent) iron for a certain price. Later, vendor wanted to increase price in line with a rise in price for zinc. Purchaser agreed to the increase being reflected in the letter of credit but later claimed it could rely on the original lower price (NB// there was no provision for price increases in the contract). The iron arrived & purchaser paid full amount but sued to recover amount in excess of original price.

Decision: There was no consideration provided by the vendor in exchange for the increase in price. Every promise allegedly given to the plaintiff by the defendant under the so-called second agreement was identical with a promise given under the original agreement. In contemplation of law it is no detriment to a party merely to perform, and no promise of detriment merely to promise what is already his legal duty to the other party to the alleged contract. Of opinion that the original contract at all relevant times remained in force and that it was never varied or superseded by what was alleged to have been a new contract.

Illegitimate pressure or valid compromise?

It will be duress if the pressure was illegitimate, rather than a valid compromise or settlement of claim. In assessing whether it was illegitimate pressure or a valid compromise, the courts may look at the following as raised in Pau On v Lau Yiu Long

• If there was protest by the person coerced at the time of the exertion of pressure.

• How quickly the person coerced sought to set aside contract after the pressure.

• Whether the person coerced received independent legal advice before entering into the contract.

• Whether the person coerced had an alternative course open to him, such as an adequate legal remedy.

• The intention and delivery of the duress (rather than the nature of the pressure).

16) UNDUE INFLUENCE [CB970]

A party to a contract (the dependent party) is alleging that prior to making the contract, the other party (the ascendant party) exerted undue influence which affected the dependent party’s mind and judgment in entering the contract by virtue of reliance on & confidence in the stronger party. The main remedy available is rescission.

(a) Relationships of influence [CB970]

A r’ship of influence is a r’ship characterised by the ascendancy of one party over the other. If a weaker party can prove that a relationship of influence existed between the parties, there is a presumption that undue influence was exercised by the stronger party over the weaker. It is the stronger party who must rebut this presumption by proving that the contract (or gift) was not the result of abuse of influence but was entered into only after full free and informed thought.

|Actual undue influence |Presumed undue influence |

|Facts must show that the transaction was the outcome|Deemed relationships of influence: r’ships which as a matter|Otherwise, rship of influence in fact: |

|of such an actual influence over the mind of the |of law/equity raise the presumption that influence has been |where the claimant establishes that he or |

|innocent party that it cannot be considered his free|exercised. Eg parent-child, guardian-ward, doctor-patient |she generally places such trust & |

|act: Johnson v Buttress |etc. The r’ship of acct/fin advisor to client is not such a |confidence in the wrongdoer that a |

|Looks only to the specific transaction in dispute |rship. |presumption of influence should be made: |

| |NOT deemed rship: fiduciary rships, husband/wife. |Johnson v Buttress. |

|The onus is on the subordinate party to prove there |The onus is on the party seeking to enforce the contract to rebut presumption. |

|was undue influence | |

If a relationship of influence is neither proved nor deemed, then the person seeking to avoid the contract has the burden of proving ‘actual’ undue influence.

|Johnson v Buttress (1936) |

|In determining whether there was undue influence, adequacy of consideration should be taken into account. Inadequate consideration can suggest undue influence|

[CB971] A man gave his land and cottage to Mrs Johnson (defendant) before he dies because he was very fond of her. The administrator of his will challenged the transfer.

Issue: Should the transfer be set aside? Mrs Johnson had failed to rebut the presumption of undue influence. She could not show that the transfer was the result of the free exercise of Buttress’s independent will.

|Deemed rship of undue influence |Actual undue influence |

|If there is evidence of a history between the parties that has a power |If there is no prior history between the parties but sufficient evidence from |

|imbalance, there is most likely to be a deemed relationship of undue influence|the process of negotiations and the contract itself, there may be an actual |

|established by the facts. |relationship of undue influence. |

There is no requirement of manifest disadvantage (of the subordinate and caused by the influence) (Blomley v Ryan).

