CONTRACTS NOTES Agreements vs. Contracts

o Agreements are not legally binding (e.g. agreement to drive your friend home) while contracts are legally binding (e.g. sale of land)

o How to distinguish between the two – look at the intention of the two parties (What would a reasonable third party think about the words and actions of the two parties? Does it amount to a contract?)

Law of Contract o Different types of contracts – one type of contract lawo There are common, fundamental principles that apply to all types of contractso No Contracts Act/Code – based on common law (some statutes)o English law is sometimes used in international cases (e.g. a Chinese buyer and

a Norwegian shipper) How to plead a contract case:

o Agreement – there was an agreement (offer and acceptance)o Terms – there was a clause/term that stated …o Breach – it was a breach that the defendant did …o Remedy – due to this breach, the remedy required is …

Creating a contract:o A contract comes into existence when the acceptance of an offer has been

communicated to the offeroro Up until a contract if formed, the two parties are under no obligation to one

another and can withdraw from negotiations (some exceptions)

Offer For an agreement, there must be an offer and acceptance of that offer Offeror = the person who makes the offer Offeree = the person to whom the offer was made What is an offer? – an offer must be a statement that is intended to be an offer from

an objective, reasonable viewpoint (Harvey v Facey) – would a reasonable person believe an offer was made OR an offer must take the form of a proposal for consideration which gives the offeree an opportunity to accept or reject (Bramblers Holdings Ltd v Bathurst City Council)

o As opposed to an invitation to treat – an invitation of one party to another party to make the first party an offer (Pharmaceutical Society of Great Britain v Boots)

Generally, displays in shop windows (Fisher v Bell) and advertisements in newspaper (Wallace v Brodribb) are an invitation to treat

The scope of the offer (who the offer is made to) depends on the language used – can be restricted to certain classes of people, the public at large, everyone but with certain exclusions, etc

An offer is ineffective until it has been communicated (Henthorn v Fraser) If an offer is communicated to the offeree by a third party, the offer is not effective

until it has been communicated by the offeror or by the third part acting with the authority of the offeror (Cole v Cottingham)

Unilateral vs. Bilateral Contracts

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o Bilateral – two parties undertake negotiations and come to an agreement of executory promises (often the case)

o Unilateral – acceptance of an offer occurs when one party perform the actions requested by the offeror (a promise in return for doing an act) e.g. a reward contract - $100 reward if you find a dog)

Carlill v Carbolic Smoke Ball Co – example of a unilateral contracto Difference – the obligations in a unilateral contract are executed (contract

formed after task is completed) while the obligations in a bilateral contract are executor (contract is formed before tasks are completes)

o For a unilateral contract to exist, there must be a relationship of quid pro quo (this for that). There are three ways of establishing qui pro quo (Australian Woolen Mills Pty Ltd v Commonwealth):

Has the offeror expressly or impliedly requested the doing of the act by the offeree?

Has the offeror stated a price that the offeree must pay for the promise?

Was the offer made in order to induce the doing of the act?

Auctionso In an auction, the bidder makes an offer and the seller accepts the offer with

the fall of the hammer (Sale of Goods Act 1896 (Qld)) – thus, a bidder can withdraw their bid before the fall of the hammer (as there has been no acceptance)

o An advertisement that an auction will take a place is not an offer (Harris v Nickerson )

o There is no automatic contract between the seller and the highest bidder in an auction without a reserve (AGC v McWhirter)

Tenderso Putting a project ‘out to tender’ is an invitation to treat – the people

submitting tenders are making an offero There is no obligation to accept the highest offer (Blackpool & Fylde Aero

Club v Blackpool BC or IPEX v State of Victoria) o There is an obligation to follow the advertised process (a process contract)

(Blackpool or Hughes Aircraft Systems v Airservices Australia)o An advertisement calling for tender will be considered an offer if it states that

they will accept the highest or lowest tender (Harvela Investments Ltd v Royal Trust Co of Canada)

Passenger Ticketso Key question: When is a contract formed?o Conventional Analysis: Asking for a ticket is an invitation to treat. The sales

person handing a passenger a ticket is an offer. Acceptance occurs when the passenger looks at the ticket, is given time to read the terms and walks away (MacRobertson Miller v Commissioner of State Taxation)

Why? – the offeree must accept the offer with knowledge of the terms of the offer. This would not occur if acceptance occurred when the passenger was issued with the ticket and terms were printed on the ticket

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This reasoning applied in Thornton v Shoe Lane Parking (Lord Denning said that the conventional analysis can’t apply because you can’t negotiate with a machine)

o The conventional analysis was not applied Baltic Shipping v Dillon – the offer and acceptance occurred before the issue of the ticket (which included terms) – thus, the terms were not included in the contract

o Every case is different – need to look at each case and decided when both parties intended for offer and acceptance to take place

Electronic Transactionso Same rules of offer and acceptance apply to electronic transactionso Electronic Transaction Acts have been enacted in all States with the objective

of providing a framework that facilitates confidence in electronic transactionso A contract between a person and an automated system or between two

automated systems is not invalid

Acceptance Acceptance is an unqualified assent to the terms of the offer Two aspects:

o Fact of acceptance - has the offeree actually accepted?o Has the acceptance been communicated to the offeror?

Fact of Acceptance – what counts as acceptance? Acceptance can occur through words or conduct Need to ask – would a reasonable person assume acceptance was meant by one’s

words or actions? Signature indicates acceptance – even if the offeree hasn’t read the terms they are

signing to (Fitness First v Chong)o Indicates that a ‘meting of the minds’ is not necessary – it doesn’t matter if

the offeree has misinterpreted the offer this may be affected by estoppel

Counter-Offerso A counter-offer can destroy an original offer (Hyde v Wrench)

E.g. A offers to sell for $1000. B replies that he will buy at $950. A refuses $950. B says he accepts at $1000. There is no acceptance as the counter-offer destroyed the original offer

Not always the case – a counter-offer won’t destroy an original offer if the original offeror treats the counter-offer as part of the process as working out what is meant by the original offer (Oriolo v Wolfram)

o If a response to an offer is only a request for information (not a counter-offer), then the offer remains open for acceptance (Stevenson v Maclean)

o If an acceptance is unclear due to a number of queries, this is not a counter-offer, acceptance or rejection – the offer remains open (Rest Sea v APT)

Acceptance Through Conducto When an offeree says nothing, just performs some action that indicates

acceptance this is harder to prove

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o E.g. – commercial businesses will tend to start work and sign contracts later. There will be acceptance inferred through conduct in these situations (Brogden v Metropolitan Railway)

o Key Case: Empirnall v Machon Paull – the developer refused to sign a contract but acted in accordance with the contract until he came into financial difficulties. Held that his conduct inferred acceptance

o If A writes to B offering to sell something for a set price and B writes to A at the same time offering to buy that thing and the set price – there is no obligation to accept the offer

o Test: Would a reasonably bystander regard the offeree’s conduct as signalling acceptance of the offer?

Acceptance Must be in Exchange of the Offero Reward cases – the act performed must be done in exchange for an offer/on

faith of the offer o E.g. R v Clarke – a man who gave information given that lead to the rest of a

criminal was not entitled to the reward as he did not give this information in exchange for the offer; rather, to avoid his own conviction

Communication of Acceptance General Rule – Acceptance only has effect when communicated to the offeror (Latec

Finance v Knight) Generally, silence can not indicate acceptance (Felthouse v Bindley) If the contract is signed but not communicated to the other party, there is no

communication of acceptance; thus, no contract (Latec Finance v Knight) If an offer prescribes an exclusive method for the communication of acceptance, then

only an acceptance communicated by that method will be effective (Manchester Diocesan Case – must accept the offer in the prescribed way or by any ‘not less advantageous mode’)

Communication of acceptance can be waived (Carlill v Carbolic Smoke Ball)

The Postal Ruleo The Postal Rule = acceptance is effective as soon as it is posted (the time at

which acceptance is received is irrelevant) (Adam v Lindsell) Acceptance occurs when/where the acceptance is posted If the letter is lost in the post, the postal rule still applies (Household

Fire v Grant) The postal rule can be varied (e.g. stating that the contract arises

when the acceptance is received by post – Holwell Securities v Hughes)

Instantaneous Forms of Communicationo The postal rule does not apply to instantaneous forms of communication –

acceptance is effective when received by the offeror (Entores v Miles Far Eastern Corp)

o Acceptance by an instantaneous form of communication occurs when/where it is received (Brinkibon v Stahag Stahl; Olivaylle Pty Ltd v Flottwed AG (No 4))

o Fax – is a instantaneous form of communication (Reese Bros Plastics v Hamon-Sobelco Australia)

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o Emails – acceptance is effective once it is received by the server operated by the recipient or a commercial server used by the recipient (United Nations Convention on the Use of Electronic Communications in International Contracts 2005)

s.24(1) of the Electronic Transactions (Queensland) Act (2001) states that ‘If the addressee of an electronic communication has designated an information system to receive electronic communications … the time of receipt of the communication is the time when it enters the information system.’

s.24(2) – if no designated information system, ‘the time of receipt of the communication is the time when it comes to the attention of the addressee.’

