A CONTRACT LAW WORKBOOK
Solutions Guide
Chapter 1: The Law in Australia – An introduction
Reflective exercises (page 8)
1
List and define two types of public law
Public law is concerned with the regulation of conduct on the part of the State.
Two types of public law are criminal law and taxation law. Criminal law is a
body of law that deals with constituents of criminal behaviour. Taxation law is
a body of law that deals with the compulsory exaction of money by the
government for public purposes.
2
Distinguish between the two primary sources of law and use examples
to support your argument.
The two key sources of law are judge-made law and law made by the
legislature. Judge-made law is found in the decisions made by judges and is
also called common law. While most law originated from common law, in
modern times statute law has expanded substantially. The second source of
law – law made by the legislature – takes the form of statutes and delegated
legislation. Statute law is made by the Parliament or other bodies to whom
Parliament has given law-making powers. The Parliament can create new
laws, repeal and codify old laws or do any combination of these. An example
of legislation is the Trade Practices Act 1974 (Cth).
Chapter 2: Dimensions of Common Law
Reflective exercises (page 13)
1
What does the term “stare decisis” mean in the context of common
law?
The doctrine of precedent or “stare decisis” is fundamental to the operation of
common law. The doctrine of precedent states that a court must follow the
decision of a court in the same hierarchy which is superior to that court.
2
Explain the difference between “ratio decidendi” and “obiter dictum”.
The ratio decidendi in the decision in the court is what becomes binding and is
the reason or ground for the judicial decision. An obiter dictum is an
observation by a judge on a legal question by a case before them, but not
arising in such a manner as to require a decision.
3
Explain, in your own words, the doctrine of precedent.
The doctrine of precedent is fundamental to the operation of common law.
The doctrine states that a court must follow the decision of a superior court in
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the same hierarchy. Hence, a court is not bound to follow the decision of a
court that is inferior to it in the same hierarchy.
Reflective exercises (page 15)
1
Explain the difference between original and appellate jurisdiction
Australia is made up of a number of courts which operate to accommodate
different matters. Some courts have original jurisdiction and some have
appellate jurisdiction. Original jurisdiction is where the courts have jurisdiction
to hear a case in the first instance. Conversely, appellate jurisdiction is where
the courts have the power to decide appeals.
2
The Supreme Court deals with a dispute between two citizens relating
to a large commercial property. This dispute had been decided in the
District Court, but upon appeal is now before the Supreme Court. The
Supreme Court in this instance is an example of which type of
jurisdiction?
This question provides an example of an appellate jurisdiction. Note, however,
that the court will likely also hear more serious matters in the first instance.
Reflective exercises (page 17)
1
What is a law report?
A law report is a published record of a decision of a judge or judges. It
identifies the names of the parties, the name of the court and the names of
the judges and the dates on which the case was heard. The report also
includes details regarding the cases and legislation that have been
considered as well as the full facts and reasons for the decision.
2
If you saw a citation, such as John v Nick (1988) 135 CLR 88, what
information could you gain from this case citation?
A law citation identifies the names of the parties, the name of the report and
the year in which the case was heard. In this example, “John” and “Nick” are
the two parties involved, “1988” is the year in which the matter was heard,
“135” is the volume number of the Commonwealth Law Reports, of which
“CLR” is the abbreviation, and “88” is the page number on which the report
begins.
Further questions to consider (page 18)
The doctrine of precedent
(a)
Explain the difference between binding and persuasive precedents –
you will need to research in a suitable textbook.
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The doctrine of precedent states that a court must follow the decision of a
superior court in the same hierarchy. Precedents can be either binding or
persuasive. A binding precedent is one that must be followed by a judge in a
lower court in the same court hierarchy in deciding cases of a similar nature.
On the other hand, if a case were to occur in a superior court within a different
court hierarchy, the decision would not bind the court but might otherwise
have persuasive influence.
(b)
Explain the term “ratio decidendi”. Can there be more that one “ratio
decidendi” in a case?
The ratio decidendi in a court’s decision is what becomes binding. It is the
reason or ground for the judicial decision. It exemplifies a proposition of law.
There may be more than one ratio decidendi in a case – in which case the
plural term “rationes decidendi” applies.
(c)
Using your textbook, determine what the term “distinguishing” means in
the context of common law.
The term “distinguishing” is used to nullify the validity of a previously made
decision in a court. This is usually achieved through identifying and
demonstrating essential differences in the facts or on a point of law.
Court hierarchy
(a)
Explain in your own words what the court hierarchy is and how it
operates.
The doctrine of precedent is predicated upon the existence of the court
hierarchy and system. Therefore it is necessary to understand this hierarchy
to understand the operation of the doctrine. Australia is made up of a number
of courts and jurisdictions – for example, the High Court, Supreme Courts and
District Courts – which operate to accommodate different matters according to
their place in the hierarchy. Some courts have original jurisdiction and some
have appellate jurisdiction. The doctrine of precedent states that a court must
follow the decision of a court in the same hierarchy which is superior to that
court. Hence, a court is not bound to follow the decision of a court that is
inferior to it in the same hierarchy. Precedents can be either binding or
persuasive. A binding precedent is one that must be followed by a judge in a
lower court in the same court hierarchy in deciding cases of a similar nature. If
a case were to occur in a superior court within a different court hierarchy the
decision would not bind the court but might otherwise have persuasive
influence.
(b)
Identify the advantages of the court hierarchy.
The hierarchy of the courts enables each court to specialise, to an extent, in
respect of their facilities and personnel, which is beneficial for the disputing
parties. In addition, administrative convenience is achieved and greater
economy of operation when similar matters are tried in similar courts.
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(c)
A judge presiding over the District Court of Queensland is faced with a
case based upon similar facts which was recently determined by the
District Court of New South Wales. Does the District Court judge need
to follow the decision made in the District Court of New South Wales?
The doctrine of precedent states that a court must follow the decision of a
court in the same hierarchy which is superior to that court. In this particular
case, not only is the District Court of Queensland on the same hierarchical
level as the District Court of New South Wales, it is also in a different
jurisdiction, and hence in a different hierarchy. Precedents can be either
binding or persuasive. Therefore, in this case the decision in New South
Wales would only have a persuasive influence upon the case in Queensland.
Law reports
(a)
Explain the elements of a law report – in consultation with your
textbook.
A law report is a published record of the decisions of a judge or judges. It
identifies the names of the parties, the name of the court and the names of
the judges and the dates on which the case was heard. As well as providing
the text of the judgment itself, it also details the cases and legislation that
have been considered and the full facts and reasons for the decision.
(b)
What is a legal case citation?
A case citation is a means of identifying a particular case. It will provide the
names of the parties involved and the year in which the case was decided. If
the case has been “reported”, ie published in a report series, it will also
indicate the particular report series, the volume number (if applicable) and the
page on which the report begins. If the case has not been reported, the
citation will be “media neutral” and will provide the name of the parties, the
year of the decision and indicate the jurisdiction and court in which the case
was heard.
(c)
As part of a contractual arrangement, Robertson is having a dispute
with Keller. If the parties were to go to court in 2007, what would their
case citation look like – not taking into account the volume of the case
but considering the case appeared in the Commonwealth Law Reports
(CLR) beginning on page 152.
Robertson v Keller (2007) CLR 152.
Chapter 3: Dimensions of Statute Law
Reflective exercises (page 27)
1
What does the term “delegated legislation” mean?
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Law can be made by an authority other than Parliament – for instance a local
council. Such legislation is called “delegated legislation”.
2
Outline, in your own words, what the legislative process entails.
The main stages of the passage of legislation through Parliament are as
follows: the drafting of the bill; the bill’s introduction to the Lower House of
Parliament (the House of Representatives) with three readings; if passed by
the Lower House of Parliament then consideration by the Upper House (the
Senate, except in Queensland); once passed through both Houses, the
Governor-General gives “Royal Assent” and the Act comes into effect on the
date proclaimed.
3
What happens to law if it is not passed through the Lower House of
Parliament? You may want to consult another suitable textbook to answer this
question.
The bill does not become law but may subsequently be reintroduced for future
consideration.
Reflective exercises (page 30)
1
Explain delegated legislation and provide an example.
When Parliament provides other bodies, such as a local council, with the
ability to make law, such legislation is called “delegated legislation”. For
example, Parliament may allow local government to regulate parking in a
particular location as the local government will be more aware of any
particular related issues.
2
What are the rules relating to statutory interpretation?
A number of rules of statutory interpretation have been developed by the
common law. The first is the “literal” rule whereby if the language is
unambiguous the courts will read the statute literally and give it its ordinary
meaning. The second is the “golden” rule whereby the courts may depart from
the literal meaning of a rule if it would prevent an absurdity. The final is the
“mischief” rule which is applied where the words of an Act are ambiguous,
illogical or inconsistent. The courts will consider the “mischief” that Parliament
was trying to remedy when passing the Act.
3
An Act of Parliament states that “a person must observe and comply
with the instructions of a traffic-control signal”. Thinking about the
working of this Act, what would be the most suitable rule relating to its
interpretation?
According to the literal rule, a person must in a literal sense observe and
comply with the instructions of a traffic-control signal – presumably even if it
were faulty! The golden rule states that the courts may depart from the literal
meaning of a rule if it would prevent an absurdity. Therefore, according to this
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interpretation, in the event that the light was faulty some measure of flexibility
may be provided in order to avoid an absurd outcome. According to the
mischief rule, where the words of an Act are ambiguous, illogical or
inconsistent the courts will consider the “mischief” that Parliament was trying
to remedy when passing the Act. In this particular case it is clear that the
legislative enactment was intended to prevent a person failing to observe and
comply with the instructions of a traffic control signal. Hence, the literal rule is
most applicable as the enactment can be read literally.
Reflective exercises (page 32)
1
What is an Acts Interpretation Act?
The Commonwealth, State and Territory Parliaments have passed Act
Interpretation Acts which set down rules and presumptions for the
interpretation of common terms and to assist in matters relating to the
operation of statutes.
2
Would a court use extrinsic material in the interpretation of legislation?
Discuss.
A court may take into consideration certain extrinsic material in interpreting an
ambiguous provision in an Act. For instance a Law Reform Commission report
may provide material which needs to be taken into account in respect of the
interpretation of legislation.
Further questions to consider (page 34)
The law-making process
(a)
Outline the steps in the legislative process.
The main stages of the passage of legislation through Parliament are as
follows: the bill is drafted and then introduced to the Lower House of
Parliament with three readings; if passed by Lower House of Parliament then
it is considered by the Upper House (except in Queensland where there is no
Senate); once passed through both Houses Royal Assent is given by the
Governor-General and the Act comes into effect on the date proclaimed. If the
bill does not become law it may subsequently be re-introduced for future
consideration.
