LAW EXTENSION COMMITTEE
WINTER COURSE 2005
CONTRACTS
LECTURE NOTES
WEEK SIX
TERMS OF A CONTRACT
INTRODUCTION
Here we are concerned with the content, or terms, of a contract. Terms can be broadly
classified as either express or implied. In either case terms signify the obligations of
the parties to the contract.
A failure by to comply with any of his or her obligations amounts to a breach of
contract. A breach of contract will entitle the innocent party to seek damages for the
breach. Where the remedy of damages is pursued the innocent party will always
succeed, the critical question being the amount of damages that the court will award.
This question is taken up in the remedies part of this subject. A breach of contract
may also permit the innocent party to terminate the contract. This is a right that is
additional to his or her right to damages. The circumstances in which termination for
breach is permitted will be looked at under the topic of discharge of contracts.
Alternatively, the innocent party may seek to have the contractual obligation enforced
by an order for specific performance, thereby requiring performance of the obligation.
An order for specific performance will not always be made by a court and the
circumstances in which it will be refused will be explored in the remedies part of this
subject.
EXPRESS TERMS
Express terms are those explicitly included in the contract by the parties. Our concern
here is to identify what the express terms are. In many cases this will not present any
difficulties. Thus, in a written contract signed by both parties and which sets out the
parties’ obligations, the express terms will be the said obligations.
However, there are cases where the identity of express terms is not at all clear. The
following examples can serve as introductions to a number of principles used in
identifying the express terms of a contract.
Example 1
X and Y undertook lengthy negotiations relating to the sale X’s Ford
motor vehicle to Y for $ 5,000. During the negotiations, X stated that the
car was a 1996 model Ford. After the contract was completed Y
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discovered that the Ford was a 1994 model, and therefore worth somewhat
less than a 1996 model.
Is the statement by X as to the year model a term of the contract, with the
consequence that X is in breach of contract? In other words, did X
promise to sell a 1996 Ford or simply a Ford? If it is the former, X is
liable to Y for damages for breach of contract, whereas in the latter case
there is no liability for damages because there is no breach of contract.
Example 2
P has agreed to lease his farm to Q and a detailed written lease agreement
is prepared by P for the parties to sign. The written lease agreement covers
all the terms one would generally expect to find in a contract of this type.
Q is in agreement with all of its terms. However, before Q signs the lease,
he seeks an assurance from P that the drainage system on the farm is in
good working order. The written agreement prepared by P is silent on this
matter. P promises Q that the drainage system is in excellent condition. Q
signs the lease. Q later after discovers that the drainage system is not in
good working order.
Can Q sue P for breach of contract in relation to the fact that the drainage
system is not working as promised by P? In other words, does the promise
amount to an express term in a contract between P and Q?
Terms or Mere Representations
Example 1 above raises the question of whether X’s statement was a term of the
contract or merely a representation. This is crucial because, if X’s statement is false
and it is held to be a term, X is in breach of contract and liable to Y for damages. If
the statement is a mere representation, it lacks any contractual force and X cannot be
liable for damages for breach of contract. (It is possible that the statement may
amount to a misrepresentation, with the consequences that X may be able to rescind
the contract, but this is an altogether different remedy to that of damages for breach of
contract. Misrepresentation will be dealt with under the topic of vitiating factors later
in this subject.)
In ascertaining whether statements such as the one made by X are terms or mere
representations, the court in Ellul & Ellul v Oakes (1972) 3 SASR 377, set out a
number of factors that can be used to reach a determination in any case before it.
Students need to read this case and note the four factors listed therein
None of these factors is conclusive. They are simply indicators. It is ultimately for the
court to ascertain ‘whether there is evidence of an intention by one or both of the
parties that there should be contractual liability in respect of the accuracy of the
statement’: Ellul & Ellul v Oakes, at 387, per Zelling J. The intention is to be
determined by an objective analysis of the facts. Secret or uncommunicated thoughts
in this respect are irrelevant: Hospital Products v USSC, (1984) 156 CLR 41at 61, per
Gibbs CJ.
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The cases of Oscar Chess Ltd v Williams [1957] 1 WLR 370 and Dick Bentley
Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623 illustrate the
difficulties the courts can have in ascertaining the intention of the parties.
Students should read both of these cases and be able to discuss what distinguishes
them. In Dick Bentley Lord Denning made statements about reasonableness and fault
in this area. What did Zelling J say about this in Ellul & Ellul v Oakes?
Parol Evidence Rule
Example 2 above raises the application of the parol evidence rule.
The parol evidence rule contains the following two parts:
(i)
the exclusion of extrinsic evidence that would add to, subtract from or vary the
terms of a written contract; and
(ii)
the exclusion of extrinsic evidence that would otherwise have assisted the
court in interpreting or construing the contract.
Our concern here is with the first part of the rule. Although the rule relates to all
forms of extrinsic evidence, most of the cases are concerned with oral evidence.
As has been previously noted, subject to any statutory requirement to the contrary,
there is no requirement of writing for any contract. Thus, a contract could be



Entirely oral
Partly oral and partly written
Entirely written.
The parol evidence rule is concerned with entirely written contracts and states that
oral evidence cannot be introduced that will have the effect of adding to, subtracting
from or varying the terms of an entirely written contract. Thus, the express terms of
the contract are only those recorded in the contract. In Example 2 above it would
appear that the written lease is an entirely written contract. Thus, no oral evidence
could be presented to supplement the written document by the addition of a terns
relating to the condition of the drains.