UNCITRAL notes – an information system is designated if it has been expressly specified for a particular purpose (listing an email address or number on a letterhead is not enough)

o Lord Wilberforce said that there is no universal rule that covers all circumstances (said different principles may apply when acceptance is sent or received through a third party, sent out of office hours or not intended to be read immediately) – need to look at each individual case and apply relevant factors (e.g. intention of the parties (mainly the offeror), sound business practices, where the risks should lie)

Battle of the Formso When two companies send different contracts/standard forms to each other.

Which contract is used? English approach – the last form sent is seen as a counter-offer and

will destroy the previous offer (Butler Machine Tool Co Ltd v Ex-Cell-O-Corp (England) Ltd)

Two approaches: Conflict (the exchange of terms is a battle and the court must determine which set of terms prevail) or Synthesis (the court building a contract from the two forms)

Not all contracts fit into the classic offer/acceptance style agreement. Sometimes need to look at whether the parties conduct reveals a manifestation of mutual consent with an intention to be legally bound (Kriketos v Livschitz)

o Test: does the two parties conduct (what was said/not said, commercial aims and expectations) reveal an agreement (manifestation of mutual assent) which shows an intention to be legally bound by the essential elements of a contract? (Branir Pty Ltd v Owston Nominees (no 2) Pty Ltd)

o Where no offer and acceptance can be identified, need to ask whether an agreement can be inferred, whether mutual assent has manifested and whether a reasonable person in the position of each party think there was a concluded bargain (Brambles Holdings Ltd v Bathurst City Council)

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Termination of Offer An offer is terminated when it is revoked, lapses or rejected by the offeree An offer can be revoked anytime before acceptance has occurred. Revocation has to

be communicated to the offeree (Byrne v Van Tienhoven) What counts as revocation?

o If one party hears about the revocation from a third party, providing that third party is a reliable source, the offer has been revoked (Dickinson v Dodds)

Can you promise to keep an offer open for a period of time?o Generally, a promise to keep an offer (a firm offer) is not contractually

binding unless: There is a process contract (collateral contract) The offeree purchases an option (Dickinson v Dodds)

Option: consideration is given in exchange for keeping an offer open. The option holder can enter into the contract at any time within a specified period

Estoppel – Waltons v Maher Sale of Goods (Vienna Convention) Act 1986 (Qld) – Art. 16(2) states

one cannot revoke an offer if the offer indicates it is irrevocable or it is reasonable to rely on the offer as being irrevocable

Revocation of Unilateral Offerso One can withdraw a unilateral offer even if the offeree does not see the

revocation if no tasks have been performed (do so in the same way the offer was advertised)

o There is an implied promise not to revoke a unilateral offer after performance has commenced (Abbott v Lance; Veivers v Cordingly)

o Mobil v Wellcome – held that there was no universal principle that the offeror may not revoke an offer after the offeree has begun performance Need to consider - does the offeror know the offeree has commenced

performance, does the offeree understand that incomplete performance is at their risk, did the parties intend that the offeror should be at liberty to revoke the offer, are the acts of performance detrimental or beneficial to the offeree?

Lapse of Offero An offer will lapse after a certain time

Time period may be expressly mentioned If no time period is stipulated, the offer will lapse after a reasonable

period of time (Bartolo v Hancock) (possible that offers are ‘here and now’ offers)

Reasonable time will depend on the circumstances Failure to accept within a certain time indicates rejection

(Manchester Diocesan Council Case) If acceptance occurs too late, the offeror may treat this as a

counter-offer which they choose to accept o If an offeree dies, the estate can accept the offer (except for personal

contracts)o If an offeror dies, the offer lapses if the offeree knows of the death (Fong v

Cilli)

Rejection and Counter-Offer

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o Once an offer is rejected, it can no longer be accepted (Tim v Hoffman & Co)o Counter-offers will extinguish the original offer (Harris v Jenkins)

Failure of Conditions and Changed Circumstanceso An offer may be subject to a condition that must be fulfilled before the offer

is accepted or a condition that states an offer will lapse upon the occurrence of a certain event (Financings Ltd v Stimson)

o If two parties are supposed to sign a contract, the agreement does not become binding until both parties sign the contract (Neill v Hewens)

Restitutionary Remedieso Can a negotiating party recover costs of preparing for a contract that is not

eventually agreedo No general right – individual risk o Unjust enrichment (restitution) applies when there is no contract (British

Steel v Cleveland Bridge)o One can recover costs associated with work requested to be done by the

other party (Peet v Richmond)

Certainty An agreement must be complete and certain

o Not necessary to provide every detail – courts can fill in gaps Certainty is linked with intention – the more certain an argument is, the more likely

the parties intended to be legally bound by the agreement Key Question: Is the agreement sufficiently certain and sufficiently complete that it

is capable of constituting a binding contract? When there is uncertainty – you take an objective approach (What would a

reasonable person conclude?) Complexity and uncertainty are different – can’t say that a contract is not binding

because the terms are complex and are capable of having multiple meanings (Upper Hunter v Australian Chilling)

Types of uncertainty: Uncertainty as to the identity of the parties, content (clauses contradict each other), scope (clauses are missing)

Three requirements:o A contract must be sufficiently complete (parties must reach an agreement

on all terms that the contract intended to cover and on matters that the court cannot resolve)

o A contract must be sufficiently certain and clear (parties understand their rights and obligations)

o Promises made by the parties must not be illusory The effect that uncertainty, incompleteness or of an illusory term will differ between

each case – depends on how essential the matter is to the ‘heart of the agreement’o If the term is essential – the contract will failo If the term is unessential – the provision will be severed if the court infers

an intention that the agreement should be valid in the absence of the provision (Fitzgerald v Masters)

The provision can also be waived if possible (cannot waive a essential provision – Grime v Bartholomew)

Geebung Investments v Varga Group Investments that courts should be the upholder of bargains and not their destroyers – uphold a contract as far as it is possible

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Completenesso Both parties must agree on all terms (or at least the essential terms)o A contract will be sufficiently complete if the parties reach an agreement on

the essential terms o Essential term = ‘a term without which the contract cannot be enforced’

(Thomas v White) (will differ between cases)o Consider – how essential the term is, why the term has been left out, does

the agreement remain wholly executor or has it been partly or wholly performed

o If an agreement has been wholly or partly performed, the court is more willing to imply terms into the contract, rather than destroy it

o If an agreement is incomplete, you can look at the parties conduct after the contract to determine intent (Quarante v Owners Strata Plan)

Certaintyo A contract can fail because a term is too vague that the court cannot attribute

a meaning to ito If you have a meaningless expression (e.g. a clause is unclear), you can ‘sever’

it (Fitzgerald v Masters)o If a clause is left blank, you can sever it (Laybutt v Amoco)

Contradictory in Scammel v Oustono If a term is incompletely expressed, it cannot be severed if it was central to

the contract (Whitlock v Brew)

Gap Filling of Incomplete Expressionso One way to fill in gaps is by the courts implying terms into a contract o Statutory Gap Filling:o Sale of Goods Act 1896 (Qld): implied terms

s.11(2) – price s.16 – sale by description (good must meet the description that you

sell them by) s.17 – goods shall be reasonably fit for purpose (e.g. if you are selling

a car, the car must work) o Competition and Consumer Act 2010

ACL – statutory guarantees s.56 – supply by description s.54 – goods to be of acceptable quality

Terms Left Open: General Principles o If an issue is intentionally left undecided, it is difficult to say that a binding

contract exists as the matter was raised but not dealt with E.g. May & Butcher v R – a clause stating that a price is ‘to be agreed

on’ was to uncertain so that the contract was not binding o If there is a history of dealing between the parties, the court may infer a term

though conduct and intention (Foley v Classique Coaches)o Giving someone the power to decide a term in the future is not uncertain as

the two parties have agreed to let one party choose something (Godeke v Kirwan)

Defective Machinery

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o When the contract specifies some form of machinery (e.g. arbitration to deal with disputes) but the contract doesn’t specify how to carry out this machinery or the machinery fails (e.g. the contract doesn’t state who will be the arbitrator, a nominated arbitrator refuses to participate)

A contract can be held void on this basis (Hall v Busst; George v Roach)

The court will operate the machinery if necessary (Sudbrook v Eggleton)

Negotiations in Good Faitho Can you have an agreement to negotiate?