(b) Rebutting the Presumption [CB974]

- A presumption will be rebutted if the confidant has shown that the ‘client’ acted of his own free will and was not materially affected by the confidence placed in the confidant (Westmelton v Archer & Schulman).

- In determining whether the presumption has been rebutted, the court will consider whether the weak party was given competent advice by an independent and well-informed advisor and whether there was adequate time to reflect on that advice ie rebuttal requires proof that the dependent party exercised free & informed judgment.

- However, there is no rule of law that in order to rebut the presumption the weak party must be shown to have received such advice, particularly if the court is of opinion that the independent advice would not have had any effect on the transaction. Union Fidelity Trustee Co v Gibson

Westmelton (Vic) Pty Ltd v Archer and Schulman [1982]

[CB975] Facts: Plaintiff solicitor advised defendant company, continuing to do the company’s legal work after he was appointed director. He presented a bill of costs for legal work & suggested that that this could be reduced in exchange for a percentage in the company’s profits. After leaving the directors/ meeting, this was agreed. D paid the reduced bill but refused to pay the profits. The company argued solicitor was obliged to advise the directors of company to obtain separate legal advice as to the nature & extent of the proposed agreement.

Issue: Was there undue influence on the part of the solicitor? There is a rebuttable presumption of undue influence. Westmelton had more expertise in commerce & finance than most solicitors & there was no obligation on the solicitor to advice the obtaining of independent legal advice. Therefore no advantage taken of the confidential relationship.

Although there was a solicitor-client relationship between the parties (ie a deemed relationship of influence), this was not a case where the presumption of influence could only be rebutted by proof that the solicitor had advised the directors of the defendant to obtain separate legal advice on the nature of the proposed contract. In this case the company had more expertise in commerce and finance than most solicitors.

Once the court was satisfied that the plaintiff solicitor dealt fairly and honestly with a well-informed and sophisticated corporate client, and that the client was in no way relying upon any confidence or expectation of legal advice, then it was possible to conclude that there was no duty to advise the client further.

17) UNCONSCIONABLE DEALING [CB979]

(a) Basic elements [CB979]

Relief is given in such an instance in respect of unfair or unconscionable contracts where one party (stronger party) has exploited or taken unconscientious advantage of the special disability of another (weaker party). The stronger party who obtained the benefit of the bargain has the burden of showing the fairness of it. If this bargain is not discharged, the court will give relief. The main form of remedy available is rescission.

(b) Modern Applications [CB979]

Relief is given in respect of unfair or unconscionable contracts where one party has exploited or taken unconscientious advantage of the special disability of another. Unconscionable dealing is concerned with the person in advantage.

|Commercial Bank of Australia v Amadio |

|“Relief on the ground of unconscionable conduct is usually taken to refer to the class of case in which the party makes unconscientious use of his superior |

|position or bargaining power to the detriment of a party who suffers from some special disability or is placed in some special situation of disadvantage”. |

| |

|Proving unconscionable dealing: |

|There must be a disability that leads to an inequality between the parties. |

|The disability must be sufficiently evident to the other party that it would be unconscionable to hold them to the contract. |

|The transaction cannot be fair, just or reasonable (Bridgewater v Leahy). |

The burden lies on the person who obtained the benefit of the bargain has the burden of showing the fairness of it.

|Fry v Lane as per Kay J: “The circumstances of poverty and ignorance of the vendor, and absence of independent advice, throw upon the purchaser, when the |

|transaction is impeached, the onus of proving… that the purchase was ‘fair, just and reasonable’” |

Remedy

o Recission: If found to be unconscionable, the remedy will be either rescission or damages (contract is voidable) under the common law.

o TPA provisions: However, there are provisions in the Trade Practices Act that give the court much wider remedial powers (s82 & 87).

When is a person in a position of special disability?

o It is difficult to pin down a comprehensive list of categories (Commercial Bank of Australia v Amadio)

o “The circumstances adversely affecting a party, which may induce a court of equity either to refuse its aid or to set a transaction aside, are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-à-vis the other. It does not appear to be essential in all cases that the party at a disadvantage should suffer loss or detriment by the bargain (Blomley v Ryan)

o However, there are some useful categories (drunkenness and mental disorder, lack of knowledge and education, and emotional dependence) which the law has recognised.