In Bacchus Marsh Concentrated Milk Co Ltd v Joseph Nathan & Co Ltd (1919) 26
CLR 337, at 451-452, Higgins J stated that the justification for the rule was the
desirability of preserving ‘finality in written instruments meant to be final’ and of not
allowing ‘written words to be altered or qualified by the uncertain testimony of
slippery memory’.
The parol evidence rule only applies if the contract is intended to be an entirely
written one. It has no application to contracts that are intended to be partly written and
partly oral: Hospital Products v USSC (1984) 156 CLR 41, at 61, 89-90, 120. On the
issue of whether a contract is intended to be partly written and partly oral, oral
evidence is admissible: State Rail Authority of New South Wales v Heath Outdoor Pty
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Ltd (1986) 7 NSWLR 170, at 191-192. The existence of a written document that
appears to represent a complete agreement is not conclusive that it was intended to be
an entirely written contract. If, however, the written document has a clause which
states that it is an entire agreement, there is authority to suggest that this will be seen
as an entirely written contract to which the parol evidence rule will apply: Hope v
RCA Photophone of Australia Pty Ltd (1937) 59 CLR 348.
Exceptions to the Parol Evidence Rule
The parol evidence rule is not absolute. Some of the exceptions include:
(i)
oral evidence is permitted to establish that the operation of the contract is not
to occur until the happening of a certain event: Pym v Campbell (1856) 119
ER 903
(ii)
oral evidence is permitted to establish the existence of an implied term based
upon some custom or trade usage. (Customarily implied terms will be
discussed later in this topic).
(iii)
oral evidence is permitted to establish that a written contract incorrectly
records the agreement of the parties. Such evidence will enable the court to
issue an order for rectification of the written contract.
(iv)
oral evidence is admissible to clarify any ambiguity in then text of an entirely
written contract, but that it was not admissible to contradict the plain meaning
of that language: Codelfa Construction Pty Ltd v State Rail Authority of New
South Wales (1982) 149 CLR 337, at 352, per Mason J. The ambiguity must
be more than merely theoretical. In such cases the evidence is not introduced
to alter the terms of the contract but simply to determine the subject of the
contract. A patent ambiguity arises if the language used obviously has more
than one meaning, or is intrinsically of doubtful meaning or has no generally
accepted meaning. A latent ambiguity is established by extrinsic facts that cast
doubt on what would otherwise have a clear meaning. A classic illustration of
latent ambiguity is that of Raffles v Wichelhaus (1864) 159 ER 375, in which
parties agreed that goods would be shipped out of Bombay harbour by the ship
called ‘Peerless’. Oral evidence was led that indicated that there were two
ships by that name in Bombay harbour at the time.
(v)
oral evidence is permitted to establish the existence of a prior collateral
contract: L G Thorne v Thomas Borthwick & Sons (A’Asia) Ltd (1955) 56 SR
(NSW) 81.
Collateral Contracts
Example 2 is also an example of where a collateral contract could arise. In this case,
P’s assurance as to the condition of the drains could amount to a separate and distinct
contract – one that in law is referred to as a collateral contract. Indeed, in De Lassalle
v Guildford [1901] 2 KB 215, on very similar facts to Example 2, a collateral contract
was found to exist.
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The collateral contract in Example 2 consists of one express term, namely, the
promise by P that the drains on the farm were in excellent condition. The
consideration for P’s promise is the entry into of the main contract by Q– in this case
the entry into of the written lease.
As stated by Lord Moulton in Heilbut Symons & Co v Buckleton [1913] AC 30, at 47:
It is evident, both on principle and on authority, that there may be a
contract the consideration for which is the making of some other contract.
On the other hand, courts are somewhat reluctant to find a collateral contract if the
statement alleged to be a collateral contract ‘is one that you would expect to find its
place naturally in the principal contract’: Shepperd v The Council for the Municipality
of Ryde (1952) 85 CLR 1, at 12.
The elements of a collateral contract are:


that the statement is promissory in nature
there cannot be an inconsistency between the main contract and the alleged
collateral contract.
Promissory Nature of the Statement
For a person to establish a collateral contract he or she must established that he or she
entered into the main contract in consideration of the statement made by the
representee. For this to be possible, the statement must be in the form of a promise or
assurance. That he or she would not have entered into the contract had the statement
not been made is not enough to establish a collateral contract, although it may
establish a misrepresentation, the consequences of which are discussed later in this
subject. As was said by Lord Moulton in Heilbut Symons v Buckleton, at 51, it was
fundamental that there be ‘an intention on the part of either or both parties that there
should be a contractual liability in respect of the statement’. In J J Savage & Sons Pty
Ltd v Blakney (1970) 119 CLR 435, at 442, the High Court said that a statement, to be
a collateral contract must be ‘promissory and not merely representational’.
Students should read J J Savage & Sons Pty Ltd v Blakney and be able to discuss why
it was that the collateral contract argument suggested by Blakney failed in that case.
Inconsistency
The alleged collateral contract cannot contradict a term of the main contract: Hoyt’s
Pty Ltd v Spencer (1919) 27 CLR 133.
Students should read Hoyt’s v Spencer and be able to discuss why the collateral
argument failed in this case. Would the principles of promissory estoppel provide an
alternate remedy to Hoyt’s?