English approach No, an agreement to negotiate is not legally binding as negotiating parties should be free to withdraw at anytime (Walford v Miles, Petromec Inc v Petroleo Brasileiro SA)

o Traditional Approach – there is no obligation to negotiate in good faith as contract law is adversarial (Walford v Miles)

o Is there an obligation to continue negotiations? Usually no (but have we moved on in Australia)

o You can have an agreement to negotiate in good faith, but this agreement must be very clear (Coal Cliff v Sijehama)

o Good faith means to act honestly ‘within the framework or fidelity to the bargain’ not to act in the interests of the other party (Strzelecki Holdings v Cable Sands)

Conditional Agreementso A condition is a factual event. Three types of conditional agreements:

Condition Precedent – a condition must occur prior to there being a binding contract

Condition Subsequent – a binding contract exists but may be void if a condition occurs after the contract arises

Condition Precedent to Performance – A contract is binding but performance is condition on a condition occurring (e.g. there is a contract that A has to sell land to B but A doesn’t have to do this until B gets the finances)

o ‘Subject to Contract’ – an agreement exists but is not binding until a contract is signed (e.g. Masters v Cameron – an agreement existed but was subject to a formal contract being signed).

o There are four types of cases where there is an agreement but a later contract.

Intention to be immediately bound (the contract will just act as record of the contract) (CBA v Dean)

There is an agreement but performance is conditional on the later contract (Niesmann v Collingridge)

No intention for there to be an agreement until a formal contract is drawn up (Masters v Cameron)

An intention to be immediately bound, but for this agreement to be superseded by a later agreement (Anaconda Nickel v Tarmoola)

o ‘Subject to finance’ – there is a contract but if the buyer cannot get the needed finance, the seller can walk away (Meehan v Jones)

Illusory Promises

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o A promise is illusory if the promisor has an unfettered discretion in relation to performance of that promise

o A clause that includes an illusory promise is void (Placer Development Ltd v Cth)

o A promise may be rendered illusory by an exemption clause that has such a large effect that a promise has no force (MacRobertson Miller Airline Services v Commissioner of State Taxation)

o A promise is not illusory if important matters are left to be determined by a third party or if subsidiary matters are left to be determined by one of the parties (Godecke v Kirwan)

Intention Key Question: Was there an intention to create legal relation? Did the parties intend

on being legally bound by their agreement? Must be a manifestation of intention to create legal relations for a contract to exist This is determined objectively – look at whether there was a manifestation (making

the other party believe that there was intention) rather than if the party really did have intention Would a reasonable person regard the agreement as intended to be binding? (Merritt v Merritt)

o A party cannot say that there was no intention if a reasonable person in the position of the other party would have assumed there was intention (Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd) exception if the other party knew the party had no intention

o Factors to consider = subject matter of the agreement, status of the parties, relationship of the parties and surrounding circumstances

Possible that parties did not intend on being legally bound (SA v Cth) There are some presumptions in regards to intention (family and commercial) Ermogenous v Greek Orthodox Community of SA Inc – warned of using presumptions,

there is the danger that a presumption will become a rule

Family Agreementso Presumption that family agreements are not intended to be legally binding

Onus of proof rests on the person trying to prove a contract exists Ermogenous suggests that there should be no presumption – rather,

relationship should be one of the factors to consider (courts now take a more objective approach)

o E.g. Balfour v Balfour – husband agreed to pay wife £30 but failed to. Wife sued but lost – held that most agreements between husband and wife were not binding – it is possible for such an agreement to be binding, depends on objective intention

o The court is more willing to find intention in cases of couples separating (Merritt v Merritt)

o Example of binding family agreements – Wakeling v Ripley – the letter indicated that there was an intention to be legally bound; Todd v Nicol – there was intention to be legally binding as the agreement concerned permanent future arrangements that affected financial security

o Commercial agreements between family members will usually satisfy the intention requirement – Roufos v Brewster – held there was an intention to create legal relations as the transaction was inherently commercial

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Social Agreementso Presumption that social agreements are not intended to be legally binding

(e.g. promise to give a friend a lift home) – there are exceptions, will depend on objective intention

o The Satanta; Clarke v Dunrabem – a contract for a social competition can be binding of it was serious and knowledge of the risks were possessed

o Trevey v Grubb – there may be intention in an agreement between friends to share the winnings of a lottery ticket

Commercial Agreements:o Presumptions that commercial agreements are intended to be legally binding

this presumption can be rebutted Onus of proof rests on the person trying to say that a contract does

not exist o Ex Gratia payments – Edwards v Skyways – even if a company does not have

to make a payment, if they make the offer they are legally boundo Can expressly state in a contract that there was no intention to create legal

relations (may affect issues of certainty) Letters of intent – Pirt Biotechnologies v Pirtferm – need to look at the

language a letter of intent (a statement that the party would like to create legal relations in the future) to determine if there is no intention

Letters of comfort – a letter from a parent company to bank saying that it is going to lend money to a subsidiary company offering some assurance in regards to a guarantee of supporting the subsidiary company but without creating clear liability

Kleinwort Benson Ltd v Malaysia Mining Corp Bhd – intention will depend on the language used

Banque Brussles Lambert SA v Australian National Industries Ltd – held that a letter of comfort did intend to create legal relation as there is no room in commerce for a such a statement not to be binding

o Government schemes – will depend if the agreements is commercial or implementation of government policy – Australian Woolen Mills v Cth – held to be no intention as it was only a conditional gift or administrative action

o Honour clauses – saying that there is no legal intention but the parties honourably pledge themselves to carry out their intentions, can be no intention in these cases – Rose & Frank Co v J R Compton & Bros

o Preliminary agreements (‘subject to contract’) – need to consider whether these preliminary agreements were intended to be binding – will consider post-agreement conduct and communication and the language used in the agreement

Consideration Which promises ought to be binding? ones that have consideration (based on

Roman Law causa – a reason for enforcing a promise) Basis – something must be given in return for a promise for it to be binding

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Questions arise when A has made a promise to B that B wishes to enforce but there is doubt as to whether B has given A anything in return

What is consideration? – no single definition o Currie v Misa – ‘some right, interest, profit or benefit accruing to the one

party, or some forbearance, detriment, loss or responsibility, given, suffered or undertaken by the other.’

o Thomas v Thomas – Consideration must move from the promisee and be of some benefit to the promisor or some detriment to the promisee

Consideration doesn’t have to be given to the promisor There must be good consideration – a recognised, legally enforceable consideration

(there will be no contract if there is bad consideration) Consideration must be sufficient (consideration must be something that the law

regards as valuable) but does not need to be adequate (worth the promise) – Woolworths Ltd v Kelly (nominal consideration is allowed – Thomas v Thomas)

Key Terms:o Promisor = the person making the promise that is trying to be enforceso Promisee = the person seeking to enforce the promise o Executed consideration – contract/consideration has been performed –o Executory consideration – one or both sets of obligations are yet to be

performed Consideration must be in exchange for a promise – Australian Woolen Mills v Cth If two or more parties are joint promisees, consideration may be provided by one of

them on behalf of both or all of them (Coulls v Bagot’s Executor and Trustee Co) It is possible for a party to be a stranger to the consideration yet still a party to the

contract; however, such a party cannot enforce the contract (Trident General Insurance Co Ltd v McNiece Bros Pty Ltd)

A promise will not constitute good consideration if the promisee retains an unfettered discretion as to performance – illusory consideration (Place Development Ltd v Cth)

Two aspects of consideration: o The Benefit/Detriment Requirement:

Currie v Misa – the consideration must consist of a detriment to the promisee or a benefit to the promisor

An exchange of promises will be sufficient (each promise is consideration for the other promise)

o The Bargain Requirement: Benefit or detriment bust be given in return for the promise

(Australian Woolen Mills v Commonwealth) Difference between a bargain and a conditional gift (a conditional gift

doesn’t usually have a benefit for the promisor) An act performed in reliance on a promise will not amount to good

consideration (Beaton v McDivitt)

Past Considerationo General rule: past consideration is not sufficient (something given to the

promisor before a promise was made) o There must be a link between the consideration and promise