(b)
Describe the rules that courts use to assist in the interpretation of
statute law.
A number of rules of statutory interpretation have been developed by the
common law. The first is the literal rule: if the language is unambiguous the
courts will read the statute literally and give it its ordinary meaning. The
second is the golden rule: the courts may depart from the literal meaning of a
rule if it would prevent an absurdity. The final is the mischief rule: if the words
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of an Act are ambiguous, illogical or inconsistent, the courts will consider the
“mischief” that Parliament was trying to remedy when passing the Act.
Acts interpretation
(a)
Outline and describe the differences between the various types of
approaches that can be taken for statutory interpretation.
Three rules of statutory interpretation have been developed by the common
law. The first is the literal rule: if the language is unambiguous the courts will
read the statute literally and give it its ordinary meaning. The second rule, the
golden rule, differs from the first by providing an element of flexibility in
allowing the courts to depart from the literal meaning of a rule if it would
prevent an absurdity. The third rule, the mischief rule, comes into play where
the words of an Act are ambiguous, illogical or inconsistent. Where this is the
case the courts will consider the “mischief” that Parliament was trying to
remedy when passing the Act. In addition to these rules, a court may also
take into consideration certain extrinsic material in interpreting an ambiguous
provision in an Act. Further, all jurisdictions – ie the Commonwealth, State
and Territory Parliaments – have passed Act Interpretation Acts which set
down rules and presumptions for the interpretation of common terms and to
assist in matters relating to the operation of statutes.
(b)
What is an Acts Interpretation Act?
An Acts interpretation Act is a piece of legislation (or statute) which sets down
rules and presumptions regarding the interpretation of terms and matters
relating to the content and operation of a statute. All Commonwealth, State
and Territory jurisdictions in Australia have passed Acts Interpretation Acts.
(c)
Can there be more that one meaning in an Act of Parliament?
Statutes are construed differently and it is for this reason that rules are used
to assist the court in interpreting the meaning of an Act of Parliament. Ideally
there is only one meaning behind a provision of an Act of Parliament but often
ambiguities and inconsistencies occur due in part to the changing nature of
the law.
(d)
Explain in your own words why legislation needs to be interpreted.
Statutes frequently need to be interpreted by the courts to establish what it
was that Parliament intended.
(e)
Identify the advantages of using Acts Interpretation Acts to resolve
ambiguity in statute law.
An Acts Interpretation Act sets down rules and presumptions regarding the
meaning and interpretation of terms and matters relating to the content and
operation of the statute. The advantages, therefore, are that courts are
provided with the means to understand and apply the law.
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Extrinsic materials
(a)
In consultation with your textbook, outline the extrinsic material that a
court may use to assist in interpreting legislation.
A court may take into consideration certain extrinsic material in interpreting an
ambiguous provision in an Act. Examples of the extrinsic material that can be
relevant are Law Reform Commission reports and Parliamentary Committee
reports.
Chapter 4: Formative Elements of Contract Law
Reflective exercises (page 42)
1
Define the two critical elements of an agreement in contract law.
The two critical elements of an agreement in contract law are that there is an
offer and an acceptance. An offer is a proposal which is intended to bind the
offeror upon acceptance. Be sure that each of the rules relating to offer has
been considered. Valid acceptance is an unqualified and final assent to an
offer. A valid offer and acceptance amount to an agreement.
2
Joel is shopping for a football and he passes a sporting store with a
display indicating a one-time special on a limited edition “flavio” soccer
ball for $29. Joel thinks this is a bargain and enters the store to inquire
further. The store manager immediately tells Joel that the display ball is
the last one he has in stock. Joel then insists that he has the right to
buy the ball on display. Advise Joel on his rights in relation to the
purchase of the soccer ball.
What we have here is a clear indication of a desire to buy, which is
communicated and amounts to an offer. An offer is a proposal which is
intended to bind the offeror upon acceptance. Where this arrangement
becomes problematic is with respect to acceptance. Valid acceptance is an
unqualified and final assent to an offer. A valid offer and acceptance amount
to an agreement. However, no acceptance has taken place here. It might be
worth discussing the distinction between an offer and invitation to treat here
also.
Reflective exercises (page 45)
1
What presumptions do the courts have regarding the intention of the
parties in social and domestic circumstances?
The presumptions as they relate to social and domestic circumstances can be
summarised as follows. If an agreement concerns a commercial matter, the
courts presume that the parties do intend to create legal relations (Edwards v
Skyways [1964] 1 WLR 349).
2
Jillian and Andrea are sisters who are thinking about buying white
goods together. They shop around at a few retailers and decide to
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enter into a deferred payment scheme to make their major purchase of
white goods more affordable. Just before they are about to sign the
agreement Jillian changes her mind. What rights, if any, does Andrea
have to force Jillian to go through with the transaction?
The important factor here is that this is dependent upon the existence of a
valid legally binding contract. While it seems that the elements of a contract
are present, it is arguable whether a contract has been effected due to the
decision not to sign the written contract with, presumably, a third party. In this
case, therefore, the presumption that relates to social and domestic
circumstances – ie that the parties do not intend to create legal relations – is
applicable rather than that applying to a commercial matter since the
arrangement was between Jillian and Andrea, not the retailer. Hence, Andrea
cannot force Jillian to go through with the transaction.
Reflective exercises (page 48)
1
What is the meaning of “consideration”?
Consideration is one measure of intent of the parties to establish legally
enforceable rights and obligations. It could be said that consideration is the
price that is paid for a promise.
2
John promises his son Nick that in consideration of all his love and
affection he would provide him a yearly allowance of $5,000. After an
argument following a change in Nick’s behaviour, John makes no
further payments. Referring to the legal principles, explain if Nick can
enforce future payments.
Love and affection would not amount to a valid form of consideration for this
agreement to be legally binding. Consideration is essential in every contract
and must be something of value. It is not possible to quantify this in any way.
Similarly, consideration must be definite and must be present and not past
and must be possible of performance. In addition, it must amount to more
than what a party is already obliged to do. Hence, in this case the
consideration aspect of the agreement is problematic and would render the
agreement unenforceable notwithstanding the potential issues associated with
the intention to be legally bound.
Further questions to consider (page 49)
Offer and acceptance
(a)
An offer must be distinguished from an invitation to treat. Discuss with
reference to your textbook.
An offer is a proposal which is intended to bind the offeror upon acceptance.
On the other hand, an invitation to treat is merely an indication of willingness
to deal or trade.
(b)
What is a counter offer? Discuss with reference to your textbook.
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A counter offer is a conditional acceptance of an offer and is separate from a
legally binding acceptance. This conditional acceptance becomes an offer that
can then be accepted or rejected by the original offeror.
(c)
As part of a negotiation to buy a car, Robert offers $800 for its
purchase. Sue responds to Robert’s offer by stating that she will accept
$850 for the car. Robert elects not to continue with the purchase. Is
there a valid contract in place?
An offer is a proposal which is intended to bind the offeror upon acceptance.
[Discuss with the students whether the rules relating to offer have been
considered.] A valid acceptance is an unqualified and final assent to an offer.
[Be sure when considering acceptance in contract that each of the rules
relating to acceptance has been considered.] In this case, Robert is making
an offer of $800 but Sue is making a counter offer rather than an acceptance
of the offer. Robert is thereby able to accept or reject this offer and chooses to
reject it. Therefore, there is no formal agreement in place as there is no valid
offer and acceptance.
(d)
In the following negotiations between two commercial entities the
following occurred:
1 October
8 October
11 October
15 October
20 October
letter of offer posted;
letter of revocation posted;
acceptance telegraphed;
letter of acceptance sent to confirm the telegraph; and
letter of revocation received.
Explain whether a contract has been concluded with reference to the relevant
legal principles.
A contract has been effected here. An offer was posted on 1 October.
Although the offer was followed up by a letter of revocation, that letter
presumably did not arrived before the acceptance was telegraphed. An
approach of acceptance that expedites the contractual process is likely to be
acceptable. Nevertheless, the letter of acceptance follows, which thereby
affirms the acceptance was sent (re postal acceptance rule) prior to the letter
of revocation being received. A valid contract is effectuated, arguably on 11
October, certainly on 15 October.
Intention to create legal relations
(a)
What is the legal presumption where there are commercial
arrangements between parties?
For an agreement to be legally binding the parties to the agreement must
have intended that legal consequences would flow from the failure of one
party to perform his or her obligations. The courts presume an intention to be
bound, or not bound, given a particular circumstance. The presumption
applied by the courts is that commercial agreements are intended to give rise
to legal relations. This presumption may be readily rebutted if the evidence is
presented disclosing a contrary intention.
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(b)
Explain how this legal presumption can be rebutted by evidence of a
contrary intention.
The presumptions underlying an intention to be legally bound can be rebutted
by evidence to adduce that the social or domestic relationship intended to
have legal consequences flowing from the breach or, alternatively, that the
commercial relationship did not intend to have legal consequences because it
was social or domestic in nature. Either presumption may be readily rebutted
if the evidence is presented disclosing a contrary intention.
(c)
Tom and Sue are married and recently Tom was transferred interstate
where he obtained a promotion and a pay rise. Tom promises his wife
and extra $50 per month to maintain the household while he is away.
Tom pays for a couple of weeks and then fails to make any further
payments. Could Sue enforce the agreement with Tom?
For an agreement to be legally binding the parties to the agreement must
have intended that legal consequences would flow from the failure of one
party to perform his or her obligations. The courts presume an intention to be
bound, or not bound, given a particular circumstance. The presumption
applied by the courts is that social and domestic agreements are not intended
to give rise to legal relations (Todd v Nichol [1957] SASR 72). Hence, as this
agreement relates to a social and domestic matter it is arguably a social or
domestic relationship whereby the parties did not intend legal consequences
to arise from its breach. However, this argument could be rebutted by
evidence to the contrary, such as the need to maintain the household – which
arguably could give rise to breach of contract.
Consideration
(a)
Past consideration is no consideration. Explain.
Past acts cannot amount to consideration that is sufficient to support a
subsequent contract.
(b)
In what contracts is consideration necessary?
Consideration is an essential element of all simple contracts but is not
essential for deeds.
(c)
Derrick delivers pizza for Mario Pizza world. As he gets toward the end
of his shift Mario, the manager, asks if Derrick would deliver his final
pizza to a friend’s house for a bonus payment of $100. Derrick accepts
and delivers the pizza, but afterwards Mario refuses to pay. Discuss
the enforceability of this promise in terms of consideration.