It could also be further noted that s 52 of the Trade Practices Act 1974 (C’th), which
outlaws misleading or deceptive conduct, provides another possible avenue for
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someone in the position of Hoyt’s. This statutory provision will be covered later in
this subject.
Collateral Contract With A Third Party
The situation envisaged here can be described as a ‘tripartite collateral contract’: N C
Seddon & M P Ellinghaus, Cheshire and Fifoot’s Law of Contract, Eighth Australian
Edition, LexisNexis-Butterworths, 2002, at 96. It can be summarised as follows:
If A makes a promise to B who, in reliance on that promise, enters into a
contract with C, the entry into the contract with C constitutes the main
contract and is also the consideration for the collateral contract constituted
between A and B on the basis of A’s promise to B. There is one
qualification here and that is that the contract between B and C must
provide a benefit to A.
Thus, in Andrews v Hopkinson [1957] 1 QB 229, A, a car dealer, made certain
assurances to B, the purchaser, in relation to a car that B subsequently purchased from
C, a finance company. A’s assurance constituted a contract with B that was collateral
to the main contract between B and C. The benefit to A was the sale of the car he
concluded to B.
In these tripartite collateral contracts the rule in Hoyt’s v Spencer does not apply, ie.
there can be an inconsistency between the collateral contract between A and B and the
main contract between B and C.
Incorporation of Terms by Signature
Here we are concerned with the effect of a person signing a document containing
terms of a contract. Signature will ordinarily bind a party to the terms even if the
signatory has not read or understood the terms set out in the document: L’Estrange v
F Graucob Ltd [1934] 2 KB 394. Many of the cases dealing with this principle
involve situations where an exclusion clause is contained in a signed document and
the question is whether the exclusion clause is incorporated into a contract. An
exclusion clause is a clause that excludes a defendant from any liability – usually for
damages at common law - when the defendant has committed a breach of his or her
contractual obligations.
L’Estrange was recently reaffirmed by the High Court of Australia in Toll (FGCT)
Pty Ltd v Alphapharm Pty Ltd (2004) 79 ALJR 129.
In Toll, insofar as this issue is concerned, the facts concerned the signature to a
printed form with printing on the front and back. On the front, just above the place
where it was signed appeared the words: ‘Please read “Conditions of Contract”
(Overleaf) prior to signing’. The signatory did not read the relevant conditions, nor
were they mentioned in any conversation between the relevant parties. The conditions
contained an exclusion clause. The issue before the High Court was whether the
exclusion clause formed part of the contract.
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In the Court of Appeal in Toll (2003) 56 NSWLR 662, Bryson J, at 678 said that
whether an exclusion clause forms part of a contract where the document is signed
depends upon whether the party relying on the exclusion clause has done what can be
considered sufficient to give notice of the exclusion clause to the other party. His
Honour further said that, although there was no difference in legal principle between
signed and unsigned documents in this context, ie. both require notice to be given, the
fact that a document was signed carried considerable force in indicating an intention
of the party signing the document to be bound by it. The Court of Appeal concluded,
however, that the exclusion clause on the back of a signed document was not, in the
circumstances of that case, incorporated into the contract.
The High Court over-ruled the decision of the Court of Appeal and its reasoning.
Students should read Toll, especially paragraphs 35-68, and be able to discuss the
facts of the case and the analysis made there of L’Estrange.
A few days after the decision in Toll, the reasons underpinning the signature rule were
explained by the High Court as follows in Equuscorp Pty Ltd v Glengallan
Investments Pty Ltd [2004] HCA 55, at [34]-[35]:
First, it accords with the "general test of objectivity [that] is of pervasive
influence in the law of contract". The legal rights and obligations of the
parties turn upon what their words and conduct would be reasonably
understood to convey, not upon actual beliefs or intentions.
Secondly, in the nature of things, oral agreements will sometimes be
disputable. Resolving such disputation is commonly difficult, timeconsuming, expensive and problematic. Where parties enter into a written
agreement, the Court will generally hold them to the obligations which
they have assumed by that agreement. At least, it will do so unless relief is
afforded by the operation of statute or some other legal or equitable
principle applicable to the case. Different questions may arise where the
execution of the written agreement is contested; but that is not the case
here. In a time of growing international trade with parties in legal systems
having the same or even stronger deference to the obligations of written
agreements (and frequently communicating in different languages and
from the standpoint of different cultures) this is not a time to ignore the
rules of the common law upholding obligations undertaken in written
agreements. It is a time to maintain those rules. They are not unbending.
They allow for exceptions. But the exceptions must be proved according
to established categories. The obligations of written agreements between
parties cannot simply be ignored or brushed aside.
Exceptions to the L’Estrange Principle
In L’Estrange itself it was held that the
situations where documents are signed as
This exception also extends to signatures
influence and unconscionable conduct. As
principle in that case did not apply to
the result of fraud or misrepresentation.
obtained as the result of duress, undue
is noted in Toll the principle of non est
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factum – a species of mistake – also operates as an exception. The non est factum
principle will be analysed when dealing with mistake later in this subject.
Here we will focus on the exception based upon misrepresentation and students
should read the case of Curtis v Chemical Cleaning & Dyeing Co Ltd [1951] 1 KB
805.