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o Past consideration will usually not suffice – Roscoria v Thomas o Executed consideration is different to past consideration (e.g. unilateral

contracts – if someone finds a dog and there is a promise for a $100 reward, the consideration is executed but the promise remains executory)

o Exception – when services are performed at the request of another party in circumstances that would raise implications that they are to be paid for in the future, the performance will amount to good consideration (Lampleigh v Braithwait)

This exception will only apply in cases where there is an understanding throughout the transaction that services were to be paid for

The Existing Legal Duty Ruleo General rule: A promise to perform or the performance of an existing legal

duty does not constitute sufficient consideration (Wigan v Edward)o Terms:

Beneficiary: the person who promises to perform an existing legal duty and claims the benefit of the contractual modification

Modifying Party: the party assuming an additional obligation or releasing the beneficiary from an obligation

o Example – B promised to build a garage and fence for MP for $30,000. Post-contract, B realises she has agreed to perform the work at a loss. B shows reluctance so B and MP reach an agreement that if B build the garage, MP will pay an extra $5000 and will not make B build the fence. In return for MP’s promise, B promises to perform her contractual obligation (hasn’t agreed to anything she wasn’t already obliged to do) the court will not enforce MP’s promise even though it was intended to be binding

o Part-Payment of a debt – part-payment will not constitute good consideration for an agreement to discharge the debt (Pinnel’s Case)

Exceptions to the existing legal duty rule o Fresh Consideration – When the beneficiary undertakes fresh consideration

(they undertake something more that what there were obliged to do) – Hartley v Ponsonby

o Practical Benefit – When the beneficiary’s promise to perform an existing obligation confers a practical benefit to the modifying party – Williams v Roffey Bros & Nicholls (Contractors) Ltd

o Promises Made to Third Parties – A promise to perform an existing contract does amount to good consideration if it is made to a third party – Pau On v Lau Yiu Long

o Compromise and Forbearance to Sue – When a promise made through a bona fide compromise of legal claim will be considered good consideration – Wigan v Edwards

o Termination and Replacement – The existing legal duty rule doesn’t apply where the original contract is terminated by agreement and replaced with a new contract (must be an intention to terminate the contract, rather than modify it)

Equitable Estoppel Estoppel arises where an assumption of non-contractual promises and

representations, induced by the representor’s conduct, have been relied on to the relying party’s detriment if the representor acts inconsistent with the assumption

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Lord Denning invented the doctrine of estoppel in The High Trees Case – the landlord has a 99 year lease of a block of flats with a tenant for £2500 p.a. Tenant couldn’t get anyone to occupy flats during the war. Landlord reduced rent to £1250 p.a. 5 years later all flats were let. Landlord claimed arrears and full rent in the future. The defendant was estopped from asserting his strict legal rights under the contract. The idea that the existing contractual rights will not be enforced if defendant was induced to believing they are suspended. The landlord was estopped from receiving full rent for the period where it was inequitable to receive full rent.

Equitable doctrine – discretionary remedies (up to the courts to decided what is fair). Operates when it is unjust to depart from an assumption

Parties:o Representor (R) = the person making a promise or representationo Relying party (RP) = the party who relies on this promise or representation

Different types of estoppel:o Common law estoppel – R induces RP to believe that they have signed the

contract. R is estopped from denying that an assumption is untrue and the rights of a party will be determined according to the assumed state of affairs (Walton Stores v Maher)

o Equitable Estoppel: R induces RP to believe that they will sign the contract. R is estopped from acting inconsistently with the assumption without ensuring that the departure does not cause harm to RP

Proprietary Estoppel: Where RP is encouraged to act on or in relation to someone else’s land in the expectation of getting some form of proprietary right (Riches v Hogben)

Promissory Estoppel: Where RP has acted to their detriment in reliance to a future promise (High Trees)

Estoppel involves assumptions that R will enter into a contract with RP in the future; R will transfer land, pay money or provide another benefit to RP; or R will not enforce a certain contractual right against RP

Development of Promissory Estoppel in Australia Je Maintiendrai v Quaglia – similar to High Trees. Landlord not awarded repayment of

unpaid rent Legione v Hateley – doctrine of ‘promissory estoppel’ accepted by HC as part of

Australian law. Wanted to consider estoppel as a variation of contractual rights, not the creation of a new doctrine

Walton Stores v Maher – promissory estoppel can apply even if there is no pre-existing contract (confirmed in Saleh v Romanous)

Cth v Verwayen – looked for a single, unifying doctrine of estoppel Giumelli v Giumelli

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Walton Stores v Maher (1988) Facts: Draft contract sent by tenant (Walton Stores) to landlord (Maher) for the

demolition of old building on land and to build a new one. Landlord suggested amendments. W’s solicitor said the amendment had been approved orally and later sent a redraft on the contract with amendments and aid that they would let M know tomorrow if the amendment were not agreed to. W did not contact M. M signed contract and sent to W. W changed mind and said to go slow and did not sign the contract. M begins demolition work. W has knowledge of this but does nothing. When the new building was 40% completed, W told M they did not want to proceed and had not signed a contract, thus were entitled to withdraw.

o Held: that W was estopped from denying their implied promise to complete the contract.

o W knew that M was exposed to detriment by acting on the basis of false assumption and it was unconscionable for W to adopt a course of action that encouraged M’s asumptions

Brennan J stated how to establish an equitable estoppel:o (1) P assumed that a particular legal relationship existed between him and D

or expected that a particular legal relationship would exist between them o (2) D induced P to adopt that assumption or expectationo (3) P acts or abstains from acting in reliance on the assumption or expectationo (4) D knew or intended him to do soo (5) P's action or inaction will occasion detriment if the assumption or

expectation is not fulfilled; ando (6) D has failed to act to avoid that detriment whether by fulfilling the

assumption or expectation or otherwise.

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Elements of Estoppel Three elements are requires: assumption, inducement and detrimental reliance Three elements are not necessarily required but must always be considered:

reasonableness, unconscionability and departure or threatened departure

Assumption: RP adopted an assumption – either to fact (CL) or future conduct (equity) Jordan v Money said estopped can only arise from an assumption of act but there Is

suggestion that this is no longer good law in Australia This assumption must be based on a clear and unambiguous promise/representation

(either express, implied or though conduct) – Legione v Hateley

Inducement Assumption of RP must be induced by R’s conduct (either an express representation

or inaction) – R must know or intend that RP will act or abstain from acting If assumption induced by silence – must show that RP intended reliance, knew of the

acts of reliance should have reasonably expected reliance Murphy v Overton Investments - do not need a promise or representation, need to

look at whether RP was induced to adopt an assumption

Detrimental Reliance RP must act on assumption in a way that they will suffer detriment if R is allowed to

depart from assumption Two types of loss:

o Reliance Loss: Loss suffered by RP due to relying on the assumption when R acts inconsistently with the assumption – occurs if RP has taken some action on the faith of the promise

o Expectation Loss: Loss of benefit the relying party assumed they were going to receive

o E.g. Walton Stores v Maher – Reliance loss = expenditure incurred in demolishing the existing building and partially constructing a new one. Expectation Loss = Rent they were expecting to receive during the lease

Cth v Verwayen – detriment does not have to be financialo Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd – detriment suffered must

be material, significant or substantialReasonableness

RP’s reliance must be reasonable – taking relevant detrimental action on reliance on assumption must be reasonable (Murphy v Overton Investments Pty Ltd)

R’s departure from the assumption must be unconscionable Unconscionable Conduct

Cth v Verwayen – unconscionability relates to the conduct of R in the circumstances and how R induced the adoption of the assumption

Knowledge of RP’s assumption and any intention to induce reliance is relevant Galaxidis v Galaxidis – denying responsibility for detriment sustained as a result of

unreasonable reliance is not unconscionable It must be unconscionable/inequitable to allow R to go back on the promise

Departure or Threatened Departure R must depart or threaten to depart from the assumption for estoppel to arise

(Ashton Mining Ltd v Commissioner of Taxation)

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The Effect of an Estoppel Common law estoppel – prevents R from saying that certain facts are untrue. Rights

of parties are determined according to the assumed state of affairs Equitable estoppel – raises an equity (entitlement to equitable relief) Dilwyn v Llewelyn – requires the representor to perform the relevant promise or to

act in accordance with the relevant representation Two interests:

o Reliance Interest: RP has an interest in protection from harm resulting from their reliance on the relevant promise or representation

Order R to pay monetary compensation for detriment suffered by RPo Expectation Interest: RP has an interest in receiving the benefit that they

expected to receive Order R to conduct specific performance or payment of damages in

lieu of specific performance

Equitable estoppel can arise if the offeror leads the offeree to believe that the offer will not be revoked and the offeree acts to his or her detriment in reliance on that assumption – won’t necessarily make the offer irrevocable, the court will grant the offeree an equity and the court may grant relief in some other way