The issue that arises in this matter relates to consideration. Specifically, the
issue relates to consideration in circumstances where the promisor does
something that they are already obliged to do. Hence, the action of delivering
the pizza arguably is already part of Derrick’s and therefore the manager is
not required to pay.
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Chapter 5: Components of Contract – The Terms and Conditions
Reflective exercises (page 60)
1
What is the doctrine of privity? Why do we have such a doctrine?
Privity of contract means there must be a direct legal relationship between the
parties to the contract for rights and obligations to arise. This agreement or
“meeting of the minds” must be a result of direct negotiations between the
parties to the contract. At common law only a person who is party to a
contract may seek contractual remedies by reference to it. That is, only a
party to a contract can sue on it, or be sued on it.
2
John is shopping for a vacant block of real estate to build a new house
for his family. The real estate agent shows John the block but indicates
that the seller will not negotiate on price. John wants to place an offer
but thinks the vacant block is overpriced. Thinking about privity of
contract, can the real estate agent prevent John from placing an offer?
Put simply, no. At common law only a person who is party to a contract may
seek contractual remedies by reference to it. That is, only a party to a contract
can sue on it, or be sued on it. John can therefore enter the contract with the
seller despite the real estate agent’s position.
Reflective exercises (page 63)
1
Thinking about commercial contracts, write some examples of where
you might see exclusions clauses.
Airline tickets, car parks, dry cleaners.
2
Jillian is considering the purchase of air line tickets to fly to another
major city to visit her sister. After shopping widely for the best ticket
prices, she elects to purchase tickets through www.u-got_it.com, an
online airline ticketing service offering great fares. Following a
successful transaction via credit card, a series of terms and conditions
appear online which indicate that Jillian must fly in the evening to
obtain the best fare. Advise Jillian of her position in contract.
An exemption clause may become a term of the contract by signature or by
notice. It is important to note that if a person signs a document he or she is
bound by it even if they do not read it. However, different rules apply to
exemption clauses where there is no signed document. Where a document is
not signed, the exemption clause will only apply if the party knows of the
clause, or if reasonable steps are taken to bring it to his or her notice before
the contract is made. In this case, there is an unsigned document but an issue
that does arise is whether the terms contained within the contract were
apparent at the time the contract was formed or only subsequent to the
formation of the contract as per Olley v Marlborough Court [1949] 1 KB 532.
Reflective exercises (page 67)
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1
What is the definition of a “condition”?
A condition is a significant or essential part of a contract. A breach of a
condition entitles the innocent party to terminate the contract and claim
damages.
2
John buys a washing machine and is told by the salesperson that the
manufacturer warrants all defects for a period of one year. Soon after
using the washing machine an electrical defect arises and the machine
becomes inoperable. Outline, in detail, how contract law could provide
a remedy here and explain why.
In this scenario the washing machine is the subject matter of the contract.
Hence, in this circumstance it is arguably a condition. As the contract has
been performed at the time in which the defect takes place, it is likely that
recourse will need to be sought on the basis of warranties. A breach of
warranty entitles the innocent party to damages only for the loss suffered as a
result of the breach and does not give a right to end the contract.
Further questions to consider (page 68)
Privity of contract
(a)
Outline and define the exceptions to the privity of contract doctrine.
Certain exceptions to the privity of contract rule have been laid down by
common law or equity, or created by statute. Foremost is agency. Agency is
an agreement whereby an agent may contract on behalf of the principal with a
third party, resulting in a contract between principal and third party. This
thereby works against the concept of privity. However, this does not represent
a true exception to the privity doctrine because the law deems the principal to
be contracting in his or her own right – that is, as principal. Similarly, enforcing
a contract by beneficiary of trust through the trustee can work contrary to the
privity of contract rule. A person may enter into a contract in his or her
capacity as a trustee. While the trustee is the party in law, and as such only
he or she can sue on the contract, equity will permit the beneficiary to sue on
the contract (Re Garbett [1963] NZLR 384). In the assignment of legal rights,
a party to a contract can assign his or her rights under a contract to a third
party, thus vesting the right to enforce these rights in the third party. Clearly
this has the effect of working against the privity of contract and therefore has
become known as an exception. In dealings with property, it is possible to
apply restrictive covenant or an easement to the land which will then bind all
subsequent successors in title, and may benefit a third party or parties.
(b)
Explain why agency operates as an exception to privity given that,
typically, this relationship facilitates contracts.
Agency is an agreement whereby an agent may contract on behalf of the
principal with a third party, resulting in a contract between principal and third
party. This thereby works against the concept of privity but does not represent
a true exception to the privity doctrine because the law deems the principal to
be contracting in his or her own right.
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13
Exclusion clauses
(a)
What is the relevance of exclusion clauses to commercial contracts?
An exemption clause is a term within a contract which seeks to exempt one of
the parties from liability. The term may also seek to limit a party’s liability to a
specific sum if certain events occur, such as a breach of warranty or
negligence. Thus it is important to appreciate the implications of exclusion
clauses in commercial contracts since they directly impact upon the
agreement.
(b)
As part of purchasing an airline ticket, Robert reads the following
clause: “The airline will not take any responsibility for loss or damage to
personal goods howsoever caused.” Discuss this clause in the context
of its relevance to the agreement and the impact it may have on
Robert.
Foremost, an exemption clause is a term within a contract which seeks to
exempt one of the parties from liability. The term may also seek to limit a
party’s liability to a specific sum if certain events occur, such as a breach of
warranty or negligence. In this case the clause is seeking to avoid liability for
loss or damage to personal goods. However, it does not delimit its respective
liability as well as it might due to the vague nature of the wording. While the
clause attempts to cover liability for any possible consequence, it could be
construed as contra proferentum due to the fact that the clause may be
destructive to the rights of unsuspecting parties.
(c)
Tom hires a motel room late at night after travelling by car for a number
of hours. He signs in at reception and then proceeds to the room
located on the second floor. Upon entering the room he notices a sign
stating: “The motel will not be liable for any valuables not stored in the
motel safe.” Exhausted and hungry, Tom puts his laptop on the bed
and leaves the room for dinner. During his absence the laptop is stolen.
Tom wants to take legal action against the motel. Advise Tom.
Where a document is not signed the exemption clause will only apply if the
party knows of the clause, or if reasonable steps are taken to bring it to his or
her notice before the contract is made. In the case of Olley v Marlborough
Court [1949] 1 KB 532, the plaintiff booked in at the defendant’s hotel. When
the plaintiff went to her room she saw a notice on the wall stating that the
hotel would not be liable for articles lost or stolen unless they were handed in
for safe keeping. The plaintiff left some furs in the bedroom, closed the selflocking door, and hung the key on a board in reception. The furs were stolen.
In this case, it was held that the exemption clause was not effective. The
contract was completed at the reception desk, and accordingly a notice in the
bedroom came too late to be incorporated into the contract. Hence, in Tom’s
case, the term has been brought to his notice following the formation of the
contract and therefore cannot be deemed to be a part of that contract.
Conditions and warranties
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(a)
Explain the difference in the remedies available for a breach of a
condition versus a breach of a warranty in contract.
A breach of a condition entitles the innocent party to terminate the contract
and claim damages, whereas a breach of warranty entitles the innocent party
to damages only for the loss suffered as a result of the breach and does not
give a right to end the contract.
(b)
Explain the relevance of distinguishing a condition from a warranty for
a plaintiff in a civil matter involving contract.
This distinction is important as it determines the remedies that are available to
the parties. A breach of a condition entitles the innocent party to terminate the
contract and claim damages, whereas a breach of warranty entitles the
innocent party to damages only for the loss suffered as a result of the breach
and does not give a right to end the contract.
(c)
With reference to a suitable textbook, explain how the courts might
determine if a contractual term is a condition or warranty.
The courts will determine whether a contractual term is a condition or
warranty by examining the circumstances and evidence of the particular case.
Ultimately the nature and effect of a breach and the appropriate remedy will
be determined through considering the intention of the parties to the contract.
(d)
Warranties are of lesser importance in contract but are still relevant.
Why?
A breach of warranty entitles the innocent party to damages only for the loss
suffered as a result of the breach. It does not mean that they can end the
contract.
(e)
Derrick buys a bicycle from Pizenza cycles on the basis of a display
item he sees in store. When he gets home he realises that the bicycle
does not have the accessories that were on the display and he decides
to return the bike and get a refund of his money. Advise Derrick.
This question is largely concerned with the contract that has been formed
between Pizenza cycles and Derrick. Ultimately to determine what was
included in the contract it will be necessary to consider the representations, if
any, that were made prior to the forming of the contract. Indeed, if the contract
was formed purely upon the basis of an advertisement, then the
advertisement itself will likely be construed as an invitation to treat.
Chapter 6: Vitiating Elements – Capacity
Reflective exercises (page 79)
1
Define two classes of persons who may not be capable of entering a
legally binding contract
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Those who have not attained the age of majority (minors) and those who are
bankrupt may not be capable of entering a legally binding contract.
2
Joel, who is 14 years old, is shopping for sportswear. He passes a
sporting store with a display indicating a one-time special on a limited
edition “Flavio” sportswear. Joel thinks this is a bargain and enters the
store to inquire further. The store manager immediately tells Joel that
he is not able to conduct business with Joel as he is under age. Joel
threatens to sue the store if they do not sell him the sportswear. Advise
the store manager of their position in contract law.
Not all persons can enter into legally binding contracts. Certain classes of
people are categorised as incapable of entering into contractual obligations.
Until his 18th birthday Joel is a minor. Contracts with minors at common law
are valid and bind both the infant and the other contracting party where they
are of benefit to the minor and remain valid unless and until they are
repudiated by the infant. It is arguable that because this contract is not for
necessaries, it is therefore not valid.
Reflective exercises (page 81)
1
Is a contract legally binding, if one party to the contract was unaware of
the mental incapacity of the other?
Not all persons can enter into legally binding contracts. Certain classes of
people, including those with a mental disability or those who are intoxicated,
are categorised as incapable of entering into contractual obligations. Hence,
the law extends a measure of protection to these parties.
2
Jillian, who is currently bankrupt, wants to enter a contract with Andrea
to buy a business. Can Jillian enter into such an agreement? Would it
be likely the trustee in bankruptcy would be supportive of such an
investment?
When a person is bankrupt all property rests in the trustee in bankruptcy. The
bankrupt is thereby limited, monetarily to the contract that they may enter into
without permission. It is unlikely that the trustee in bankruptcy would be
supportive of this contract or investment.
Reflective exercises (page 83)
1
What is the underlying rationale behind restricting the contracting
capacity of persons who are incarcerated?