(i) Drunkenness and mental disorder [CB980]

i. A person who went through mental disability or drunkenness does not appreciate the general nature of a transaction into which he or she entered will be able to avoid the transaction provided the other party was aware of or suspected the impaired mental capacity (Blomley v Ryan)

ii. While “mere drunkenness affords no ground for resisting a suit to enforce a contract,” where the judgment of one party was impaired by alcohol, and the other party was aware of this, “equity will generally refuse specific performance at the suit of that other…” (Blomley v Ryan)

iii. Note: “the defendant’s condition must have been patent” to the agent of the plaintiff (Blomley v Ryan)

(ii) Lack of knowledge and education [CB984]

The court needs to ask whether a party was under a special disability when dealing with the other party, whether their special disability was sufficiently evidence to the other party to make it prima facie unfair and whether the other party has discharged the onus cast on it to show that the transaction was fair, just and reasonable (Commercial Bank of Australia v Amadio).

• Must have knowledge of the respondent’s situation

(iii) Emotional dependence [CB994]

❑ Emotional dependence can create a disability for purposes of the unconscionable dealing rule (Louth v Diprose).

❑ Strong dissent in Bridgewater v Leahy due to the facts of the case which suggested that the alleged victim of the unconscionable dealing had the requisite independence of mind and capacity for judgment and that the transaction coincided with his plans.

▪ “That special disability arose not merely from the respondent’s infatuation. It extended to the extraordinary vulnerability of the respondent in the false ‘atmosphere of crisis’ in which he believed that the woman with whom he was ‘completely in love’ and upon whom he was emotionally dependent was facing eviction from her home and suicide unless he provided the money for the purchase of the house. The appellant was aware of that special disability. Indeed, to a significant extent, she had deliberately created it” (majority opinion in Louth v Diprose)

▪ “the position of disadvantage which renders one party subject to exploitation by another such that the benefit of an improvident disposition by the disadvantaged party may not in good conscience be retained may stem from a strong emotional dependence or attachment” (Bridgewater v Leahy).

▪ The disability can be emotional dependence (although usually this will be argued under undue influence) (Bridgewater v Leahy).

The importance of ‘fair, just and reasonable’

o The courts will be likely to find unconscionable dealing when consideration is not adequate because the contract is unlikely to be fair, just and reasonable (Blomley v Ryan).

o Even if there was a disability and the advantaged party knew of the disability, the contract can still be enforced if the contract is fair, just and reasonable (Bridgewater v Leahy).

Sections under the Trade Practices Act

o Section 51AB: Prevents unconscionability between corporations and consumers.

o Section 51AC: Prevents unconscionability between big and small businesses.

|Commercial Bank of Australia v Amadio (1983) |

|Deane J held that the doctrine operated where: |

|A party to a transaction was under a special disability in dealing with the other party with the consequence that there was an absence of any reasonable |

|degree of equality between them. |

|The disability was sufficiently evident to the stronger party to make it prima facie unfair or ‘unconscientious’ that he procure, or accept, the weaker |

|party’s accent to the impugned transaction in the circumstances in which he procured or accepted it. |

|Where such circumstances are shown to have existed, an onus is cast upon the stronger party to show that the transaction was fair, just and reasonable. |

[CB984] Facts: Son convinced his parents (Amadio/plaintiffs/respondents) to go guarantor for him allowing him to continue to operation an account with the bank (defendant/appellant). The Amadios were elderly, spoke little English & had little or no business experience. The son’s business was about to go under. The bank knew this but arranged for the Amadios to sign the guarantee, which contained conditions different from those the son had told them would be in it. The son’s business went into liquidation & the bank served noticed on the Amadios.

Issues: Were the Amadios’ special disability sufficiently evident to the bank to make it prima facie unfair? Yes: Bank rep knew that son was dominant, company was in trouble & that son could not have explained docs to parents.