It is difficult to establish an estoppel in pre-contractual negotiations o Walton Stores v Maher – different because terms of the contract had been

concluded, immediate commencement of work was required and WS knew M were acting on the assumption that WS had or would sign the contract

o Contrast to Austotel v Franklins Services – no estoppel as the two parties had failed to reach an agreement on rent (a crucial element)

Privity – estoppel can arise where a contractual claim is barred based on the privity rule – a person is not a party to the contract but who had been led to believe that they were a party or would receive benefit under a contract may be able to establish an estoppel if they acted to their detriment on the faith of the assumption (Trident General Insurance v McNiece Bros)

R does not necessarily have to be a party to a contract to be liable Equitable estoppel may apply if a contract is unenforceable because it fails to comply

with formal requirements under statute – Colin v Holden Estoppel can operate where one party induces another party to believe that a

contract has been or will be varied or that a term will not be enforced (Anaconda Nickel v Edensor Nominees)

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Terms Terms = conditions, warranties, innominate terms Conditions vs. warranty:

o Condition = very important, can terminate contract if breachedo Warranty – not as important, cannot terminate contract if breached, only get

damages Key question: Was an oral statement expressed before a written contract but not

included in the written contract intended to be a term of the contract?o Complex – when the terms on which the parties have contracted are unclear

Express terms = terms actually agreed to by parties (either expressed in writing or orally)

Implied terms = terms that are assumed to have been agreed on (e.g. terms that a contract cannot function without); the court or a Statute can insert terms

Terms can be incorporated by reference – e.g. a contract states that a certain set of terms expressed elsewhere will be part of the contract

Terms can be made through any form of communication – email, letters, telephone conversations, sign displays, websites

Express Terms: Formalities:

o Assumption – unless there are some statutory requirements, a contract can be made informally (no requirement of a written contract or signature)

o Some legislation requires an agreement to be in writing: Property Law Act 1974 (Qld) – s.56: a guarantee must be in writing Electronic Transaction Act 2001 (Qld) – s.8: transaction is not invalid

because it took place by electronic means; Other – Corporations Act, Copyright Act, Consumer legislation

Signature:o A party is bound by a contractual document that they have signed

regardless of whether they have read or understood the terms (providing there is no fraud or misrepresentation) – L’Estrange v Graucob; affirmed in Australia in Toll (FGCT) Pty v Alphapharm Pty Ltd

o Misrepresentation of the effect or extent of the document will affect the signature – Curtis v Chemical Cleaning and Dyeing

E.g. if you think you are just signing a receipt from a delivery company but you are actually signing a contract. The contract won’t be enforceable – Hill v Wright

o Doctrine of non est factum (not my deed) – when one didn’t realise what they were doing and thought they were signing something else

Requirements: need some sort of disability, the document signed was radically different and the plaintiff has taken reasonable care

E.g. Petellin v Cullen

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Incorporation of Terms by Notice If there is no signed contract, one party may attempt to incorporate some terms

through notice (giving the other party reasonable notice of the terms before the contract is made)

Two requirements:o The terms must be available to the party to be bound before the contract is

made – Oceanic Sun Line Special Shipping Co Inc v Fayo Reasonable steps must be taken to bring the terms to the notice of the

party to be bound Party must have actual knowledge of the terms or have been given

reasonable notice of terms Knowledge: one is bound if they know that a document delivered or a

signed displayed contains contractual terms, regardless of whether they have read it or not

The mere presentation of a document that a reasonable person would expect to contain contractual terms will be sufficient notice

If the terms are not in an obvious contractual document, the party seeking to incorporate the terms must take reasonable steps to bring the terms to the notice of the party to be bound – Causer v Brown

Reasonable notice depends on the circumstances – generally, the notice must be in such a form that it is likely to come to the attention of the party to be bound

Incorporating terms by reference:o Generally not sufficient notice to tell a party that terms found in another

document that is not readily available will form part of the contract – Baltic Shipping v Dillon

o Need to take reasonable steps to notify the plaintiff of the existence of the terms and where they can be found

Parker v South East Railway – if reasonable steps to notify the plaintiff are taken, it is irrelevant whether or not the plaintiff has read them

o Need to consider: Nature of document referring plaintiff elsewhere, is it a contractual

document?: Chapelton v Barry Council – a receipt is not a contractual document

Access to incorporated document – Oceanic Sun Line v Fay; Baltic Shipping v Dillon

Identification of applicable terms – are terms identified with specific precision or does it just say ‘our usual conditions’

Time of incorporation – terms must be incorporated before acceptance – Olly v Marlborough Court Hotel; Thornton v Shoe Land Parking

Nature of clause – is it unusual? – The more unusual the clause, the greater notice must be given – Baltic Shipping v Dillon

Unusual terms – suggested that if there are unusual terms, special notice that will fairly and reasonably bring the terms to the attention of the party to be bound must be given – Interfoto Picture Library Ltd v Stiletto Visual Programs Ltd

o Toll v Alphapham – rejected the idea that special notice must be given to unusually onerous terms in a signed contract

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Summary:o If a party signs a document that includes all of the terms, they are boundo If a party signs a document that seeks to incorporate terms that are located

elsewhere, they are bound providing that reasonable notice has been given and there are no unusual terms

o If no document has been signed, a party may still be bound if terms have been incorporated by notice

Electronic Contracts Contracts made on the internet or via email will not usually be signed – will either be

a clickwrap contract (party clicks a box to say they agree to a term) or a browse wrap contract (party will be able to access the standard terms through a the website)

Electronic Transactions Act 2001 (Qld) – s.14: a signature requirement is met if a reliable method is used to identify a person and their approval and the person consents to this method

If such a method is not used, the party seeking to incorporate terms must take reasonable steps to bring those terms to the attention of the other party

Incorporation of Terms by a Course of Dealings Where two parties have had a history of dealings, contractual terms introduced in

earlier transactions may be incorporated into subsequent transactions even if the ordinary requirement of incorporation has not been met in the subsequent contracts – the parties show a willingness to be bound by such terms through their continual dealings with the other party - Balmain New Ferry Co Ltd v Robertson

Requirements – the course of dealing must be regular and uniform and the document relied on previously must be considered a contractual document

Statements Made During Negotiations A written contract may contain some but not all of the oral statements made during

negotiations If a statement made during negotiations is false, there will be consequences:

o If the statement was a term of the contract – remedy for breach of contracto If the statement was not a term of the contract, rather a mere representation

– remedy for breach of contract will not be available (maybe misrepresentation, a statutory remedy or estoppel

Need to consider two things when determining whether a statement made during negotiations forms part of the written contract:

o The parol evidence ruleo Did the parties intend the statement to be an express term of the contract, or

was it merely part of the negotiations and not intended to have legal effect?

The Parol Evidence Rule: The rule limits the extrinsic evidence that may add to or vary the terms of a written

contracto Oral contract – court will consider all relevant evidenceo Written contract – evidence is limited by the parol evidence rule

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Goss v Lord Nugent – if there is a written contract, verbal evidence is not allowed to be given in regards to what passed between the parties either before or during the time the contract was made

Rule = no evidence can be allowed if it subtracts from, adds to, varies or contradicts the language of a written contract – Codelfa v State Rail of NSW

This rule only applied when the contract is wholly in writing (need to determine whether or not the contract was intended to be wholly in writing)

o Presumption – if there is a written document, it was intended to be wholly in writing (can be rebutted)

o Entire Agreement Clauses: a clause that states that the contract is treated as being wholly in writing and any extrinsic statements are not part of the contract – Inntrepreeur Pub Co v East Crown

Effectiveness is affected by misrepresentation, rectification of the document, operation of an implied term, the ACL, later oral variation, estoppel

o It is possible for a contract to be partly written and partly oral – The Ardennes [1951]

o Easier to say that a contract is part oral/part written if there is no direct contradiction – Skyrise Consultant v Metroland

o Extrinsic evidence can be used to determine whether a contract is partly or wholly in writing – Equuscorp Pty Ltd v Glengallan Investments Pty Ltd

Can evidence of the surrounding circumstances be admitted? o Extrinsic evidence of the circumstances is used only where the language of

the contract is ambiguous or susceptible to more than one meaning – Codelfa Construction v State Rail Authority of NSW

o Surrounding circumstances does not include evidence of the parties’ subjective intentions, only objectively known facts – Byrne v Kendle