Incorporation by Notice
As noted in Toll, notice is a relevant factor in cases of incorporation of terms by
signature. However, as was stated there, it is not as significant a factor as it is in cases
where there is an unsigned document or sign containing terms alleged to be part of a
contract.
There are two major requirements to be met before a term in such cases can be said to
be incorporated into the contract. They are:


timing
reasonable notice.
Timing
In terms of timing, notice of the term has to be given at or before the entering into of
the contract. Thus, in Olley v Malborough Court Ltd [1949] 1 KB 532, the hotel
sought to rely on an exclusion clause located in a hotel room. However, the argument
failed as it was held that the contract had been formed before Olley had even set foot
in the room. Similarly, in Oceanic Sun Line Special Shipping Co Inc v Fay (1988) 165
CLR 197, exclusion clauses were printed on a ticket for a cruise in the Greek islands.
However, the clause was not incorporated into the contract as the contract for the
cruise was made in Australia, some time before the issue of the ticket in Greece.
Students should read what Lord Denning had to say about the timing issue in the
context of the facts in Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163, at 169.
Reasonable Notice
If a party actually knows that the document or sign contains contractual terms then he
or she is bound, irrespective of whether the document or sign has been read: Parker v
South Eastern Railway Co (1877) 2 CPD 416, at 423.
In the absence of actual knowledge, the delivery of the document or the placing of the
sign must be done in such a way that the other party can be taken to have been given
reasonable notice of the terms.
In this area, in the case of documents, there is a distinction drawn between documents
that are contractual in nature and non-contractual in nature.
With contractual documents the presentation and acceptance of the document will
amount to reasonable notice. In the context of a bill of lading (contract for the
shipping of goods by sea), in Parker, at 422, Mellish LJ said:
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[I]f a person who ships goods to be carried on a voyage by sea receives a
bill of lading signed by the master, he would plainly be bound by it,
although afterwards in an action against the shipowner for the loss of the
goods, he might swear that he had never read the bill of lading, and that he
did not know that it contained the terms of the contract of carriage, and
that the shipowner was protected by the exceptions contained in it. Now
the reason why the person receiving the bill of lading would be bound
seems to me to be that in the great majority of cases persons shipping
goods do know that the bill of lading contains the terms of the contract of
carriage; and the shipowner, or the master delivering the bill of lading, is
entitled to assume that the person shipping goods has that knowledge. It
is, however, quite possible to suppose that a person who is neither a man
of business nor a lawyer might on some particular occasion ship goods
without the least knowledge of what a bill of lading was, but in my
opinion such a person must bear the consequences of his own exceptional
ignorance, it being plainly impossible that business could be carried on if
every person who delivers a bill of lading had to stop to explain what a
bill of lading was.
If however, the document is non-contractual in nature, merely handing it over to the
other party is not enough. The party relying on the clause must take reasonable steps
to draw the recipient’s attention to it. Typical examples of non-contractual documents
include tickets, receipts and vouchers.
Students should read Causer v Browne [1952] VLR 1
In terms of what actually has to be done to satisfy the obligation of reasonable notice
in any given case, the facts and circumstances in each case are crucial. It is generally
accepted that the nature of the clause is an important factor. Thus, in Oceanic Sun
Line Shipping v Fay, Brennan J said, at 229,
In differing circumstances, different steps may be needed to bring an
exemption clause to a passenger’s notice, especially if the clause is an
unusual one.
Students should read in this respect Thornton v Shoe Land Parking and Interfoto
Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433
Incorporation of Terms by a Prior Course of Dealing
What is envisaged here is that parties have regularly contracted in the past on the
same terms. However, on a particular occasion a contract is entered into without
expressly incorporating the terms used in the past. The question arises whether the
terms of the past contracts are incorporated into the later contract.
Whether the previous record of contracts leads to the incorporation of those terms into
the later case is ultimately a question of reasonableness: Henry Kendall & Sons v
William Lillico & Sons Ltd [1969] 2 AC 31 at 113.
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Whether it is reasonable for the terms to be so incorporated depends mainly on the
number and consistency of the past dealings between the parties. Whilst each case
depends on its own particular circumstances the following examples can be given:

3 or 4 contracts over 5 years in relation to the repair of a car was not sufficient
to establish a consistent course of dealings in Hollier v Rambler Motors
(AMC) Ltd [1972] 2 QB 71

3 to 4 contracts per month over a three year period in relation to the sale of
meal for the feedings of pheasants and partridges were sufficient to establish a
consistent course of dealings in Henry Kendall v William Lillico.
However, what if in the past dealings the situation had been that notice of an alleged
term had been given by A to B after the contract between A and B was first entered
into and that in all subsequent contracts the same circumstances had applied.
Assuming that there was a sufficient number of contracts being entered into prior to
the latest contract, would the said term be part of the latest contract between A and B?
On this compare and contract the cases of Henry Kendall & Sons v William Lillico &
Sons Ltd and D J Hill & Co Pty Ltd v Walter H Wright Pty Ltd [1971] VR 749.
IMPLIED TERMS
Implied terms can be categorised as follows:
(i)
terms which the law finds in a certain class of contract, either by common law
or statute, although those terms may not find specific expression in the
contractual statements or documents of the parties;
(ii)
terms implied into a contract to give effect to a notorious custom or usage in a
particular trade, industry or locality.
(iii)
terms implied to give efficacy to a particular contract.