The bank had not discharged the onus to show the transaction was far bc there is no significance difference between what A thought was in doc & what was actually in doc.

18) THIRD PARTY IMPROPRIETY [CB1010]

(a) Three-party situations [CB1010]

A victim of conduct which is recognised by the law as improper may in certain circumstances obtain relief from a contract induced by such impropriety even though the impropriety emanated from a third part, that is, a person who was not a party to the contract.

The third party can be affected by a vitiating factor in 3 ways:

o If C knew of the impropriety or had reason to believe that impropriety had occurred, then its conscience would be bound, e.g. if lender knew that the debtor had coerced the guarantor of had misled the charger

o Where one (third party causing impropriety) is acting as an agent for the other

o Rule in Yerkey v Jones

(b) The rule in Yerkey v Jones [CB1011]

|Yerkey v Jones (1939) |

|Rule: If a married woman’s consent to become a surety of her husband’s debt is procured by the husband and without understanding its effect in essential |

|respects she executes an instrument of suretyship which the creditor accepts without dealing with her personally she has a prima facie right to have it set |

|aside |

| |

|This is a special principle to protect wives who guaranteed their husbands’ debts. |

|The principle also applies if the wife understood the transaction but her consent was obtained by the husband’s undue influence. |

|If the debtor is not the husband but a company controlled by him, and the wife does not have a substantial interest in that company, the principle still |

|applies. |

|The principle does not apply if the wife benefits from the transaction. |

| |

|What steps can be taken to avoid having a guarantee impeached? |

|A lender may be obliged to take steps to ensure that it has reasonable grounds for believing that the consent of the guarantor or charger was fairly obtained |

|and that the consent, with the benefit of independent advice, was adequately informed |

Facts: Yerkey own a chicken farm business. Mr Jones was 2nd husband of Mrs Jones, who had a property of her own. Mr Jones signs up to buy the chicken farm, part of the agreement is that he shall procure the wife’s guarantee on her property as security. Mrs Jones understands she is liable. Years after business fails and he can’t make the repayments and Yerkey want to exercise the security of the house.

Decision: Dixon J – wives have a special protection, where the creditor has to show that the wife signed up under free will.

This rule was affirmed in Garcia v NAB Ltd, but with a broader application.

|Garcia v NAB Ltd (1988) |

|This case recognises that society has changes, and wives are no longer automatically in situations marked by disparities in power (economic or otherwise). |

|However, for some women this is still a reality. |

|So it is suggested that the principle be given a broader application. As the principle is ‘based on trust and confidence, in the ordinary sense of those |

|words, between marriage partners’ it seems to male sense that ‘the principles applied in Yerkey v Jones will find application to other relationships… to long |

|term and publicly declared relationships short of marriage between members of the same or of opposite sex.’ |

Facts: H&W were co-directors of a Gold Trading company. Mrs Garcia played no part in the business. The money was coming into the family pot unlike Yerkey. The bank is lending more money to the company and want the house as a surety. He signs it and berates the wife to get her to sign. The company goes bust and the marriage breaks up. Wife says that the guarantee is voidable.

Held: Majority – only Yerkey applies here – Wife signs document to secure husband’s debt, thus it is for the creditor to prove positively that she knew what she was upto, since she would not gain from it. They also said Dixon J was picking on a principle wider than Yerkey not just wives but all relationships based on “trust and confidence” – “it may find appl. In long term and publicly declared rel.”

Kirby J – refered to HoL’s rejection of Yerkey

Callinan J – extends to co-habitees

19) RESCISSION [CB1045]

(a) Restitutio in integrum [CB1045]

Rescission is a form of relief, the purpose and effect of which is to set aside the contract and, generally, restore the parties to the positions they occupied before the contract was made. In other words, the contract is set aside from the beginning (ab initio) and the parties restored to their original positions (restitutio in integrum). Rescission is available for mistake, misrepresentation, breach of fiduciary duty, duress, undue influence and unconscionable dealing.