Under Queensland law a person sentenced to more than three years
imprisonment has their estate taken over by the Public Trustee. The Public
Trustee has discretion as to whether contracts can be entered into on behalf
of the prisoner. This limits the contractual capacity of a prisoner. This is done
largely for public policy reasons so that the furtherance of crime cannot be
continued whilst incarcerated.
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2
Ali is a citizen and resident of Israel. While on holidays in Australia, Ali
makes an offer on an expensive sports car, a Ferrari. Is this contractual
offer valid? Why?
Provided Ali has the requisite capacity then the contract will be deemed legal.
The term “alien” is used to describe a person who has been born outside
Australia. Aliens have the same contractual capacity as Australian citizens
generally, but they may not take a majority shareholding in certain public
companies. Hence, Ali shares the same capacity as Australian citizens
generally.
Further questions to consider (page 84)
Capacity – minors
(a)
Define and discuss the term “necessaries”.
Contracts for necessaries are binding on minors because they encompass
things without which the minor cannot reasonably exist. These items include
food, clothing, medical care and shelter. Whether a thing is a “necessary”
depends upon whether it is capable of being a necessary, which is a question
of law, and whether the thing can be properly regarded as a necessary for this
particular minor, which is a question of fact.
(b)
What are beneficial contracts of service?
A minor can be bound to pay for contracts that will be for their benefit – ie a
minor may be liable to pay a reasonable sum for his or her education or in
training for a profession or trade. But the contract must be of benefit as a
whole to the minor as shown in the case of Leng & Co Ltd v Andrews [1909] 1
Ch 763.
(c)
Rob is turning 18 in two weeks’ time and negotiates to buy a car from
Sue for $800. Sue accepts Rob’s offer but later in the day says that she
will only sell the car to Rob after two weeks if she does not have a
better offer during that time. Two weeks pass, Sue still has the car but
no longer wants to sell the car to Rob. Advise Rob.
Upon acceptance of this agreement Rob has not yet reached the age of
majority. Nevertheless, Sue accepts the offer and later decides that she will
wait until Rob reaches the age of majority. However, this stipulation is made
subsequent to the formation of the contract. When Rob reaches the age of
majority and now insists upon the completion of the contract, it is arguably a
valid contract at this time. A number of issues arise in this scenario. Foremost,
there is the matter relating to capacity to contract and also the legality of the
acceptance when the acceptance is conditionally given. However, this
conditional acceptance is nevertheless subsequent to the formation of the
contract.
Capacity – mental disability/intoxication
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(a)
What conditions have to be satisfied for a contract to be voidable for
intoxication?
Contracts made with a person suffering mental disability are valid and binding
unless it can be shown that at the time the contract was made, the person
suffering the disability was incapable of understanding the contract and that
the other party was aware of the condition, as in the case of Imperial Loan Co
v Stone [1892] 1 QB 599. In relation to intoxication, the law takes a similar
stance to that in relation to mental disability. If a person is in such a state of
intoxication that they cannot appreciate the nature of what they are doing and
the other party knew or ought to have known of the condition, then the
contract is voidable: Matthews v Baxter (1873) LR 8 Ex Ch 132.
(b)
Does the existence of a mental incapacity automatically result in a lack
of capacity to enter into legally binding contracts?
Contracts made with a person suffering mental disability are valid and binding
unless it can be shown that at the time the contract was made, the person
suffering the disability was incapable of understanding the contract and that
the other party was aware of that condition. The same applies to a person
suffering intoxication at the time of making a contract. Thus, if a person is in
such a state of intoxication that they cannot appreciate the nature of what they
are doing and the other party knew or ought to have known of the condition,
then the contract is voidable.
(c)
Tom suffers from an existing mental incapacity which impairs his ability
to speak. He enters a store to buy some electronic equipment and is
told that they cannot contract with him due to his lack of capacity. Tom
is upset and seeks your advice regarding the situation.
Although Tom’s incapacity impairs his speech, it does not necessarily impair
his understanding. Contracts made with a person suffering mental disability
are valid and binding unless it can be shown that at the time the contract was
made, the person suffering the disability was incapable of understanding the
contract and that the other party was aware of the condition. Nevertheless, in
Tom’s case the store owner is able to decide if they want to contract or not to
contract with him.
Capacity – bankruptcy and incarceration
(a)
Can a bankrupt enter into contracts?
When a person is bankrupt all property rests in the trustee in bankruptcy. The
bankrupt is thereby limited, monetarily, to contracts that they may enter into
without permission.
(b)
In what circumstances might a public trustee enter into contracts for a
party incarcerated – give examples.
The public trustee might enter contracts on behalf of a party incarcerated if
the contract will facilitate the person’s rehabilitative process and is for the
person’s or the person’s family’s wellbeing.
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(c)
Derrick delivers pizza for Mario Pizza world. As he gets toward the end
of his shift Mario, Derrick delivers a pizza to Andy’s house. Andy greets
Derrick at the door and promptly takes the pizza, saying, however, that he
cannot pay as he is bankrupt and has no money. Is there a valid contract in
place? Can Mario Pizza World recover money owed by Andy?
An implied term that applies when a pizza is ordered is that the person
making the order will pay for the goods when they are collected or delivered.
With regard to this circumstance, a contract has been formed and the nonpayment for the goods ordered amounts to a breach of contract. While
bankruptcy might preclude a person from entering into certain dealings, those
dealings do not extend to contracts such as these and therefore Andy is
required to pay and, in failing to do so, is in breach of contract.
Chapter 7: Vitiating Elements – Genuine Agreement
Reflective exercises (page 94)
1
Outline and describe the three key types of mistake.
The three types of mistake are common mistake, mutual mistake and
unilateral mistake. A common mistake occurs when each party to the contract
makes the same mistake. A mutual mistake occurs when the parties are at
cross-purposes – ie both parties are mistaken as to the other party’s intention.
A unilateral mistake occurs when one party alone is mistaken and the other
party knows or, in the circumstances, should know, of the mistake.
2
Using examples, distinguish between common mistake and unilateral
mistake.
A common mistake occurs when each party to the contract makes the same
mistake. In such cases, although the parties are in agreement as to the terms
of their contract, a shared mistake strikes at the capability of that contract.
The courts will not render a contract void for common mistake unless the
mistake is fundamental to the contract, which will, of course, depend upon the
facts of the case. On the other hand, a unilateral mistake occurs when one
party alone is mistaken and the other party knows or, in the circumstances,
should know, of the mistake. Unilateral mistake cases usually belong to
situations relating to mistaken identity, mistakes relating to a term of the
contract or a mistake as to the nature of a document that has been signed.
Importantly, unless the unilateral mistake is fundamental to the contract it will
have no consequence for the contract.
Reflective exercises (page 97)
1
What are the different types of misrepresentation?
A misrepresentation is a representation that is untrue. A misrepresentation
may be fraudulent, innocent or negligent. A misrepresentation is not a term of
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the contract so the party misled does not have the usual remedies available
for a breach of the terms of the contract.
2
John and Nick want to enter into an agreement for the sale of a remote
control toy car. Nick has had the toy car for a period of one year and
indicates that he purchased the toy second-hand but has found it to be
faultless. On basis of the representations made by Nick, John agrees
to purchase the remote control toy car. However, shortly after John has
purchased the car, it becomes apparent that the internal transmission
is badly corroded due to poor maintenance. John approaches Nick
regarding this matter and Nick states that he always maintained the car
and that the poor maintenance must have been due to the previous
owner. Consider the application of misrepresentation in this
circumstance.
A misrepresentation is a representation that is untrue. The law dealing with
misrepresentation is primarily concerned with determining the rights of such
persons and their position will largely depend upon whether the false
representation was made innocently, fraudulently or negligently. A
misrepresentation is not a term of the contract so the party misled does not
have the usual remedies available for a breach of the terms of the contract.
The outcome for this scenario is dependent upon the extent to which Nick was
aware of the underlying damage to the subject matter of the contract. Hence,
if he was not aware, then his misrepresentation may be innocent, which would
thereby make recovery difficult. However, in certain circumstances, an
innocent though negligent misrepresentation will give rise to an action for
damages as per Hedley Byrne and Co Ltd v Heller and Partners Ltd [1964]
AC 465. If the representation was negligent, then the legal remedies for
misrepresentation are rescission, for both fraudulent and innocent
misrepresentation, and damages, for fraudulent misrepresentation only.
Legislation has altered the law concerning misrepresentation but this
legislation does not apply in all circumstances. In cases where the legislation
does not apply, common law remedies may still operate.
Reflective exercises (page 101)
1
What is the key difference between duress and undue influence?
Duress applies to those situations in which a person enters a contract due to
actual or threatened violence or, indeed, due to actual or threatened unlawful
imprisonment. Undue influence can be pleaded whenever a person’s free will
is compromised by pressure exerted by another person. If, due to the
pressure exerted by one party, another party is influenced to enter a contract
with the dominant party, the courts may declare the contract voidable at the
option of the influenced party.
2
Jillian and Andrew are having a commercial dispute regarding a
building contract. Jillian physically threatens Andrew with violence if he
does not complete the contract on time. Advise Andrew regarding his
legal position in contract.
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In this instance undue influence can be pleaded as a person’s free will is
compromised by pressure exerted by another person. If, due to the pressure
exerted by one party, another party is influenced to enter a contract with the
dominant party, the courts may declare the contract voidable at the option of
the influenced party.
Further questions to consider (page
Mistake
(a)
Why would the courts be reluctant to grant relief on the basis of
mistake?
The courts are reluctant to grant relief on the grounds of mistake. An error of
judgment is not considered sufficient grounds for a contract to be set aside. In
the absence of some other vitiating factor, such as misrepresentation, the
mistaken party is usually left to suffer the consequences of their mistake.
There are, however, instances where the courts will provide a remedy for the
mistaken party. Importantly, the law will only assist if the mistake is one of
fact, not law. A mistake as to the law governing a particular situation is not
sufficient to render a contract void.
(b)
In what situations might a unilateral mistake typically arise?
Unilateral mistake occurs when one party alone is mistaken and the other
party knows, or, in the circumstances, should know, of the mistake. Unilateral
mistake cases usually belong to situations relating to mistaken identity,
mistakes relating to a term of the contract or a mistake as to the nature of a
document that has been signed. Importantly, unless the unilateral mistake is
fundamental to the contract it will have no consequence for the contract.
Misrepresentation
(a)
What is the difference between a representation and a
misrepresentation?
A representation is a statement of fact made by a party, before or at the time
of entering a contract, of some matter relating to the contract. A
misrepresentation is a representation that is untrue. The basic notion behind
misrepresentation is that the parties have agreed on the terms of the contract
and one of them was motivated to enter the contract by a representation that
is false.