Categories (ii) to (iii) can be described as sub-categories of the broader category of
terms which are implied into a contract to give effect to the presumed intention of the
parties.
In cases within categories (ii) and (iii) it is presumed that the contract is effective
without the implied term. Thus, the onus of proof rests upon the party alleging the
existence of the implied term. However, in category (i) cases of terms implied by law,
the term is presumed to be part of the contract. Thus, the onus of proof rests upon the
party who alleges that the term should not be implied into the contract: Heimann v
The Commonwealth (1938) 38 SR (NSW) 691 at 695-696.
Each of the three categories will be examined.
Implication of Terms by Law
The implication of terms by law can be from statute or the common law.
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Important statues that imply terms in sale of goods contracts are the Sale of Goods Act
1923 (NSW) and the Trade Practices Act 1974 (C’th). Statutes that imply terms may
also limit or preclude the parties from expressly excluding these implied terms, eg. ss
68-68A, Trade Practices Act (C’th).
Although certain terms can be implied into particular types of contract it is clear that
terms can be implied by the common law into all contracts. Thus, in Peters (WA) Ltd
v Petersville Ltd (2001) 205 CLR 126, a case concerning licensing of a brand name
with an associated restraint of trade, Gleeson CJ, Gummow, Kirby and Hayne JJ said,
at 142:
The law already implies an obligation by the respondents to do all such
things as are necessary on their part to enable [the other party] to have the
benefit of [the contract]. … It is not now necessary to consider the basis of
the implication. The law also implies a negative covenant not to hinder or
prevent the fulfilment of the purpose of … express promises made in [the
contract].
On the other hand, there is no implied term to the effect that a party will not threaten a
breach of contract. Thus, in Spira v Commonwealth Bank of Australia (2003) 57
NSWLR 544, at 551-552, the New South Wales Court of Appeal held that it was not
necessary to imply such a term on the basis that such threats are adequately covered
by principles relating to anticipatory breach and repudiation of contracts and the tort
of intimidation.
It is also possible that fairly broad terms can be implied by the common law into
particular types of contracts. Thus, in commercial contracts there is an implied term
requiring the exercise of good faith in the performance of the contract: Burger King
Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187.
As to the content of the implied term of acting in good faith, in Burger King, the
Court of Appeal said that it embraced the following three related notions:
(1)
(2)
(3)
an obligation on the parties to co-operate in achieving the
contractual objects (loyalty to the promise itself);
compliance with honest standards of conduct; and
compliance with standards of conduct which are reasonable
having regard to the interests of the parties.
In essence the duty of good faith suggests a demand that parties conduct themselves in
accordance with ‘standards of conduct which are honest, as well as being reasonable
having regard to the parties’ interests’: Overlook v Foxtel [2002] NSWSC 17 at para
65, per Barrett J.
In a contract between X and Y, this does not mean that X is required to subordinate
his or her own interests to those of Y, provided that X’s pursuit of those interests does
not result in an unreasonable interference with Y’s enjoyment of any benefit conferred
him or her by an express term of the contract.
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In Overlook v Foxtel, Barret J, at para 67, summed up the duty of good faith as
follows:
Viewed in this way, the implied obligation of good faith underwrites the
spirit of the contract and supports the integrity of its character. A party is
precluded from cynical resort to the black letter. But no party is fixed with
the duty to subordinate self-interest entirely which is the lot of the
fiduciary: Burger King at para 187. The duty is not a duty to prefer the
interests of the other contracting party. It is, rather, a duty to recognise and
to have due regard to the legitimate interests of both the parties in the
enjoyment of the fruits of the contract as delineated by its terms.
The common law often implies quite specific terms into particular types of contracts.
A good illustration is the employment contract. Thus, subject to any express terms, or
statute or award provision to the contrary, an employee will be bound by implied
terms to the effect that he or she:



is reasonably skilled to perform the job in question;
will faithfully serve his or her employer;
will obey lawful commands made by the employer.
In Byrne v Australian Airlines Ltd (1995) 185 CLR 411, McHugh & Gummow JJ, at
448, suggested that there was ‘much force’ to the argument that many of the terms
implied by the common law had their origins in terms implied on the facts of a
particular case (discussed below) on the basis of the presumed intention of the parties
to the contract ‘but thereafter became so much a part of the common understanding as
to be imported into all transactions of the particular description’.
Implication of Terms by Custom
A term may be implied into a contract to incorporate a relevant custom in a particular
market, trade or locality.
Students should read the leading case in this area of Con-Stan Industries of Australia
Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 for an
exposition of relevant principles.
Implication of Terms on the Facts of a Case
In this category of implied terms a court is asked to imply a particular term on the
basis of the specific facts and circumstances of the case before it.
In BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, at
282-283, the Privy Council listed the five requirements necessary to be satisfied as
follows:
Their Lordships do not think it necessary to review exhaustively the
authorities on the implication of a term in a contract which the parties
have not thought fit to express. In their view, for a term to be implied the
following conditions (which may overlap) must be satisfied: (1) it must be
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reasonable and equitable; (2) it must be necessary to give business
efficacy to the contract, so that no term will be implied if the contract is
effective without it; (3) it must be so obvious that ‘it goes without saying;’
(4) it must be capable of clear expression; (5) it must not contradict any
express term of the contract.