▪ It is different to termination bc it aims to undo the contract and has no accrued rights left.

▪ Rescission is not available if restoration of the status quo ante is impossible.

Who rescinds?

|Alati v Kruger (1955) |

|It is not that equity asserts a power by its decree to avoid a contract which the defrauded party himself has no right to disaffirm, and to revest a property |

|the title to which the party cannot affect. |

|Rescission for misrepresentation is always the act of the party himself… |

|The function of a court in which proceedings for rescission are taken is to adjudicate upon the validity of a purported disaffirmance as an act avoiding the |

|transaction ab initio, and if it is valid, to give effect to it and make appropriate consequential orders. |

[CB1046] Facts: Kruger was induced to purchase a fruit shop business from Alati by representations that the average takings were 100/week, but in actual fact they were no more than 40/week. Kruger commenced proceedings for rescission but continued to carry on the business for several months, but closed it down & left the premises before judgment was given.

Issues: Was the rescission valid? Was restitutio in integrum possible at the commencement of the action? Kruger’s discontinuation of the business did not result in his losing his right to a decree.

Rescission is an act of the parties, not of the court. Court may order implementation of rescission. Equity, unlike common law, demands only substantial, not precise, restoration of the parties to their original positions.

Effective time for rescission

|Kramer v McMahon |

|Where the rescinding act of a party to the contract does not for one reason or another bring about restitution in integrum (and it is necessary to have an |

|order of the court to bring this about) then rescission will not be effective unless the court through its powers can order that which the party was unable by|

|his own powers to effect. |

| |

|If restoration can only be achieved with the aid of the court then the possibility of restoration has to be determined at the time of the court’s order, and |

|not at the time of the party’s notice of rescission. |

Method of rescission

In order to rescind, the victim must as a general rule communicate his or her intention to rescind to the other party. The rescission may be stated and communicated to the other party for the first time in a writ claiming relief based on the rescission. Alati v Kruger (1955)

Where the guilty party, by absconding, deliberately puts it out of the power of the victim to communicate an intention to rescind, the victim may evince an intention to rescind by some overt means falling short of communication.

In Car & Universal Finance Co Ltd v Caldwell, Caldwell was the victim of a fraudulent misrepresentation. He sold his car to a rogue whose cheque bounced. He immediately informed the police and the Automobile Association and asked for their assistance in finding the car. The car was subsequently sold to an innocent purchaser.

It was held that Caldwell had done enough in the circumstances to rescind the contract, and so the innocent purchaser did not obtain the title to the car. The contract was rescinded, and title re-vested in Caldwell, before the subsequent sale to the innocent purchaser.

|Rescission at common law |Rescission in equity |

|Only available for precise restitution (restitutio in integrum|Recognises recission for innocent misrepresentation and other vitiating factors such as |

|must be precisely given) Not available for innocent |undue influence. |

|misrepresentation; only for fraudulent & negligent |Not available where a property has been ‘wholly or substantially destroyed by the default |

|misrepresentation*. |of the party seeking rescission [as] there can be no rescission because there can be no |

|Common law rescission still allows for “incidents for which |restitution’. However, ‘where the property has been improved or deteriorated by the act |

|the buyer was not responsible” (e.g. that cause deterioration |of the purchaser, and yet remains in substance what it was before the contract, equity |

|of a business), that is, incidents resulting from the inherent|adjusts the rights of the parties by awarding money compensation to one or the other, and |

|nature of the property or in the course of the exercise of |so substantially putting each party in the position which he occupied before the contract |

|contractual rights by buyer (Alati v Kruger). |was made.’ (Brown v Smitt) |

|Easier to achieve precise rescission where the contract has |Equity recognises recission where substantial restitution is possible – its about doing |

|not been performed. |what is practically just between the parties |

|In Alati v Kruger, the plaintiff was not entitled to common |In a bid to do what was practically just between the parties, the court in Vadasz v |

|law rescission because he could not give back the exact 20 |Pioneer Concrete (SA) Pty Ltd ordered only the recovery of future debt, as this would ‘do |