What extrinsic evidence can be excluded – oral statements made while negotiating, written materials such as letters or memoranda relating to the negotiations, earlier drafts of the written record

Exceptions where extrinsic evidence can be used to add to or vary the contract when the contract is wholly in writing – collateral contracts, estoppel, rectification, contract subject to a condition precedent, implied terms, determining the true consideration

If language used in a contract has special meaning in the parties’ particular trade or industry, extrinsic evidence of this meaning may be admitted but this meaning must be ‘well-known, uniform and certain’ – Homestake Australia Ltd v Metana Minerals

The parol evidence rule will apply to electronic contracts that are capable of being treated as if in writing

Exceptions to the parol evidence rule:o Ambiguity – extrinsic evidence may be given when a word does not have a

readily ascertainable meaning or is used in an inconsistent manner – Royal Botanic Gardens and Domain Trust v South Sydney City Council

o Implied terms – Codelfao Condition Precedent – Pym v Campbello Invalidity (e.g. misrepresentation or mistake) – Curtis v Chemical Cleaningo Rectification o Estoppel – Saleh v Romanouso Collateral Contracts:

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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 – Van Den Exchert v Chappel

Such a statement must be made as a promise, must be intended to induce entry into the contract and must be consistent with the terms of the main contract (can add to but not alter the main contract). If there is a direct conflict between the main and collateral contract, the parol evidence rule applies and the collateral contract does not exist – Hoyt’s Pty Ltd v Spencer

When is a Statement a Term of the Contract A party seeking to show that a statement made in negotiation forms a term of the

contract has the burden of establishing that the statement has contractual force Oral statements – the statement must have been intended by the party making it to

be a promise and to form part of the written contract (intention is judged objectively – would a reasonable person in the circumstance have considered the statement to be a contractual promise) – Oscar Chess Ltd v Williams

o There is a distinction between a promise and a representation, though this may be hard to determine – Ross v Allis Chalmers

The existence of a formal contract suggests that any statement made by the parties during negotiations and not included in the written contract were not intended to be part of the final contract – Equuscorp v Glengallan Investments

It might be possible to argue that an oral statement forms part of the contract. Relevant factors:

o Importance of statement: A statement that was highly significant to the transaction is more likely to be regarded as a promise than a statement of lesser significance – Van den Esschert v Chappell

o Content of statement: A statement is more likely to be a promise if the party making it uses words that suggest it was a promise (e.g. promise, agree, guarantee, warranty) – a statement will be a mere representation if the word indicate an expression of opinion or a hypothesis – JJ Savage & Sons v Blakney

o Knowledge of parties: A statement made by a party with expertise to a person who is inexperienced is more likely to be a promise than statement made by a party known to be inexperience or between two highly experienced parties – Oscar Chess Ltd v Williams

o Time of statement: a statement made immediately before the contract was entered into is more likely to be regarded as a promise

o Reliance: did the party rely on the statement when entering into the contract?

o Relationship to written contract: was there an intention to have the whole agreement in one document?

Even if an oral statement made in negotiations does not form part of the written contract, there are a number of doctrines that may give legal effect to the term

o Collateral contracts – see above o Estoppel – where one party seeks to depart from an assumption that they

would modify or refrain from enforcing the terms of a contract in writing

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Implied Terms Three categories of implied terms:

o Terms implied in facto Terms implied in lawo Terms implied by custom

Possible fourth category – ‘universal terms’ represented by a duty of good faith Terms will not be implied if they are expressly excluded by the parties or are

inconsistent with the express terms of the contract An implied term won’t necessarily be excluded because of an entire agreement clause

– Hart v MacDonald

Terms Implied in Fact Terms that are unique to the particular contract Based on the presumed intentions of the parties Terms do not add to the contract; rather, spell out what the contract means –

Attorney General of Belize v Belize Telecom Ltd For a term to be implied in a written contract, it must satisfy the BP Refinery test ( BP

Refinery (Westenport) Pty Ltd v Hastings Shire Council):(Must satisfy all 5 conditions)o 1. It must be reasonable and equitableo 2. It must be necessary to give business efficacy to the contracto 3. It must be so obvious that ‘it goes without saying’o 4. It must be capable of clear expressiono 5. It must not contradict any express term of the contract

1. Reasonable and Equitableo A term cannot be beneficial to one party but detrimental to the other party –

BP Refinery (Westenport) Pty Ltd v Hastings Shire Council 2. Business Efficacy

o A term won’t be implied if the contract is effective without it – ask: Would a reasonable person regard the proposed term as necessary to enable the contract to operate in a businesslike manner?

o If the contract can still operate without the term, but not operate effectively, the term can be implied – Re Romin Pty Ltd

o E.g. The Moorcock (implied term that wharf owner should make the berth reasonably fit for the purpose or inform the other party that it is not); Breen v Williams (no implied term that a patient is entitled to obtain their medial records from their doctor as this is not necessary for effective performance of the contact)

3. Obviousnesso Most important condition o An implied term must be so obvious that ‘it goes without saying’ and if an

officious bystander was to suggest making a provision about it, the parties would agree without hesitation (Shirlaw v Southern Foundries)

o E.g. Gwan Investments Pty Ltd v Outback Health Screenings (implied a term that the overall weight of the truck and health unity should be within the limit to allow it to drive on public roads); Codelfa Construction v State Rail Authority of NSW (no implied term that the State Rail Authority had to pay Codelfa’s increased costs as this was not a case where an obvious provision had been overlooked)

4. Clarity

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o Terms must be able to be expressed in a clear and precise manner – Ansett Transport Industries v Cth

5. Consistencyo An implied term must not be inconsistent with an express term of the

contract Fairness is not a ground for implying a term in if it does not satisfy the 5 conditions BP Refinery test is very strict – may be less strict when there is no formal contract

(e.g. oral contract between lawyer and client or doctor and patient)o Hard to draw a distinction between the term of the contract and implied

termso Hawkins v Clayton – a terms can be implied if it is necessary for the

reasonable or effective operation of a contract (reasonableness or efficacy are sufficient grounds alone)

o Suggested that obviousness is still an important element in informal contracts – Byrne v Australian Airlines Ltd

Terms Implied in Law Terms implied in all contracts of a particular class or description – not based on the

intention of the parties E.g. – condition of reasonable fitness and merchantable quality on a contract for sale

of goods, implied condition on letting a furnished house that it will be reasonably fit for habitation, implied duty of care in the carriage of passengers

Requirements for implying terms in law for the first time: (new terms implied in law may develop over time)

o The term must be applicable to a definite class of contractual relationshipo The terms must be suitable for it to be recognised as implied in all contract of

that classo Test of necessity – a term is necessary if ‘the enjoyment of rights conferred by

the contract would or could be rendered nugatory, worthless or seriously undermined’ – Byrne v Australian Airlines Ltd

Different to the business efficacy test – more general and have consideration to the inherent nature of the contract and of the relationship established

Terms Implied by Custom A term may be implied on the basis of custom or usage in a particular market or

context – if a custom is well-known and acquiesced in, then everyone making a contract in that situation can reasonably be presumed to have imported that term into the contract

Principles of implying a term by custom are expressed in Con Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Pty Ltd :

o 1. The existence of a custom or usage that will justify the implication of a term into a contract (question of fact)

o 2. The custom does not have to be universally accepted, but must be so well-known and acquiesced in that everyone making such a contract is presumed to have included the terms (question of fact)

o 3. The term cannot be contrary to the express terms of the contracto 4. A person can be bound by a term implied by custom even if they did not

know of the custom Strict requirements – not many terms are implied by custom

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It is not enough to prove that such a term was the ordinary course of events; rather, must prove a clear course of conduct were the practice always happened (Con-Stan)

Implied Duty of Good Faith in Contract Performance Undecided by the High Court whether Australia should recognise a duty of good faith

(issue left open in Royal Botanic Gardens and Domain Trust v South Sydney City Council) – duty has been recognised in Federal and State courts

Why recognised a duty of good faith?o Ensures co-operation and fairness in contract performance – supplements

express terms that deal with this matter Some argue that good faith is not an implied term; rather, should be a principle of

construction (all contracts should be construed on the basis that there is an expectancy of good faith in all terms unless explicitly otherwise stated)

Some court treat a duty of good faith as a term implied in law – Burger King Corporation v Hungry Jack’s Pty Ltd (if so, the class of contracts that it applies to is undefined)

Good faith is equated with unconscionability – ‘the principles of good faith restrains the deliberate pursuit of self-interest’; concerns with the extent to which one party is obliged to acknowledge and respect the interests of the other