(b)
Discuss the remedies that are available for the various types of
misrepresentation.
The law dealing with misrepresentation is primarily concerned with
determining the rights of those persons making the misrepresentation and
their position will largely depend upon whether the false representation was
made innocently, fraudulently or negligently. A misrepresentation is not a term
of the contract so the party misled does not have the usual remedies available
for a breach of the terms of the contract. The legal remedies for
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misrepresentation are rescission, for both fraudulent and innocent
misrepresentation, and damages, for fraudulent misrepresentation only.
Legislation has altered the law concerning misrepresentation but this
legislation does not apply in all circumstances. In the cases where the
legislation does not apply the common law remedies may still operate.
(c)
Explain how fraudulent misrepresentation differs from negligent
misrepresentation – for further detail in answering this question you will
need to refer to your textbook.
A fraudulent misrepresentation is made knowingly and recklessly, whereas a
negligent misrepresentation is a representation made unknowingly without
taking reasonable care to insure its accuracy.
(d)
Tom is a financial adviser who is advising John. Tom has knowledge of
the significant instability and financial volatility in share prices but fails
to advise John of this despite knowing that John is intending to invest
substantially in shares. Consider the ramifications for Tom of not
disclosing this risk to John.
This amounts to misrepresentation. An important distinction needs to be made
in this circumstance regarding the type of representation that has taken place.
A negligent misrepresentation is a representation made unknowingly without
taking reasonable care to insure its accuracy. Fraudulent misrepresentation is
made knowingly and recklessly. This amounts to a fraudulent
misrepresentation for which damages can be claimed.
Undue influence and unconscionable conduct
(a)
Outline the recognised categories where undue influence may arise.
Undue influence is presumed to exist in certain instances and, in those
situations, the dominant party bears the burden of proving the absence of
pressure. These situations involve parties that are in a fiduciary relationship,
such as parent and child, trustee and beneficiary, physician and patient,
solicitor and client.
(b)
What is unconscionable conduct?
Unconscionable conduct occurs where one party makes harsh and
unconscionable bargains when they are bargaining against a weaker party. In
such cases, the onus of proving undue influence lies on the party suffering the
disadvantage, but once established, the onus shifts to the dominant party to
show that the transaction was fair and reasonable. A remedy may
consequently be available if the inequality of bargaining power allows the
stronger party to force a manifestly unfair contract on the weaker party.
Chapter 8: Vitiating Elements – Void Contracts
Reflective exercises (page 109)
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1
What is the key difference between a contract being rendered illegal
and a contract being rendered void by statute law?
Contracts can be rendered illegal where an Act of Parliament declares a
certain kind of contract shall be illegal. This applies to contracts that may be
seen by the law as harmful or detrimental to the parties concerned. Similarly,
contracts may be rendered void at common law where they are deemed
unacceptable for economic or social reasons. Generally contracts deemed
illegal at common law are also void at common law.
2
From both a policy and safety standpoint, explain why contracts might
be influenced by legislation.
Despite allowing parties the freedom of contract it is important that minimum
standards of safety are protected and these are usually contained within the
legislation that regulates the making of contracts.
Reflective exercises (page 112)
1
Provide three examples of contracts that would be illegal at common
law.
A contract to commit a crime, such as a contract to commit assault would be
regarded as illegal. Other examples of contracts that are illegal at common
law are contracts to commit a fraud or tort and immoral contracts of a sexual
kind.
2
John wants to buy a hotrod to engage in illegal street racing. Nick is
selling his hot rod but only wants to sell the car to someone who will
maintain and enjoy the car and not use it for illegal purposes. Is Nick
obliged to sell his car to John?
In this scenario Andrew has made representations that the subject of the sale
will be used for an illegal purpose at common law – ie to commit the crime of
illegal street racing. This contract can thereby be rendered illegal at common
law. However, it is arguable as to whether the anticipation of the committal of
a crime renders the contract prima facie illegal.
Reflective exercises (page 113)
1
What is the key difference between illegal contracts at common law
and void contracts at common law?
Contracts that are illegal at common law include agreements that are contrary
to public policy, such as contracts to commit a crime or tort, or immoral
contracts of a sexual kind, contracts which injure the state in its foreign
relations, contracts which affect the freedom or security of marriage or
parental duties, contracts which tend to prevent the administration of justice,
contracts intended to defraud the revenue and contracts in restraint of trade.
Contracts that are void at common law include contracts to oust the
jurisdiction of the courts, contracts in restraint of trade and contracts that are
prejudicial to the status of marriage.
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2
Andrew decides to open a new business selling marriage certificates to
parties wanting to immigrate into Australia. Is Andrew able to do this?
Would the contracts Andrew enters into be legally binding?
The contract would not be legally binding. Such agreements are
unenforceable as they are contrary to public policy. It is a contract that affects
the freedom or security of marriage. Therefore it is likely to be unenforceable
on this basis.
Further questions to consider (page 115)
Contract illegal by statute
(a)
The sale of gunpowder becomes illegal by an Act of Parliament but
Rob still wants to sell his remaining stock of gunpowder. Is he able to
do so?
No, contracts can be rendered illegal where an Act of Parliament declares a
certain kind of contract shall be illegal. Such contracts include those that a
prejudicial to the national interests, safety or foreign relations. Noncompliance with a provision is made an offence under the particular statute. A
case in point is Joe v Young [1964] NZLR 24.
(b)
In what situations might Parliament typically change statutes to make
contracts illegal?
Parliament might change legislation for a number of reasons. A key rationale
behind a change in legislation that might make contracts illegal is the need to
protect consumer safety.
Contracts void at common law
(a)
Discuss the type of contracts that might be considered void at common
law.
Contracts that are void at common law include contracts to oust the
jurisdiction of the courts, contracts in restraint of trade and contracts that are
prejudicial to the status of marriage. Contracts to oust the jurisdiction of the
courts are void as the parties to a contract cannot agree to avoid the courts in
the event of a dispute arising. This does not preclude parties from including a
clause to facilitate dispute resolution. Contracts in restraint of trade are
contracts where one party agrees with the other party to restrict his liberty in
future to carry on trade with other persons not parties to the contract in such a
manner as he chooses: see Diplock LJ in Petrofina (GB) Ltd v Martin [1966] 1
All ER 126.
Contracts illegal at common law
(a)
What is the key difference between contracts becoming illegal at
common law versus contracts becoming illegal at statute?
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Contracts that are illegal at statute are illegal due to their contravention of a
legislative enactment, whereas contracts illegal at common law are contrary to
case law. While a contract that is illegal due to a statutory prohibition is void
and unenforceable, a statute may not make a particular contract illegal but
declare it void. Similarly, the courts will not enforce agreements that are
contrary to public policy. The following are examples of contracts illegal at
common law: contracts to commit a crime or tort, immoral contracts of a
sexual kind, contracts which injure the state in its foreign relations, contracts
which affect the freedom or security of marriage or parental duties, contracts
which tend to prevent the administration of justice, contracts intended to
defraud the revenue and contracts in restraint of trade.
(b)
Tom is a semi-skilled financial adviser who is advising John. Tom has
knowledge of a key change in legislation which will impact upon his
right to advise clients. The legislative change will mean that, without
further training, Tom will not be able to advise clients. Regardless of
this change, Tom continues to advise his clients. What implications, if
any, will this have on the contracts he forms with his clients?
The contract that is formed between Tom and his clients will be illegal due to
the statutory prohibition which renders the contract unenforceable. Contracts
that are illegal at statute are illegal due to their contravention of a legislative
enactment, whereas contracts illegal at common law are contrary to case law.
Tom can be held to be in contravention of this legislative enactment.
Chapter 9: Termination of Contract
Reflective exercises (page 122)
1
What are the exceptions to performance and why do they exist?
The exceptions to performance include: 1. Several contracts – where a
contract can be divided into several parts, payments for parts that have been
completed can be claimed. 2. Acceptance of part performance – where one
party has accepted the partial performance of the contract, having an option
to reject, and promises to pay, it is implied that a part performance has taken
place and a quantum meruit may be claimed by the other party. 3. Prevention
of performance – where one party is prevented by the other from completely
performing the contract they may bring a quantum meruit action to claim for
the work done. 4. Substantial performance – where a contract has been
substantially performed, an action may be made in contract for the contract
price less a reduction for the deficiencies. This exception only applies when
the defect relates to the quality of performance. 5. Time of performance – at
common law, a party who failed to perform their obligations within a given
time was in breach of contract. The equitable rule, which now prevails, is that
time is only of the essence if the parties expressly state, or if a party who has
been guilty of undue delay is notified by the other party, that unless they
perform within a reasonable time the contract will be regarded as broken. 6.
Tender of performance – where an obligation under a contract is to deliver
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goods or render service, if refused, tender of the goods or services discharges
the party tendering them from further obligation and entitles them to damages
for breach. These exceptions allow a certain amount of flexibility where a
party does not precisely perform the contract to completion.
Reflective exercises (page 124)
1
What is a unilateral discharge?
Where one party has completely performed their side of the contract, any
release by them of the other party must be under seal, or supported by
consideration.
Reflective exercises (page 126)
1
Why might a general rule state that “if a person contracts to do
something, he or she is not discharged if performance proves to be
impossible”?
Sometimes it might not be possible to complete a contract due to frustration.
Frustration can occur if the whole basis of the contract is the continued
existence of a specific thing, which is destroyed by a change in the law or if
either party to a contract of personal service dies, becomes seriously ill, or is
called up for military service. The effect of frustration is that the contract is
discharged automatically in respect of the future, but it is not made void from
the beginning.
Reflective exercises (page 128)
1
What is the difference between a condition and a warranty in contract
law?
A contractual condition is an aspect of the contract that goes to the heart of
the agreement, whereas a contractual warranty is ancillary and is important to
the contract, but not critical. Hence, a breach of contract does not
automatically discharge the contract. A breach of a warranty in contract only
entitles the innocent party to an award of damages. Breach of a condition
entitles the innocent party to damages and the option to treat the contract as
discharged.
Reflective exercises (page 129)
1
Thinking about the underlying policy rationale, why can contracts be
terminated by the operation of law?
A contract may be terminated by operation of law – ie, independently of the
wishes of the parties. This may occur for a number of reasons that are driven
by public policy – for example on the basis of public safety.
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Further questions to consider (page 130)
(a)
Identify the five ways in which contracts may end and briefly explain
each.
The five ways in which a contract may be discharged or terminated are:
performance, agreement, frustration, breach and operation of the law.