|pounds of vegetables given to him, nor the right/benefit of |no more than hold the appellant to what eh was prepared to undertake independently of any |

|actually possessing the shop for the small amount of time. |misrepresentation’ |

| |According to Brown v Smitt, equity will compensate for improvements made by plaintiff to |

| |property if: |

| |they are permanent and lasting |

| |made before right to rescind arose |

| |not just for personal taste |

| |it is not “improving the vendor out of his estate” (e.g. if improvements cost more than |

| |property) |

| |It is possible that partial rescission of a contract is available, but it is unknown in |

| |what kind of circumstances this would come about (Vadasz v Pioneer Concrete (SA) Pty Ltd).|

*At common law, damages could be awarded for fraudulent and negligent misrepresentation but not for purely innocent misrepresentation. Although equity could not award damages for innocent misrepresentation, it could, in granting rescission, award an indemnity (i.e. require that the representor indemnify the representee against obligations created by the contract).

The award of an indemnity:

Equity can require a representor to indemnify a representee against obligations created by the contract.

­ Putting the parties in the position they were in before the contract, replacing them in statu quo, does not involve replacing them in the same position in all respects, but only in respect of the rights and obligations created by the contact which is rescinded.

­ A party in case of rescission, cannot ask the court to award him compensation for all collateral losses which he may have sustained by reason of the fact that he entered into the contract, such as losses incurred in carrying on a business…

­ But only such compensation as will restore the status quo ante in relation to the subject matter of the contract.

|Brown v Smitt |

|HC: Putting the parties in the position they were in before the contract, replacing them in status quo, does not involve replacing them in the same position |

|in all respects, but only in respect of the rights and obligations created by the contract which is rescinded. A party in case of rescission, cannot ask the |

|court to award him compensation for all collateral losses which he may have sustained by reason of the fact that he entered into the contract, such as losses |

|incurred in carrying on a business…but only such compensation as will restore the status quo ante in relation to the subject matter of the contract. Such |

|losses could only be recovered in an action of [tort]. |

[CB1050] Facts: Smitt was induced to purchase a farm by fraudulent misrepresentation by Brown as to its farming qualities. He went into possession & commenced farming before seeking to rescind the contract.

Issue: Does the vendor have to pay for any improvements to the land? Rescission conformed, but orders for damages varied

• If property has been wholly or substantially destroyed by the person seeking rescission, rescission will not be possible.

• Where person whose fraud had induced the contract should not be allowed to get the property back with lasting improvements without making allowances for those improvements.

• Doctrine will not justify “improving the vendor out of his estate”

• Matters of taste or personal enjoyment are not recoverable

Partial Rescission

Rescission also recognises the possibility of partial rescission (Vadasz v Pioneer Concrete (SA) Pty Ltd). It seems that partial rescission will be granted if the victim would have accepted some obligation in the absence of the vitiating factor. The victim is also held to the obligation.

|Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) |

|A contract can only be set aside in its entirety if, had it not been for the vitiating factor, the victim would not have entered the contract all (Amadio an |

|example) |

|If victim would have accepted some obligation in the absence of the vitiating factor, then partial rescission should be granted, & the victim held to that |

|obligation. |

[CB1056] Facts: V signed an ‘all monies’ guarantee for Pioneer, who fraudulently told him it was only to cover any future debts. V company continued to go into debt & Pioneer sued him for all past & future monies owed. V claimed the guarantee was vitiated by misrepresentation.

Issue: Could V rescind the entire contract? A contract can only be set aside in its entirety if, had it not been for the vitiating factor, the victim would not have entered the contract all (Amadio an example)

If victim would have accepted some obligation in the absence of the vitiating factor, then partial rescission should be granted, & the victim held to that obligation.