Good faith is not concerned with the fairness of terms agreed on What does good faith require?

o No clear statement as to what the implied duty requires from the parties o Complemented by the duty of co-operation: each party agrees to do all such

things as are necessary on his part to enable the other party to have the benefit of the contract – Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd

Where the performance of a contract is qualified by a ‘contingent condition’, requiring the occurrence of some specified event before the parties are obliged to continue with the performance of the contract, the duty of co-operation will require that both parties do what is reasonably necessary to satisfy the condition (e.g. if the contract is subject to the approval of a plan of subdivision, the vendor has an implied duty to submit the plan for approval

o Good faith doesn’t preclude the exercise of a power whenever the exercise will have harsh consequences for the other party; rather, ensures that there is some level of regard for the interests of the other party

o Good faith can be measured by a number of different standards: Reasonableness – under a duty of good faith or reasonableness, a

party exercising a contractual discretion must act in an unbiased way and also make an attempt to verify the information on which the decision is to be based – Renard Construction (ME) v Minister for Public Works

Extraneous Purpose – suggest that an implied duty of good faith should preclude a party from exercising a contractual power for an extraneous purpose

Legitimate interests – good faith will not restrict decisions and actions, reasonably taken, which are designed to promote the legitimate interests of a party; loyalty to the contract (South Sydney District Rugby League Football Club Ltd v News Ltd)

Can a duty of good faith be excluded?o Reasonably specific words may exclude an implied duty of good faith

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o A clause that states that all implied terms are excluded can be effective in excluding a duty of good faith – Vodafone Pacific Ltd v Mobile Innovations

o Suggested that an entire agreement clause is not enough to exclude a dutyInterpretation/Construction

Rule for Interpretation The court will try to give effect to the parties’ intention – intentions are determined

objectively (need to consider what the words and conduct of the parties would have lead a reasonable person in the position of the parties to believe)

Subjective beliefs of the parties are irrelevant (Pacific Carriers v BNP Paribas)

The general rule is that words are construed according to their plain, ordinary or natural meaning (Codelfa)

Move towards considering extrinsic factors (only in times of ambiguity) – in light of the surrounding circumstances known to the parties and the purpose and object of the transaction, how would a reasonable person have understood the words to mean? (Pacific Carrier v BNP Paribas)

The meaning of words are determined objectively according to objective background facts (Reardon Smith v Hansen Tangen (The Diana Prosperity)

o Background facts can only be considered if the language of the contract is ambiguous and susceptible to more than one meaning (Codelfa)

Pacific Carrier v BNP Paribas had a wider view – ambiguity is not required to consider surrounding circumstances (not authority)

Subsequent conduct cannot be used as evidence when interpreting the meaning of terms (Codelfa)

Evidence of what the parties said their actual intentions were, evidence of negotiations and post-contract conduct is excluded by the parol evidence rule (Codelfa)

o Evidence of negotiations is not considered as drafts of contracts can often change and the intention of parties can change over time – only the final document and objective intentions are relevant (Prenn v Symmonds)

If the term is open to two possible constructions, the Court will choose the option that ‘avoids a result which is capricious, unreasonable, inconvenient or unjust even if it is not the most obvious or most grammatically accurate’ (ABC v Australian Performing Rights Association)

o Will avoid interpretations that result in unreasonable or uncommercial consequences – assumption that parties intended their agreement to have a reasonable commercial meaning

Some support for the idea that If the natural and ordinary meaning of the term is absurd (and ‘flouts business common sense’), the court may interpret the term differently to generate a reasonable outcome (The Antaios)

Rectification – a contract can be changed if there is a mistake (e.g. it says 100 instead of 1000) – not varying the contract; rather, expressing the common intention of the parties (Franklins v Metcash Trading)

o Possible to correct a mistake through construction – interpreting the term to mean what was intended by the parties (Chartbrook v Persimmon)

Specific Rules of Interpretation

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Expressio unius exclusio alterius – the express mention of one thing, excludes all other things (Hare v Horton)

Ejuisdem generis – if a term such as ‘any other cause’ is used, only causes of ‘a like kind’ are included (Tillman v Knutsford)

If there is a conflict between a pre-printed clause and typed/handwritten additions, the court will tend to give effect to the additions (The Starsin)

Contracts are to be interpreted so as to avoid defeating the main purpose and intent of the contract (Glyn v Margetson)

Exclusion Clauses Exclusion/exemption/exception clauses = clauses that aim to exclude a party’s liability

for conduct that would otherwise be a breach of contract or constitute a tort Other types of clauses – Indemnity clause (insurance), limitation of liability clause,

time limit clause, liquidated damage clause, penalty clause Some concern in regards to exclusion clauses where there is a substantial degree of

inequality between the parties (e.g. an individual and a large business) Exclusion clauses for contract for the supply of goods and services are subject to

regulations under the ACL

Need to ask: Was the exclusion clause properly incorporated into the contract? Is the person seeking to rely on the protection of the clause a party to the contract? Does the clause apply to exclude or reduce liability in relation to the issue in dispute

Interpretation of Exclusion Clauses: The meaning and effect of an exclusion clause is to be determined by the ordinary

processes of construction of a contract (natural and ordinary meaning read in the light of the contract as a whole) (Darlington Futures v Delco Australia)

In cases of ambiguity, exclusion clauses may be construed contra proferentem – construed strictly against the interests of the party seeking to rely on the clause (Wallis Sons & Wels v Pratt & Haynes)

Ambiguity is an indemnity should be construed in favour of the person providing the indemnity

Ambiguity in a guarantee should be construed in favour of the guarantor Four Corner’s Rule – an exclusion clause won’t exclude liability for acts that are not

authorised by a contract (outside the ‘four corners’ of the contract) An exclusion clause is unlikely to exclude liability for a breach that would defeat the

main object of the contract (Council of the City of Sydney v West) No special rule for fundamental breaches – Photo Production v Securior An exclusion clause is unlikely to exclude liability for loss occurring during a deviation

from the contractually agreed voyage or route (Thomas National Transport (Melbourne) v Mary & Baker (Australia))

To exclude liability for negligence, an express reference to negligence as an exclude head of liability, general words that include expansive language that would encompass negligence or if negligence is the only basis on which one can be liable is needed (David v Pearce Parking Station)

An exclusion clause will only exclude liability for a deliberate breach of contract if the words are very clear

‘Reading Down’ Exemption Clauses – if the exemption clause cannot be applied literally without creating an absurdity or defeating the main object of the contract, the term will be read down

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Still need to look at the ACL

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Australian Consumer Law The Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010

(Cth)) replaces implied terms in contracts for the sale of goods or services with statutory guarantees

These statutory guarantees always apply to every contract in relation to goods or services (can’t contract out of the ACL – will always apply)

Statutory guarantees replaced implied conditions and warranties – goods:o s.51 – guarantee as to titleo s.52 – guarantee as to undisturbed possessiono s.53 – guarantee as to undisclosed securitieso s.54 – guarantee as to acceptable qualityo s.55 – guarantee as to fitness for any disclose purposeo s.56 – guarantee relating to the supply of goods by descriptiono s.57 – guarantees relating to the supply of goods by sample or demonstration

model o s.58 – guarantee as to repairs and spare partso s.59 – guarantee as to express warranties

Statutory guarantees replaced implied conditions and warranties – services:o s.60 – guarantee as to due care and skillo s.61 – guarantee as to fitness for a particular purposeo s.62 – guarantee as to reasonable time for supplyo s.63 – services to which subdivision does not apply

Application of ACL: The Act applies to the conduct of corporations Protect consumers (either individuals or small businesses) Consumer is defined in s.3 – a party is a consumer if:

o The price of goods does not exceed the prescribed amount ($40,000); oro If there is a higher price, goods were of a kind ordinary acquired for personal

domestic use or consumption; oro The good was a vehicle/trailer for use on public roads;

ANDo The plaintiff did not acquire the goods for re-supply, or using/transforming

them in trade or commerce, manufacture or repairing other goods

Some Key Sections s.51 – Title

o (1) If a person (the supplier) supplies goods to a consumer, there is a guarantee that the supplier will have a right to dispose of the property in the goods when that property is to pass to the consumer.

o (2) Subsection (1) does not apply to a supply (a supply of limited title) if an intention that the supplier of the goods should transfer only such title as the supplier, or another person, may have: (a) appears from the contract for the supply; or(b) is to be inferred from the circumstances of that contract.

s.54 – Acceptable Quality o s.54(2) Goods are of acceptable quality if they are:

