Summary Guide for Chapter 9
Foundations of
Australian Law
Fourth Edition
Callie Harvey
ISBN: 978-0-7346-1191-8 (print)
ISBN: 978-0-7346-2057-6 (ePDF)
Foundations of Australian Law, Fourth Edition
Chapter 9 – Contracts II
Answer guide to questions on contractual capacity
The law acknowledges that, due to various circumstances, some individuals or
groups lack ability to partly or fully comprehend their rights and responsibilities
when forming a contract.
These individuals or groups are subject to some restrictions and conditions when
entering into contracts, and include: minors, people with mental disabilities or
intoxicated persons, some companies, married women (in the past, under common
law), and bankrupts.
Contractual capacity of minors
Valid contracts
Under common law principles, some contracts against minors are deemed
valid and enforceable.

Contract for necessaries – the person bringing the action against the
minor for non-payment of goods and services has the onus to prove:

that the good or service was a necessary; and

that the good or service was necessary under the particular
circumstances.

If the court concludes that the item(s) was necessary, then the minor is
required to pay a reasonable price.
Case example: Scarborough v. Sturzaker [1905] 1 Tas. LR117

Beneficial contracts of service – these enable a minor to be employed
or participate in further education to acquire knowledge and skills
required in the workforce. Beneficial contracts of service are valid if
the minor has received an overall benefit as a result of the contract.
Case example: De Francesco v. Barnum [1890] 45 CH D430

Contracts for cash - minors who make cash payments for goods or
services are legally bound, assuming that all other contractual
elements are present.
Voidable contracts
Contracts that are voidable by a minor are either:

binding unless repudiated by the minor; or

not binding unless ratified by the minor or within a reasonable period
of time after tuning 18 years of age.
Case example: Steinberg v. Scala (Leeds) ltd. [1923] 2 Ch 452
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Summary Guide
Void contracts
A contract is deemed as void in circumstances where the minor pays for goods
to be supplied or supplies goods that are unnecessary and where the contract
is not of a continuing nature, i.e. leasing.
People with mental disabilities and intoxicated persons
People who suffer from a mental disability or are influenced by alcohol or drugs
will be legally bound by any contract they enter into unless they have evidence to
support the following:

that they did not fully understand the contract due to their condition
(mental illness or influence of alcohol/drugs); or

that the other party knew or ought to have known that they suffered from
a condition at the time that the contract was formed.
Case example: York Glass Co. ltd. v. Jubb [1925] All ER Rep 285
If the contract relates to necessaries, the other party is required to pay a reasonable
price for the goods or services.
Corporations
A corporation is capable of suing and of being sued and its contractual powers are
through authorised individuals, i.e. agents.
Companies may be restricted in their contractual powers in the following ways:

by their creator, i.e.
by a statute establishing the company or
memorandum of association of an incorporated company;

by the nature of their existence i.e. a company cannot be contracted to act
in a play; or

by the Corporations Act 2001 (Cwth).
Married women
Acts of parliament have been passed to empower married women and give them
the capacity to enter into legally enforceable agreements.
Bankrupts
Bankruptcy Act (1966) (Cwth) provides that a person who has declared
himself/herself bankrupt must disclose this fact when forming particular contracts
i.e. contracts involving credit of more than $3,600.
Answer guide to questions on terms of a contract
A representation will be considered to be a term if the parties to the contract
intended it to be legally binding.
The court once again will apply the objective test: Would a reasonable person
conclude that the parties intended the statement(s) to be legally binding? All the
evidence is closely examined and if it shows that the answer to this question is
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Foundations of Australian Law, Fourth Edition
‘yes’, then the statement will be considered to be a term. If the answer is ‘no’, then
the statement is classified as a representation.
If a term has been breached, the plaintiff may be awarded damages, whereas if the
court found that the term was a representation, the law does not provide any
remedies.
Case example: Dick Bentley Productions ltd. v Harold Smith (Motors) ltd. (1956) 2 All
ER 65
Express terms
Condition
A condition is vital, the most important term that is the heart of the contract.
The innocent party has the option of rescinding, i.e. withdrawing, from the
contract and/or claiming damages.
Warranty
A warranty is a minor or non-essential term of a contract.
If one party did not execute a warranty, the party is entitled to claim damages
for the loss suffered and to force the other party to fulfill the terms to the
contract.
To test whether a term is a condition or a warranty, the court will ask whether
the term ‘goes to the heart’ of the contract? If the answer is ‘yes’, then the term
is a condition; if the answer is ‘no’, then the term is a warranty.
Case example: Poussard v Spiers & Bond [1876]
Answer guide to questions on consent of parties
Mistake
‘Mistake’ in contract law refers to the circumstance where a party’s error or
misunderstanding affects the enforceability of the contract.
Mistake of fact

Common mistake
The parties to a contract are mistaken about a fact that is an essential term
of a contract.
Case example: Prichard v. Merchant’s & Tradesman’s Mutual Life Insurance
Society [1858] 3 CBNS 622

Mutual mistake
The parties to a contract each make a mistake as to what the other party is
saying.
Case example: Raffles v. Wichelhaus [1864] 2 H & C 906; 159 ER 375

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Unilateral mistake
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Unilateral mistake occurs where one of the contracting parties is aware or
ought to be aware of the fact that the other party is making a mistake, but
does nothing to rectify this error.
Case example: Taylor v. Johnson [1983] 151 CLR 422