This statement has been approved by the High Court many times: Secured Income
Real Estate v St Martin’s Investments Pty Ltd (1979) 144 CLR 596, at 605-606;
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149
CLR 337, at 347; Hospital Products Ltd v United States Surgical Corporation (1984)
156 CLR 41, at 66, 117-118, Byrne v Australian Airlines Ltd (1995) 185 CLR 410, at
422, 441.
The onus for showing that the criteria have been satisfied lies on the party that asserts
the implied term. That onus is heavier where the contract is detailed and complex. In
Codelfa, at 346 Mason J said:
[T]he more detailed and comprehensive the contract the less ground there
is for supposing that the parties have failed to address their minds to the
question at issue. And then there is the question of identifying with any
degree of certainty the term which the parties would have settled upon
had they considered the question. (Emphasis added)
Each of the BP Refinery elements will be examined in turn.
Equitable and reasonable
In relation to the first requirement - reasonableness and equitableness - it is possible to
say two things. First, it is clear that such a requirement refers to fairness as between
the parties. Thus, in Byrne v Australian Airlines Ltd, at 442, McHugh and Gummow
JJ rejected the suggested implication because ‘[t]he contractual term propounded by
the appellants would operate in a partisan fashion.’ Second, it is clear that
reasonableness and equity is to be judged by reference to the benefits and burdens
each party can expect to enjoy or undertake under the contract. Thus, in BP Refinery v
Shire of Hastings, at 284, the majority of the Privy Council rejected the proposed
implication into a rating agreement requiring a continuity of corporate identity on the
ground that such an implication would deprive the appellant of a benefit which
induced it to make a major capital investment in the defendant’s Shire.
However, reasonableness alone is not enough to imply a term: Codelfa, at 346, per
Mason J.
Necessary to give business efficacy to the contract
The cases indicate that the requirement that a term be ‘necessary to give business
efficacy to the contract’ does not mean that the term must be so necessary that without
the term the contract would, for all purposes, be ineffective, but that the term must be
necessary to make the contract effective and workable according to the presumed
intention of the parties, as disclosed by the terms of the contract and the admissible
14
surrounding circumstances: State of New South Wales v Banabelle Electrical Pty
Limited (2002) 54 NSWLR 503, at 521-522.
So obvious it goes without saying
The requirement of obviousness has been tested by asking whether the parties would
have readily agreed on the proposed implied term if it had been suggested to them in
the course of their negotiations: Codelfa, at 374, per Aickin J. This element overlaps
considerably with that of business efficacy and in that sense addresses itself not to the
actual intentions of the parties but to their presumed intention as reasonable persons
as disclosed by the contract and surrounding circumstances: Heimann v
Commonwealth (1938) 38 SR (NSW) 691 at 695 per Jordan CJ.
Capable of clear expression
The requirement that a term be capable of clear expression is one which has two
elements. First, the term upon which the parties would have agreed had the matter at
issue been drawn to their attention must be clear. The second is that the term to be
implied must be one capable of being formulated with a sufficient degree of precision.
Consistency with express terms
The requirement of consistency with the express terms of the contract requires that the
term said to be implied does not contradict the effect of the express terms of the
agreement and does not deal with a matter which the contract deals with adequately.
Students should read Codelfa Construction Pty Ltd v State Rail Authority of New
South Wales (1982) 149 CLR 337, a leading example of a case dealing with terms
implied on the facts of the case.
The elements in BP Refinery will be applied in cases of formal and detailed written
contracts. The question that arises is the relevance of the BP Refinery elements in
cases of less formal and/or verbal contracts. In Byrne v Australian Airlines Ltd (1995)
185 CLR 410, at 442, McHugh & Gummow JJ suggested that in such cases ‘the
question is whether the implication of [a] particular term is necessary for the
reasonable or effective operation of the contract in the circumstances of the case’.
This comment clearly suggests that an over-rigid application of the BP Refinery
principles is not to be undertaken in such cases.
CONSTRUCTION OF TERMS OF A CONTRACT
General Principles
The Court should seek to adopt a construction that will preserve the validity of the
contract and in that regard should strive to avoid holding agreements, and most
particularly commercial agreements, void for uncertainty: Meehan v Jones (1982) 149
CLR 571, at 589, per Mason J.
In Royal Botanic Gardens & Domain Trust v South Sydney Council (2002) 186 ALR
289, at 292, Gleeson CJ, Gaudron, McHugh, Gummow & Hayne JJ said:
15
In Codelfa [Construction Pty Ltd v State Rail Authority (NSW) (1982) 149
CLR 337, at 352], Mason J (with whose judgment Stephen J and Wilson J
agreed) referred to authorities … which indicated that, even in respect of
agreements under seal, it is appropriate to have regard to more than
internal linguistic considerations and to consider the circumstances with
reference to which the words in question were used and, from those
circumstances, to discern the objective which the parties had in view. In
particular, an appreciation of the commercial purpose of a contract:
“presupposes knowledge of the genesis of the transaction, the background,
the context, the market in which the parties are operating”: (Reardon
Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 at 995-6). Such
statements exemplify the point made by Brennan J in his judgment in
Codelfa [at 401]: “The meaning of a written contract may be illuminated
by evidence of facts to which the writing refers, for the symbols of
language convey meaning according to the circumstances in which they
are used.”