Performance – when both parties have performed their obligations, the
contract is considered to be extinguished. Agreement – occurs where one or
both parties agree that relations shall come to an end. Frustration – occurs
where the subject matter of the contract is no longer capable of performance.
Breach – occurs where at least one of the parties has failed to fulfil their
obligations under the contract. Operation of the law – occurs where a contract
is terminated by operation of the law rather than through the wishes of the
parties.
(b)
What is the underlying policy reason for having the doctrine of
frustration in contract?
Sometimes it might not be possible to complete a contract due to frustration.
Hence, if no doctrine existed to the contrary the party through no fault of their
own might be held in breach of contract. Therefore, the doctrine of frustration
can apply if the whole basis of the contract is the continued existence of a
specific thing which is destroyed, by a change in the law or if either party to a
contract of personal service dies, becomes seriously ill, or is called up for
military service. The effect of frustration is that the contract is discharged
automatically as to the future, but it is not made void from the beginning.
(c)
Tom offers to sell his law text book collection to Andrew for $200.
Andrew agrees and a simple contract is formed. The next day Andrew
tells Tom that he does not have the money to complete the contract
and that he thinks they should just forget about it. Advise Tom.
Tom may decide to forget the agreement and then the contract will terminate
through mutual agreement. However, it seems that a prima facie contract has
been formed and that Tom may now have the right to obtain a measure of
damages for the losses suffered (if any) by breach.
(d)
If both parties agree to no longer be in contractual relations with each
other, what type of discharge is this? Explain.
Tom may decide to forget the agreement and then the contract will terminate
through an agreement. This amounts to a bilateral discharge. A bilateral
discharge occurs when the contract is executory or partly executory on both
sides. The consideration requirement is automatically present since both
parties will surrender something of value – ie the right to insist on the other
party’s performance.
(e)
Referring to a suitable textbook, explain the term “novation”.
“Novation” is the making of a new contract in substitution for an earlier one.
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(f)
A term called “severability” is used in contract. With reference to a
suitable textbook, explain the meaning of this term.
Severability refers to the potential for a part of the contractual instrument to be
severed from the whole. An example in contract is that a void clause may be
deleted leaving the remainder of the contract enforceable.
(g)
Derrick, a builder, is employed to build a home extension for Mario.
Having completed half the work, Mario is not interested in continuing
the contract with Derrick and asks him to leave. Advise Derrick in
regard to his options in contract law.
As the contract has been partly performed, Derrick may be able to seek an
award of damages (quantum meruit). Where one party is prevented by the
other from completely performing the contract they may bring a quantum
meruit action to claim for the work done. Alternatively, where a contract has
been substantially performed, an action may be made in contract for the
contract price less a reduction for the deficiencies. This exception only applies
when the defect relates to the quality of performance.
Chapter 10: Remedies
Reflective exercises (page 138)
1
Define the basic principles underlying damages in contract.
The underlying objective of a monetary award is to compensate the aggrieved
party.
2
Define “quantum meruit” and, using your textbook, cite a case that
relates to this contractual damages term
A “quantum meruit” claim is a claim for reasonable payment for work that has
been completed or goods that have been delivered: see Pavey Matthews Pty
Ltd v Paul (1987) 162 CLR 221.
Reflective exercises (page 140)
1
Define the basic principles underlying equitable remedies – refer to a
suitable textbook
Equity is a body of law that aims to reduce the harshness of the common law
by providing a measure of discretion to judges in limited circumstances. The
key remedies relating to contract include injunction and specific performance.
2
What is the key difference between specific performance and an
injunction?
The key differences between these two types of equitable remedies are that
one remedy forces the party to do something (specific performance) and the
other prevents a party from doing something (injunction).
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Reflective exercises (page 142)
1
What is the relevance of the limitation period for contracts?
The limitation period is relevant as it identifies the last possible opportunity an
aggrieved party may seek recourse in contract.
2
What is restitution and does it rely upon the existence of a contract?
Restitution is a remedy that operates outside of contract and is aimed at
preventing unjust enrichment.
Further questions to consider (page 144)
Damages
(a)
Remoteness of damage was discussed in the case of Hadley v
Baxendale. How did this case relate to remoteness?
Remoteness of damages refers to those damages that are recoverable but
which are limited to those that are not too remote. Further, the loss payable as
compensation for damages must have been within the reasonable
contemplation of the parties as likely to result from the breach of contract. In
Hadley v Baxendale (1854) 9 Exch 341 the claim for loss of profits was
considered too remote from the original contract in respect of a broken mill
crankshaft.
(b)
How far does the duty to mitigate loss extend in contract law?
A duty is imposed by law to take reasonable steps to mitigate the loss caused
by a breach of contract. A person suing for damages in contract is required to
act reasonably in mitigating their loss but is not required to take undue steps,
or expose themselves to the risk of spending money they cannot afford to
reduce their loss. Hence, a clear limit exists in respect of how far a person
must go to mitigate loss.
Equitable remedies
(a)
Why are the remedies of specific performance and injunction
considered to be discretionary?
These are equitable remedies and, as such, are different from common law
remedies. Specific performance and injunction are considered to be
discretionary because they are delivered at the discretion of the judge
presiding over the case.
(b)
If damages are likely to provide an appropriate remedy for an innocent
party who has suffered losses as a result of a breach of contract, would
the court consider the application of discretionary remedies?
The equitable remedies of specific performance and injunction are considered
to be discretionary as they are delivered at the discretion of the judge
presiding over the case. They may be applied in circumstances where the
application of common law principles would bring about a harsh outcome.
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(c)
Tom has an agreement with Andrew to repair his house. Andrew has
indicated that he will repair the house, but he annoys the neighbours by
commencing work at 6 am. Andrew does this for a number of days and
Tom is not sure what he can do to stop him. Advise Tom.
Tom may seek an order by the courts to prevent Andrew from continuing
breach the condition of the contract. While a breach of contract that amounts
to damages would be the typical common law remedy, this remedy is an
equitable remedy that is discretionary.
Limitation of actions and restitution
(a)
What is a Statute of Limitations and how does it operate?
This is a piece of legislation that stipulates the time limit that exists for
bringing an action. Once this time frame has passed it is no longer possible to
take legal action.
(b)
What does the term “unjust enrichment” mean?
Unjust enrichment is where a benefit has been obtained for no return.
(c)
Derrick requests that his grass to be cut by Mario’s mowing service.
When Mario arrives to cut the lawn, he mistakenly cuts the lawn of the
house next door and charges Derrick. Derrick wants to seek some
redress for being charged for a service in which he obtained no benefit.
Advise Derrick.
This arguably amounts to unjust enrichment where a party has obtained a
benefit for no return – ie the neighbour obtains benefit of having his lawn
mown at no expense. Restitution is a remedy that operates outside of
contract, which is aimed at correcting and preventing unjust enrichment.
Chapter 11: Revision
Exam preparation questions – Chapter 1
1
What are the two key sources of law and how is law made?
The two key sources of law are judge-made law and law made by the
legislature. Judge-made law is found in the decisions made by judges and is
also called common law. Most law originated from common law, which might
include, in criminal matters, the state versus the citizen or, alternatively, in civil
matters the citizen versus the citizen. The second source of law is law made
by the legislature in the form of statutes and delegated legislation. In modern
times statute law has expanded substantially. It is made by the Parliament or
by other law-making bodies that have been delegated the power to make law
by Parliament. The Parliament can create new laws, repeal and codify old
laws or do any combination of these. Legislation can develop more rapidly
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and in arguably a more scientific and proactive manner whereas judge-made
law can only deal with matters in a reactive manner.
2
Compare the two following scenarios:
(i)
Samuel commits an armed robbery of a bank.
(ii)
Samuel has a contractual dispute with Clive.
Explain the classification of these scenarios in law and discuss the likely
outcomes in law.
In scenario 1, the offence is criminal in nature and therefore will proceed with
the state taking action against Samuel. The likely outcome of a court
proceeding in this matter would result in criminal sanction, such as
imprisonment.
In scenario 2, Samuel is having a contractual dispute with Clive. Contract is a
civil law matter which will result in a civil court proceeding as citizen versus
citizen – in this case, Samuel v Clive. The likely outcome of this dispute would
be an award of damages.
3
A distinction is made between public and private law. If a dispute arises
regarding taxation, this is an example of which type of law and why?
Public law is concerned with the regulation of conduct on the part of the state.
Private law is concerned with matters occurring between citizens. A dispute
regarding taxation is an example of public law as taxation law is a body of law
that deals with the compulsory exaction of money by the government for
public purposes.
Exam preparation questions – Chapter 2
1
Discuss the relationship between the doctrine of precedent and the
hierarchy of the courts.
The doctrine of precedent is fundamental to the operation of common law.
The doctrine states that a court must follow the decision of a court in the same
hierarchy which is superior to that court. Hence, a court is not bound to follow
the decision of a court that is inferior to it in the same hierarchy. The doctrine
of precedent is based on the court hierarchy and system – therefore it is
necessary to understand this hierarchy in order to understand the operation of
the doctrine. Australia is made up of a number of courts which operate to
accommodate different matters according to their jurisdiction and position
within the hierarchy. Some courts have original jurisdiction and some have
appellate jurisdiction. Original jurisdiction is where the courts have jurisdiction
to hear a case in the first instance. On the other hand, appellate jurisdiction is
where the courts have the power to decide appeals.
2
Discuss the current court hierarchy in Australia. You may wish to
consider this diagrammatically.
High Court of Australia – Highest Court
Federal Courts
Supreme Courts
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District Courts
Magistrates Courts
Local Courts
Students may also include tribunals and appeals courts, the relevance of
which should be recognised.
3
What is a case citation and why is it necessary in law?
A case citation case provides the details of the parties to the dispute, the year
of the case and the details regarding the law report in which the proceedings
where published. Case citations make it possible to locate and consult
relevant precedent in law.
Exam preparation questions – Chapter 3
1
Outline and explain “statutory interpretation”.
Parliament exercises the legislative function of passing law. These laws are
intended to reflect the needs of society. Acts of Parliament can create new
laws, remove or restate old laws or do any combination of these. Statutes
frequently need to be interpreted by the courts to establish what it was that
Parliament intended. The interpretation of statutes is aided in each jurisdiction
by an Acts Interpretation Act.
2
Explain the rules regarding statutory interpretation and provide an
example for each rule to demonstrate its usage.