Non est factum
This mistake involves an error regarding the nature of a particular
document.
To prove this mistake, two conditions must be present:

the document signed was radically different to what was expected;
and

the failure to read and understand the document was not due to
carelessness.
Case example: Petelin v Cullen (1975) 132 CLR 355
Mistake of law
Misrepresentation
Fraudulent misrepresentation
Party A, the defendant, intentionally and purposely makes an untrue
statement of fact to induce Party B, the plaintiff, to enter into a contract. The
innocent party, the plaintiff, who was induced to enter into a contract where
fraudulent misrepresentation was present, is entitled to rescind, i.e. withdraw
from, the contract and claim damages.
Case example: Horsfall v. Thomas [1962] 1 H & C90; 158 ER 813
Innocent misrepresentation
The party making the misrepresentation actually believes the statement to be
correct. The innocent party, i.e. the plaintiff, who was induced to enter into a
contract where innocent misrepresentation was present, is entitled to rescind
the contract but cannot claim damages.
Negligent misrepresentation
The party makes a false statement without belief in its truth. The party is
reckless or careless when making the statement.
The innocent party who was induced to enter into a contract where negligent
misrepresentation was present is entitled to bring a court action against the
other party and claim damages.
Case example: L. Shaddock & Associates Pty. ltd. v. Paramatta City Council (No.
1) [1981] 150 CLR 225
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Foundations of Australian Law, Fourth Edition
Undue influence
Undue influence arises in circumstances where one person uses their position or
ascendancy, i.e. dominance, over another in order to induce them to form a
particular contract.

Special relationships
Common law presumes that in certain relationships a fiduciary
relationship exist and the party who has a position of power must act in
the best interests of the other party. Where such relationships exist and
undue influence has occurred, the defendant has the burden, i.e. the onus,
to disprove the presumption made by common law and to show that the
plaintiff:


entered the contract voluntarily and under their free will; and

that they fully understood the terms of the contract.
Other relationships
Where relationships are not considered to be special, the plaintiff has the
burden to prove that the defendant used undue influence. He/she must
provide evidence that illustrates:

the defendant exercised their position of power improperly; and

the defendant caused them to enter into a contract that they would not
normally enter into.
Case example: Allcard v. Skinner [1887] 36 CH D 145
If undue influence is exercised, the contract is voidable at the option of the
plaintiff.
Duress
Duress occurs when the defendant uses threats or violence to force the plaintiff to
enter into a contract. There is a lack of genuine consent. Three types of duress
exist:

Duress against a person – this refers to a situation where the defendant
enters into a contract due to a threat or fear for their safety or that of their
loved ones.
Case example: Barton v. Armstrong [1974] 3 ALR 355
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
Duress against property – this occurs when the defendant threatens to
withhold, seize or damage the plaintiff’s property in order to induce them
to enter into a contract.

Economic duress – this occurs when a person receives economic threats
with the purpose of forcing them to form a contract. It usually occurs
where the parties are in an existing contractual relationship and a threat is
used to negotiate a new contract on better terms. Economic threats are
ones that state that a person will experience some monetary loss unless
they enter into a particular contract, and the defendant uses excessive
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Summary Guide
pressure that is beyond normal commercial pressure to induce the other
party to enter into a contract.
Case example: Cockrill v. Westpac Banking Corporation [1996] 142 ALR227
A contract formed under duress is voidable at the option of the plaintiff.
Unconscionable contracts
Unconscionability means that unfair, unjust or inequitable conduct has taken
place. The burden of proof rests with the plaintiff. He/she, i.e. the weaker party,
must present evidence to illustrate the following:

that they were the weaker party and had a disability or special
disadvantage;

that the stronger party knew about their disability and took advantage of
this disability, thus it was unfair and unconscionable; or

the disability prevented them from making an independent decision about
the contract.Case example: Commercial Bank of Australia v Amadio [1983] 151
CLR 447
Unconscionable conduct is also prohibited by statute law. At the Commonwealth
level the Trade Practice Ant 1974 (Cwlth) protects:

Consumers by traders in relation to unconscionable conduct in supplying
goods or services.

Small businesses dealing with bigger businesses in relation contract
dealings of up to $1 million.
State legislation includes fair trading acts which prohibit persons or suppliers
from engaging in unconscionable conduct, e.g. the Fair Trading Act 1989 (Qld).
Answer guide to questions on legality of object
Contracts illegal at common law
The following types of contracts are deemed illegal at common law and are
punishable by fines and in some cases imprisonment:

contracts made with the purpose of defrauding the government of
revenue and taxes;

contracts to commit an unlawful criminal act, tort or fraud against another
person;

contracts that prejudice or delay the administration of justice;

contracts which are sexually immoral or prejudicial to the institution of
marriage;

contracts that encourage corruption in public life;

contracts that involve breach of duty by an agent or employee; and

contracts in unreasonable restraint of trade.
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Foundations of Australian Law, Fourth Edition
Contracts illegal by statute
Express prohibition
Express prohibition refers to the circumstance where statute law expressly
prohibits a contract.
Case example: Re Mahmoud & Ispahani [1921] 2 KB 716
Implied prohibition
Where implied prohibition exists, the court examines the purpose of the Act,
i.e. the intention that Parliament had when passing the Act.
Case example: Gaffney v. Ryan [1995] 1 Qd 19.
Contracts can become illegal in formation or performance
Under statute law, some types of contracts are illegal at the time they are
made.
Case example: JM Allan (Merchandising) ltd. v Cloke [1963] 2 QB 340
Contracts void by statute
A contract may be rendered void by statute but not be illegal. Contracts
involving gaming or wagering are considered void in all states and territories.
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