(b) Bars to Rescission [CB1056]

• Requirement of substantial restitution

• Rescission is barred if the contract has been affirmed by representee: Coastal Estates Pty Ltd v Melevende

• Affirmation may be inferred from lapse of time: JAD International

• Rescission will not usually take effect until the representee has notified the representor of the representee’s election to rescind. However, it is not necessary if communication is impossible AND the plaintiff took all reasonable steps to find the other party (Car & Universal Finance Co Ltd v Caldwell).

• Intervention of third party rights may bar rescission, e.g. purchaser sells to third party (like mistake as to identity)

• Non-fraudulent representor may be protected by a contractual provision that states that the representee has no relied on any pre-contractual statements: Byers v Dorotea

• Rescission takes place after representee has notified the representor of his election to rescind

• Innocent misrepresentation ( rescission cannot be granted; fraud must be proved first: Vimig Pty Ltd

1. Affirmation

❑ When a contract is voidable by reason of a vitiating factor, the victim of the relevant misconduct must elect whether to avoid or affirm the contract. Generally, notice of affirmation or avoidance must be given to the other party which can be done expressly or impliedly by conduct that clearly manifests the relevant intent (North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd). The word and conduct required to constitute an election must be unequivocal.

❑ Concerning where the victim does not know of the right to rescind, it was said in Coastal Estates Pty Ltd v Melevende that ‘because the making of an election necessary presupposes a knowledge that a choice between alternative courses is open, in general, no question of affirmation can arise in the absence of such knowledge. There appears, however, to be one important qualification upon this. If a representee, after discovery of the facts which entitle him to avoid a contract, exercises, in an unequivocal manner, rights under the contract adversely to the other party, he will in general be deemed to have elected to affirm it, although not aware of his right to elect’.

2. Intervening third party rights

❑ If a bona fide third party acquires rights in the subject matter of a voidable contract, rescission is barred. If the wrongdoer sells the goods to an innocent third party, before the contract is rescinded by the original victim, a good title passes (White v Garden; Lewis v Averay). If the original victim rescinds the contract before the third party purports to buy the goods (Car & Universal Finance Co Ltd v Caldwell) or if the original contract is void ab initio (Cundy v Lindsay) or if the purchaser is not bona fide, no title passes to the third party.

3. Executed contracts

4. Sale of goods

A contract for the sale of goods can be rescinded in equity for innocent misrep:

1. As per s 4(2) in the Sale of Goods Act 1923 (NSW), the rules of equity apply

2. Section 4(2A) of the Sale of Goods Act 1923 (NSW) specifically provides that the legislation shall not affect any remedy in equity in respect of misrepresentation.

5. Incorporation of representation in contract

❑ The previous rule from Seddon v North Eastern Salt Co Ltd and followed in Vimig Pty Ltd v Contract Tooling Pty Ltd was that if a contract has been executed, then rescission cannot be obtained on the ground of innocent misrepresentation by the vendor or lessor.

❑ However, the rule was reconsidered in Academy of Health and Fitness Pty Ltd v Power where it was held in respect of a written contract that the party induced to enter into it by an innocent misrepresentation did not lose the equitable right to rescind by reason of the representation having become a term of the contract that was at no time more than a warranty. This rule has been confirmed by statue in NSW, ACT, and VIC.

6. Exclusion clauses

7. Statutory curtailments

(i) Can a contract for the sale of goods be rescinded in equity for innocent misrepresentation? [CB1058]

|Watt v Westhoven [1933] |

|Mann ACJ: S4 of the Goods Act 1928: The rules of the common law including the law merchant and in particular the rules relating to the effect of |

|misrepresentation mistake or other invalidating cause shall continue to apply to contracts for the sale of goods. |

[CB1058] Facts: The plaintiff sold and delivered to the defendant a motor car for 375 pounds, and received payment of 300pouns of the price. In an action in the County Court to recover the remainder of the purchase money, the defendant counterclaimed for a rescission of the sale and repayment of the purchase money already paid, upon grounds that she was induced to purchase the car by the misrepresentation of the plaintiff’s agent as to the age of the car and as to its original cost. The jury found that the misrepresentations complained of were false, that they were not fraudulent, and that each of them formed part of the inducement to the purchase. They also found that the purchase price was reasonable, and that the car was still substantially in the same condition as when purchased. A case stated reserved by the trial judge for the opinion of the Full Court, asked whether rescission could be ordered.