Statutes frequently need to be interpreted by the courts to establish what it
was that Parliament intended. Acts Interpretation Acts are intended to assist
in this regard. All Commonwealth and State jurisdictions have an Acts
Interpretation Act which outlines the operation of legislation and defines
commonly used terms. In addition, a number of rules of statutory
interpretation have been developed by the common law. The first of these is
the literal meaning rule – if the language is unambiguous the courts will read
the statute literally and give it its ordinary meaning. Hence the court will
consider what the legislature literally intended. The second rule is the golden
rule whereby the courts may depart from the literal meaning of a rule if it
would prevent an absurdity. The third rule is the mischief rule – where the
words of an Act are ambiguous, illogical or inconsistent the courts will
consider the “mischief” that Parliament was trying to remedy when passing
the Act. In other words, the courts will consider the specific nature of the
statute in determining the mischief the legislature was attempting to
overcome.
3
List and explain the process of legislative enactment.
The main stages of the passage of legislation through Parliament are the
drafting of the bill, followed by the introduction of the bill to the Lower House
of Parliament (the House of Representatives) where it is read three times. If
the bill is passed by Lower House of Parliament it is then considered by the
Upper House (the Senate, except in Queensland). Once the bill has passed
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through both Houses, Royal Assent is given by the Governor-General. The
Act then comes into effect on the date proclaimed and is law.
Exam preparation questions – Chapter 4
1
Identify the principles that underlie a legally binding agreement.
Foremost there must be an agreement that is a valid offer and acceptance
(with the exception of contracts by deed), an intention to create legal relations
and consideration. An offer is a proposal which is intended to bind the offeror
upon acceptance. Be sure that each of the rules relating to offer has been
considered. Valid acceptance is an unqualified and final assent to an offer. Be
sure when considering acceptance in contract that each of the rules relating to
offer have been considered. A valid offer and acceptance amount to an
agreement. For an agreement to be legally binding the parties to the
agreement must have intended that legal consequences would flow from the
failure of one party to perform his or her obligations. The courts presume an
intention to be bound, or not bound, given a particular circumstance. The
presumption applied by the courts is that social and domestic agreements are
not intended to give rise to legal relations. This presumption may be readily
rebutted if the evidence is presented disclosing a contrary intention.
Consideration is one measure of intent of the parties to establish legally
enforceable rights and obligations. It could be said that consideration is the
price that is paid for a promise.
2
Outline the formative elements of contract.
For a contract to be formed a number of critical elements must be satisfied.
These include a valid offer and acceptance (with the exception of contracts by
deed), an intention to create legal relations and consideration. An offer is a
proposal which is intended to bind the offeror upon acceptance. Valid
acceptance is an unqualified and final assent to an offer. A valid offer and
acceptance amount to an agreement. For an agreement to be legally binding
the parties to the agreement must have intended that legal consequences
would flow from the failure of one party to perform his or her obligations. The
courts presume an intention to be bound, or not bound, given a particular
circumstance. The presumption applied by the courts is that social and
domestic agreements are not intended to give rise to legal relations. This
presumption may be readily rebutted if the evidence is presented disclosing a
contrary intention.
3
Dean and Sam are brother and sister and Dean asks Sam to clean his
room weekly for a fee of $20 per week. Sam agrees. Two months into
the arrangement Sam no longer performs her task and Dean wants to
enforce the agreement against his sister. Outline the legal avenues and
issues for Dean.
The issue here relates specifically to an intention to be legally bound. For an
agreement to be legally binding the parties to the agreement must have
intended that legal consequences would flow from the failure of one party to
perform his or her obligations. The courts presume an intention to be bound,
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or not bound, given a particular circumstance. The presumption applied by the
courts is that social and domestic agreements are not intended to give rise to
legal relations. This presumption may be readily rebutted if the evidence is
presented disclosing a contrary intention. In agreements concerning domestic
and social matters the courts presume that the parties do not intend to create
legal relations (Todd v Nichol [1957] SASR 72). Hence, as this agreement
relates to a social and domestic matter it is arguably a social or domestic
relationship whereby the parties did not intend legal consequences to arise
from its breach. However, this argument could be rebutted by evidence to the
contrary such as the need to maintain the household – which arguably could
give rise to breach of contract.
4
Tom makes Sonya an offer to purchase a book for $100. Sonya then
offers the book to Tom for $120, after which Tom suggests to Sonya an
offer of $110, which Sonya accepts. Outline the various aspects of
contract which have taken place here and identify if a contract has
been formed.
Tom has made an offer to Sonya to purchase a book for $100. Sonya is free
to accept or reject this offer. She rejects this offer but subsequently makes an
offer to Tom of $120. Tom then makes a counter-offer of $110 which again
Sonya is free to accept of reject. At no material time has a contract been
formed due to the lack of a valid contractual acceptance.
Exam preparation questions – Chapter 5
1
Outline and discuss the differences between contractual conditions and
warranties.
A breach of a condition entitles the innocent party to terminate the contract
and claim damages, whereas a breach of warranty entitles the innocent party
to damages only for the loss suffered as a result of the breach and does not
give a right to end the contract. This distinction is important as it determines
the remedies that are available to the parties.
2
Discuss a key element associated with the legality of an exclusion
clause.
Foremost, an exemption or exclusion clause is a term within a contract which
seeks to exempt one of the parties from liability. The term may also be applied
in circumstances where a party may be seeking to limit his or her liability to a
specific sum if certain events occur, such as a breach of warranty or
negligence. Such a clause seeks to avoid liability for lass or damage to
personal goods. However an exclusion clause does not always delimit its
respective liability as well as it might due to the vague nature of the term.
Where the clause attempts to cover liability for any possible consequence it
might be construed contrary to contra proferentum due to the fact that the
clause may be destructive to the rights of unsuspecting parties. For an
exclusion clause to become part of a contract it must be a term of the
contract. Hence, different rules exist in regard to signed and unsigned
documents regarding exclusion clauses.
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3
Guy, a singer, contracts with CEBEL Ltd for concerts for a period of
three months. The contract states that Guy would deal exclusively with
CEBEL in relation to matters arising out of the contract. Mr Wood, the
manager of a venue in Sydney, contacts Guy and places a number of
demands upon Guy in respect of his appearance at the next scheduled
concert. Guy realises that these demands will cost him considerably in
time and expense and does not want to follow the directions of Mr
Wood. Explain, in your own words, if Guy is contractually obligated to
Mr Wood and, if so, why.
The issue that arises in this hypothetical situation relates to privity of contract.
The contract that exists is between Guy, the singer and CEBEL Ltd for
concerts for a period of three months. The contract specifically states that Guy
would deal exclusively with CEBEL in relation to matters arising in the
contract. Mr Wood is not a party to the contract and therefore contractually is
not able to make demands upon Guy.
4
Ted takes his jacket to a dry cleaner for alteration and enters a contract
which contains the following clause:
“The dry cleaner will not be held liable for any damage to clothing
arising during alteration.”
During the alteration an existing tear on the jacket becomes enlarged
and Ted wants to seek recourse in contract against the dry cleaner.
Advise Ted of his likelihood of success in suing in contract law.
In this instance, an assumption must be made as to whether the contract is
written or verbal. As it contains a clause, an assumption is made that the
contract was written. Hence, it is important to note that if a person signs a
document he or she is bound by it even if they do not read it, unless it
contains manifest misrepresentations. In this instance, the exclusion clause
would be likely to remove liability on the part of the dry cleaner and therefore
reduce the likelihood of success for Ted if he takes action in contract law.
Exam preparation questions – Chapter 6
1
Outline contracts that are legally binding for children who lack
contractual capacity.
Contracts for necessaries are binding on minors because they encompass
things without which the minor cannot reasonably exist. These items include
food, clothing, medical care and shelter. Whether a thing is a necessary
depends whether it is capable of being a necessary, which is a question of
law, and whether the thing can be properly regarded as a necessary for a
particular minor, which is a question of fact. A minor can be bound to pay for
contracts that will be for their benefit – ie a minor may be liable to pay a
reasonable sum for his or her education or training for a profession or trade.
But the contract must be of benefit as a whole to the minor as shown in the
case of Leng & Co Ltd v Andrews [1909] 1 Ch 763.
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2
Outline the extent of the operation of contractual capacity.
Not all persons can enter into legally binding contracts. Certain classes of
persons do not enjoy full contractual capacity either because of age or mental
condition and the law protects such people. Examples of such classes of
persons include minors and those suffering mental incapacity such as
intoxicated persons. Other classes of persons who are limited in their capacity
to enter into contracts include bankrupts and criminals. The underlying
rationale here is that the law provides the community with protection from
such people.
3
Tom, who is heavily intoxicated, wants to buy a television. Rob is
selling his Television for $800. Tom makes an offer to purchase Rob’s
television for $700 and Rob accepts. Tom later tells Rob that he had
not intended to purchase the television and had only done so due to his
intoxicated state. Advise Rob in respect of his rights under contract
law.
Tom has in this instance entered into a legally binding contract. However, the
contract is prima facie ineffective due to being formed while Tom was in a
state of intoxication. The legality of the agreement will be dependent upon the
extent to which Rob was aware or ought to have been aware of his state of
incapacity. It is likely that Rob could avoid liability under contract if it could be
successfully argued that Tom did not have the requisite capacity at the time in
which the contract was formed.
4
Jeff suffers from an intellectual impairment that impacts upon his ability
to make decisions, and therefore he has a full-time carer. One day he
is briefly left alone and answers a call by ITEL Pty Ltd, a mobile phone
company. In his limited ability to communicate he repeatedly agrees
with the ITEL representative, who subsequently subscribes Jeff to an
expensive phone contract. Is Jeff liable for this phone contract?
Contracts made with a person suffering mental disability are valid and binding
unless it can be shown that at the time the contract was made the person
suffering the disability was incapable of understanding the contract and that
the other party was aware of the condition, as in the case of Imperial Loan Co
v Stone [1892] 1 QB 599. It would seem that Jeff suffers from an intellectual
impairment that impacts upon his ability to make decisions but this might not
have been obvious to the ITEL representative. Therefore Jeff may fall into the
category of those classes of people who are incapable of entering into
contractual obligations either because of age or mental condition, and the law
protects such people. However, in this case it is arguable that the contract
formed between Jeff and ITEL is valid due to the fact that the ITEL
representative was possibly unaware of Jeff’s incapacity..
Exam preparation questions – Chapter 7
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1
Discuss misrepresentation in the context of contract law.
A misrepresentation is a representation that is untrue. The basic notion
behind misrepresentation is that the parties have agreed on the terms of the
contract and one of them was motivated to enter the contract by a
representation that is false. The law dealing with misrepresentation is
primarily concerned with determining the rights of such persons and their
position will largely depend upon whether the false representation was made
innocently, fraudulently or negligently. A misrepresentation is not a term of the
contract so the party misled does not have the usual remedies available for a
breach of the terms of the contract. The legal remedies for misrepresentation
are rescission, for both fraudulent and innocent misrepresentation, and
damages, for fraudulent misrepresentation only. Legislation has altered the
law concerning misrepresentation but this legislation does not apply in all
circumstances. In the cases where the legislation does not apply, the common
law remedies may still operate.