(a) fit for all the purposes for which goods of that are commonly supplied; and

(b) acceptable in appearance and finish; and (c) free from defects; and

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(d) safe (e) durable as a reasonable consumer fully acquainted with the state

and condition of the goods (including any hidden defects of the goods) would regard as acceptable having regard to the maters in subsection (3) (nature, price, statements or representation made about the goods and any other relevant circumstances).

s.56 – Descriptiono (1) If:

(a) a person supplies, in trade or commerce, goods by description to a consumer; and

(b) the supply does not occur by way of sale by auction; there is a guarantee that the goods correspond with the description.

o (2) A supply of goods is not prevented from being a supply by description only because, having been exposed for sale or hire, they are selected by the consumer.

o (3) If goods are supplied by description as well as by reference to a sample or demonstration model, the guarantees in this section and in section 57 both apply.

s.58 – Repairs and spare partso s.58 – guarantee that the manufacturer of the goods will take reasonable

action to ensure that facilities for the repair of the goods, and parts for the goods, are reasonably available for a reasonably period after the goods are supplied

s.59 – Express Warranties o s.59 – guarantee that a manufacturer or supplier will comply with any express

warranty that they provideo Express warranty = an additional, extended warranty that manufacturers may

provide or suppliers may try to seel o Is this express warranty needed as s.55 guarantees acceptable quality – an

express warranty will provide more certainty as the ACL does not state how long a statutory guarantee will last for

s.60 – Due Care and Skill (Services)o s.2 defined services as the performance of work (e.g. cleaning, security), the

provision of facilities (e.g. parking) or entertainment (e.g. holidays, cinemas) s.63 excludes transportation or storage of goods

o s.60 – guarantee that services will be rendered with due care and skill (not an absolute guarantee, just what is due)

s.61 – Fitness for a Particular Purposeo s.61 – If the consumer make known a particular result they want from the

service, there is a guarantee that the services, and any product resulting from the service, will be reasonably fit for that purpose and will be of such a nature, quality, state or condition to reasonably achieve that result

s.259 – Remedies if a statutory guarantee is breachedo Use these remedies – not common law o Non-major vs. major failures

Non-major – consumer can ask supplier to remedy failure in a reasonable time

Major – consumer can reject the goods or recover compensation for reduction in value

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Unfair Terms Legislation has been enacted in order to protect consumers from unfair terms Part 3 of the Fair Trading Act 1989 (Qld) is referred to the Australian Consumer Law

(Qld) refers directly to the ACL in the CCA Unfair contract terms (UCT) are covered in the Australian Consumer Law, Part 2-3 s.23(1): A term of a consumer contract is void if:

o (a) the terms is unfair; and o (b) the contract is a standard form contract

Who is affected by this legislation? Defendants:

o Corporations As the CCA 2010 is a Cth Act, its application is limited to constitutional

corporations (foreign, trading or financial corporations) Restricted to corporations that engage in interstate trade or

commerce S.2A extends the application of the ACL to the Crown and their affairs

o Businesses Part 3 of the ACL (Qld) in the Fair Trading Act 1989 (Qld) sates that

the Act applies to and in relation to persons carrying on business within Queensland; or persons ordinarily resident in this jurisdiction

Plaintiffs:o UCT legislation only applies to a ‘consumer contract’

s.23(2): A consumer contract is a contract for: (a) a supply of goods or services; or (b) a sale or grant of an interest in land

Contract must be with an individual only (excludes a corporation, partnership and small businesses (unless there is a sole trader))

Individual use must be wholly or predominantly for personal, domestic or household use/consumption

What contracts are regulated by UCT legislation? s.23(1)(b) provides that for UCT legislation to apply, the contract must be a standard

form contract ‘Standard form contract’ is not defined in the ACL – does list factors to consider when

determining whether or not a contract is a standard form contract o It is commonly understood to mean a document prepared by the trader of

goods or services that is used by the trader in all transaction of that kind and concluded without negotiations

s.23(2) – must be a consumer contract and concern the relevant areas The burden of proof rests on the corporation (s.27(1): if a party … alleges that a

contract is a standard form contract, it is presumed to be a standard form contract unless another party … proves otherwise)

s.27(2): In determining whether a contract is a standard form contract, a court may take into account such matters as it thinks relevant, but must take into account the following:

o (a) whether one of the parties has all or most of the bargaining power relating to the transaction;

o (b) whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;

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o (c) whether another party was, in effect, required either to accept or reject the terms of the contract … in the form in which they were presented;

o (d) whether another party was given an effective opportunity to negotiate the terms of the contract …;

o (e) whether the terms of the contract … take into account the specific characteristics of another party or the particular transaction;

o (f) any other matter prescribed by the regulations. If a contract is not a standard form contract, Part 2-3 will not apply and the plaintiff

will have to rely on common law remedies Exclusions: s.28 lists contracts to which UCT legislation does not apply:

o s.28(1): This Part does not apply to: (a) a contract of marine salvage or towage; or (b) a charterparty of a ship; or (c) a contract for the carriage of goods by ship

o s.28(3): This Part does not apply to a contract that is the constitution … of a company

What amounts to a term being unfair? s.24(1): A term of a consumer contract if unfair if:

o (a) it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and

An imbalance will be significant if the imbalance would detract from the rights of the consumer under the common law or from the reasonable expedition of consumer as to the likely distraction of rights and obligations under the contract

o (b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

Presumption in s.24(4) that a terms is not reasonably necessary in order to protect legitimate interests

Must first prove that there was a legitimate interest (if the term protects the trader from a business risk inherent in the transaction rather than an attempt to appropriate gains not contemplated as part of the original bargain)

Must then prove that the term is ‘reasonably necessary’ to protect the interest (must be proportionate)

o (c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

s.24(2): The court must take into account:o (a) the extent to which the term is transparento (b) the contract as a whole

s.24(3): A term is transparent if the term is:o (a) expressed in reasonably plain language; and (plain, not legal)o (b) legible; and (print is not too small)o (c) presented clearly; and (presented in paragraphs)o (d) readily available to any party affected by the term.

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s.25(1) provides examples of unfair terms. A term will be unfair if it:o (a) allows one party to avoid or limit performanceo (b) permits one party to terminate a contracto (c) penalises one party (but not another party) for a breach or terminationo (d) permits one party to vary the terms of the contracto (e) permits one party to renew or not renew the contracto (f) permits one party to vary the upfront price without the right of the other

party to terminateo (g) permits one party unilaterally to vary the characteristics of

goods/services/interest in lando (h) permits one party unilaterally to determine whether the contract was

breached or to interpret the meaningo (i) limits one party’s vicarious liability for its agentso (j) permits one party to assign contract to the detriment of the other party

without the parties consento (k) limits one party’s right to sue another partyo (l) limits evidence one party can adduceo (m) imposes the evidential burden on one partyo (n) prescribed by the regulations.

s.26(1): Section 23 does not apply to a term of a consumer contract to the extent … that the term:

o (a) defines the main subject matter of the contract; o (b) sets the upfront price payable under the contract; or

Thus – can’t complain that the price of a good or service is unfair if the party was notified at the start of the ‘upfront price’

o (c) is a term required, or expressly permitted, by a law of the Cth [or State]

Outcome If the term is an unfair term in a standard form contract, the ACL, Part 2-3 will apply

and render the term void s.23(2) – The contract continues to bind the parties if it is capable of operating

without the unfair term If the term is not unfair or is not in a standard form contract, the plaintiff will have to

rely on common law remedies A party will either argue that a term is unfair as a defence to an action trying to

enforce the term of may take pre-emptive action against an unfair term Remedies = injunction, compensation orders and compensation order for non-parties

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Preliminary Common Law Matters Do we have a contract? Has there been a breach of a term or a statutory guarantee? Is there a liability to be excluded? Is the clause incorporated into the contract? Does the clause cover the breach as a matter of construction?

UCT Legislation Is there a breach of any term?

No – stop Yes – next question

Any term clearly modifying or excluding obligations? No – next question Yes – next question

Is the contract between a corporation and consumer? No – apply term according to its meaning Yes – next question

Is this an excluded contract? Yes – apply term according to its meaning No – next question

Is the term in a standard for question? No – apply term according to its meaning Yes – next question

Is there a significant imbalance in rights and obligations? No – stop Yes – next question

Is the imbalance to the detriment of the consumer? No – stop Yes – next question

Is the term reasonably necessary for the defendant’s legitimate interest?

Yes – stop No – next question

Is the term transparent? Yes or no – next question

Is the term in the list of examples and/or unfair? No – apply term according to its meaning Yes – cannot apply unfair term

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