It makes it clear that an innocent misrepresentation by which one party to a contract induces the other party to enter into it is not a ground for rescission at the suit of the latter, unless it was such that there is a complete difference in subject matter between the thing bargained for and that obtained, so as to constitute a failure of consideration. (Kennedy v Panama etc Mail Co (1867))

(ii) Can an executed contract be rescinded for innocent misrepresentation? [CB1060]

Rescission cannot be granted for innocent misrepresentation where the contract has been performed (Seddon v North Eastern Salt Co; Vimig Pty Ltd v Contract Tooling Pty Ltd).

|Vimig Pty Ltd v Contract Tooling Pty Ltd (1987) |

|Concluded that the rule does exist to preclude rescission for innocent misrepresentation of an executed contract. |

|Absent fraud, equity would not order rescission of the contract of sale after conveyance. |

Facts: Vimig executed an agreement to purchase a precision engineering business, & settled the transaction on the same day. It later claimed a right to rescind the agreement on the ground of misrepresentations in the business’s accounts.

The rule in Seddon’s case ‘Where a contract has been executed rescission is not possible if misrepresentation is only innocent. Fraud (& now also negligence) must be proved before rescission is granted’ was criticised but not departed from.

(iii) Affirmation [CB1060]

▪ Affirmation may take the form of an express communication from the representee that he has elected to treat the contract as binding, or conduct of his in relation to the contract or its subject matter from which the proper inference is that he has so elected (Coastal estates Pty Ltd v Melevende)

▪ Affirmation can arise by election (unequivocal conduct consistent only with decision to affirm) or estoppel (unequivocal representation that contract was on foot and detriment to other party) (Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd).

Knowledge of relevant facts

▪ ‘Where in addition to knowing all material facts, which would entitle him to avoid the contract, the representee is aware also that he has the choice open either to avoid or affirm, it is a question of fact whether his conduct evidences a determination of his election’ (Coastal estates Pty Ltd v Melevende)

▪ NOTE: possible evidence that the plaintiff knew of their right to rescind is if they saw a solicitor

▪ NOTE: ‘if a representee, after discovery of the facts which entitle him to avoid a contract, exercises, in an unequivocal manner, rights under the contract adversely to the other party he will in general be deemed to have elected to affirm it, although not aware of his right to elect’ (Coastal estates Pty Ltd v Melevende)

Estoppel

The above exception in Coastal estates Pty Ltd v Melevende can also be understood in terms of estoppel – the plaintiff was estopped from exercising right to rescind because he acted to the detriment of other party (Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd).

|Coastal Estates Pty Ltd v Melevende [1965] |

|Representee may lose right to rescind before s/he has made an election when: |

|Rights of 3rd parties have intervened |

|Delay in rescinding may make it unjust to others |

|Where it is unjust to representor |

| |

|What amounts to affirmation? |

|Knowledge of material facts entitling rescission person to avoid contract. |

|Knowledge of choice to affirm or avoid |

|After that affirmation may take form of express communication or |

|Conduct evidencing an affirmation |

|Qualification |

|Absent knowledge of right, a representee may lose this right to if representee exercises rights adversely to the representor, eg. takes a benefit from |

|representor, as this amounts to an affirmation. |

[CB1060] Facts: In 1960, Melevende was induced to buy 8 blocks in a seaside subdivision by fraudulent misrepresentations that Coastal Estates intended to erect a boatel nearby & would itself build houses in the subdivision. By 1962 he knew of the fraud, but he continued to make payments under the contract & negotiated to vary its terms. Later that year he obtained legal advice & sued for rescission. Vendor argued that payment of rates to council amounted to affirmation of the contract.

Issue: Was the contract affirmed by the payments? What was needed for an affirmation? Appeal dismissed. Once the truth is discovered, representee must elect whether to rescind or affirm the contract.

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