Similarly in Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181, at
188, Gleeson CJ, Gummow and Hayne JJ, in referring to Mason J’s comments in
Codelfa, cited with approval the following statement by Lord Hoffmann in Investors
Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98 at
114 where his Lordship said:
… the ascertainment of the meaning which the document would convey
to a reasonable person having all the background knowledge which would
reasonably have been available to the parties in the situation in which they
were at the time of the contract.
A contact is read in a way which will result in a sensible and businesslike meaning:
Australian Broadcasting Commission v Australasian Performing Right Association
Ltd (1973) 129 CLR 99 at 109. If a contract is open to two constructions it will
receive that construction which will avoid consequences which are capricious,
unreasonable, unjust or inconvenient: TCN Channel Nine Pty Ltd v Hayden
Enterprises Pty Ltd (1989) 16 NSWLR 130, at 146.
A fundamental principle is ‘that the intention of the parties is to be ascertained from
the instrument as a whole and that this intention when ascertained will govern its
construction’ and furthermore, that, in the course of construing an instrument as a
whole in this fashion, the court can engage in ‘the rejection of repugnant words, the
transposition of words, and the supplying of omitted words’: Fitzgerald v Masters
(1956) 95 CLR 420 at 437.
Exclusion Clauses
The fundamental approach to the construction of an exclusion clause is set out in
Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500, at 510, where
the High Court set out the following two major points:
16
(i)
(ii)
an exclusion clause should be construed ‘according to its natural and
ordinary meaning, read in the light of the contract as a whole, thereby
giving weight to the context in which the clause appears including the
nature and object of the contract’.
the contra proferentum principle will be applied so that in cases of
ambiguity the clause will be construed against the person relying on the
exclusion clause.
One of the significant consequences of the first point is that exclusion clauses will
more likely be upheld in commercial contracts. Assuming parties to be at arms length
and of similar bargaining strengths, the exclusion clause is simply part of a freely
entered into contract which reflects the allocation of risk or loss agreed to by the
parties: Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, at 851, per
Lord Diplock. However, in consumer contracts a stricter approach can be justified and
warranted on the basis that the consumer is vulnerable and less capable of protecting
his or her interests.
In relation to the contra proferentum principle, the case of Wallis v Pratt & Hayes
[1911] AC 394 is an illustrative example which students should read.
A number of cases illustrate the workings of these basic rules.
Students should read Photo Production Ltd v Securicor Transport Ltd [1980] AC 827;
Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500; Glebe Island
Terminals Pty Ltd v Continental Seagram Pty Ltd (1993) 40 NSWLR 206
Although the principles set out in Darlington Futures are to apply there are other
principles that may be relevant in assisting the court in construing an exclusion clause.
These can be considered in the context of:



The deviation cases;
The four corners rule;
Exclusion clauses excluding negligence.
Deviation Cases
If a carrier deviates from the agreed voyage or route, he or she loses the benefit of an
exclusion clause. Thus, in Thomas National Transport (Melbourne) Pty Ltd v May &
Baker (Australia) Pty Ltd (1966) 115 CLR 353 TNT was to transport May & Baker’s
goods from Melbourne to Sydney. A TNT sub-contractor collected the goods but was
unable to have them stored overnight in TNT’s depot as it was shut when he arrived.
The sub-contractor stored them in his own garage, but they were destroyed by fire that
night. TNT relied on an exclusion clause to protect them. The High Court ruled
against TNT on the basis that the contract stipulated that the goods be stored in TNT’s
depot. The storage in the sub-contractor’s garage was an unauthorised deviation
which rendered the exclusion clause inapplicable.
However, this is not an absolute rule. It is still a matter of construction of the contract
so that in the appropriate case an exclusion clause will apply even after a deviation
has occurred.
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Four Corners Rule
The four corners rule states that if the defendant’s act that causes loss to the plaintiff
is an act that has not been authorised or contemplated by the contract then an
exclusion clause cannot protect the defendant from liability for damages flowing from
that act. Such an act is said to be outside the scope, or four corners, of the contract.
Students should read the leading case of The Council of the City of Sydney v West
(1965) 114 CLR 481.
Exclusion Clauses and Negligence
For negligence by a contract breaker to be within the scope of an exclusion clause it is
clear that it must be clearly intended that the clause covers negligence: Davis v Pearce
Parking Station Pty Ltd (1954) 91 CLR 642, at 649.
The rules that apply to exclusion clauses and how they are construed in the event that
the plaintiff’s loss is due to the negligence of the defendant have been summarised in
Canada Steamship Lines Ltd v The King [1952] AC 192, at 208, as follows:
(i)
(ii)
(iii)
an express exemption of liability for negligence will effectively exclude
liability on the part of the defendant;
where there is no express reference to negligence, the court needs to
determine if the words used are wide enough to exclude negligence, with
any doubts on this to be resolved by applying the contra proferentum
principle;
if the words used are wide enough to cover negligence but also encompass
other grounds of liability other than negligence, the clause will be read as
applying only to the other ground of liability and will not operate to
exclude the claim for negligence.
In relation to these rules a number of points can be made.
If the exclusion clause explicitly excludes liability for negligence it will be effective,
unless rendered inoperative on some other basis such as the four corners rule.