2
Outline the penalties that might be considered with unconscionable
conduct.
Equity is prepared to grant relief against harsh and unconscionable bargains
wherever one party to the bargain is at a special disadvantage. In such cases,
the onus of proving undue influence lies on the party suffering under the
disadvantage, but once established, the onus shifts to the dominant party to
show that the transaction was fair and reasonable. A remedy may
consequently be available if the inequality of bargaining power allows the
stronger party to force a manifestly unfair contract on the weaker party. In
respect to the penalties, the courts will take into account the most appropriate
relief for the injured party as the remedy is equitable and discretionary.
3
Tim, who is an experienced and specialist adviser on engineering
construction, is advising Fred. Tim has knowledge of the significant
issues that exist with the use of zinc in high rise construction. Despite
this knowledge, he allows Fred, his client, to build a high rise
construction with steel containing large quantities of zinc. As a
consequence of the zinc quantities, the building becomes unstable
shortly after construction. Advise Fred of his rights, if any, against Tim.
This amounts to misrepresentation. An important distinction needs to be made
in this circumstance regarding the type of representation that has taken place.
A negligent misrepresentation is a representation made unknowingly without
taking reasonable care to insure its accuracy. A fraudulent misrepresentation
is made knowingly and recklessly. This amounts to a negligent
misrepresentation. The legal remedies for misrepresentation would likely be
damages.
4
Sammy is selling a car to Jim. During the course of negotiations
Sammy becomes irate at Jim’s requests for further details regarding
the car and threatens to physically assault Jim if he does not go
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through with the contract. Because Jim is frightened of the potential
physical abuse, he agrees. Does Jim have to complete this contract?
What arguments might Jim raise to suggest that the contract is invalid?
The negotiations between Sammy and Jim are pre-contractual – that is, they
are taking place before a contract is formed. In relation to the threat that is
made by Sammy to Jim, this might be construed as duress. Duress applies to
those situations in which a person enters a contract due to actual or
threatened violence or, indeed, to actual or threatened unlawful imprisonment.
If duress is established, the contract is voidable at the option of the victim of
the duress: see Barton v Armstrong (1973) 3 ALR 355. Hence, this contract
might be voidable at the request of Jim if he was induced to enter the contract
due to the actual or threatened violence.
Exam preparation questions – Chapter 8
1
Outline the differences between a contract that is void and a contract
that is illegal.
Contracts can be rendered illegal where an Act of Parliament declares a
certain kind of contract shall be illegal if it is contrary to public policy. Similarly,
contracts can be illegal at common law – for instance if the contract is to
commit a crime. A void contract lacks validity due to lack of intention or
consideration on the part of one or both of the parties, or it may be made void
by statute. Contracts that are void at common law include contracts to oust
the jurisdiction of the courts, contracts in restraint of trade and contracts that
are prejudicial to the status of marriage. The general effect of a contract being
illegal is that the contract is void and neither party can sue on it.
2
Providing two examples, outline an agreement that attempts to oust the
jurisdiction of the courts.
A contract that attempts to oust the jurisdiction of the courts is a contract that
circumvents the principles espoused by the courts. The first example of this is
an agreement whereby the parties agree that in the event of a dispute they
will not resolve the matter before the courts despite the existence of a
common law requirement for them to do so. A second example is an
agreement that has been entered into by contracting parties which is contrary
to common law contractual principles.
3
Andrew decides to start a business selling illegally copied DVDs at the
markets. Is Andrew able to do this? Would the contracts Andrew enters
into be legally binding?
The type of business that Andrew proposes is contrary to legislative
enactments in Australia. Contracts can be rendered illegal where an Act of
Parliament declares a certain kind of contract shall be illegal. In this instance,
the contravention would be of the Copyright Act [students need not identify
this]. Non-compliance with a provision is made an offence under the particular
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statute. While the validity of the contracts with third parties is arguably valid if
they are bona fide purchasers for value, the legality of the situation is
dependent upon their awareness of the illegal product. Nevertheless, while
Andrew can physically sell the DVDs, the act of selling them is illegal and the
contracts technically would be regarded as void by statute.
4
Doug enters a contract with an overseas person to import pistols and
rifles into Australia with the view that he can sell them at the local
Saturday markets. Indicate if this contract is a valid and enforceable
contract in Australia.
The type of contract between Doug and the foreign exporter is likely to be
contrary to legislative enactments in Australia. Contracts can be rendered
illegal where an Act of Parliament declares a certain kind of contract shall be
illegal. Further, the contracts that Doug will have with potential customers at
the local Saturday markets, where he intends to sell the pistols and rifles, are
also likely to be contrary to legislative enactments in Australia. While Doug
may physically do this act, the act of selling the items is illegal and the
contracts entered into in both instances would technically be regarded as void
by statute.
Exam preparation questions – Chapter 9
1
Outline and discuss the ways in which a contract can come to an end.
There are four ways in which a contract may be terminated: through
performance, agreement, frustration, breach or operation of the law.
Performance – this indicates that both parties have performed their
obligations and therefore the contract is considered to be extinguished.
Agreement – this is where one or both parties agree that relations shall come
to an end. Frustration – this occurs where the subject matter of the contract is
no longer capable of performance. Breach – occurs where at least one of the
parties has failed to fulfil their obligations under the contract. Termination
through operation of the law means that a contract may be terminated by
independently of the wishes of the parties.
2
Highlight and discuss the process involved when parties agree to
terminate their contractual agreement.
While an agreement is effective by virtue of the satisfaction of the formative
elements of the contract, where both parties agree to terminate a contract,
they both surrender something of value in order to bring the agreement to an
end. Thus, the contract becomes mutually terminated. This is called bilateral
discharge. Bilateral discharge occurs when the contract is executory or partly
executory on both sides. The consideration requirement is automatically
present since both parties will surrender something of value – ie, the right to
insist on the other party’s performance.
© 2008 Thomson Reuters (Professional) Australia Limited
Instructor Supplement to accompany Holm, A Contract Law Workbook
39
3
Fred, a motor mechanic, has made an agreement with Derrick, to do
maintenance work on Derrick’s car. Half-way through the work Fred
obtains a more lucrative offer to repair another vehicle and
subsequently decides to work on the other car. Derrick expects to
collect his car late in the day and arrives to find his maintenance
incomplete. Identify the type of contractual termination that might have
taken place here and the remedies, if any, that Derrick might have
against Fred.
The contractual termination that has taken place in this instance is through a
breach of contract on the part of Fred. However, Fred may seek to obtain an
award of damages suffered as a consequence of this breach of contract – he
is still entitled to a payment for the amount of work that has been completed.
Despite the likely existence of a bailment here, which students will not be
expected to discuss, Derrick may be able to seek an award of damages
(quantum meruit). Where one party is prevented by the other from completely
performing the contract they may bring a quantum meruit action to claim for
the work done. Alternatively, where a contract has been substantially
performed, an action may be made in contract for the contract price less an
amount for the deficiencies. However, this exception only applies when the
defect relates to the quality of performance.
4
Jane decides to sell a piece of artwork to John for $2,000. In transit the
artwork is destroyed in a freak accident whereby neither party is
responsible. Can John sue Jane for breach of contract? If not, why?
The difficulty in this instance is that the contract can no longer be performed.
The general rule is that if a person contracts to do something he or she is not
discharged if performance proves to be impossible. However, if frustrationcan
be established, the contract is discharged automatically as to the future, but it
is not made void from the beginning. In this case, at common law the loss lay
where it fell – ie, money paid before the frustration occurred could not be
recovered: see Krell v Henry [1903] 2KB 740. Hence, John will not be able to
sue Jane for breach of contract unless stipulations existed within their
agreement regarding accidents.
Exam preparation questions – Chapter 10
1
Identify the equitable and common law remedies that are available for
a breach of contract.
© 2008 Thomson Reuters (Professional) Australia Limited
Instructor Supplement to accompany Holm, A Contract Law Workbook
40
The remedies that are available for a breach of contract are dependent on the
type of breach that has occurred. The usual remedy at common law is
damages expressed in monetary terms. The underlying objective of awarding
a monetary award is to compensate the aggrieved party. Equitable remedies
include specific performance and injunction. Specific performance is an order
of the court requiring a party to perform the obligations under the contract.
This equitable remedy is awarded within the discretion of the court. An award
of specific performance will usually only be granted in circumstances where
an award of damages will not provide an adequate remedy. An injunction is
an order of a court that restrains a person from doing a wrongful act. An
injunction is a discretionary remedy and is likely to be refused where damages
would be appropriate.
2
Define and discuss the operation of an injunction.
An injunction is an order of a court that restrains a person from doing a
wrongful act. In the context of contract law, an injunction is an order that
restrains a party from breaching their contractual obligations. An injunction is
a discretionary remedy and is likely to be refused where damages would be
appropriate.
3
Eddie orders a one-of-a-kind artistic work through a museum but,
despite a contract, the museum decides not to complete the
agreement. What options in contract might Eddie have against the
museum?
As the artistic work is “one-of-a-kind”, it may be difficult to obtain a remedy of
damages that will adequately reflect the value of this artistic work. Therefore,
the courts may consider an alternative form of compensation such as the
discretionary remedy of specific performance in order to force the museum to
fulfil their obligations under the agreement.
4
Nicole sells Eric a new waterbed. On arrival at Eric’s house the
waterbed leaks all over the floor. Eric becomes so despondent that he
does nothing further to prevent the leakage. Some time later, the water
has leaked all over the house, damaging over $5,000 in electrical
equipment. Discuss the likely success of Eric’s claim against Nicole for
the damage caused.
The general principle underlying damages is that, as far as money is able to
do so, it will place the innocent party in the same position they would have
been if the contract had been performed. However, in this instance, Eric does
not actively take action to mitigate the damage caused. A duty is imposed by
law to take reasonable steps to mitigate the loss caused by a breach of
contract. A person suing for damages in contract is required to act reasonably
in mitigating their loss but is not required to take undue steps, or expose
themselves to risk, or spend money they cannot afford to reduce their loss.
Therefore, Eric may seek recourse, but arguably any damages awarded may
be reduced due to his failure to take steps to mitigate his overall losses.
© 2008 Thomson Reuters (Professional) Australia Limited
Instructor Supplement to accompany Holm, A Contract Law Workbook
41