However, other words and expressions will be effective if they are ones that include
negligence within their scope, eg. words such as ‘howsoever caused’ and ‘under no
circumstances’ will generally be said to incorporate negligence: Rutter v Palmer
[1922] 2 KB 87, at 94
If the only way in which the defendant could be liable for breach of contract is by
acting negligently then a clause that makes no mention of negligence will usually be
sufficient to exclude liability for the defendant. In Alderslade v Hendon Laundry Ltd
[1945] KB 189, Lord Greene MR said, at 192:
[W]here the head of damage in respect of which limitation of liability is
sought to be imposed by such a clause is one which rests on negligence
and nothing else, the clause must be construed as extending to that head of
damage, because it would otherwise lack subject-matter.
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However, Lord Greene made an important point that is reflected in the third rule in
Canada Steamship Lines Ltd v The King. Immediately after the above quotation Lord
Greene continued as follows:
Where, on the other hand, the head of damage may be based on some
other ground than that of negligence, the general principle is that the
clause must be confined in its application to loss occurring through that
other cause, to the exclusion of loss arising through negligence. The
reason is that if a contracting party wishes in such a case to limit his
liability in respect of negligence, he must do so in clear terms in the
absence of which the clause is construed as relating to a liability not based
on negligence. A common illustration of the principle is to be found in the
case of common carriers. A common carrier is frequently described,
though perhaps not quite accurately, as an insurer, and his liability in
respect of articles entrusted to him is not necessarily based on negligence.
Accordingly if a common carrier wishes to limit his liability for lost
articles and does not make it quite clear that he is desiring to limit it in
respect of his liability for negligence, then the clause will be construed as
extending only to his liability on grounds other than negligence.
Students should read Alderslade and White v John Warwick & Co Ltd [1953] 2 All
ER 1021 and be able to explain why the plaintiff failed to be able to sue in negligence
if the former case, but was able to do so in the latter case.
EXCLUSION CLAUSES AND LEGISLATION
Important legislative provisions have been enacted limiting the application of
exclusion clauses. One of the most important examples of legislative intervention in
this respect is found in ss 68-68A of the Trade Practices Act 1974 (C’th). A less
specific statutory intervention is by means of the Contracts Review Act 1980 (NSW).
The Trade Practice s Act 1974 (C’th)
Section 68 of the Trade Practice s Act 1974 stipulates as follows:
(1)
Any term of a contract (including a term that is not set out in the contract but
is incorporated in the contract by another term of the contract) that purports to
exclude, restrict or modify or has the effect of excluding, restricting or modifying:
(a)
the application of all or any of the provisions of this Division;
(b)
the exercise of a right conferred by such a provision;
(c)
any liability of the corporation for breach of a condition or
warranty implied by such a provision; or
(d)
the application of section 75A;
is void.
(2)
A term of a contract shall not be taken to exclude, restrict or modify the
application of a provision of this Division or the application of section 75A unless the
term does so expressly or is inconsistent with that provisions or section.
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Thus, the effect of s 68 relates to the consumer protection provisions in Division 2
Part V (ss 66-74) and s 75A.
Two of the more significant provisions here are s 71 which stipulates an implied
condition that goods supplied by a corporation to a consumer are of merchantable
quality, and s 74 which stipulates an implied warranty that services supplied by a
corporation to a consumer will be rendered with due care and skill and that any
materials supplied in connexion with those services will be reasonably fit for the
purpose for which they are supplied.
There are qualifications to the application of s 68 as follows:
(i)
Section 68A places qualifications upon the provisions of s 68. Thus, by s
68A(1), if a corporation supplies good or services, other than for personal,
domestic or household use, a clause will not be void under s 68 if it limits the
corporations liability to
(i)
in the case of goods, replacing or repairing goods or paying for the
replacement or repairing of goods
(ii)
in the case of services, to supplying or paying for the supplying of the
said services.
However, s 68A(1) will not apply if it is established that it is not fair and
reasonable for the corporation to rely upon it: s 68A(2). In determining
whether or not reliance upon the term by the corporation would be fair and
reasonable the court should consider all the circumstances of the case
including the relative bargaining strength of the parties, any inducement by the
buyer to agree to the term, whether the buyer had the opportunity to buy the
goods or services without the term being included in the contract, whether the
buyer ought to have reasonably known of the term, and in the case of goods,
whether the goods were manufactured or provided to meet a special order of
the buyer: s 68A(3).
(ii)
The conditions and warranties in Division 2 of Part V only apply to
consumers. By s 4B ‘consumers’ are broadly defined as persons (including
corporations) buying goods or services at a price less than $40,000, or if the
contract is for more than $40,000 the goods or services are of a kind ordinarily
acquired for personal, domestic or household consumption or in the case of a
motor vehicles, the vehicle is used for transport of goods on public roads. In
the case of goods they must also not be purchased for the purpose of resale or
use in a process of transforming them into something else by some process of
manufacture or production.
The Contracts Review Act 1980 (NSW)
Under s 7 of the Contracts Review Act 1980 (NSW) a court can, inter alia, declare a
term of a contract void if it is unjust. Thus, if an exclusion clause is found to be unjust
within the meaning of the Act it could be declared void. In John Dorahy’s Fitness
Centre Pty Ltd v Buchanan (Court of Appeal in NSW, 18 December 1996,
Unreported) an exclusion clause which effectively excluded the defendant from
20
liability in both tort and contract was, in the particular circumstances of the case,
found to be unjust.
A more detailed analysis of the Contracts Review Act 1980 will be undertaken later in
this subject.